The
HEART
miSSion™
of oUR
AeroVironment®
2 0 1 3 c o R P o R AT E o V E R V i E W
AeroVironment ®
THE HEART OF OUR MISSION™
Corporate Overview 2013 2
The RESCUERS
Extending a hand to those in peril.
As much as our hands can do for us, it’s what they can do for others that’s at the
heart of our mission and the mission of today’s first responders. Their job is to
save lives. Their reasons are clear. What’s often unclear is their path to delivering
lifesaving help.
To find their way quickly and safely, more and more emergency personnel are
asking for our rapidly deployable small UAS to provide critical “eyes in the sky”
and real-time situational awareness whenever and wherever danger threatens.
And Qube® is ready to fly, ready to find the lost or stranded, ready to direct
the rescue and ready to warn those in harm’s way. In the hands of firefighters,
police, paramedics and other rescue personnel, Qube is designed to serve a
critical role in protecting property and saving lives.
The
HEART
of OUR
MISSION™
At the heart of every mission, there
is a job to be done. Since the days
when our hearts inspired great firsts
like human powered flight and solar
powered cars, AeroVironment has
been a company of impassioned
thinkers, engineers and entrepreneurs
whose reason and mission for
empowering customers has sparked
one bold solution after another. It’s
thinking with our hearts and minds,
and today it’s delivering technologies
that matter more than ever through
both our unmanned aircraft systems
(UAS) and efficient energy systems.
Putting them to work, our customers
are improving the way we live and
drive, protect our citizens, defend our
nation and care for our planet.
COVER IMAGE
GlOBAl OBSERVER’S MISSION
Designed to provide affordable, persistent, high-altitude observation and
communication, Global Observer ® is designed to provide advanced warning over
a large area to reduce the impact of disasters, spare property and save lives.
QUBE’S MISSION
With its vertical lift-off, agile maneuvering
and hovering capabilities, Qube provides
a mission critical public safety solution for
first responders.
AeroVironment ®
THE HEART OF OUR MISSION™
Corporate Overview 2013 4
The PRESERVERS
Keeping a finger on the pulse of our planet.
WASP’S MISSION
A man-packable, all-environment micro air
vehicle (MAV), Wasp can operate over land
or water, delivering advanced imagery in the
most challenging conditions.
Their mission often takes them to some of the harshest, most remote parts of
the planet. Flying in conventional aircraft can be dangerous at best, or simply
impossible. So for biologists, geologists and environmental scientists our small
UAS have become crucial new tools in their efforts to monitor and preserve
wildlife and the environment.
Now, with their fingers at the controls of an AeroVironment unmanned aircraft
system like Wasp®, they have a safe and fast method to collect pertinent data
previously out of reach. Whether the mission is studying the shrinking Stellar
Sea Lion population in Western Alaska for the National Marine Mammal
Laboratory, or flying into the noxious, sulfur dioxide plume of Costa Rica’s
Turrialba volcano to collect climate data for NASA, AeroVironment’s toolkit
of small UAS is giving researchers the ability to touch the planet and our
lives like never before.
The TROUBlESHOOTERS
Keeping an eye out for problems.
RAVEN’S MISSION
Under five pounds, Raven can fly upwards
of 90 minutes with a range of 10 kilometers,
acquiring data to keep our customers’
operations running safely, efficiently and
more profitably.
At AeroVironment, anticipating the needs of our customers’ operations
requires that distinctly human power™ of foresight. It’s seeing the
challenges and the solutions even before they do. More importantly, it’s
seeing trouble in the field before trouble can happen—because no longer
is that field just the battlefield, nor our battle-proven small UAS just for
the military.
Now, AeroVironment customers working in agriculture, oil and gas, utilities,
mining and elsewhere can count on highly-mobile, easily launched UAS like our
Raven® to monitor their assets in the field. Not only are small UAS less expensive
than conventional aircraft to own and operate, but they can also help spot a
small problem before it becomes a big one. From the remote and rugged terrain
of West Virginia’s coal fields, to the sprawling farms of America’s heartland, to oil
and gas platforms dotting our oceans, Raven is on a new kind of mission.
AeroVironment ®
THE HEART OF OUR MISSION™
Corporate Overview 2013 6
The PROTECTORS
PUMA’S MISSION
Our longest endurance UAS capable of
landing in water or on land, Puma’s optical
(EO) and infrared (IR) cameras allow our
protectors to keep “eyes on target” across
the broadest area—and its endurance will
only increase.
Arming our police and warfighters with better information.
The soldier on the battlefield carries a toolkit from which he can arm himself.
So does the police officer on the street. But there’s one tool they both reach for
more and more when duty calls at home or abroad—a small unmanned aircraft
system, like AeroVironment’s Puma™, to help them accomplish their mission and
safely come home.
From the moment a police officer or soldier throws Puma™ into the air, real-time
video is transmitted to their position on the ground, arming them with more
than just firepower. Rather, our mission is to arm them with a more strategic
power—the power of information. Backpack portability, launched from almost
anywhere, invaluable in the tactical advantages they deliver and the money
they save our customers, it’s no wonder that our small UAS now represent
85% of the unmanned aircraft in the Pentagon’s inventory. Internationally,
the demand for our small UAS is also building, while our UAS mission
services continues to offer unique value to our customers who look to
AeroVironment for a complete solution.
EV CHARGER’S MISSION
From overnight charging to our DC fast
charging stations that will deliver a full charge
in less than 30 minutes, AeroViroment’s
mission is to keep EV drivers on the move
wherever their lives take them.
The TRAIlBlAzERS
Having the legs to go far.
Many an idea has come and gone when it comes to building a more efficient car.
If it’s good and people like how it fits their lifestyle, it might have the legs to go
far. If not, it will stall. Throughout its history, the electric vehicle has done both.
People want the quiet, cleaner, more economical drive, but electric vehicles
never went far—perhaps because they couldn’t go far. Only today, things are
changing fast—through faster charging.
Since the days when our hearts inspired us to engineer the first electric
vehicle of the modern era, the GM Impact, AeroVironment has been a
trailblazer in the development of fast charge systems for electric vehicles.
Together with our clients—Nissan, Mitsubishi Motors North America,
BMW of North America, Ford and others—we’re changing drivers into
EV trailblazers faster than ever by giving them the freedom of several
charging options —like our easy-to-install home electric vehicle charging
stations and public DC fast charging stations. It’s the new electric
vehicle lifestyle, charged by AeroVironment’s years of experience and
proven solutions, and it’s got legs.
AeroVironment ®
THE HEART OF OUR MISSION™
Corporate Overview 2013 8
The PlANNERS
Putting our minds to work where
we live and drive.
We plan for the future. Because we have the human power™ to
imagine a better tomorrow, AeroVironment’s thinkers, engineers
and entrepreneurs have long dreamt of a bright new future for
transportation—less dependent on fossil fuels, alive with clean
electric vehicles quietly zipping down our highways and around our
cities. Only we don’t have to dream it anymore. Happily, we’re already
on the road there.
Across America, plug-in vehicle charging infrastructure is blossoming.
Planners are rolling out AeroVironment charging stations in cities and
across islands like Oahu. Highways are being electrified, like the West
Coast Electric Highway™ that added more than 40 AeroVironment
public chargers between Oregon and Canada. Every major airport hub
in the United States and many factories and distribution centers now
rely on our industrial fast charge systems, including our PosiCharge™
fast charge systems at the Seattle-Tacoma International Airport. And
every day our electric vehicle test systems are fueling longer lasting
battery technologies so EV drivers are free to go wherever they have a
mind to go.
AeroVironment ®
THE HEART OF OUR MISSION™
Corporate Overview 2013 10
The DOERS
Putting our heart into everything we do.
People often ask exactly what it is that we do. We are, after all,
a leader in two important and growing markets. We are builders
and makers, engineering innovative solutions to our customers’
important problems. Only we do more than that. Like our founder,
Dr. Paul MacCready, we’re also dreamers, constantly experimenting
with new ideas that help our customers do more. A lot more. With
our unmanned aircraft systems and our efficient energy systems, our
customers do more by achieving greater security, productivity, safety,
mobility and a cleaner environment. And helping them to do it all—
that’s at the heart of our every mission and everything that we do.
AeroVironment ®
THE HEART OF OUR MISSION™
Corporate Overview 2013 12
Dear Stockholders
AeroVironment faced a number of industry, market and federal budget
challenges in our fiscal year 2013, yet it was also a year of important
achievements for our team. Recognizing that much work remains, I am
confident in our strategy and believe our team’s accomplishments over the
last year position us to capitalize on our advantages in market position,
innovation, agility, persistence and capital structure to achieve our
long-term goals, further enhance stockholder value and remain a source
of stable and reliable support for our customers.
2013 Results & the AeroVironment Growth Thesis
Contracting delays resulting from cuts to federal spending for the U.S. Department of Defense pushed $100
million in expected Unmanned Aircraft Systems (UAS) revenue out of our fiscal year 2013. In addition, our
Efficient Energy Systems (EES) business segment was impacted by slower than anticipated sales of electric
vehicles. We have responded by reducing costs in both our UAS and EES business segments to preserve
profitability while minimizing the impact of these cost reductions on our ability to realize new market
opportunities. Though uncertainty remains in the broader environment, across our business we continue to
make great strides in executing on our long-term plan and shaping our future.
On our balance sheet, despite year-over-year inventory growth and a revenue decline, cash grew by more than
$11 million during fiscal 2013. Our balance sheet gives us enormous flexibility to support our growth strategy
by enabling AeroVironment to make strategic investments quickly and decisively to secure market entry and
expansion. Our solid balance sheet also provides customers and prospective customers confidence in our
strength and staying power, especially when we compete for new opportunities against smaller competitors
that are not as well-capitalized or against much larger organizations with deeper pockets.
Looking ahead, our growth thesis remains the underpinning of our strategy:
1. AeroVironment is a technology solutions provider, driving profitable long-term compound growth through
the delivery of innovative solutions for large market opportunities.
2. We expect to maintain our leadership in the existing markets where our previous innovations have already
been adopted.
Market Share Leadership
AeroVironment is a market share leader in small UAS, industrial electric vehicle (EV) charging systems, EV test
systems and passenger EV charging solutions. Across these businesses we have expanded our offering, our
customer reach and the value that we deliver.
UAS: In our fiscal year 2013, our UAS team accelerated delivery of pan-tilt-zoom gimbaled sensor payloads for
Raven® systems and added the new Tier II unmanned helicopter to our offering, giving our customers more
capability to gather critical information in a broader set of situations and environments. Our UAS team also won
several new international small UAS contracts, bringing our count of international customers to 24.
EES: In EES we expanded the number of Level 2 charging systems deployed across North America to more
than 12,000, while also securing the position of exclusive home charging installation and hardware provider for
the Ford Motor Company’s line of plug-in electric vehicles.
Opportunities for Continued Growth & 2014 Priorities
Over the past year we have established or strengthened leadership positions in important new growth areas
based on multiple new solutions. Our Switchblade® tactical missile system performed well on the battlefield in
fiscal 2013, helping to protect our troops and creating momentum for increased demand.
We demonstrated superior capabilities in the U.S. Department of State’s UAS mission services competition,
expanded the number of public safety agencies pursuing FAA approval to operate our Qube® system,
continued to pursue adoption opportunities for our Global Observer® high-altitude, long endurance UAS
and solidified our position as a leading provider of EV charging solutions poised to benefit from the broader
and faster adoption of EVs. While there is always timing and volume uncertainty associated with innovative
solutions for new markets, each one of these opportunities offers the possibility of long-term growth and
significant value creation.
We have three principal priorities for fiscal 2014: a sustained focus on being number one with our customers;
winning and executing on key growth opportunities; and operating profitability from a continued focus
on efficiency and operational excellence. We believe that, through these initiatives and by successfully
executing on our business model, AeroVironment will yield the highest return on capital and sustained
stockholder value possible.
The heart of our mission is helping our customers and stakeholders succeed in important ways. With the
support of our people, our Board of Directors and you, we look forward to maximizing that success, today
and tomorrow.
3. We expect to achieve high, long-term growth and superior return on investment from the adoption of
Thank you.
multiple new solutions in new and adjacent markets.
Timothy E. Conver
Chairman,
Chief Executive Officer & President
AeroVironment ®
FInAnCIAL hIGhLIGhTS
The AeroVironment team faced a challenging year, yet executed effectively to deliver important progress. Government contracting
delays amid anticipated reductions in defense spending resulted in a decline in revenue in fiscal 2013, but we strengthened
our leading market positions in small unmanned aircraft systems, electric vehicle test and charging systems and positioned
Switchblade® tactical missile systems for increasing demand. We continued to focus on helping our customers succeed in their
important missions, and by doing so, to increase value for all our stakeholders.
REVEnUE bY SEGME nT
in thousands except for share and per share data
ShARE PRICE
2011
2012
2013
Fiscal Year Ended April 30, 2013
High
Low
ExECUTIVE MANAGEMENT TEAM
BOARD OF DIRECTORS
Timothy E. Conver
Chairman,
Chief Executive Officer and President
Jikun Kim
Senior Vice President
and Chief Financial Officer
Cathleen S. Cline
Senior Vice President of Administration
Thomas herring
Senior Vice President
and Chief Operating Officer
Roy Minson
Senior Vice President and General Manager,
Unmanned Aircraft Systems
Timothy E. Conver
Director
Chairman, Chief Executive Officer and President,
AeroVironment, Inc.
Joseph F. Alibrandi
Director
Chief Executive Officer, Alibrandi Associates
Kenneth R. baker
Director
President and Chief Executive Officer,
Techbroker, L.L.C.
Arnold L. Fishman
Director
Chairman,
Lieberman Research Worldwide
UAS
EES
Total Revenue
$ 249,769
42,734
292,503
$ 273,728
5 1,280
325,008
$ 194,276
45,876
240,1 52
Income from Operations
33,951
net Income
EPS Fully Diluted
Total Assets
Stockholders’ Equity
25,909
1.17
33 1 ,747
263,468
43,076
30,45 1
1.36
369, 1 5 1
299, 1 9 8
3,802
10,426
0.47
363,465
315,186
Operating Margin
12%
13%
2%
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$ 27.82
24.88
23.70
23.1 8
$ 21 .14
21 .56
19.25
16.98
Wahid nawabi
Senior Vice President and General Manager,
Efficient Energy Systems
Murray Gell-Mann
Director
Co-Founder, Santa Fe Institute
Fiscal Year Ended April 30, 2012
high
Low
STOCkHOLDER INFORMATION
Investor Relations
Steven A. Gitlin
Vice President, Investor Relations
Charles R. holland
Director
General, USAF (Ret),
Former Commander,
U.S. Special Operations Command
(2000-2003)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$ 36.49
34.28
33.87
3 1 .87
$ 26. 81
24.01
28.33
23.70
Fiscal Year Ended April 30, 2011
high
Low
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$ 28. 1 7
24.47
29.91
35.96
$ 20.70
2 1 .25
22.25
2 7.20
To obtain free copies of this overview and 10-K,
please contact AeroVironment’s Investor
Relations Department:
Stephen F. Page
Director
Trustee, Loyola Marymount University
AeroVironment, Inc.
Attn: Investor Relations
181 W. huntington Drive, Suite 202
Monrovia, California 91016
Phone: 626.357.9983, ext. 245
Facsimile: 626.359.9628
Email: ir@avinc.com
IR website: http://investor.avinc.com
www.avinc.com
Transfer Agent
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
brooklyn, new York 11219
Shareholder Services
800.937.5449
Independent Registered
Public Accounting Firm
Ernst & Young LLP
Market Information
The common stock of the Company is traded on
the nASDAQ Stock Market under the symbol “AVAV.”
© 2013 AeroVironment, Inc. All rights reserved. Any and all third
party companies and organizations and their respective service
and trademarks set forth herein, including but not limited to
nissan, bMW, Mitsubishi, Ford, West Coast Electric highway,
nASA, GM Impact, and the national Marine Mammal Laboratory,
are not affiliated with, endorsing, guaranteeing or sponsoring
AeroVironment, or any AeroVironment affiliate’s, products or
services. Any and all such third party service and trademarks set
forth herein are the intellectual property of their respective owners.
AVinc.com
A V A V
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:1) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
(cid:2)
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended April 30, 2013
For the transition period from
to
Commission file number 001-33261
AEROVIRONMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
95-2705790
(I.R.S. Employer Identification No.)
181 W. Huntington Drive, Suite 202
Monrovia, CA
(Address of Principal Executive Offices)
91016
(Zip Code)
Registrant’s telephone number, including area code: (626) 357-9983
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
Name of each exchange on which registered
Common Stock, par value $0.0001 per share
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes (cid:2) No (cid:1)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes (cid:2) No (cid:1)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (cid:2) No (cid:1)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes (cid:1) No (cid:2)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:2)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer’’ and ‘‘smaller reporting company’’
in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer (cid:2)
Smaller reporting company (cid:2)
Accelerated filer (cid:1)
Non-accelerated filer (cid:2)
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:2) No (cid:1)
The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price on the
NASDAQ Global Select Market on October 27, 2012 was approximately $422.9 million.
As of June 7, 2013, the issuer had 22,614,315 shares of common stock, par value $0.0001 per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the conclusion of the registrant’s fiscal year ended April 30, 2013, are incorporated
by reference into Part III of this Form 10-K.
AEROVIRONMENT, INC.
INDEX TO FORM 10-K
PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A.
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B.
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . .
Item 8.
Item 9.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A.
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B.
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10.
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . .
Item 11.
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13.
Certain Relationships and Related Transactions, and Director Independence . . . . . .
Item 14.
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Page
2
25
48
48
48
48
49
51
51
61
62
93
93
94
96
96
96
96
96
Item 15.
Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
97
1
Forward-Looking Statements
PART I
This Annual Report on Form 10-K, or Annual Report, contains forward-looking statements, which
reflect our current views about future events and financial results. We have made these statements in
reliance on the safe harbor created by the Private Securities Litigation Reform Act of 1995 (set forth in
Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the
Securities Exchange Act of 1934, as amended, or the Exchange Act). Forward-looking statements
include our views on future financial results, financing sources, product development, capital
requirements, market growth and the like, and are generally identified by terms such as ‘‘may,’’ ‘‘will,’’
‘‘should,’’ ‘‘could,’’ ‘‘targets,’’ ‘‘projects,’’ ‘‘predicts,’’ ‘‘contemplates,’’ ‘‘anticipates,’’ ‘‘believes,’’
‘‘estimates,’’ ‘‘expects,’’ ‘‘intends,’’ ‘‘plans’’ and similar words. Forward-looking statements are merely
predictions and therefore inherently subject to uncertainties and other factors which could cause the
actual results to differ materially from the forward-looking statement. These uncertainties and other
factors include, among other things:
(cid:127) unexpected technical and marketing difficulties inherent in major research and product
development efforts;
(cid:127) availability of U.S. government funding for defense procurement and research and development
programs;
(cid:127) the extensive regulatory requirements governing our contracts with the U.S. government and the
results of any audit or investigation of our compliance therewith;
(cid:127) the potential need for changes in our long-term strategy in response to future developments;
(cid:127) unexpected changes in significant operating expenses, including components and raw materials;
(cid:127) changes in the supply, demand and/or prices for our products;
(cid:127) increased competition, including from firms that have substantially greater resources than we
have;
(cid:127) changes in the regulatory environment; and
(cid:127) general economic and business conditions in the U.S. and elsewhere in the world.
Set forth below in Item 1A, ‘‘Risk Factors’’ are additional significant uncertainties and other
factors affecting forward-looking statements. The reader should understand that the uncertainties and
other factors identified in this Annual Report are not a comprehensive list of all the uncertainties and
other factors that may affect forward-looking statements. We do not undertake any obligation to update
or revise any forward-looking statements or the list of uncertainties and other factors that could affect
those statements.
Item 1. Business.
Overview
We design, develop, produce, support and operate a technologically-advanced portfolio of products
and services. We supply unmanned aircraft systems, or UAS, tactical missile systems and related
services primarily to organizations within the U.S. Department of Defense, or DoD. We also supply
charging systems and services for electric vehicles, or EVs, and power cycling and test systems to
commercial, consumer and government customers. We derive the majority of our revenue from these
business areas and we believe that the markets for these solutions have significant growth potential.
Additionally, we believe that some of the innovative potential products in our research and
development pipeline will emerge as new growth platforms in the future, creating additional market
opportunities.
2
The success we have achieved with our current products and services stems from our investment in
research and development and our ability to invent and deliver advanced solutions, utilizing proprietary
and commercially available technologies, to help our government, commercial and consumer customers
operate more effectively and efficiently. We develop these highly innovative solutions by working very
closely with our key customers in each segment of our business and solving their most important
challenges related to our areas of expertise. Our core technological capabilities, developed through
more than 40 years of innovation, include lightweight aerostructures, power electronics, electric
propulsion systems, efficient electric power generation, conversion, and storage systems, high-density
energy packaging, miniaturization, digital data links, aircraft payloads, controls integration, systems
integration and engineering optimization coupled with professional field service capabilities.
Our UAS business segment focuses primarily on the design, development, production, support and
operation of innovative UAS and tactical missile systems that provide situational awareness, multi-band
communications, force protection and other mission effects to increase the security and effectiveness of
our customers’ operations. Our Efficient Energy Systems, or EES, business segment focuses primarily
on the design, development, production, marketing, support and operation of innovative efficient
electric energy systems that address the growing demand for electric transportation solutions.
Our Strategy
As a technology solutions provider, our strategy is to develop innovative, safe and reliable new
solutions that enable us to create new markets or market segments, gain market share and grow as
market adoption increases. We believe that by introducing new solutions that provide customers with
compelling value we are able to create new markets or market segments and then grow our positions
within those markets or market segments profitably, instead of competing in existing markets against
large, incumbent competitors that may possess advantages in scope, scale and relationships.
We intend to grow our business by maintaining market leadership in UAS, tactical missile systems,
electric vehicle charging systems and power cycling and test systems, and by creating new solutions that
enable us to enter and lead new markets. Key components of this strategy include the following:
Expand the sale of our existing solutions to current and new customers. Our small UAS, electric
vehicle charging systems and power cycling and test systems are leading solutions in their respective
markets. We intend to increase the penetration of our small UAS products and services within the U.S.
military, the military forces of allied nations, other government agencies and first responders. We
believe that the broad adoption of our small UAS by the U.S. military will continue to spur demand by
allied nations, and that our efforts to pursue new applications will help to create opportunities beyond
the military market we currently serve. We similarly intend to increase the penetration of our electric
vehicle charging systems and services, and our power cycling and test systems, into existing and new
customer segments globally.
Deliver innovative new solutions. Customer-focused innovation is the primary driver of our
growth. We plan to continue internal and customer-funded research and development efforts to develop
better, more capable products, services and business models, both in response to and in anticipation of
emerging customer needs. In some cases these innovations result in upgrades to existing offerings,
expanding their value among existing customers and markets. In other cases these innovations become
entirely new solutions that position us to address new markets, customers and business opportunities.
We believe that by continuing to invest in and secure customer funding for research and development
we will continue to deliver innovative new products and services that address market needs within and
outside of our current target markets, enabling us to create new opportunities for growth.
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Foster our entrepreneurial culture and continue to attract, develop and retain highly-skilled
personnel. We have created a company culture that encourages innovation and an entrepreneurial
spirit, which helps to attract and retain highly-skilled professionals. We intend to maintain this culture
to encourage the development of the innovative, highly technical system solutions and business models
that give us our competitive advantage. A core component of our culture is the demonstration of trust
and integrity in all of our interactions, contributing to a positive work environment and engendering
loyalty among our employees and customers.
Preserve our agility and flexibility. We are able to respond rapidly to evolving markets, solve
complicated customer problems, and deliver new products, services and capabilities quickly, efficiently
and affordably. We believe this ability helps us to strengthen our relationships with customers and
partners. We intend to maintain our agility and flexibility, which we believe to be important sources of
differentiation when we compete against organizations with more extensive resources.
Effectively manage our growth portfolio. Our production and development programs and
services provide us with numerous investment opportunities that we believe will support our long-term
growth by providing our customers with valuable new capabilities. We evaluate each opportunity
independently and within the context of all other investment opportunities to determine its relative
priority. This process informs decisions we make regarding potential growth capital requirements and
ensures that we allocate resources based on relative risks and returns to maximize long-term return on
investment, which is a key element of our growth strategy.
Customers
We sell the majority of our UAS and tactical missile systems and services to organizations within
the DoD, including the U.S. Army, Marine Corps, Special Operations Command and Air Force. Our
EES business segment generates revenue from commercial, consumer and, to a lesser extent,
government customers.
During our fiscal year ended April 30, 2013, approximately 43% of our sales were made to the
U.S. Army pursuant to orders made under contract by the U.S. Army on behalf of itself as well as
several other organizations within the DoD. Other U.S. government agencies and government
subcontractors accounted for 27% of our sales revenue, while purchases by foreign, commercial
customers and consumers accounted for the remaining 30% of sales revenue during our fiscal year
ended April 30, 2013.
Technology, Research and Development
Technological Competence and Intellectual Property
The innovations developed by our company and our founder include, among others: the world’s
first effective human-powered and manned solar-powered airplanes; the first modern passenger electric
car, the EV1 prototype for General Motors; the world’s highest flying airplane in level flight, Helios(cid:3),
a solar-powered unmanned aircraft system that reached over 96,000 feet in 2001; and, more recently,
Global Observer, the world’s first liquid hydrogen-fuelled unmanned aircraft system and the Nano
Hummingbird(cid:3), the world’s first flapping wing unmanned aircraft system capable of precise hover and
omni-directional flight. The Smithsonian Institution has selected seven vehicles developed by us or our
founder for its permanent collection. Our history of innovation excellence is the result of our talented,
creative and skilled employees whom we encourage to invent and develop innovative new solutions.
Our company was founded by the late Dr. Paul B. MacCready, the former Chairman of our board
of directors and an internationally renowned innovator who was instrumental in establishing our
entrepreneurial and creative culture. This culture has consistently enabled us to attract and retain
highly-motivated, talented employees and has established our reputation as an innovative leader in the
industries in which we compete.
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A component of our ongoing innovation is a screening process that helps our business managers
identify early market needs, which assists us in making timely investments into critical technologies
necessary to develop solutions to address these needs. Similarly, we manage new product and business
concepts through a commercialization process that balances spending, resources, time and intellectual
property considerations against market requirements and potential returns on investment. Strongly
linking our technology and business development activities to customer needs in attractive growth
markets is an important element of this process. Throughout the process we revalidate our customer
requirement assumptions to help ensure that the products and services we ultimately deliver are of high
value.
As a result of our commitment to research and development, we possess an extensive portfolio of
intellectual property in the form of patents, trade secrets, copyrights and trademarks across a broad
range of UAS and advanced energy technologies. As of April 30, 2013, we had 97 U.S. patents issued;
75 U.S. patent applications pending; 51 active Patent Cooperation Treaty applications; and numerous
foreign patents and applications. In many cases, when appropriate and to preserve confidentiality, we
opt to protect our intellectual property through trade secrets as opposed to filing for patent protection.
The U.S. government has licenses to some of our intellectual property that is specifically developed
in performance of government contracts, and may use or authorize others to use this intellectual
property. In some cases we fund the development of certain intellectual property to maximize its value
and limit potential competitors from utilizing it. While we consider the development and protection of
our intellectual property to be integral to the future success of our business, at this time we do not
believe that a loss or limitation of rights to any particular piece of our intellectual property would have
a material adverse effect on our overall business.
Research, Development and Commercialization Projects
A core component of our business strategy is the development and commercialization of innovative
solutions that we believe can become new products or services and enable us to enter large new
markets or accelerate the growth of our current products and services. We invest in an active pipeline
of these commercialization projects that range in maturity from technology validation to early market
adoption. We cannot predict when, if ever, we will successfully commercialize these projects, or the
exact level of capital expenditures they could require, which could be substantial.
For the fiscal years ended April 30, 2013, 2012 and 2011, our internal research and development
spending amounted to 15%, 10% and 12%, respectively, of our revenue, and customer-funded research
and development spending amounted to an additional 16%, 9% and 12%, respectively, of our revenue.
Sales and Marketing
Our marketing strategy is based on developing leadership positions in new markets through the
introduction of innovation solutions that improve customer operational effectiveness and efficiency. Our
ability to operate in an agile, flexible manner helps us achieve first mover advantage and work closely
with early customers to achieve successful adoption of our solutions. Once we establish a market
position we work to maintain our leadership position while growing our revenue by expanding sales and
through continuous innovation and customer support. Our reputation for innovation is a key
component of our brand and has been acknowledged through a variety of awards and recognized in
numerous articles in domestic and international publications. We have U.S. registered trademarks for
AeroVironment, EV Solutions, PosiCharge, PosiNet, Global Observer, Raven, Wasp, Qube and
Switchblade, and have submitted several other applications for trademark registration.
International Sales
We are increasing our sales efforts abroad and have contracted with international sales
representatives for our business segments in a number of foreign markets. Our international sales
accounted for approximately 15%, 5% and 7%, of our revenue for the fiscal years ended April 30,
2013, 2012 and 2011, respectively.
5
Competition
We believe that the principal competitive factors in the markets for our products and services
include product performance, safety, features, acquisition cost, lifetime operating cost, including
maintenance and support, ease of use, rapid integration with existing equipment and processes, quality,
reliability, customer support, brand and reputation.
Manufacturing and Operations
We pursue a lean and efficient production strategy across our business segments, focusing on rapid
prototyping, supply chain management, final assembly, integration, quality and final acceptance testing.
Using concurrent engineering techniques within an integrated product team structure, we rapidly
prototype design concepts and products while optimizing our designs for manufacturing requirements,
mission capabilities and customer specifications. Within this framework we develop our products with
feedback and input from manufacturing, quality, supply chain management, key suppliers, logistics
personnel and customers. We rapidly incorporate this input into product designs to ensure maximum
efficiency and quality in our products. As a result, we believe that we significantly reduce the time
required to move a product from its design phase to full-rate production deliveries with high reliability,
quality and yields.
We outsource certain production activities, such as the fabrication of structures, the manufacture of
electronic printed circuit board subassemblies, payload components and the medium to high volume
production of our EV charging products, to qualified suppliers, with many of whom we have long-term
relationships. This outsourcing enables us to focus on final assembly system integration and test
processes for our products, ensuring high levels of quality and reliability. We believe that our efficient
supply chain is a significant strength of our production strategy. We have forged strong relationships
with key suppliers based on their ability to grow with our production needs and support our growth
plans. We continue to expand upon our suppliers’ expertise to improve our existing products and
develop new solutions. We rely on both single and multiple suppliers for certain components and
subassemblies. See ‘‘Risk Factors—If critical components of our products that we currently purchase
from a small number of suppliers or raw materials used to manufacture our products become scarce or
unavailable, then we may incur delays in manufacturing and delivery of our products, which could
damage our business’’ for more information. All of our production system operations incorporate
internal and external quality programs and processes to increase acceptance rates, reduce lead times
and lower cost.
Contract Engineering Services
We actively pursue internally and externally funded projects that help us to strengthen our
technological capabilities. Our UAS business segment submits bids to large research customers such as
the Defense Advanced Research Projects Agency, the U.S. Air Force, the U.S. Army and the U.S.
Special Operations Command for projects that we believe have future commercial application. Contract
engineering services conducted through our EES business segment represent a strategic source of
innovation for us, and a portion of our business involves providing advanced battery module and pack
testing services to automotive and battery manufacturers in support of their electric and hybrid electric
vehicle development and production programs. Providing these services contributes to the development
and enhancement of our technical competencies. In an effort to manage the ability of our key technical
personnel to support multiple, high-value research and development initiatives, we attempt to limit the
volume of contract engineering projects that we accept. This process enables us to focus these
personnel on projects we believe offer the greatest current and future value to our business.
6
Contract Mix
The table below shows our revenue for the periods indicated by contract type, including both
government and commercial sales:
Fiscal Year Ended
April 30,
2013
2012
2011
Fixed-price contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost-reimbursable contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time-and-materials contracts . . . . . . . . . . . . . . . . . . . . . . . . . . .
75% 76% 69%
25% 23% 30%
0% 1% 1%
Employees
As of April 30, 2013, we had 768 full-time employees, of whom 262 were in research and
development and engineering, 109 were in sales and marketing, 248 were in operations and 149 were
general and administrative personnel. We believe that we have a good relationship with our employees.
Backlog
We define funded backlog as unfilled firm orders for products and services for which funding
currently is appropriated to us under the contract by the customer. As of April 30, 2013 and 2012, our
funded backlog was approximately $59.4 million and $93.2 million, respectively. We expect that
approximately 91% of our funded backlog will be filled during our fiscal year ending April 30, 2014.
In addition to our funded backlog, we had unfunded backlog of $76.6 million and $96.1 million as
of April 30, 2013 and 2012, respectively. We define unfunded backlog as the total remaining potential
order amounts under cost reimbursable and fixed price contracts with multiple one-year options, and
indefinite delivery, indefinite quantity, or IDIQ contracts. Unfunded backlog does not obligate the U.S.
government to purchase goods or services. There can be no assurance that unfunded backlog will result
in any orders in any particular period, if at all. Management believes that unfunded backlog does not
provide a reliable measure of future estimated revenue under our contracts.
Because of possible future changes in delivery schedules and/or cancellations of orders, backlog at
any particular date is not necessarily representative of actual sales to be expected for any succeeding
period, and actual sales for the year may not meet or exceed the backlog represented. Our backlog is
typically subject to large variations from quarter to quarter as existing contracts expire, or are renewed,
or new contracts are awarded. A majority of our contracts, specifically our IDIQ contracts, do not
currently obligate the U.S. government to purchase any goods or services. Additionally, all U.S.
government contracts included in backlog, whether or not they are funded, may be terminated at the
convenience of the U.S. government.
Other Information
AeroVironment, Inc. was originally incorporated in the State of California in July 1971 and
reincorporated in Delaware in 2006.
Our principal executive offices are located at 181 W. Huntington Dr., Suite 202, Monrovia,
California 91016. Our telephone number is (626) 357-9983. Our website home page on the Internet is
http://www.avinc.com. We make our website content available for information purposes only. It should
not be relied upon for investment purposes, nor is it incorporated by reference into this Annual
Report.
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We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and proxy statements for our annual stockholders’ meetings, as well as any amendments to
those reports, available free of charge through our website as soon as reasonably practical after we
electronically file that material with, or furnish it to, the Securities and Exchange Commission, or SEC.
You can learn more about us by reviewing our SEC filings. Our SEC reports can be accessed through
the investor relations page of our web site at http://investor.avinc.com. These reports may also be
obtained at the SEC’s public reference room at 100 F. Street, N.E., Washington, DC 20549. The SEC
also maintains a web site at www.sec.gov that contains reports, proxy statements and other information
regarding the Company.
Unmanned Aircraft Systems
Our UAS business segment addresses the increasing economic and security value of network-
centric ISR and communications with innovative UAS and tactical missile system solutions.
Industry Background
Small UAS
The market for small UAS has grown significantly over the last decade, initially due to the U.S.
military’s post-Cold War transformation, and now more directly from the demands associated with the
global threat environment. Following the end of the Cold War, the U.S. military began its
transformation into a smaller, more agile force that operates via a network of observation,
communication and precision targeting technologies. This transformation accelerated following the
terrorist attacks of September 11, 2001, as the U.S. military required improved, distributed observation
and targeting of enemy combatants who operate in small groups, often embedded in dense population
centers or dispersed in remote locations. We believe that UAS, which range from large systems, such as
Northrop Grumman’s Global Hawk and General Atomics’ Predator, Sky Warrior, Reaper and Gray Eagle,
to small systems, such as our Raven, Wasp AE and Puma, serve as integral components of this
transforming military force. These systems provide critical observation and communications capabilities
serving the increasing demand for actionable intelligence, while reducing risk to individual
‘‘warfighters.’’ Small UAS can provide real-time observation and communication capabilities to the
small units who control them. As we explore opportunities to develop new markets for our small UAS,
such as border surveillance, law enforcement, first response and infrastructure monitoring, we expect
further growth through the introduction of UAS technology to non-military applications once rules are
established for their safe and effective operation in each country’s national airspace system.
Stratospheric Persistent UAS
We believe a market opportunity exists for UAS that can fly for multiple days to perform
continuous remote sensing and communications relay missions in an affordable manner. The emergence
of distributed military threats in geographic areas with limited communications infrastructure has
prompted U.S. military forces to deploy solutions to manage the increasing volume of data generated
by their operations in those areas. Existing solutions such as communications satellites and manned and
unmanned aircraft address some of this emerging demand for bandwidth, but do so at relatively high
financial and resource costs. Given the nature of asymmetrical warfare, with embedded military
adversaries operating in population centers, rural areas and remote locations, the ability to observe
areas of interest on a continuous basis with high resolution sensors remains a critical and largely unmet
need. Geosynchronous satellites provide fixed, continuous communications relay capabilities to much of
the globe, but they operate nearly 25,000 miles from the surface of the earth, therefore limiting the
bandwidth they can provide and requiring relatively larger, higher power ground stations. Remote
sensing satellites typically operate at lower altitudes, but are unable to maintain geosynchronous
positions, meaning they are moving with respect to the surface of the earth, resulting in a limited
presence over specific areas of interest, and significant periods of time during which they are not
8
present over those areas. UAS that are capable of operating for extended periods of time over an area
of interest without gaps in availability while carrying a communications relay or observation payload in
an affordable manner could help to satisfy this need.
Tactical Missile Systems
The development of weapons capable of rapid deployment and precision strike while minimizing
the risk to surrounding civilians, property and operators accelerated in recent years due to advances in
enabling technologies. Weapons such as laser-guided missiles, ‘‘smart’’ bombs and GPS-guided artillery
shells have dramatically improved the accuracy of strikes against hostile targets. When ground forces
find themselves engaged in a firefight or near a target, their ability to deploy and use a precision
weapon system quickly and easily can mean the difference between mission success and failure.
Embedding a lethal payload into a remotely piloted, man-portable delivery system could provide
warfighters with a valuable and more cost-effective alternative to existing airborne and land-based
missile systems.
Our UAS Solutions
Small UAS Products
Our small UAS, including Raven, Wasp AE, Puma and Shrike, are designed to provide valuable
ISR and communications, including real-time tactical reconnaissance, tracking, combat assessment and
geographic data, directly to the small tactical unit or individual operator, thereby increasing flexibility in
mission planning and execution. Our small UAS wirelessly transmit critical live video and other
information generated by their payload of electro-optical or infrared sensors directly to a hand-held
ground control unit, enabling the operator to view and capture images, during the day or at night, on
the control unit. Our ground control systems allow the operator to control the aircraft by programming
it for GPS-based autonomous navigation using operator-designated way-points and also provide for
manual flight operation. The ground control systems are designed for durability and ease of use in
harsh environments and incorporate a user-friendly, intuitive, user interface. All of our small UAS
currently in production operate from our common ground control system.
All of our small UAS are designed to be man-portable, assembled without tools in less than five
minutes and launched and operated by one or two people, with limited training required. The efficient
and reliable electric motors used in all of our small UAS are powered by replaceable modular battery
packs that can be swapped out quickly, enabling rapid return to flight. All of our small UAS, other
than Switchblade, which we consider a tactical missile system, are designed to be reusable and can be
recovered through an autonomous landing feature that enables a controlled descent to a designated
location.
In military applications, our small UAS enable tactical commanders to observe around the next
corner, to the next intersection or past the ridgeline in real-time. This information facilitates faster,
safer movement through urban, rural and mountainous environments and can enable troops to be
proactive based on field intelligence rather than reactive. Moreover, by providing this information, our
systems reduce the risk to warfighters and to the surrounding population by providing the ability to
tailor the military response to the threat. U.S. military personnel regularly use our small UAS, such as
Raven, for missions such as force protection, combat observation and damage assessment. These
reusable systems are easy to transport, assemble and operate and are relatively quiet when flying at
typical operational altitudes of 200 to 300 feet above ground level, the result of our efficient electric
propulsion systems. Furthermore, their small size makes them difficult to see from the ground. In
addition, the low cost of our small UAS relative to larger systems and alternatives makes it practical for
customers to deploy these assets directly to warfighters.
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Our small UAS offerings also include spare equipment, alternative payload modules, batteries,
chargers, repair services and customer support. We provide training by our highly-skilled instructors,
who typically have extensive military experience, and continuous refurbishment and repair services for
our products. By maintaining close contact with our customers and users in the field, we gather critical
feedback on our products and incorporate that information into ongoing product development and
research and development efforts. This approach enables us to improve our solutions in response to,
and in anticipation of, evolving customer needs.
Each system in our small UAS portfolio typically includes multiple aircraft, our common and
interoperable hand-held ground control system and an array of spare parts and accessories. Our current
small UAS portfolio consists of the following aircraft:
Small
UAS
Product
Wingspan Weight
(lbs.)
(ft.)
Recovery
Standard
Sensors
Puma
9.2
13.0 Vertical autonomous
landing capable (ground
or water)
Raven
4.5
4.5 Vertical autonomous
landing capable
Wasp AE
3.3
2.8 Vertical autonomous
landing capable (ground
or water)
Shrike
3.0
5.5 Vertical takeoff and
landing
Mechanical pan, tilt,
zoom and digital zoom
electro-optical and
infrared
Mechanical pan, tilt,
zoom and digital zoom
electro-optical and
infrared
Mechanical pan, tilt,
zoom and digital zoom
electro-optical and
infrared
Mechanical pan, tilt,
zoom and digital zoom
electro-optical and
infrared
Range
(mi.)(1)
Flight Time
(min.)(1)
9.0
120
6.0
90
3.0
50
5.0
40
(1) Represents point-to-point minimum customer-mandated specifications for all operating conditions.
In optimal conditions, the performance of our products may significantly exceed these
specifications. Our Digital Data Link, or DDL relay can extend range significantly.
The ground control system serves as the primary interface between the operator and the aircraft,
and allows the operator to control the direction, speed and altitude of the aircraft as well as view the
visual information generated by the aircraft through real-time, streaming video. Our ground control
system interfaces with each of our air vehicles, except Qube, providing a common user interface with
each of our air vehicles. In addition to the thousands of air vehicles delivered to our customers,
thousands of ground control systems are also in our customers’ hands.
The Qube is an unmanned aircraft system tailored to the needs of first response professionals such
as law enforcement, search and rescue and fire department personnel. Based on the Shrike platform,
the Qube incorporates a simplified touch screen interface to control the system and view the
information produced by the air vehicle’s onboard sensors. Portable and easy to assemble, operate and
stow, the Qube is designed to provide rapid airborne information within one kilometer of its launch
point in situations where time is short and risk is high.
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During fiscal 2013 we began deploying new miniature gimbaled sensor payloads with mechanical
pan, tilt and zoom capabilities that integrate both electro-optical and infrared sensors into a single
payload for our Raven system. Part of a new line of miniature gimbaled products, these sensor payloads
provide small UAS operators with enhanced observation and target tracking functionality. Our DDL is
now integrated into Puma, Raven and Wasp AE, Shrike and Qube systems, enhancing their capabilities,
and ultimately, the utility of our small UAS by enabling more efficient radio spectrum utilization and
communications security. Small UAS incorporating our DDL offer many more channels as compared to
our analog link, increasing the number of air vehicles that can operate in a given area. Additionally,
our DDL enables each air vehicle to operate as an Internet-Protocol addressable hub capable of
routing and relaying video, voice and data to and from multiple other nodes on this ad hoc network.
This capability enables beyond line-of-sight operation of our small UAS, further enhancing their value
proposition to our customers.
UAS Logistics Services
In support of our small UAS we offer a suite of services that help to ensure the successful
operation of our products by our customers. These services generate incremental revenue for the
company and provide us with continuous feedback to understand the utility of our systems, anticipate
our customers’ needs and develop additional customer insights. We believe that this ongoing feedback
loop enables us to continue to provide our customers with innovative solutions that help them succeed.
We provide spare parts as well as repair, refurbishment and replacement services through our services
operation. We designed our services operation to minimize supply chain delays and support our
customers with spare parts, replacement aircraft and support whenever and wherever they need them.
One of our facilities also serves as the primary depot for repairs and spare parts.
We provide complete training services to support all of our small UAS. Our highly-skilled
instructors typically have extensive military experience. We deploy training teams throughout the
continental United States and abroad to support our customers’ wide variety of training needs on both
production and development-stage systems.
UAS Mission Services
Customers who require the information generated by our small UAS but who may not wish to
purchase, operate and support the equipment themselves can contract with us for turnkey mission
services. We deploy qualified operators to locations around the world to provide UAS-generated
reconnaissance video and other information to support numerous types of missions.
UAS Contract Engineering Services
We provide contract engineering services in support of customer-funded research and development
projects, delivering new value-added technology solutions to our customers. These types of projects
typically involve developing new system solutions and technology or new capabilities to existing
solutions that we introduce as retrofits or upgrades. We recognize customer-funded research and
development projects as revenue.
We supply our UAS products and services to multiple customers in the United States and beyond.
We had delivered approximately 84% of the U.S. Army’s acquisition objective for new Raven small
UAS, which totals 2,358 systems, as of April 30, 2013. For the fiscal years ended April 30, 2013, 2012
and 2011, our UAS segment products and services accounted for 81%, 84% and 85%, respectively, of
our revenue.
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UAS Technology, Research and Development
Our primary areas of technological competence represent the sum of numerous technical skills and
capabilities that help to differentiate our approach and product offerings. The following list highlights a
number of our key UAS technological capabilities:
(cid:127) lightweight, low speed aerostructures and aerodynamic design;
(cid:127) miniaturized avionics and micro/nano unmanned aircraft systems;
(cid:127) image stabilization and target tracking;
(cid:127) unmanned autonomous control systems;
(cid:127) payload capability, miniaturization and integration;
(cid:127) electric and hydrogen propulsion systems and high-pressure-ratio turbochargers;
(cid:127) stratospheric flight operations;
(cid:127) fluid dynamics;
(cid:127) miniature, low power wireless digital communications; and
(cid:127) system integration and optimization.
Three of our UAS development initiatives are described below:
Global Observer. Global Observer is our high-altitude, long-endurance unmanned aircraft
system under development to address the critical need for affordable, 24-hour, 365-days-a-year
persistent communications and ISR. Each Global Observer aircraft is designed to operate at
up to 65,000 feet for up to a week before landing. A complete system would include at least
two aircraft, one flying over a designated area and the other in preparation for takeoff or in
transit to or from the designated area, which would alternate positions approximately every
week to maintain an uninterrupted presence. Global Observer is the continuation of years of
research with both our own and U.S. government development funding. The system has been
developed and tested under a three-and-one-half-year joint capabilities technology
demonstration program, or JCTD, sponsored by several agencies of the U.S. government. We
expect the efficiency and endurance of this unmanned aircraft system, three to four times the
longest flight time of existing payload-capable fixed-wing aerial options, to provide for
dramatically lower operating and total life cycle costs for missions where long distance
persistent communications or surveillance is critical. The Global Observer platform is intended
to be the low-cost equivalent of a 12-mile-high, redeployable satellite, providing a potential
footprint of coverage of up to 600 miles in diameter and capable of providing a broad array of
services, including high-speed broadband data, video and voice relay and ISR. We expect these
capabilities to provide the foundation for multiple high-value applications including
communications relay and ISR missions for defense and homeland security, storm tracking,
telecommunications infrastructure, wildfire detection/tracking and disaster recovery services.
The first Global Observer aircraft developed in the JCTD successfully completed
extensive ground testing and then eight test flights at Edwards Air Force Base in California
between August 2010 and March 2011, the last three flights using its liquid hydrogen-fuelled
propulsion system. More than 18 hours into its ninth flight, after reaching 30,000 feet altitude,
the aircraft experienced a mishap that resulted in it impacting the ground on an uninhabited
portion of the base and being damaged beyond repair. Our internal analysis quickly
determined the cause of the mishap and we subsequently developed and successfully tested a
solution designed to prevent it from happening in the future.
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Tier II Unmanned Aircraft System. We are expanding our family of UAS to include a
tier II unmanned helicopter that is capable of longer duration, higher altitude and carrying
heavier payloads, to address an unmet and growing market opportunity. Our supplier provides
the base aircraft that we then modify significantly to serve the needs of our target markets.
We believe this offering will enhance our value proposition to customers through more
capable mission services as well as hardware sales, both as a stand-alone solution and
combined with our small UAS. Our tier II unmanned helicopter will be the only such aircraft
that can be operated from our portable and interoperable common ground control system,
providing a level of portability, flexibility and ease of use not available elsewhere.
Miniature DDL module. Our digital data link (DDL) is now incorporated into each
product within our family of small UAS and has been integrated into other unmanned aircraft
systems for testing and demonstration purposes. As small and lightweight as DDL is, we
developed a smaller DDL module to enable a broad range of devices and users to benefit
from its flexible, low cost and rapidly deployable nature. With our miniature DDL module,
users of devices such as smart phones can participate in secure DDL-enabled data networks
on an ad hoc basis. We believe that this innovation will expand our presence into the tactical
communication market.
UAS Sales and Marketing
We organize our U.S. UAS business development team members by customer and product and
have team members located where they are in close proximity to the customers they support, where
possible. Our program managers are organized by product and focus on designing optimal solutions
and contract fulfillment, as well as internalizing feedback from customers and users. By maintaining
assigned points of contact with our customers, we believe that we are able to enhance our relationships,
service existing contracts effectively and gain vital feedback to improve our responsiveness and product
offerings.
UAS Manufacturing and Operations
We have successfully developed the manufacturing infrastructure to produce UAS products at high
rates, support initial low rate production for new UAS development programs and tactical missile
systems and execute initial low-rate production of our stratospheric persistent UAS, Global Observer.
Continued investment in infrastructure has established our manufacturing capability to meet demand
with scalable capacity. By drawing upon experienced personnel across various manufacturing industries
including aerospace, automotive and volume commodities, we have instituted lean production systems
and lever our International Organization for Standardization, or ISO, certification, integrated supply
chain strategy, document control systems, and process control methodologies for a high volume,
efficient production system. Presently, we perform small UAS manufacturing at the 85,000 square foot
manufacturing facility we established in 2005. This ISO 9001:2008 certified manufacturing facility is
designed to accommodate demand of up to 1,000 aircraft per month. ISO 9001:2008 refers to a set of
voluntary standards for quality management systems. These standards are established by the ISO to
govern quality management systems used worldwide. Companies that receive ISO certification have
passed audits performed by a Registrar Accreditation Board-certified auditing company. These audits
evaluate the effectiveness of companies’ quality management systems and their compliance with ISO
standards. Some companies and government agencies view ISO certification as a positive factor in
supplier assessments. Our 105,000 square foot facility housing the Global Observer program is
equipped with specialized testing and production capabilities to enable low rate production of this
unique system.
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UAS Competition
The market for military small UAS is evolving rapidly and subject to changing technologies,
shifting customer needs and expectations and the potential introduction of new products. We believe
that a number of established domestic and international defense contractors have developed or are
developing small UAS that will continue to compete directly with our products. Some of these
contractors have significantly more financial and other resources than we possess. Our current principal
small UAS competitors include Elbit Systems Ltd., L-3 Communications Holdings, Inc. and Lockheed
Martin Corporation. We do not view large UAS such as Northrop Grumman Corporation’s Global
Hawk, General Atomics, Inc.’s Predator and its derivatives, The Boeing Company’s ScanEagle and
Textron Inc.’s Shadow as direct competitors to our small UAS because they perform different missions,
do not typically deliver their information directly to front-line ground forces and are not hand launched
and controlled, although we cannot be certain that these platforms will not become direct competitors
in the future.
The market for high altitude long endurance UAS is in an early stage of development. As a result,
this category is not well defined and is characterized by multiple potential solutions. An existing
contractor that claims to provide long endurance UAS is Northrop Grumman Corporation with its
Global Hawk. Several aerospace and defense contractors are pursuing this market opportunity with
proposed very long duration UAS, including The Boeing Company, Qinetiq Group PLC, Aurora Flight
Sciences Corporation, Lockheed Martin Corporation and Northrop Grumman Corporation. Companies
pursuing airships as a solution for this market include Lockheed Martin Corporation and Northrop
Grumman Corporation. Companies pursuing satellites as a solution for this market include The Boeing
Company, Lockheed Martin Corporation, General Dynamics Corporation, EADS N.V., Ball
Corporation and Orbital Sciences Corporation.
The market for UAS mission services includes some of the companies competing in the small UAS
market as well as companies focused on delivering services as opposed to developing and producing
their own UAS. UAS manufacturers such as The Boeing Company’s Insitu Business and Textron Inc.’s
AAI Corporation currently provide UAS mission services to military customers. Other companies such
as ISR Group Inc., Dyncorp International LLC and VT Group plc focus on providing services including
those employing UAS.
The market for Tactical Missile Systems is in an early stage of development, but is evolving rapidly.
Potential competitors in this market include Textron Inc. and Lockheed Martin Corporation.
The market for tier II unmanned helicopters includes Schiebel Corporation’s CamCopter S-100,
Indra Sistemas, S.A.’s Pelicano, Saab AB’s Skeldar V-200 and Yamaha Corporation’s RMAX.
The market for non-military small UAS is in an early stage of development. The primary factors
hindering the development of this market in the U.S. include Federal Aviation Administration, or FAA,
regulations that severely restrict the use of small UAS in the national airspace system and Federal
Communications Commission regulations regarding the availability of electromagnetic frequency
spectrum for the operation of these systems. Initial likely non-military users of small UAS include
public safety organizations such as law enforcement agencies, search and rescue teams and fire
departments. In addition to companies competing in the military small UAS market, the non-military
market could attract numerous additional competitors given perceived lower barriers to entry and a
much more fragmented marketplace as compared to the military market. Potential additional
competitors could include start-up companies and individuals providing extremely low cost solutions.
We believe that the principal competitive factors in the markets for our UAS products and services
include product performance, features, acquisition cost, lifetime operating cost, including maintenance
and support, ease of use, integration with existing equipment and processes, quality, reliability,
customer support, brand and reputation.
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UAS Regulation
Due to the fact that we contract with the DoD and other agencies of the U.S. government, we are
subject to extensive federal regulations, including the Federal Acquisition Regulations, Defense Federal
Acquisitions Regulations, Truth in Negotiations Act, Foreign Corrupt Practices Act, False Claims Act
and the regulations promulgated under the DoD Industrial Security Manual, which establishes the
security guidelines for classified programs and facilities as well as individual security clearances. The
federal government audits and reviews our performance on contracts, pricing practices, cost structure,
and compliance with applicable laws, regulations and standards. Like most government contractors, our
contracts are audited and reviewed on a continual basis by federal agencies, including the Defense
Contract Management Agency, or DCMA, and the Defense Contract Audit Agency, or DCAA.
Certain of these regulations carry substantial penalty provisions, including suspension or debarment
from government contracting or subcontracting for a period of time if we are found to be in violation.
We carefully monitor all of our contracts and contractual efforts to minimize the possibility of any
violation of these regulations.
In addition, we are subject to industry-specific regulations due to the nature of the products and
services we provide.
For example, we are subject to further U.S. government regulation, including by the FAA, which
regulates airspace for all air vehicles, by the National Telecommunications and Information
Administration and Federal Communications Commission, which regulate the wireless communications
upon which our UAS depend in the U.S., and under the International Traffic in Arms Regulations,
which regulate the export of controlled technical data, defense articles and defense services. In 2006,
the FAA issued a clarification of its existing policies stating that, in order to engage in public use of
small UAS in the U.S. National Airspace System, a public (government) operator must obtain a
Certificate of Authorization, or COA, from the FAA or fly in restricted airspace. The FAA’s COA
approval process requires that the public operator certify the airworthiness of the aircraft for its
intended purpose, that a collision with another aircraft or other airspace user is extremely improbable,
that the small unmanned aircraft system complies with appropriate cloud and terrain clearances and
that the operator or spotter of the small unmanned aircraft system is generally within one half-mile
laterally and 400 feet vertically of the small unmanned aircraft system while in operation. Furthermore,
the FAA’s clarification of existing policy states that the rules for radio-controlled hobby aircraft do not
apply to public or commercial use of small UAS. The U.S. Congress recently mandated that the FAA
develop rules that provide for the integration of small UAS into the national airspace system by
September 30, 2015. The FAA is in the process of drafting updated regulations specifically for small
UAS operations. We have engaged in discussions with the FAA to help ensure that these new
regulations allow for the maximum safe utilization of our small UAS.
Furthermore, our non-U.S. operations are subject to the laws and regulations of foreign
jurisdictions, which may include regulations that are more stringent than those imposed by the U.S.
government on our U.S. operations.
UAS Government Contracting Process
We sell the significant majority of our small UAS products and services as the prime contractor
under contracts with the U.S. government. Certain important aspects of our government contracts are
described below.
UAS Bidding Process
Most of our current government contracts were awarded through a competitive bidding process.
The U.S. government awards competitive-bid contracts based on proposal evaluation criteria established
by the procuring agency. Competitive-bid contracts are awarded after a formal bid and proposal
competition among providers. Interested contractors prepare a bid and proposal in response to the
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agency’s request for proposal or request for information. A bid and proposal is usually prepared in a
short time period in response to a deadline and requires the extensive involvement of numerous
technical and administrative personnel. Following award, competitive-bid contracts may be challenged
by unsuccessful bidders.
UAS Funding
The funding of U.S. government programs is subject to congressional appropriations. Although
multi-year contracts may be authorized in connection with major procurements, Congress generally
appropriates funds on a fiscal year basis, even though a program may continue for many years.
Consequently, programs are often only partially funded initially, and additional funds are committed
only as Congress makes further appropriations.
The contracts for our full-rate production UAS are funded either through operational needs
statements or as programs of record. Operational needs statements represent allocations of
discretionary spending or reallocations of funding from other government programs. Funding for our
production of initial Raven system deliveries was provided through operational needs statements. We
define a program of record as a program which, after undergoing extensive DoD review and product
testing, is included in the five-year government budget cycle, meaning that funding will be allocated for
purchases under these contracts during the five-year cycle, absent affirmative action by the customer or
Congress to change the budgeted amount. Funding for these programs is subject to annual approval.
We are currently the sole provider and prime contractor under all of the programs of record
established by the DoD for small UAS.
UAS Material Government Contract Provisions
All contracts with the U.S. government contain provisions, and are subject to laws and regulations,
that give the government rights and remedies not typically found in commercial contracts, including
rights that allow the government to:
(cid:127) terminate existing contracts for convenience, which affords the U.S. government the right to
terminate the contract in whole or in part anytime it wants for any reason or no reason, as well
as for default;
(cid:127) reduce or modify contracts or subcontracts, if its requirements or budgetary constraints change;
(cid:127) cancel multi-year contracts and related orders, if funds for contract performance for any
subsequent year become unavailable;
(cid:127) claim rights in products and systems produced by its contractors if the contract is cost
reimbursable and the contractor produces the products or systems during the performance of the
contract;
(cid:127) adjust contract costs and fees on the basis of audits completed by its agencies;
(cid:127) suspend or debar a contractor from doing business with the U.S. government; and
(cid:127) control or prohibit the export of products.
Generally, government contracts are subject to oversight audits by government representatives.
Provisions in these contracts permit termination, in whole or in part, without prior notice, at the
government’s convenience or upon contractor default under the contract. Compensation in the event of
a termination, if any, is limited to work completed at the time of termination. In the event of
termination for convenience, the contractor may receive a certain allowance for profit on the work
performed.
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UAS Government Contract Categories
We have three types of government contracts, each of which involves a different payment
methodology and level of risk related to the cost of performance. These basic types of contracts are
typically referred to as fixed-price contracts, cost reimbursable contracts, including cost-plus-fixed fee,
cost-plus-award fee, and cost-plus-incentive fee, and time-and-materials contracts.
In some cases, depending on the urgency of the project and the complexity of the contract
negotiation, we will enter into a Letter Contract prior to finalizing the terms of a definitive fixed-price,
cost reimbursable or time-and-materials definitive contract. A Letter Contract is a written preliminary
contractual instrument that provides limited initial funding and authorizes us to begin immediately
manufacturing supplies or performing services while negotiating the definitive terms of the
procurement.
Fixed-Price. These contracts are not subject to adjustment by reason of costs incurred in
the performance of the contract. With this type of contract, we assume the risk that we will
not be able to perform at a cost below the fixed-price, except for costs incurred because of
contract changes ordered by the customer. Upon the U.S. government’s termination of a
fixed-price contract, generally we would be entitled to payment for items delivered to and
accepted by the U.S. government and, if the termination is at the U.S. government’s
convenience, for payment of fair compensation for work performed plus the costs of settling
and paying claims by any terminated subcontractors, other settlement expenses and a
reasonable allowance for profit on the costs incurred.
Cost Reimbursable. Cost reimbursable contracts include cost-plus-fixed fee contracts,
cost-plus-award fee contracts and cost-plus-incentive fee contracts. Under each type of
contract, we assume the risk that we may not be able to recover costs if they are not allowable
under the contract terms or applicable regulations, or if the costs exceed the contract funding.
(cid:127) Cost-plus-fixed fee contracts are cost reimbursable contracts that provide for payment
of a negotiated fee that is fixed at the inception of the contract. This fixed fee does not
vary with actual cost of the contract, but may be adjusted as a result of changes in the
work to be performed under the contract. This contract type poses less risk of loss than
a fixed-price contract, but our ability to win future contracts from the procuring agency
may be adversely affected if we fail to perform within the maximum cost set forth in
the contract.
(cid:127) A cost-plus-award fee contract is a cost reimbursable contract that provides for a fee
consisting of a base amount, which may be zero, fixed at inception of the contract and
an award amount, based upon the government’s satisfaction with the performance
under the contract. With this type of contract, we assume the risk that we may not
receive the award fee, or only a portion of it, if we do not perform satisfactorily.
(cid:127) A cost-plus-incentive fee contract is a cost reimbursable contract that provides for an
initially negotiated fee to be adjusted later by a formula based on the relationship of
total allowable costs to total target costs.
We typically experience lower profit margins and lower risk under cost reimbursable
contracts than under fixed-price contracts. Upon the termination of a cost reimbursable
contract, generally we would be entitled to reimbursement of our allowable costs and, if the
termination is at the U.S. government’s convenience, a total fee proportionate to the
percentage of work completed under the contract.
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Time-and-Materials. Under a time-and-materials contract, our compensation is based on
a fixed hourly rate established for specified labor or skill categories. We are paid at the
established hourly rates for the hours we expend performing the work specified in the
contract. Labor costs, overhead, general and administrative costs and profit are included in the
fixed hourly rate. Materials, subcontractors, travel and other direct costs are reimbursed at
actual costs plus an amount for material handling. We make critical pricing assumptions and
decisions when developing and proposing time-and-materials labor rates. We risk reduced
profitability if our actual costs exceed the costs incorporated into the fixed hourly labor rate.
One variation of a standard time-and-materials contract is a time-and-materials, award fee
contract. Under this type of contract, a positive or negative incentive can be earned based on
achievement against specific performance metrics.
UAS Indefinite Delivery Indefinite Quantity Contract Form
The U.S. government frequently uses IDIQ contracts and IDIQ-type contract forms, such as cost
reimbursable and fixed price contracts with multiple one-year options, to obtain fixed-price, cost
reimbursable and time-and-materials contractual commitments to provide products or services over a
period of time pursuant to established general terms and conditions. At the time of the award of an
IDIQ contract or IDIQ-type contract, the U.S. Government generally commits to purchase only a
minimal amount of products or services from the contractor to whom such contract is awarded.
After award of an IDIQ contract the U.S. Government may issue task orders for specific services
or products it needs. The competitive process to obtain task orders under an award contract is limited
to the pre-selected contractors. If such contract has a single prime contractor, then the award of task
orders is limited to that contractor. If the contract has multiple prime contractors, then the award of
the task order is competitively determined among only those prime contractors.
IDIQ and IDIQ-type contracts typically have multi-year terms and unfunded ceiling amounts that
enable, but do not commit, the U.S. government to purchase substantial amounts of products and
services from one or more contractors.
Efficient Energy Systems
Our EES business segment addresses the increasing economic, environmental and energy security
value of electric transportation with solutions for developing, manufacturing and charging electric
vehicles.
Industry Background
Electric Vehicle Charging Systems
Plug-in electric (PEV) and advanced hybrid electric vehicles (HEV) require on-board battery packs
to provide the electricity that powers their operation. These battery packs vary in chemistry, size,
weight, shape, and energy storage capacity. As drivers operate electric vehicles, their battery packs
discharge electricity similar to the way an internal combustion vehicle’s gasoline tank supplies fuel to
the engine as it is driven. Upon discharging the battery pack, the driver of an electric vehicle must
either replace it with a fully charged pack, if it is removable, or recharge the pack while it remains in
the vehicle. Because of the differences in battery sizes and composition, as well as the manner in which
each vehicle is operated, a variety of charging systems exist to support these vehicles. These charging
systems range from relatively slow charging devices that require many hours to completely recharge a
battery pack to very fast chargers that can do so in minutes.
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Passenger and Fleet Electric Vehicle Charging Systems
Numerous factors contribute to a growing interest among consumers, governments and automakers
in vehicles that do not rely on fossil fuels. These factors include:
(cid:127) concerns regarding the environmental impact of resource extraction and carbon emissions
associated with fossil fuel-based transportation;
(cid:127) growing awareness of the geopolitical and economic costs associated with the current
dependence on petroleum imports;
(cid:127) anticipation of future energy price volatility;
(cid:127) the increasing demand for automobiles in large, rapidly growing markets such as China and
India and the resulting anticipated growth in demand for fossil fuels; and
(cid:127) increasing government and private investments in ‘‘clean’’ technologies.
In response to these factors numerous automotive manufacturers around the world are developing
and introducing modern plug-in electric vehicles, or PEVs, for everyday consumer and fleet
transportation. Vehicles in this class incorporate battery electric drive systems either in a dedicated
format in which an onboard battery pack supplies electricity to one or more electric motors, or in an
advanced hybrid design, in which an onboard battery pack provides electricity to an electric motor, and
a small onboard internal combustion engine recharges the battery as needed. A PEV requires that its
battery pack be recharged from an external power source or be replaced with a fully charged battery
pack. An advanced hybrid EV does not require recharging from an external power source because an
onboard gasoline powered internal combustion engine recharges the battery pack, but using an external
power source can minimize gasoline consumption and vehicle carbon emissions.
Most EVs will likely be recharged using external systems installed at home, work and at public
places such as shopping centers, supermarkets, highway rest stops, and locations similar to gasoline
refueling stations. With a growing number of new consumer electric vehicle models now deployed, and
additional models scheduled to follow, there exists a need for the implementation of charging
infrastructure to enable their safe, reliable and practical recharging.
The rate at which a passenger electric vehicle battery pack can be recharged depends on a number
of factors including battery type, size, ambient temperature, the capacity of the vehicle’s onboard
controller to convert electricity to the proper format for storage in a battery pack, its ability to receive
high current charging and the amount of power available. Electric vehicle charging systems may be
segmented into three general categories.
Level
Infrastructure Requirement
Recharge Time
Level 1 . . . . . . . . . . . . . . . . . . Power cord with safety features
Level 2, known as Electric
Vehicle Supply Equipment
. . . .
that plugs into a dedicated
120-volt AC outlet
Requires professional
installation of a dedicated
240-volt AC circuit
Level 3, DC or fast/quick charge Typically requires installation
onto a three-phase, 480-volt AC
circuit
Capable of slow recharge that
could require up to 24 hours or
more for certain battery packs
Capable of fully recharging most
battery packs in four to eight
hours
Capable of fully recharging
battery packs designed to accept
such a charge in minutes
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We believe that broad adoption of passenger electric vehicles will require a mix of these types of
charging systems, distributed so as to make them accessible to drivers when and where they need them.
The adoption of passenger electric vehicles also necessitates supporting services, such as: experienced
electrical assessment and installation, the integration of PEVs and charging systems into smart grids
and the ability to monitor and manage the use of electricity and provide for various payment methods
and plans such as subscription and credit card point-of-sale.
Industrial Electric Vehicle Charging Systems
While the broad availability of passenger electric vehicles is fairly recent, industrial electric vehicles
have been in use extensively for decades. In industrial environments such as factories, distribution
centers and airports, fast charge technology, which charges a battery with a high electrical current while
the battery remains in the vehicle, eliminates the need for frequent battery changing and a dedicated
battery room. This approach increases productivity, reduces operating costs and improves facility safety.
The earliest adopters of fast charge technology include the automotive and air transportation industries.
Large food and retail industry customers now also utilize fast charge technology.
Industrial electric vehicles rely on large onboard batteries that can consume up to 17 cubic feet
and weigh up to 3,500 pounds. In multi-shift fleet operations traditional slow charging systems require
users to exchange vehicle batteries throughout the day because these batteries discharge their energy
through vehicle usage and there is insufficient vehicle downtime to recharge them during a shift. As a
result, drivers must leave their work areas when the battery reaches a low state of charge and drive to a
dedicated battery changing room, which often occupies valuable floor space and is frequently located
far from a driver’s work area. The driver, or in some cases a dedicated battery attendant, must then
remove the battery from the vehicle, place it on a storage rack, connect it to a conventional battery
charger, identify a fully-charged battery, move it into the vehicle’s battery compartment and reconnect
the battery to the motor before the driver may return to the work area. These battery changes take
place every day in facilities around the world, resulting in reduced material movement and increased
operating costs. Furthermore, depending on the type of battery, conventional battery chargers can
require up to eight hours to recharge the battery, which then must cool for up to an additional eight
hours before it is ready to be used again. Consequently, depending on vehicle usage and the number of
shifts in an operation, a fleet may require more than one battery per vehicle, which necessitates
additional storage space, chargers and maintenance time. Moreover, the high levels of heat generated
by conventional battery chargers during their normal use can cause excessive evaporation of the water
contained in the battery and damage to the battery’s components. Over time, this evaporation of fluid
and damage to components result in battery degradation and adversely affect the battery’s life.
Power Cycling and Test Systems
Developers and manufacturers of electric and hybrid electric vehicles typically conduct a variety of
tests on the electric propulsion and energy storage systems that convert electricity to motion. These
tests include simulating the consumption, conversion and storage of electricity through a range of
operating scenarios, and include long-term testing to simulate the rigors of real-world driving.
Developers of battery packs, electric motors and fuel cells also test their devices to validate design
hypotheses and identify potential operating issues. Global interest in electric transportation solutions,
including electric and hybrid electric vehicles, has increased and has served as a driver of increased
demand for electric vehicle and component test systems. This demand spans commercial, government,
military and university research and development labs as well as commercial manufacturing facilities as
more funding and attention are focused on clean transportation.
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Our EES Solutions
EES Products
Our EES business segment produces electric transportation and industrial productivity solutions for
commercial, consumer and government customers, develops new potential electric transportation
solutions and performs contract engineering services. These solutions consist of: electric vehicle
charging systems, services and related solutions for plug-in passenger and fleet vehicles, PosiCharge
industrial electric vehicle charging systems for electric material handling vehicles and airport ground
support equipment, and power cycling and test systems for developers and manufacturers of EVs as
well as battery packs, electric motors and fuel cells. For the fiscal years ended April 30, 2013, 2012 and
2011, EES sales accounted for 19%, 16% and 15%, respectively, of our revenue. We believe that the
markets for our electric vehicle charging systems and power cycling and test systems continue to
develop and that continued diversification of our customer base and the increasing adoption of electric
vehicles will support increased penetration into target markets.
Passenger and Fleet Electric Vehicle Charging Systems
In response to automakers’ plans to introduce plug-in EVs (PEVs) and broader trends favoring
electric transportation, we have developed solutions to support the adoption and use of PEVs from
nearly every major automaker and many startups worldwide. Our initial EV charging technology
emerged from our development of the GM Impact, the first modern EV. Over two decades we
improved the technology, deployed it to industrial markets, and adapted it for the current generation of
EVs. We believe that most EV drivers will charge their vehicles overnight at their homes. Those
without a charging location at home or who make trips beyond the range of their vehicle’s battery pack
will require public charging infrastructure. Our strategy is to offer a full solution of charging
infrastructure, including overnight home chargers, public chargers, public fast chargers, installation
services, data collection systems and communications through multiple wired and wireless data
communications options. We offer an integrated solution designed to enable the broad adoption and
the practical use of plug-in electric and hybrid electric vehicles. From home charging to ‘‘pay at the
pump’’ fast charging in minutes, our goal is to enable drivers to use electric vehicles as practical
alternatives to gasoline-powered automobiles.
A component of our strategy is to develop relationships across multiple channels that lever our
strengths and provide complementary pathways to market. We have announced several such agreements
to date with leading auto manufacturers, electric utilities and state and municipal governments.
We believe these early successes represent a valuable position from which to expand our charging
infrastructure footprint in the United States and globally. We continue to work in the United States
and internationally with automakers, utilities and government agencies at multiple levels as well as with
private industry to explore business models and to promote our solutions.
In addition to the thousands of the ‘‘Level 2’’ charging systems we have deployed in North
America, we have also begun to deploy PEV fast charging systems, which we view as a powerful tool
that can help enable the broader adoption of PEVs in two main categories:
(cid:127) Passenger Electric Vehicles. A network of fast charging stations would ensure
that EV drivers have access to a complete battery recharge in minutes, and
that advanced plug-in hybrid EV drivers could drive more miles in electric
mode, thereby reducing emissions and consuming less gasoline or diesel, which
are typically significantly more expensive than electricity.
(cid:127) Fleet Electric Vehicles. Fleet PEVs could come in multiple vehicle types and
duty cycles, from inner-city taxis and buses to medium range delivery vans and
utility repair vehicles. A few fast charging systems installed in a maintenance
yard or networks of systems in cities could help fleet operators maintain
throughput while reducing emissions and fuel expenses.
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Passenger and Fleet Electric Vehicle Charging Services
We have created a nationwide network of licensed electrical contracting firms to provide
installation and repair services for our growing footprint of passenger and fleet electric vehicle charging
systems. We identify, qualify, select, train, certify and monitor the performance of these contractors and
equip them with proprietary tools, expertise and web-based information systems to facilitate the
successful installation and support of our charging systems as this market opportunity grows. Our
24-hour customer service center provides support to answer customer inquiries and promote a high
level of customer satisfaction.
In addition to supplying and installing passenger and fleet EV charging systems that do not
incorporate communications capabilities in accordance with automakers’ requirements, we also supply
and install charging systems that possess the ability to connect wirelessly with a web-accessible,
centralized database for two-way communication and asset management. This capability enables us to
provide an integrated, networked solution to support subscriber and utility business models. Our
charging systems incorporate meters that provide electricity consumption information for analysis and
revenue generation and permit remote management to enable time-of-use operation.
Our products and services can readily be customized to support our partners’ marketing programs.
This capability is designed to enable automakers, utilities, government agencies and other businesses to
deliver a branded solution to their customers that will enhance their customer relationships.
PosiCharge Industrial Electric Vehicle Charging System
Developed from our work on electric and hybrid electric vehicles and advanced battery systems in
the 1990s, PosiCharge industrial electric vehicle charging systems quickly and safely recharge industrial
vehicle batteries while the batteries remain in the vehicle during regularly scheduled breaks and other
times when the vehicle is not in use, thereby maintaining a sufficient level of energy throughout the
workday. By eliminating battery changing, PosiCharge systems improve supply chain productivity by
returning time to the vehicle operator to complete more work. Furthermore, because of their advanced
efficient energy capabilities, PosiCharge systems can reduce the amount of electricity required to
support electric industrial vehicles by several hundred dollars per year per vehicle, as compared to less
efficient conventional battery chargers. Many customers who implement our charging systems in their
facilities are able to re-purpose the battery changing room floor space for more productive activities
and create a safer working environment, as drivers or battery attendants no longer need to exchange
large lead-acid batteries continually.
The proprietary battery charging algorithms built into PosiCharge systems, which are tailored to
battery type, brand and size, maximize the rate at which energy is delivered into the battery while
minimizing heat generation and its damaging effects on the battery’s internal components. We
developed these algorithms over years of advanced battery testing and usage. We believe our work to
develop these algorithms contributed to the major battery manufacturers offering warranties for the use
of their batteries with our charging systems, which provided a critical assurance to customers that our
rapid charging systems would not harm their batteries. In combination with a weekly equalization
charge that balances all the cells within the battery pack, our ‘‘intelligent’’ charging process enhances
the performance of batteries. We believe that competing rapid and conventional charging systems,
which lack our current and voltage regulating tailored charge algorithms and monitoring capabilities,
may actually contribute to lower battery performance and lifespan, ultimately resulting in higher battery
costs and degraded vehicle performance.
We project that PosiCharge system customers typically begin to realize cost savings when compared
to battery changing within the first 12 months of operation. Operators of large fleets of electric
industrial vehicles who use PosiCharge systems in multiple settings, including factories, distribution
centers, cold storage facilities and airport tarmacs, include Ford Motor Company, United Airlines, Inc.,
Southwest Airlines, Nestle Foods, Total Logistics Control and IKEA.
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Our PosiCharge systems and support products range from lower-power devices for smaller, less
heavily-used vehicles to high-power devices for large, heavy-duty vehicles, and are capable of charging
from one to 16 vehicles concurrently, depending on the needs of the operation. Included in our product
line are systems for indoor and outdoor use, such as for airport ground support equipment. We also
supply various accessories to help our customers integrate PosiCharge systems into their operations.
Our PosiCharge offering is focused on providing new smart, efficient products to enhance the
charging process and help customers maximize the life of their industrial fleets by managing and
extending the life of their batteries, and by increasing the productivity of their drivers.
Power Cycling and Test Systems
We supply a line of power cycling and test systems to research and development organizations that
focus on electric propulsion systems, electric generation systems and electricity storage systems.
Customers employ these systems to test batteries, electric motors, electric and hybrid drivetrains and
fuel cell systems.
Our line of DC test systems has the flexibility to perform a variety of electric load tests. With a full
power range (+/(cid:4)5kW to +/(cid:4)800kW) of bi-directional DC equipment, our power cycling and test
systems can handle a wide variety of DC supply or load requirements—from lead acid to the latest
lithium-ion battery chemistries to fuel cells with integrated power electronics. In addition, these systems
can emulate any drive train component, enabling the testing of individual components or partial drive
trains accurately and realistically, allowing hardware-in-the-loop testing. We also offer flexible software
control options via the C language Remote Operation System and Windows-based languages such as
LabVIEW or CAN.
EES Technology, Research and Development
The following list highlights a number of our key EES technological capabilities:
(cid:127) battery management and testing;
(cid:127) power electronics and controls;
(cid:127) efficient electric drive systems and controls;
(cid:127) fuel cell system integration and testing;
(cid:127) high-density energy packaging;
(cid:127) efficient electric power generation, storage and management;
(cid:127) charging algorithms and thermal management;
(cid:127) on/off grid controls and controls integration;
(cid:127) system integration and optimization; and
(cid:127) web-based real-time data collection and reporting.
EES Sales and Marketing
Passenger and Fleet Electric Vehicle Charging Systems
As the market for PEVs evolves, we are pursuing numerous potential sales channels for our
products and services. We continue to seek to partner with auto manufacturers, utilities, government
agencies and private enterprises, both domestically and abroad, to position ourselves for the potential
demand for charging solutions associated with electric and hybrid electric vehicle adoption. We also sell
our charging products directly to consumers. We have a nationwide network of licensed electrical
contractors whom we train and certify to install and service home and public charging systems. To
enable this installation and service network we have developed an e-commerce platform to integrate
customers’ orders, inventory management, dispatching and provisioning, billing and product and service
traceability. This platform, along with our nationwide network, is designed to support our growth as we
pursue numerous electric vehicle charging opportunities.
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Industrial Electric Vehicle Charging Systems
We primarily sell our PosiCharge industrial electric vehicle charging systems through a dedicated,
direct sales force complemented by a network of industrial battery and lift-truck dealers. The sales
team targets large entities with the potential for domestic and international enterprise adoption of our
solutions. The sales team also coordinates distribution of PosiCharge systems through battery and
lift-truck dealers. These dealers’ relationships with, and proximity to, our customers’ facilities enable
them to sell our solutions and provide post-sale service to our customers. We believe that these dealers
are well suited to address the large number of smaller and geographically dispersed customers with
industrial vehicle fleets. When evaluating a facility for its ability to benefit from PosiCharge systems, we
typically perform a detailed analysis of the customer’s operations. This analysis allows us to quantify the
benefit projected for a PosiCharge system implementation, helping customers to determine for
themselves if the business case is sufficiently compelling.
Power Cycling and Test Systems
We sell our power cycling and test systems through a dedicated, direct sales force and through a
network of international distributors and representatives who have access to the research and
development and manufacturing organizations that procure and use these types of systems. Given the
distances involved, we enable and often rely on our international distributors to provide service in
support of our customers.
EES Manufacturing and Operations
We perform assembly and testing of our power cycling and test systems at a 20,000 square foot,
ISO 9001:2008 and ISO14001:2004 certified facility. We designed this facility for flexibility, using a work
cell model for final assembly, and have included fixtures optimized for final testing. We utilize contract
manufacturing for the production of the majority of our PosiCharge industrial electric vehicle charging
systems. We have also implemented a contract manufacturing strategy to support our passenger and
fleet electric and hybrid electric vehicle charging systems business opportunity.
EES Competition
Competitors in the emerging market for passenger and fleet electric and hybrid electric vehicle
charging systems include focused charging system suppliers such as ChargePoint, Inc., ECOtality, Inc.
and ClipperCreek, Inc. and large industrial electrical device suppliers such as Eaton Corporation,
General Electric Company, Leviton Manufacturing Co., Inc., Schneider Electric SA, The ABB Group
and Siemens AG.
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The primary direct competitors to PosiCharge systems are other fast charge suppliers, including
Aker Wade Power Technologies LLC, PowerDesigners, LLC and ECOtality, Inc. Some of the major
industrial motive battery suppliers have aligned themselves with fast charge suppliers. In addition, our
PosiCharge systems compete against the traditional method of battery changing. Competitors in this
area include suppliers of battery changing equipment and infrastructure, designers of battery changing
rooms, battery manufacturers and dealers who may experience reduced sales volume because
PosiCharge systems reduce or eliminate the need for extra batteries.
Direct competitors for our power cycling and test systems include Bitrode Corporation and
Digatron Firing Circuits.
We believe that the principal competitive factors in the markets for our products and services
include product performance, safety, features, acquisition cost, lifetime operating cost, including
maintenance and support, ease of use, integration with existing equipment, quality, reliability, customer
support, brand and reputation.
For additional financial information with respect to our UAS and EES segments, please see
Note 13 to our consolidated financial statements, which are included in Item 8, ‘‘Financial Statements
and Supplementary Data’’ of this Annual Report.
Item 1A. Risk Factors.
We rely heavily on sales to the U.S. government, particularly to agencies of the Department of Defense.
Historically, a significant portion of our total sales and substantially all of our small UAS sales
have been to the U.S. government and its agencies. Sales to the U.S. government, either as a prime
contractor or subcontractor, represented approximately 70% of our revenue for the fiscal year ended
April 30, 2013. The DoD, our principal U.S. government customer, accounted for approximately 54%
of our revenue for the fiscal year ended April 30, 2013. We believe that the success and growth of our
business for the foreseeable future will continue to depend on our ability to win government contracts,
in particular from the DoD. Many of our government customers are subject to budgetary constraints
and our continued performance under these contracts, or award of additional contracts from these
agencies, could be jeopardized by spending reductions, including constraints on government spending
imposed by the Budget Control Act of 2011, or budget cutbacks at these agencies. The funding of U.S.
government programs is uncertain and dependent on continued congressional appropriations and
administrative allotment of funds based on an annual budgeting process. We cannot assure you that
current levels of congressional funding for our products and services will continue. Furthermore, all of
our contracts with the U.S. government are terminable by the U.S. government at will. A significant
decline in government expenditures generally, or with respect to programs for which we provide
products, could adversely affect our business and prospects. Our operating results may also be
negatively impacted by other developments that affect these government programs generally, including
the following:
(cid:127) changes in government programs that are related to our products and services;
(cid:127) adoption of new laws or regulations relating to government contracting or changes to existing
laws or regulations;
(cid:127) changes in political or public support for security and defense programs;
(cid:127) delays or changes in the government appropriations and budget process;
(cid:127) uncertainties associated with the current global threat environment and other geo-political
matters; and
(cid:127) delays in the payment of our invoices by government payment offices.
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These developments and other factors could cause governmental agencies to reduce their
purchases under existing contracts, to exercise their rights to terminate contracts at-will or to abstain
from renewing contracts, any of which would cause our revenue to decline and could otherwise harm
our business, financial condition and results of operations.
Military transformation and changes in overseas operational levels may affect future procurement priorities
and existing programs, which could limit demand for our UAS.
Following the end of the Cold War, the U.S. military began a transformation of its operational
concepts, organizational structure and technologies in an effort to adapt its warfighting capabilities to
the new threat environment. The resulting shift in procurement priorities toward achieving these
capabilities, together with the operational activity in Afghanistan and Iraq, led to an increase in
demand for our small UAS. We cannot predict whether current or future changes in priorities due to
defense transformation or a change in the threat environment will afford new opportunities for our
small UAS business in terms of existing, additional or replacement programs. Furthermore, we cannot
predict whether or to what extent this defense transformation or current overseas operational levels will
continue. If defense transformation or overseas operations cease or slow down, then our business,
financial condition and results of operations could be impacted.
We operate in evolving markets, which makes it difficult to evaluate our business and future prospects.
Our UAS, electric vehicle charging systems and other energy technologies are sold in new and
rapidly evolving markets. Accordingly, our business and future prospects may be difficult to evaluate.
We cannot accurately predict the extent to which demand for our products will increase, if at all. The
challenges, risks and uncertainties frequently encountered by companies in rapidly evolving markets
could impact our ability to do the following:
(cid:127) generate sufficient revenue to maintain profitability;
(cid:127) acquire and maintain market share;
(cid:127) manage growth in our operations;
(cid:127) develop and renew contracts;
(cid:127) attract and retain additional engineers and other highly-qualified personnel;
(cid:127) successfully develop and commercially market new products;
(cid:127) adapt to new or changing policies and spending priorities of governments and government
agencies; and
(cid:127) access additional capital when required and on reasonable terms.
If we fail to address these and other challenges, risks and uncertainties successfully, our business,
results of operations and financial condition would be materially harmed.
We face competition from other firms, many of which have substantially greater resources.
The defense industry is highly competitive and generally characterized by intense competition to
win contracts. Our current principal small UAS competitors include Elbit Systems Ltd., L-3
Communications Holdings Inc. and Lockheed Martin Corporation. We do not view large UAS such as
Northrop Grumman Corporation’s Global Hawk, General Atomics, Inc.’s Predator and related products,
The Boeing Company’s ScanEagle and Textron Inc.’s Shadow as direct competitors because they
perform different missions, do not typically deliver their information directly to front-line ground
forces, and are not hand launched and controlled, although we cannot be certain that these platforms
will not become direct competitors in the future. Some of these firms have substantially greater
financial, management, research and marketing resources than we have. Our UAS services business also
faces competition from smaller businesses that can provide training and logistics services for multiple
UAS platforms, including our small UAS.
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The primary direct competitors to our PosiCharge industrial electric vehicle charging system
business are other fast charge suppliers, including Aker Wade Power Technologies LLC,
PowerDesigners, LLC and ECOtality Inc., as well as industrial battery manufacturers who distribute fast
charging systems from these suppliers. The primary direct competitors to our power cycling and test
system business are other test system suppliers, including Bitrode Corporation and Digatron Firing
Circuits. Our primary competitors in the emerging market for passenger and fleet electric vehicle
charging systems include charging system suppliers such as ChargePoint, Inc., ECOtality Inc. and
ClipperCreek Inc. As the passenger and fleet electric and hybrid electric vehicle charging systems
market grows we expect that certain charging products may begin to be viewed as commodities, and we
therefore anticipate increasing competition from various charging system suppliers and large industrial
electrical device suppliers such as Eaton Corporation, General Electric Company, Leviton
Manufacturing Co., Inc., Schneider Electric SA, The ABB Group and Siemens AG. Our electric vehicle
charging system installation and support services business faces competition from local licensed
electricians as well as larger electrical service providers.
Our competitors may be able to provide customers with different or greater capabilities or benefits
than we can provide in areas such as technical qualifications, past contract performance, geographic
presence, price and the availability of key professional personnel, including those with security
clearances. Furthermore, many of our competitors may be able to utilize their substantially greater
resources and economies of scale to develop competing products and technologies, manufacture in high
volumes more efficiently, divert sales away from us by winning broader contracts or hire away our
employees by offering more lucrative compensation packages. Small business competitors in our
services businesses may be able to offer more cost competitive services, due to their lower overhead
costs, and take advantage of small business incentive and set-aside programs for which we are
ineligible. In the event that the market for small UAS or electric vehicle charging systems and services
expands, we expect that competition will intensify as additional competitors enter the market and
current competitors expand their product lines. In order to secure contracts successfully when
competing with larger, well-financed companies, we may be forced to agree to contractual terms that
provide for lower aggregate payments to us over the life of the contract, which could adversely affect
our margins. In addition, larger diversified competitors serving as prime contractors may be able to
supply underlying products and services from affiliated entities, which would prevent us from competing
for subcontracting opportunities on these contracts. Our failure to compete effectively with respect to
any of these or other factors could have a material adverse effect on our business, prospects, financial
condition or operating results.
If the UAS, electric vehicle charging and power cycling and test systems markets do not experience significant
growth, if we cannot expand our customer base or if our products do not achieve broad acceptance, then we
may not be able to achieve our anticipated level of growth.
For the fiscal year ended April 30, 2013, our UAS and EES businesses accounted for 81% and
19% of our total revenue, respectively. We cannot accurately predict the future growth rates or sizes of
these markets. Demand for our products may not increase, or may decrease, either generally or in
specific markets, for particular types of products or during particular time periods. We believe the
market for electric vehicle charging is nascent. Moreover, there are only a limited number of major
programs under which the U.S. military, our primary customer, is currently funding the development or
purchase of our UAS. Although we are seeking to expand our customer base to include foreign
governments, domestic non-military agencies and commercial customers, we cannot assure you that our
efforts will be successful. The expansion of the UAS, electric vehicle charging and power cycling and
test systems markets in general, and the market for our products in particular, depends on a number of
factors, including the following:
(cid:127) customer satisfaction with these types of systems as solutions;
(cid:127) the cost, performance and reliability of our products and products offered by our competitors;
(cid:127) customer perceptions regarding the effectiveness and value of these types of systems;
27
(cid:127) the availability and adoption of electric and hybrid electric vehicles;
(cid:127) limitations on our ability to market our UAS products and services outside the United States
due to U.S. government regulations;
(cid:127) obtaining timely regulatory approvals, including, with respect to our small UAS business, access
to airspace and wireless spectrum; and, with respect to our electric vehicle charging business,
proper certifications and licenses to offer and perform electrical installation work; and
(cid:127) marketing efforts and publicity regarding these types of systems.
Even if UAS, electric vehicle charging and power cycling and test systems gain wide market
acceptance, our products may not adequately address market requirements and may not continue to
gain market acceptance. If these types of systems generally, or our products specifically, do not gain
wide market acceptance, then we may not be able to achieve our anticipated level of growth and our
revenue and results of operations would suffer.
If critical components of our products that we currently purchase from a small number of suppliers or raw
materials used to manufacture our products become scarce or unavailable, then we may incur delays in
manufacturing and delivery of our products, which could damage our business.
We obtain hardware components, various subsystems and systems from a limited group of
suppliers. We do not have long-term agreements with any of these suppliers that obligate them to
continue to sell components, subsystems, systems or products to us. Our reliance on these suppliers
involves significant risks and uncertainties, including whether our suppliers will provide an adequate
supply of required components, subsystems, or systems of sufficient quality, will increase prices for the
components, subsystems or systems and will perform their obligations on a timely basis.
In addition, certain raw materials and components used in the manufacture of our products are
periodically subject to supply shortages, and our business is subject to the risk of price increases and
periodic delays in delivery. Similarly, the market for electronic components is subject to cyclical
reductions in supply. If we are unable to obtain components from third-party suppliers in the quantities
and of the quality that we require, on a timely basis and at acceptable prices, then we may not be able
to deliver our products on a timely or cost-effective basis to our customers, which could cause
customers to terminate their contracts with us, increase our costs and seriously harm our business,
results of operations and financial condition. Moreover, if any of our suppliers become financially
unstable, then we may have to find new suppliers. It may take several months to locate alternative
suppliers, if required, or to redesign our products to accommodate components from different
suppliers. We may experience significant delays in manufacturing and shipping our products to
customers and incur additional development, manufacturing and other costs to establish alternative
sources of supply if we lose any of these sources or are required to redesign our products. We cannot
predict if we will be able to obtain replacement components within the time frames that we require at
an affordable cost, if at all.
Any efforts to expand our offerings beyond our current markets may not succeed, which could negatively
impact our operating results.
We have focused on selling our small UAS to the U.S. military, our industrial electric vehicle fast
charging and test systems to large industrial electric vehicle fleet operators primarily in North America,
our power cycling and test systems primarily to research and development facilities in North America,
and our electric vehicle charging systems to domestic commercial customers, distributors and
consumers. We plan, however, to seek to expand our UAS sales into other government and commercial
markets, and our industrial electric vehicle charging and power cycling and test systems and electric
vehicle charging systems sales into international markets. Efforts to expand our product offerings
beyond the markets that we currently serve may divert management resources from existing operations
and require us to commit significant financial resources to unproven businesses that may not generate
additional sales, either of which could significantly impair our operating results.
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Failure to obtain necessary regulatory approvals from the FAA or other governmental agencies, or limitations
put on the use of small UAS in response to public privacy concerns, may prevent us from expanding the sales
of our small UAS to non-military customers in the United States.
In 2006, the FAA issued a clarification of its existing policies stating that, in order to engage in
public use of small UAS in the U.S. National Airspace System, a public operator must obtain a COA
from the FAA, or fly in restricted airspace. The FAA’s COA approval process requires that the public
operator certify the airworthiness of the aircraft for its intended purpose, that a collision with another
aircraft or other airspace user is extremely improbable, that the small unmanned aircraft system
complies with appropriate cloud and terrain clearances and that the operator or spotter of the small
unmanned aircraft system is generally within one half-mile laterally and 400 feet vertically of the small
unmanned aircraft system while in operation. Furthermore, the FAA’s clarification of existing policy
stated that the rules for radio-controlled hobby aircraft do not apply to public or commercial use of
small UAS.
On February 14, 2012, the FAA Modernization and Reform Act of 2012 was enacted, establishing
various deadlines for the FAA to allow expanded use of small UAS for both public and commercial
applications. In response to this direction, the FAA and the DOJ established an agreement on May 14,
2012 that, if implemented in a timely and efficient manner, may allow more use of small UAS by U.S.
law enforcement agencies. The FAA has also drafted updated regulations specifically for small UAS
commercial operations and is in the process of obtaining approval to release for public comment.
However, we cannot assure you that these actions will result in the expanded use of our small UAS by
law enforcement or other non-military government agencies or commercial entities and we may not be
able to expand our sales of small UAS beyond our military customers, which could harm our business
prospects.
In addition, there exists public concern regarding the privacy implications of U.S. commercial and
law enforcement use of small UAS. This concern has included calls to develop explicit written policies
and procedures establishing usage limitations. We cannot assure you that the response from regulatory
agencies, customers and privacy advocates to these concerns will not delay or restrict the adoption of
small UAS by non-military customers.
The markets in which we compete are characterized by rapid technological change, which requires us to
develop new products and product enhancements, and could render our existing products obsolete.
Continuing technological changes in the market for our products could make our products less
competitive or obsolete, either generally or for particular applications. Our future success will depend
upon our ability to develop and introduce a variety of new capabilities and enhancements to our
existing product offerings, as well as introduce a variety of new product offerings, to address the
changing needs of the markets in which we offer our products. Delays in introducing new products and
enhancements, the failure to choose correctly among technical alternatives or the failure to offer
innovative products or enhancements at competitive prices may cause existing and potential customers
to purchase our competitors’ products.
If we are unable to devote adequate resources to develop new products or cannot otherwise
successfully develop new products or enhancements that meet customer requirements on a timely basis,
our products could lose market share, our revenue and profits could decline, and we could experience
operating losses.
The electric vehicle charging industry is especially dynamic. For example, a single fast charge
connector communication protocol standard for the U.S. market has not yet been established, although
other standards are emerging throughout the world. If we are unable to accurately anticipate fast
charge standards that are adopted in our potential markets or develop products that meet such
standards quickly enough to meet customer requirements, our electric vehicle charging systems could
lose market share, our revenue and profits could decline, and we could experience operating losses.
29
We expect to incur substantial research and development costs and devote significant resources to identifying
and commercializing new products, which could significantly reduce our profitability and may never result in
revenue to us.
Our future growth depends on penetrating new markets, adapting existing products to new
applications, and introducing new products that achieve market acceptance. We plan to incur
substantial research and development costs as part of our efforts to design, develop and commercialize
new products and enhance existing products. We spent $37.2 million, or 15% of our revenue, in our
fiscal year ended April 30, 2013 on research and development activities and expect to continue to
spend significant funds on research and development in the future. Because we account for research
and development as an operating expense, these expenditures will adversely affect our earnings in the
future. Further, our research and development programs may not produce successful results, and our
new products may not achieve market acceptance, create additional revenue or become profitable,
which could materially harm our business, prospects, financial results and liquidity.
If we are unable to manage our growth, our business could be adversely affected.
Our headcount and operations have grown rapidly over the last several years. This rapid growth
has placed, and will continue to place, a strain on our management and our administrative, operational
and financial infrastructure. We anticipate further growth of headcount and facilities will be required to
address expansion in our product offerings and the geographic scope of our customer base. Our success
will depend in part upon the ability of our senior management to manage this growth effectively. To do
so, we must continue to hire, train, manage and integrate a significant number of qualified managers
and engineers. If our new employees perform poorly, or if we are unsuccessful in hiring, training,
managing and integrating these new employees, or retaining these or our existing employees, then our
business may suffer.
For us to continue our growth, we must continue to improve our operational, financial and
management information systems. If we are unable to manage our growth while maintaining our quality
of service, or if new systems that we implement to assist in managing our growth do not produce the
expected benefits, then our business, prospects, financial condition or operating results could be
adversely affected.
Our earnings and profit margins may decrease based on the mix of our contracts and programs and other
factors related to our contracts.
In general, we perform our production work under fixed-price contracts and our repair and
customer-funded research and development work under cost-plus-fee contracts. Under fixed-price
contracts, we perform services under a contract at a stipulated price. Under cost-plus-fee contracts,
which are subject to a contract ceiling amount, we are reimbursed for allowable costs and paid a fee,
which may be fixed or performance based. We typically experience lower profit margins under
cost-plus-fee contracts than under fixed-price contracts, though fixed-price contracts have higher risks.
In general, if the volume of services we perform under cost-plus-fee contracts increases relative to the
volume of services we perform under fixed-price contracts, we expect that our operating margin will
suffer. In addition, our earnings and margins may decrease depending on the costs we incur in contract
performance, our achievement of other contract performance objectives and the stage of our
performance at which our right to receive fees, particularly under incentive and award fee contracts, is
finally determined.
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We use estimates in accounting for many of our programs and changes in our estimates could adversely affect
our future financial results.
Contract accounting requires judgment relative to assessing risks, including risks associated with
customer-directed delays and reductions in scheduled deliveries, unfavorable resolutions of claims and
contractual matters, judgments associated with estimating contract revenues and costs, and assumptions
for schedule and technical issues. Due to the size and nature of many of our contracts, the estimation
of total revenues and cost at completion is complicated and subject to many variables. For example, we
must make assumptions regarding the length of time to complete the contract because costs also
include expected increases in wages and prices for materials; consider whether the intent of entering
into multiple contracts was effectively to enter into a single project in order to determine whether such
contracts should be combined or segmented; consider incentives or penalties related to performance on
contracts in estimating sales and profit rates, and record them when there is sufficient information for
us to assess anticipated performance; and use estimates of award fees in estimating sales and profit
rates based on actual and anticipated awards. Because of the significance of the judgments and
estimation processes described above, it is likely that materially different amounts could be recorded if
we used different assumptions or if the underlying circumstances were to change. Changes in
underlying assumptions, circumstances or estimates may adversely affect our future results of operations
and financial condition.
Our senior management and key employees are important to our customer relationships and overall business.
We believe that our success depends in part on the continued contributions of our senior
management and key employees. We rely on our executive officers, senior management and key
employees to generate business and execute programs successfully. In addition, the relationships and
reputation that members of our management team and key employees have established and maintain
with government defense personnel contribute to our ability to maintain good customer relations and to
identify new business opportunities. We do not have employment agreements with any of our executive
officers or key employees, and these individuals could terminate their employment with us at any time.
The loss of any of our executive officers, members of our senior management team or key employees
could significantly delay or prevent the achievement of our business objectives and could materially
harm our business and customer relationships and impair our ability to identify and secure new
contracts and otherwise manage our business.
We must recruit and retain highly-skilled employees to succeed in our competitive business.
We depend on our ability to recruit and retain employees who have advanced engineering and
technical services skills and who work well with our customers. These employees are in great demand
and are likely to remain a limited resource in the foreseeable future. If we are unable to recruit and
retain a sufficient number of these employees, then our ability to maintain our competitiveness and
grow our business could be negatively affected. In addition, because of the highly technical nature of
our products, the loss of any significant number of our existing engineering personnel could have a
material adverse effect on our business and operating results. Moreover, some of our U.S. government
contracts contain provisions requiring us to staff a program with certain personnel the customer
considers key to our successful performance under the contract. In the event we are unable to provide
these key personnel or acceptable substitutes, the customer may terminate the contract.
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Our business may be dependent upon our employees obtaining and maintaining required security clearances,
as well as our ability to obtain security clearances for the facilities in which we perform sensitive government
work.
Certain of our U.S. government contracts require our employees to maintain various levels of
security clearances, and we are required to maintain certain facility security clearances complying with
DoD requirements. The DoD has strict security clearance requirements for personnel who work on
classified programs. Obtaining and maintaining security clearances for employees involves a lengthy
process, and it is difficult to identify, recruit and retain employees who already hold security clearances.
If our employees are unable to obtain security clearances in a timely manner, or at all, or if our
employees who hold security clearances are unable to maintain the clearances or terminate employment
with us, then a customer requiring classified work could terminate the contract or decide not to renew
it upon its expiration. In addition, we expect that many of the contracts on which we will bid will
require us to demonstrate our ability to obtain facility security clearances and employ personnel with
specified types of security clearances. To the extent we are not able to obtain facility security clearances
or engage employees with the required security clearances for a particular contract, we may not be able
to bid on or win new contracts, or effectively rebid on expiring contracts.
Cost overruns on our contracts could subject us to losses, decrease our operating margins and adversely affect
our future business.
Fixed-price contracts (including both government and commercial contracts) represented
approximately 75% of our revenue for the fiscal year ended April 30, 2013. If we fail to anticipate
technical problems, estimate costs accurately or control costs during our performance of fixed-price
contracts, then we may incur losses on these contracts because we absorb any costs in excess of the
fixed price. Under cost-plus-fee contracts, if costs exceed the contract ceiling or are not allowable under
the provisions of the contract or applicable regulations, then we may not be able to obtain
reimbursement for all such costs. Under time and materials contracts, we are paid for labor at
negotiated hourly billing rates and for certain expenses. Because many of our contracts involve
advanced designs and innovative technologies, we may experience unforeseen technological difficulties
and cost overruns. Under each type of contract, if we are unable to control the costs we incur in
performing under the contract, then our financial condition and results of operations could be
materially adversely affected. Cost overruns also may adversely affect our ability to sustain existing
programs and obtain future contract awards.
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Our products and services are complex and could have unknown defects or errors, which may give rise to
claims against us, diminish our brand or divert our resources from other purposes.
Our UAS rely on complex avionics, sensors, user-friendly interfaces and tightly-integrated,
electromechanical designs to accomplish their missions, and our electric vehicle charging and power
cycling and test systems often rely upon the application of intellectual property for which there may
have been little or no prior commercial application. Despite testing, our products have contained
defects and errors and may in the future contain defects, errors or performance problems when first
introduced, when new versions or enhancements are released, or even after these products have been
used by our customers for a period of time. These problems could result in expensive and time-
consuming design modifications or warranty charges, delays in the introduction of new products or
enhancements, significant increases in our service and maintenance costs, exposure to liability for
damages, damaged customer relationships and harm to our reputation, any of which could materially
harm our results of operations and ability to achieve market acceptance. In addition, increased
development and warranty costs could be substantial and could reduce our operating margins.
The existence of any defects, errors, or failures in our products or the misuse of our products
could also lead to product liability claims or lawsuits against us. A defect, error or failure in one of our
UAS could result in injury, death or property damage and significantly damage our reputation and
support for our UAS in general. We anticipate this risk will grow as our UAS begin to be used in U.S.
domestic airspace and urban areas. While our PosiCharge industrial electric vehicle charging systems
include certain safety mechanisms, these systems can deliver up to 600 amps of current in their
application, and the failure, malfunction or misuse of these systems could result in injury or death. Our
passenger and fleet electric and hybrid electric vehicle charging systems also have the potential to cause
injury, death or property damage in the event that they are misused, malfunction or fail to operate
properly due to unknown defects or errors.
Although we maintain insurance policies, we cannot provide assurance that this insurance will be
adequate to protect us from all material judgments and expenses related to potential future claims or
that these levels of insurance will be available in the future at economical prices or at all. A successful
product liability claim could result in substantial cost to us. Even if we are fully insured as it relates to
a claim, the claim could nevertheless diminish our brand and divert management’s attention and
resources, which could have a negative impact on our business, financial condition and results of
operations.
Our future profitability is dependent upon achieving cost reductions and projected economies of scale from
increasing manufacturing quantities of our electric vehicle charging systems. Failing to achieve such
reductions in manufacturing costs and projected economies of scale could materially adversely affect our
business.
We have limited experience manufacturing our electric vehicle charging systems in high volume.
We do not know whether or when we will be able to develop efficient, low-cost manufacturing
capabilities and processes that will enable us to manufacture these products in commercial quantities
while meeting the volume, speed, quality, price, engineering, design and production standards required
to successfully market our products. Our failure to develop such manufacturing processes and
capabilities in locations that can efficiently service our markets would have a material adverse effect on
our business, financial condition, results of operations and prospects. We recently began volume
production of electric vehicle charging systems in Taiwan, Italy and the United States. Historically, we
have produced PosiCharge industrial electric vehicle charging systems and power cycling and test
systems only in limited production quantities. Our future profitability is, in part, dependent upon
achieving increased savings from volume purchases of raw materials and component parts, achieving
acceptable manufacturing yield and capitalizing on machinery efficiencies. We expect our suppliers to
experience a sharp increase in demand for their products. As a result, we may not have reliable access
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to supplies that we require or be able to purchase such materials or components at cost effective prices.
There is no assurance that we will ever be in a position to realize any material, labor and machinery
cost reductions associated with higher purchasing power and higher production levels. Failure to
achieve these cost reductions could adversely impact our business and financial results.
We face significant risks in overseeing our outsourcing of manufacturing processes as well as in the
management of our inventory, and failure to properly oversee our manufacturing processes or to effectively
manage our inventory levels may result in product recalls or supply imbalances that could harm our business.
We have contracted for the manufacture of certain electric vehicle charging systems with contract
manufacturers. We sell these units directly and through distributors, as well as through our own online
sales channels. We face significant risks if our contract manufacturers do not perform as expected. If
we fail to effectively oversee the manufacturing process, including the work performed by our contract
manufacturers, we could suffer from product recalls, poorly performing products and higher than
anticipated warranty costs.
In connection with our manufacturing operations, we maintain a finished goods inventory of
electric vehicle charging units in various locations, including with third party logistics providers. Due to
the long-lead time of our manufacturing cycles, we need to make forecasts of demand and commit
significant resources towards manufacturing our electric vehicle charging units. As such, we are subject
to significant risks in managing the inventory needs of our business during the year, including estimates
of the appropriate demand across our models. Should actual market conditions differ from our
estimates, our future results of operations could be materially adversely affected. In the future, we may
be required to record write-downs of finished products and materials on-hand and/or additional charges
for excess purchase commitments as a result of future changes in our sales forecasts.
Due to the volatile and flammable nature of certain components of our products and equipment, fires or
explosions may disrupt our business or cause significant injuries, which could adversely affect our financial
results
The development and manufacture of certain of our products involves the handling of a variety of
explosive and flammable materials as well as high power equipment. From time to time, these activities
may result in incidents that could cause us to temporarily shut down or otherwise disrupt some
manufacturing processes, causing production delays and resulting in liability for workplace injuries
and/or fatalities. We have safety and loss prevention programs that require detailed reviews of process
changes and new operations, along with routine safety audits of operations involving explosive
materials, to mitigate such incidents, as well as a variety of insurance policies. However, we cannot
ensure that we will not experience such incidents in the future or that any such incidents will not result
in production delays or otherwise have a material adverse effect on our business and financial
condition.
The operation of UAS in urban environments may be subject to risks, such as accidental collisions and
transmission interference, which may limit demand for our UAS in such environments and harm our business
and operating results.
Urban environments may present certain challenges to the operators of UAS. UAS may
accidentally collide with other aircraft, persons or property, which could result in injury, death or
property damage and significantly damage the reputation of and support for UAS in general. While we
are aware of only one instance of an accidental collision involving one of our UAS to date, as the usage
of UAS has increased, particularly by military customers, the danger of such collisions has increased.
Furthermore, the incorporation of our DDL technology into our UAS has increased the number of
vehicles which can operate simultaneously in a given area and with this increase has come an increase
in the risk of accidental collision. In addition, obstructions to effective transmissions in urban
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environments, such as large buildings, may limit the ability of the operator to utilize the aircraft for its
intended purpose. The risks or limitations of operating UAS in urban environments may limit their
value in such environments, which may limit demand for our UAS and consequently materially harm
our business and operating results.
As a manufacturer of electrical vehicle charging products and provider of electrical installation services to
consumers, we are subject to various government regulations and may be subject to additional regulations in
the future, violation of which could subject us to sanctions or otherwise harm our business. In addition, we
could be the subject of future product liability suits or product recalls, which could harm our business.
As a manufacturer of consumer products, we are subject to significant government regulations,
including, in the United States, under The Consumer Products Safety Act, as well as under product
safety and consumer protection statutes in our international markets. In addition, certain of our
electrical contracting services are subject to regulation by various government authorities. While we
take all the steps we believe are necessary to comply with these regulations, there can be no assurance
that we will be in compliance in the future. Failure to comply could result in sanctions that could have
a negative impact on our business, financial condition and results of operations. We may also be subject
to involuntary product recalls or may voluntarily conduct a product recall. The costs associated with any
future product recalls, individually and in the aggregate in any given fiscal year, could be significant. In
addition, any product recall, regardless of direct costs of the recall, may harm consumer perceptions of
our products and have a negative impact on our future revenues and results of operations.
Governments and regulatory agencies in the markets where we manufacture and sell products may
enact additional regulations relating to product safety and consumer protection in the future, and may
also increase the penalties for failure to comply with product safety and consumer protection
regulations. In addition, one or more of our customers might require changes in our products, such as
the non-use of certain materials, in the future. Complying with any such additional regulations or
requirements could impose increased costs on our business. Similarly, increased penalties for
non-compliance could subject us to greater expense in the event any of our products were found to not
comply with such regulations. Such increased costs or penalties could harm our business.
In addition to government regulation, products that have been or may be developed by us may
expose us to potential liability from personal injury or property damage claims by the users of such
products. There can be no assurance that a claim will not be brought against us in the future. Any
successful claim could significantly harm our business, financial condition and results of operations.
Our quarterly operating results may vary widely.
Our quarterly revenue, cash flow and operating results have and may continue to fluctuate
significantly in the future due to a number of factors, including the following:
(cid:127) fluctuations in revenue derived from government contracts, including cost-plus-fee contracts and
contracts with a performance-based fee structure;
(cid:127) the size and timing of orders from military and other governmental agencies, including increased
purchase requests from government customers for equipment and materials in connection with
the U.S. government’s fiscal year end, which may affect our quarterly operating results;
(cid:127) the mix of products that we sell in the period;
(cid:127) seasonal fluctuations in customer demand for some of our products or services;
(cid:127) unanticipated costs incurred in the introduction of new products;
(cid:127) fluctuations in the adoption of our products in new markets;
35
(cid:127) changes in the level of tax credits available for research and development spending;
(cid:127) cancellations, delays or contract amendments by our governmental agency customers; and
(cid:127) changes in policy or budgetary measures that adversely affect our governmental agency
customers.
Changes in the volume of products and services provided under existing contracts and the number
of contracts commenced, completed or terminated during any quarter may cause significant variations
in our cash flow from operations because a relatively large amount of our expenses are fixed. We incur
significant operating expenses during the start-up and early stages of large contracts and typically do
not receive corresponding payments in that same quarter. We may also incur significant or
unanticipated expenses when contracts expire or are terminated or are not renewed. In addition,
payments due to us from government agencies may be delayed due to billing cycles or as a result of
failures of governmental budgets to gain congressional and presidential administration approval in a
timely manner.
Shortfalls in available external research and development funding could adversely affect us.
We depend on our research and development activities to develop the core technologies used in
our UAS and EES products and for the development of our future products. A portion of our research
and development activities depends on funding by commercial companies and the U.S. government.
U.S. government and commercial spending levels can be impacted by a number of variables, including
general economic conditions, specific companies’ financial performance and competition for U.S.
government funding with other U.S. government-sponsored programs in the budget formulation and
appropriation processes. Moreover, the U.S., state and local governments provide energy rebates and
incentives to commercial companies, which directly impact the amount of research and development
that companies appropriate for energy systems. To the extent that these energy rebates and incentives
are reduced or eliminated, company funding for research and development could be reduced. Any
reductions in available research and development funding could harm our business, financial condition
and operating results.
Variability and cyclicality in the market for electric industrial vehicles could adversely affect us.
Our PosiCharge industrial electric vehicle charging system products are purchased primarily by
operators of fleets of electric industrial vehicles, such as forklift trucks and airport ground support
equipment. Consequently, our ability to remain profitable depends in part on the varying conditions in
the market for electric industrial vehicles. This market is subject to variability as it moves in response
to cycles in the overall business environment and it is also particularly sensitive to the industrial, food
and beverage, retail and air travel sectors, which generate a significant portion of the demand for such
vehicles. Sales of electric industrial vehicles have historically been cyclical, with demand affected by
such economic factors as industrial production, construction levels, demand for consumer and durable
goods, interest rates and fuel costs. A significant decline in demand for electric industrial vehicles could
adversely affect our revenue and prospects, which would harm our business, financial condition and
operating results.
Our success in the emerging market for passenger and fleet electric and hybrid electric vehicle charging
systems will depend on numerous factors which are out of our control.
The passenger and fleet electric and hybrid electric vehicle charging systems market is expected to
grow rapidly, along with innovations in fast charging technologies. As a result, we expect to face
increasing competition from various charging system suppliers and large industrial electrical device
suppliers such as Eaton Corporation, General Electric Company, Leviton Manufacturing Co., Inc.,
Schneider Electric SA, The ABB Group and Siemens AG. While we believe that we currently have
36
superior charging technology and service infrastructure, we cannot assure you that competitors will not
develop and bring to market substantially equivalent or superior technology. In addition, because the
passenger electric and fleet charging systems market is relatively new, there is no guarantee that there
will be strong consumer demand for charging systems. Demand for such systems could also be directly
impacted by fuel costs; if fuel costs were to significantly decrease, the demand for electric vehicles and
charging systems could decline. If there is little consumer demand for our passenger electric and fleet
charging systems, our revenue and prospects could be adversely affected, which would harm our
business, financial and operating results.
Our industrial electric vehicle charging systems business is dependent upon our relationships with third
parties with whom we do not have exclusive arrangements.
To remain competitive in the market for industrial electric vehicle charging systems, we must
maintain our access to potential customers and ensure that the service needs of our customers are met
adequately. In many cases, we rely on battery and industrial vehicle dealers for access to potential
industrial electric vehicle charging system customers. Currently, several of our industrial electric vehicle
charging system competitors are working with battery manufacturers to sell fast charging systems and
batteries together. Cooperative agreements between our competitors and battery manufacturers could
restrict our access to battery dealers and potential industrial electric vehicle charging systems
customers, adversely affecting our revenue and prospects. Additionally, we rely on outside service
providers to perform post-sale services for our PosiCharge industrial electric vehicle charging system
customers. If these service providers fail to perform these services as required or discontinue their
business with us, then we could lose customers to competitors, which would harm our business,
financial condition and operating results.
Our electric and hybrid electric vehicle charging system business is dependent upon our development of
relationships with automakers, auto dealers, utilities and other participants in the electric and hybrid electric
vehicle and electricity delivery markets.
We have been selected by several major automakers to support the rollout of new model electric
vehicles across the U.S. with our home charging system. Accordingly, we depend upon those
relationships and the success of the home charging rollout to those new model electric vehicle owners
to expand our charging system footprint in the United States and worldwide. If one or more of our
partnerships with those major automakers terminates prematurely, and we cannot establish similar
relationships with other entities with direct access to electric vehicle owners and drivers, we may not be
able to develop a sustainable market for our home charging system, which may delay the
commercialization of our charging systems or jeopardize the long-term success of this product line. We
believe that the success and growth of our passenger and fleet electric vehicle charging system business
for the foreseeable future will also depend on our ability to develop similar working relationships with
other automakers, as well as auto dealers, utilities, and other participants in the electric and hybrid
electric vehicle and electricity delivery markets in the U.S. and internationally. While we have been
working with other automakers and utilities to explore business models and to promote our solutions,
there is no guarantee that we will be successful in doing so.
Our work for the U.S. government and international governments may expose us to security risks.
As a U.S. government contractor, we face various security threats, including cyber security attacks
to our information technology infrastructure, attempts to gain access to our proprietary or classified
information as well as threats to the physical security of our facilities and employees. Although we
utilize various procedures and controls to monitor and mitigate these threats, there can be no assurance
that these procedures and controls will be sufficient to prevent disruptions, the unauthorized release of
confidential information or corruption of data. Accordingly, any significant operational delays, or any
37
destruction, manipulation or improper use of our data, information systems or networks could adversely
affect our financial results and damage the reputation for our products and services. If we or our
partners are subject to data security breaches, we may have a loss in sales or increased costs arising
from the restoration or implementation of additional security measures, either of which could
materially and adversely affect our business and financial results.
In addition, we work in international locations where there are high security risks, which could
result in harm to our employees and contractors or substantial costs. Some of our services are
performed in or adjacent to high-risk locations, such as Iraq and Afghanistan, where the country or
location is suffering from political, social or economic issues, or war or civil unrest. In those locations
where we have employees or operations, we may incur substantial costs to maintain the safety of our
personnel. Despite these precautions, the safety of our personnel in these locations may continue to be
at risk, and we may in the future suffer the loss of employees and contractors, which could harm our
business and operating results.
We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our
stockholders.
We operate in emerging and rapidly evolving markets, which makes our prospects difficult to
evaluate. It is possible that we may not generate sufficient cash flow from operations or otherwise have
the capital resources to meet our future capital needs. If this occurs, then we may need additional
financing to pursue our business strategies, including to:
(cid:127) hire additional engineers and other personnel;
(cid:127) develop new or enhance existing products;
(cid:127) enhance our operating infrastructure;
(cid:127) fund working capital requirements;
(cid:127) acquire complementary businesses or technologies; or
(cid:127) otherwise respond to competitive pressures.
If we raise additional funds through the issuance of equity or convertible debt securities, the
percentage ownership of our stockholders could be significantly diluted, and these newly-issued
securities may have rights, preferences or privileges senior to those of existing stockholders. We cannot
assure you that additional financing will be available on terms favorable to us, or at all. Our former
line of credit contained, and future debt financing may contain, covenants or other provisions that limit
our operational or financial flexibility. In addition, certain of our customers require that we obtain
letters of credit to support our obligations under some of our contracts.
Our investment portfolio includes investments in auction rate securities. Failures in the auctions for these
securities affect our liquidity, while deterioration in credit ratings of issuers of such securities and/or third
parties insuring such investments may require us to adjust the carrying value of our investment through an
impairment of earnings.
As of April 30, 2013, our $5.7 million of long-term investments, recorded at fair value, consisted
entirely of auction rate municipal bonds with maturities that range from approximately 6 to 21 years.
These investments have characteristics similar to short-term investments, because at pre-determined
intervals, generally ranging from 30 to 35 days, there is a new auction process at which the interest
rates for these securities are reset to current interest rates. At the end of such period, we choose to
roll-over our holdings or redeem the investments for cash. A market maker facilitates the redemption
of the securities and the underlying issuers are not required to redeem the investment within 365 days.
38
In fiscal 2011, 2012 and 2013, we experienced failed auctions of our auction rate securities and
there is no assurance that auctions on the remaining auction rate securities in our investment portfolio
will succeed in the future. As a result, our ability to liquidate our investments in the near term may be
limited, and our ability to recover the carrying value of our investments may be limited. An auction
failure means that the parties wishing to sell securities were not able to do so. As of June 7, 2013,
including the securities involved in failed auctions, we held approximately $5.7 million of these auction
rate securities, all of which carry investment grade ratings. These investments are subject to general
credit, liquidity, market and interest rate risks, which may be exacerbated by continued problems in the
global credit markets, including but not limited to, U.S. subprime mortgage defaults, writedowns by
major financial institutions due to deteriorating values of their assets portfolios, including leveraged
loans, collateralized debt obligations, credit default swaps, and other credit-linked products. These and
other related factors have affected various sectors of the financial markets and caused credit and
liquidity issues. If the issuers of these securities are unable to successfully close future auctions or their
credit ratings deteriorate, we may in the future be required to record an impairment charge on these
investments. We currently believe these securities are not permanently impaired, primarily due to the
government backing of the underlying securities. However, it could take until the final maturity of the
underlying notes (up to 21 years) to realize our investments’ purchase price of $6.8 million. Based on
our ability to access our cash and cash equivalents, expected operating cash flows, and our other
sources of cash, we do not anticipate that the current lack of liquidity on these investments will affect
our ability to continue to operate our business in the ordinary course, however we can provide no
assurance as to when these investments will again become liquid or as to whether we may ultimately
have to recognize an impairment charge with respect to these investments.
We face risks related to the current challenging economic environment.
Our business, financial condition and results of operation could be negatively affected by economic
conditions generally, both in the United States and elsewhere around the world. Continuing concerns
over inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage
market and a difficult residential real estate market in the United States have contributed to increased
volatility and diminished expectations for the economy and the markets going forward. These factors,
combined with volatile oil prices, declining business and consumer confidence and continued
unemployment concerns, have resulted in heightened volatility and turmoil in domestic and
international equity markets. These events and the continuing market upheavals could adversely affect
our business in a number of ways, including:
Potential Deferment of Purchases and Orders by Customers: Uncertainty about current and future
global economic conditions may cause governments, including the U.S. government, which is our largest
customer, consumers and businesses to modify, defer or cancel purchases in response to tighter credit,
decreased cash availability and declining consumer confidence. Accordingly, future demand for our
products could differ materially from our current expectations. Additionally, if customers are not
successful in generating sufficient revenue or are precluded from securing financing, they may not be
able to pay, or may delay payment of, accounts receivable that are owed to us. Any inability of current
and/or potential customers to pay us for our products may adversely affect our earnings and cash flow.
Negative Impact from Increased Financial Pressures on Key Suppliers: Our ability to meet
customers’ demands depends, in part, on our ability to obtain timely and adequate delivery of quality
materials, parts and components from our suppliers. Certain of our hardware components and various
subsystems are available only from a limited group of suppliers. If certain key suppliers were to become
capacity constrained or insolvent as a result of a continuing market downturn, then we may have to
find new suppliers. We may experience significant delays in manufacturing and shipping our products to
customers and incur additional development, manufacturing and other costs to establish alternative
sources of supply if we lose any of these sources or are required to redesign our products. We cannot
predict if we will be able to obtain replacement components within the time frames that we require at
an affordable cost, if at all. In addition, credit constraints of key suppliers could result in accelerated
payment of accounts payable by us, impacting our cash flow.
39
Customers’ Inability to Obtain Financing to Make Purchases from Us and/or Maintain Their Business:
Some of our customers may require substantial financing in order to fund their operations and make
purchases from us. The inability of these customers to obtain sufficient credit to finance purchases of
our products, or otherwise meet their payment obligations to us could adversely impact our financial
condition and results of operations. In addition, if a continuing market downturn results in insolvencies
for our customers, it could adversely impact our financial condition and results of operations.
Our international business poses potentially greater risks than our domestic business.
We derived approximately 15% of our revenue from international sales during the fiscal year
ended April 30, 2013. We expect to derive an increasing portion of our revenue from international
sales. Our international revenue and operations are subject to a number of material risks, including the
following:
(cid:127) the unavailability of, or difficulties in obtaining any, necessary governmental authorizations for
the export of our UAS products to certain foreign jurisdictions;
(cid:127) regulatory requirements that may adversely affect our ability to sell certain products or
repatriate profits to the U.S.;
(cid:127) the complexity and necessity of using foreign representatives and consultants;
(cid:127) difficulties in enforcing agreements and collecting receivables through foreign legal systems and
other relevant legal issues, including fewer legal protections for intellectual property;
(cid:127) potential fluctuations in foreign economies and in the value of foreign currencies and interest
rates;
(cid:127) potential preferences by prospective customers to purchase from local (non-U.S.) sources;
(cid:127) general economic and political conditions in the markets in which we operate;
(cid:127) laws or regulations relating to non-U.S. military contracts that favor purchases from non-U.S.
manufacturers over U.S. manufacturers;
(cid:127) the imposition of tariffs, embargoes, export controls and other trade restrictions; and
(cid:127) different and changing legal and regulatory requirements, including those pertaining to data
protection and privacy, in the jurisdictions in which we currently operate or may operate in the
future.
Negative developments in any of these areas in one or more countries could result in a reduction
in demand for our products, the cancellation or delay of orders already placed, threats to our
intellectual property, difficulty in collecting receivables and a higher cost of doing business, any of
which could negatively impact our business, financial condition or results of operations. Moreover, our
sales, including sales to customers outside the United States, are denominated in dollars, and
downward fluctuations in the value of foreign currencies relative to the U.S. dollar may make our
products more expensive than other products, which could harm our business.
40
Potential future acquisitions could be difficult to integrate, divert the attention of key personnel, disrupt our
business, dilute stockholder value and impair our financial results.
We intend to consider strategic acquisitions that would add to our customer base, technological
capabilities or system offerings. Acquisitions involve numerous risks, any of which could harm our
business, including the following:
(cid:127) difficulties in integrating the operations, technologies, products, existing contracts, accounting
and personnel of the target company and realizing the anticipated synergies of the combined
businesses;
(cid:127) difficulties in supporting and transitioning customers, if any, of the target company;
(cid:127) diversion of financial and management resources from existing operations;
(cid:127) the price we pay or other resources that we devote may exceed the value we realize, or the value
we could have realized if we had allocated the purchase price or other resources to another
opportunity;
(cid:127) risks of entering new markets in which we have limited or no experience;
(cid:127) potential loss of key employees, customers and strategic alliances from either our current
business or the target company’s business;
(cid:127) assumption of unanticipated problems or latent liabilities, such as problems with the quality of
the target company’s products; and
(cid:127) inability to generate sufficient revenue to offset acquisition costs.
Acquisitions also frequently result in the recording of goodwill and other intangible assets which
are subject to potential impairments in the future that could harm our financial results. In addition, if
we finance acquisitions by issuing equity, or securities convertible into equity, then our existing
stockholders may be diluted, which could lower the market price of our common stock. If we finance
acquisitions through debt, then such future debt financing may contain covenants or other provisions
that limit our operational or financial flexibility. As a result, if we fail to properly evaluate acquisitions
or investments, then we may not achieve the anticipated benefits of any such acquisitions, and we may
incur costs in excess of what we anticipate. The failure to successfully evaluate and execute acquisitions
or investments or otherwise adequately address these risks could materially harm our business and
financial results.
Environmental laws and regulations and unforeseen costs could impact our future earnings.
The manufacture and sale of our products in certain states and countries may subject us to
environmental and other regulations. For example, we obtain a significant number of our electronics
components from companies located in East Asia, where environmental rules may be less stringent than
in the United States. Over time, the countries where these companies are located may adopt more
stringent environmental regulations, resulting in an increase in our manufacturing costs. Furthermore,
certain environmental laws, including the U.S. Comprehensive, Environmental Response, Compensation
and Liability Act of 1980, impose strict, joint and several liability on current and previous owners or
operators of real property for the cost of removal or remediation of hazardous substances and impose
liability for damages to natural resources. These laws often impose liability even if the owner or
operator did not know of, or was not responsible for, the release of such hazardous substances. These
environmental laws also assess liability on persons who arrange for hazardous substances to be sent to
disposal or treatment facilities when such facilities are found to be contaminated. Such persons can be
responsible for cleanup costs even if they never owned or operated the contaminated facility. Although
we have not yet been named a responsible party at a contaminated site, we could be named a
potentially responsible party in the future. We cannot assure you that such existing laws or future laws
will not have a material adverse effect on our future earnings or results of operations.
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Our passenger and fleet electric vehicle charging system business is subject to federal, state and international
laws regarding data protection and privacy, and a privacy breach could damage our reputation, expose us to
litigation risk and adversely affect our business.
In connection with our emerging passenger and fleet electric vehicle charging system business, we
collect, process and retain certain sensitive and confidential customer information. As a result, we are
subject to increasingly rigorous federal, state and international laws regarding privacy and data
protection. Compliance with these constantly evolving laws may cause us to incur significant costs or
require changes to our business practices, which could reduce our revenue. If we fail to comply with
these laws, proceedings may be brought against us by governmental entities or others or penalties may
be imposed on us, either of which could have a material adverse effect on our business, results of
operations and financial condition. While we rely, in part, on security services and software provided by
outside vendors to protect sensitive and confidential customer information, there is no guarantee that
the protections that we or our outside vendors have implemented will prevent security breaches. Any
actual, threatened or perceived security breach that could result in misappropriation, loss or other
unauthorized disclosure of sensitive or confidential customer information could harm our reputation
and relationship with customers, expose us to litigation risk and liability and adversely affect our
business.
Our business and operations are subject to the risks of earthquakes and other natural catastrophic events.
Our corporate headquarters, research and development and manufacturing operations are located
in Southern California, a region known for seismic activity and wild fires. A significant natural disaster,
such as an earthquake, fire or other catastrophic event, could severely affect our ability to conduct
normal business operations, and as a result, our future operating results could be materially and
adversely affected.
Risks Related to Our U.S. Government Contracts
We are subject to extensive government regulation, and our failure to comply with applicable regulations could
subject us to penalties that may restrict our ability to conduct our business.
As a contractor to the U.S. government, we are subject to and must comply with various
government regulations that impact our revenue, operating costs, profit margins and the internal
organization and operation of our business. The most significant regulations and regulatory authorities
affecting our business include the following:
(cid:127) the Federal Acquisition Regulations and supplemental agency regulations, which
comprehensively regulate the formation and administration of, and performance under, U.S.
government contracts;
(cid:127) the Truth in Negotiations Act, which requires certification and disclosure of all factual cost and
pricing data in connection with contract negotiations;
(cid:127) the False Claims Act and the False Statements Act, which impose penalties for payments made
on the basis of false facts provided to the government and on the basis of false statements made
to the government, respectively;
(cid:127) the Foreign Corrupt Practices Act, which prohibits U.S. companies from providing anything of
value to a foreign official to help obtain, retain or direct business, or obtain any unfair
advantage;
(cid:127) the National Telecommunications and Information Administration and the Federal
Communications Commission, which regulate the wireless spectrum allocations upon which UAS
depend for operation and data transmission in the U.S.;
(cid:127) the Federal Aviation Administration, which is in the process of drafting regulations specifically
for small UAS operation in the U.S.;
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(cid:127) the International Traffic in Arms Regulations, which regulate the export of controlled technical
data, defense articles and defense services and restrict from which countries we may purchase
materials and services used in the production of certain of our products; and
(cid:127) laws, regulations and executive orders restricting the use and dissemination of information
classified for national security purposes and the exportation of certain products and technical
data.
Also, we need special security clearances and regulatory approvals to continue working on certain
of our projects with the U.S. government. Classified programs generally will require that we comply
with various executive orders, federal laws and regulations and customer security requirements that may
include restrictions on how we develop, store, protect and share information, and may require our
employees and facilities to obtain government security clearances. Our failure to comply with applicable
regulations, rules and approvals or misconduct by any of our employees could result in the imposition
of fines and penalties, the loss of security clearances, the loss of our government contracts or our
suspension or debarment from contracting with the U.S. government generally, any of which would
harm our business, financial condition and results of operations. We are also subject to certain
regulations of comparable government agencies in other countries, and our failure to comply with these
non-U.S. regulations could also harm our business, financial condition or results of operations.
Our business could be adversely affected by a negative audit or investigation by the U.S. government.
U.S. government agencies, primarily the DCAA and the DCMA, routinely audit and investigate
government contractors. These agencies review a contractor’s performance under its contracts, cost
structure and compliance with applicable laws, regulations and standards. These agencies also may
review the adequacy of, and a contractor’s compliance with, its internal control systems and policies,
including the contractor’s purchasing, property, estimating, compensation and management information
systems.
Like most government contractors, our contracts are audited and reviewed on a continual basis by
the DCMA and the DCAA. Audits for costs incurred on work performed after fiscal year 2005 have
not yet been completed. In addition, non-audit reviews or investigations by the government may still be
conducted on all of our government contracts. Any costs found to be improperly allocated to a specific
contract will not be reimbursed, while such costs already reimbursed must be refunded. If an audit or
investigation of our business were to uncover improper or illegal activities, then we could be subject to
civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture
of profits, suspension of payments, fines and suspension or prohibition from doing business with the
U.S. government. We could suffer serious harm to our reputation if allegations of impropriety or illegal
acts were made against us, even if the allegations were inaccurate. In addition, responding to
governmental audits or investigations may involve significant expense and divert management attention.
If any of the foregoing were to occur, our financial condition and operating results could be materially
adversely affected.
Moreover, if any of our administrative processes and business systems are found not to comply
with the applicable requirements, we may be subjected to increased government scrutiny or required to
obtain additional governmental approvals that could delay or otherwise adversely affect our ability to
compete for or perform contracts. An unfavorable outcome to such an audit or investigation by the
DCAA, U.S. Department of Justice, or DOJ or other government agency, could materially adversely
affect our competitive position, affect our ability to obtain the maximum price for our products and
services, and result in a substantial reduction of our revenues.
If we were suspended or debarred from contracting with the federal government generally, or any
specific agency, if our reputation or relationship with government agencies were impaired, or if the
government otherwise ceased doing business with us or significantly decreased the amount of business
it does with us, our revenue and operating results would be materially harmed.
43
In February 2010, we were notified by the DOJ that it had initiated a civil investigation into our
billing practices with respect to our government contracts. The investigation is focused on three
matters:
(cid:127) the appropriateness of certain expenses included in our fiscal year 2006 Incurred Indirect Cost
Claim (reconciliation of projected rates to actual rates);
(cid:127) billing labor rates associated with time and materials government contracts; and
(cid:127) billing rates for small UAS maintenance and repair contracts.
We are currently cooperating with this investigation, which we believe may be the result of prior
DCAA audit activity. Based on our current understanding of the matters identified, we believe that the
outcome of the investigation will not have a material impact on our business. We have voluntarily
cooperated with a request for information received in connection with this investigation. No claim has
been filed against us to date.
Some of our contracts with the U.S. government allow it to use inventions developed under the contracts and
to disclose technical data to third parties, which could harm our ability to compete.
Some of our contracts allow the U.S. government to use, royalty-free, or have others use,
inventions developed under those contracts on behalf of the government. Some of the contracts allow
the federal government to disclose technical data without constraining the recipient on how those data
are used. The ability of third parties to use patents and technical data for government purposes creates
the possibility that the government could attempt to establish alternative suppliers or to negotiate with
us to reduce our prices. The potential that the government may release some of the technical data
without constraint creates the possibility that third parties may be able to use this data to compete with
us, which could have a material adverse effect on our business, results of operations or financial
condition.
U.S. government contracts are generally not fully funded at inception and contain certain provisions that may
be unfavorable to us, which could prevent us from realizing our contract backlog and materially harm our
business and results of operations.
U.S. Government contracts typically involve long lead times for design and development, and are
subject to significant changes in contract scheduling. Congress generally appropriates funds on a fiscal
year basis even though a program may continue for several years. Consequently, programs are often
only partially funded initially, and additional funds are committed only as Congress makes further
appropriations. The termination or reduction of funding for a government program would result in a
loss of anticipated future revenue attributable to that program.
The actual receipt of revenue on awards included in backlog may never occur or may change
because a program schedule could change or the program could be canceled, or a contract could be
reduced, modified or terminated early.
In addition, U.S. government contracts generally contain provisions permitting termination, in
whole or in part, at the government’s convenience or for contractor default. Since a substantial majority
of our revenue is dependent on the procurement, performance and payment under our U.S.
government contracts, the termination of one or more critical government contracts could have a
negative impact on our results of operations and financial condition. Termination arising out of our
default could expose us to liability and have a material adverse effect on our ability to re-compete for
future contracts and orders. Moreover, several of our contracts with the U.S. government do not
contain a limitation of liability provision, creating a risk of responsibility for indirect, incidental
damages and consequential damages. These provisions could cause substantial liability for us, especially
given the use to which our products may be put.
44
U.S. government contracts are subject to a competitive bidding process that can consume significant resources
without generating any revenue.
U.S. government contracts are frequently awarded only after formal, protracted competitive
bidding processes and, in many cases, unsuccessful bidders for U.S. government contracts are provided
the opportunity to protest contract awards through various agency, administrative and judicial channels.
We derive significant revenue from U.S. government contracts that were awarded through a competitive
bidding process. Much of the UAS business that we expect to seek in the foreseeable future likely will
be awarded through competitive bidding. Competitive bidding presents a number of risks, including the
following:
(cid:127) the need to bid on programs in advance of the completion of their design, which may result in
unforeseen technological difficulties and cost overruns;
(cid:127) the substantial cost and managerial time and effort that must be spent to prepare bids and
proposals for contracts that may not be awarded to us;
(cid:127) the need to estimate accurately the resources and cost structure that will be required to service
any contract we are awarded; and
(cid:127) the expense and delay that may arise if our competitors protest or challenge contract awards
made to us pursuant to competitive bidding, and the risk that any such protest or challenge
could result in the delay of our contract performance, the distraction of management, the
resubmission of bids on modified specifications, or in termination, reduction or modification of
the awarded contract.
We may not be provided the opportunity to bid on contracts that are held by other companies and
are scheduled to expire if the government extends the existing contract. If we are unable to win
particular contracts that are awarded through a competitive bidding process, then we may not be able
to operate in the market for goods and services that are provided under those contracts for a number
of years. If we are unable to win new contract awards over any extended period consistently, then our
business and prospects will be adversely affected.
We are subject to procurement rules and regulations, which increase our performance and compliance costs
under our U.S. government contracts.
We must comply with, and are affected by, laws and regulations relating to the formation,
administration and performance of U.S. government contracts. These laws and regulations, among
other things, require certification and disclosure of all cost and pricing data in connection with contract
negotiation, define allowable and unallowable costs and otherwise govern our right to reimbursement
under certain cost-based U.S. government contracts, and restrict the use and dissemination of classified
information and the exportation of certain products and technical data. These requirements, although
customary in U.S. government contracts, increase our performance and compliance costs. These costs
might increase in the future, reducing our margins, which could have a negative effect on our financial
condition. Although we have procedures in place to comply with these regulations and requirements,
failure to do so under certain circumstances could lead to suspension or debarment, for cause, from
U.S. government contracting or subcontracting for a period of time and could have a negative effect on
our reputation and ability to receive other U.S. government contract awards in the future.
45
Risks Related to Our Intellectual Property
If we fail to protect, or incur significant costs in defending, our intellectual property and other proprietary
rights, our business, financial condition, and results of operations could be materially harmed.
Our success depends, in large part, on our ability to protect our intellectual property and other
proprietary rights. We rely primarily on patents, trademarks, copyrights, trade secrets and unfair
competition laws, as well as license agreements and other contractual provisions, to protect our
intellectual property and other proprietary rights. However, a significant portion of our technology is
not patented, and we may be unable or may not seek to obtain patent protection for this technology. In
addition, the U.S. government has licenses under certain of our patents and certain other intellectual
property that are developed or used in performance of government contracts, and it may use or
authorize others to use such patents and intellectual property for government and other purposes.
Moreover, existing U.S. legal standards relating to the validity, enforceability and scope of protection of
intellectual property rights offer only limited protection, may not provide us with any competitive
advantages, and may be challenged by third parties. The laws of countries other than the United States
may be even less protective of intellectual property rights. Accordingly, despite our efforts, we may be
unable to prevent third parties from infringing upon or misappropriating our intellectual property or
otherwise gaining access to our technology. Unauthorized third parties may try to copy or reverse
engineer our products or portions of our products or otherwise obtain and use our intellectual
property. Moreover, many of our employees have access to our trade secrets and other intellectual
property. If one or more of these employees leave us to work for one of our competitors, then they
may disseminate this proprietary information, which may as a result damage our competitive position.
If we fail to protect our intellectual property and other proprietary rights, then our business, results of
operations or financial condition could be materially harmed.
In addition, affirmatively defending our intellectual property rights and investigating whether we
are pursuing a product or service development that may violate the rights of others may entail
significant expense. Any of our intellectual property rights may be challenged by others or invalidated
through administrative processes or litigation. If we resort to legal proceedings to enforce our
intellectual property rights or to determine the validity and scope of the intellectual property or other
proprietary rights of others, then the proceedings could result in significant expense to us and divert
the attention and efforts of our management and technical employees, even if we prevail.
We may be sued by third parties for alleged infringement of their proprietary rights, which could be costly,
time-consuming and limit our ability to use certain technologies in the future.
We may become subject to claims that our technologies infringe upon the intellectual property or
other proprietary rights of third parties. Any claims, with or without merit, could be time-consuming
and expensive, and could divert our management’s attention away from the execution of our business
plan. Moreover, any settlement or adverse judgment resulting from these claims could require us to pay
substantial amounts or obtain a license to continue to use the disputed technology, or otherwise restrict
or prohibit our use of the technology. We cannot assure you that we would be able to obtain a license
from the third party asserting the claim on commercially reasonable terms, if at all, that we would be
able to develop alternative technology on a timely basis, if at all, or that we would be able to obtain a
license to use a suitable alternative technology to permit us to continue offering, and our customers to
continue using, our affected product. An adverse determination also could prevent us from offering our
products to others. Infringement claims asserted against us may have a material adverse effect on our
business, results of operations or financial condition.
46
Risks Relating to Securities Markets and Investment in Our Stock
The price of our common stock may fluctuate significantly.
The market prices for securities of emerging technology companies have historically been highly
volatile, and the market has from time to time experienced significant price and volume fluctuations
that are unrelated to the operating performance of particular companies. The market price of our
common stock may fluctuate significantly in response to a number of factors, most of which we cannot
control, including the following:
(cid:127) U.S. government spending levels, both generally and by our particular customers;
(cid:127) the volume of operational activity by the U.S. military;
(cid:127) delays in the payment of our invoices by government payment offices, resulting in potentially
reduced earnings during a particular fiscal quarter;
(cid:127) announcements of new products or technologies, commercial relationships or other events
relating to us or our industry or our competitors;
(cid:127) failure of any of our key products to gain market acceptance;
(cid:127) variations in our quarterly operating results;
(cid:127) perceptions of the prospects for the markets in which we compete;
(cid:127) changes in general economic conditions;
(cid:127) changes in securities analysts’ estimates of our financial performance;
(cid:127) regulatory developments in the U.S. and foreign countries;
(cid:127) fluctuations in stock market prices and trading volumes of similar companies;
(cid:127) news about the markets in which we compete or regarding our competitors;
(cid:127) terrorist acts or military action related to international conflicts, wars or otherwise;
(cid:127) sales of large blocks of our common stock, including sales by our executive officers, directors
and significant stockholders; and
(cid:127) additions or departures of key personnel.
In addition, the equity markets in general, and NASDAQ in particular, have experienced extreme price
and volume fluctuations that have often been unrelated or disproportionate to the operating
performance of those companies. Further, the market prices of securities of emerging technology
companies have been particularly volatile. These broad market and industry factors may affect the
market price of our common stock adversely, regardless of our operating performance. In the past,
following periods of volatility in the market price of a company’s securities, securities class action
litigation often has been instituted against that company. This type of litigation, if instituted against us,
could result in substantial costs and a diversion of management’s attention and resources.
Our management, whose interests may not be aligned with yours, is able to exert significant influence over all
matters requiring stockholder approval.
As of June 7, 2013, our directors, executive officers and their affiliates collectively beneficially
owned 3,723,602 shares, or approximately 16%, of our total outstanding shares of common stock.
Accordingly, our directors and executive officers as a group may be able to exert significant influence
over matters requiring stockholder approval, including the election of directors. The interests of our
directors and executive officers may not be fully aligned with yours. Although there is no agreement
among our directors and executive officers with respect to the voting of their shares, this concentration
47
of ownership may delay, defer or even prevent a change in control of our company, and make
transactions more difficult or impossible without the support of all or some of our directors and
executive officers. These transactions might include proxy contests, tender offers, mergers or other
purchases of common stock that could give you the opportunity to realize a premium over the
then-prevailing market price for shares of our common stock.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
All of our facilities are leased. Our corporate headquarters are located in Monrovia, California
where we lease approximately 13,000 square feet under an agreement expiring in September 2015. We
have several other leased facilities in California, Alabama and Virginia that are used for administration,
research and development, logistics and manufacturing and have a total of approximately 435,000
square feet. Such leases expire between the end of 2013 and 2017.
Item 3. Legal Proceedings.
We are not currently a party to any material legal proceedings. We are, however, subject to
lawsuits from time to time in the ordinary course of business.
Item 4. Mine Safety Disclosure.
Not applicable.
48
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
PART II
of Equity Securities.
Common Stock
The following table sets forth, for the periods indicated, the high and low sales prices for our
common stock from May 1, 2011 through April 30, 2013. The following quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
Fiscal Year Ended April 30,
2013
2012
High
Low
High
Low
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . .
$27.82
$24.88
$23.70
$23.18
$21.14
$21.56
$19.25
$16.98
$36.49
$34.28
$33.87
$31.87
$26.81
$24.01
$28.33
$23.70
On June 7, 2013, the closing sales price of our common stock as reported on the NASDAQ Global
Select Market was $19.81 per share. As of June 7, 2013, there were 71 holders of record of our
common stock.
Dividends
We currently intend to retain all future earnings, if any, for use in the operation and expansion of
our business and do not anticipate paying any cash dividends in the foreseeable future. Any future
determination related to dividend policy will be made at the discretion of our board of directors and
will depend upon, among other factors, our results of operations, financial condition, capital
requirements, contractual restrictions and such other factors as our board of directors deems relevant.
49
Stock Price Performance Graph
The following graph shows a comparison of cumulative returns on our common stock, based on
the market price of the common stock, with the cumulative total returns of companies in the Russell
2000 Index and the SPADES Index.
Cumulative Total Return
$140
$120
$100
$80
$60
$40
$20
$0
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
AeroVironment Stock
Russell 2000 Index
SPADES Index
19JUN201308004577
The following table shows the value of $100 invested on April 30, 2008 in AeroVironment, Inc.,
the Russell 2000 Index and the SPADES Index.
April 30,
2008
April 30,
2009
April 30,
2010
April 30,
2011
April 30,
2012
April 30,
2013
Performance Graph Table ($)
AeroVironment Stock . . . . . .
Russell 2000 Index . . . . . . . . .
SPADES Index . . . . . . . . . . .
100
100
100
99
68
64
109
100
91
120
121
98
102
114
95
81
132
112
The stock price performance shown on the graph above is not necessarily indicative of future price
performance. Factual material was obtained from sources believed to be reliable, but we are not
responsible for any errors or omissions contained therein. No portions of this graph shall be deemed
incorporated by reference into any filing under the Securities Act, or the Exchange Act through any
general statement incorporating by reference in its entirety the report in which this graph appears,
except to the extent that we specifically incorporate this graph or a portion of it by reference. In
addition, this graph shall not be deemed filed under either the Securities Act or the Exchange Act.
50
Item 6. Selected Consolidated Financial Data.
The following selected financial data should be read in conjunction with our consolidated financial
statements. The information set forth below is not necessarily indicative of results of future operations,
and should be read in conjunction with Item 7, ‘‘Management’s Discussion and Analysis of Financial
Condition and Results of Operations’’ and the consolidated financial statements and notes thereto
included in Item 8, ‘‘Financial Statements and Supplementary Data’’ of this Annual Report in order to
understand fully factors that may affect the comparability of the financial data presented below.
Year Ended April 30,
2013
2012
2011
2010
2009
(In thousands, except per share data)
Consolidated Income Statement Data:
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . .
$240,152
$ 10,426
$325,008
$ 30,451
$292,503
$ 25,909
$249,518
$ 20,716
$247,662
$ 24,245
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average common shares
$
$
0.47
0.47
$
$
1.40
1.36
$
$
1.20
1.17
$
$
0.97
0.94
$
$
1.15
1.11
outstanding (basic): . . . . . . . . . . . . . . . . .
22,070
21,783
21,591
21,392
21,024
Weighted average common shares
outstanding (diluted): . . . . . . . . . . . . . . . .
22,390
22,315
22,081
21,977
21,776
Balance Sheet Data
Total assets . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term obligations . . . . . . . . . . . . . . . . .
$363,465
6,092
$
$369,151
6,854
$
$331,747
6,175
$
$281,971
4,438
$
$253,181
7,117
$
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Introduction
The following discussion of our financial condition and results of operations should be read in
conjunction with our ‘‘Selected Consolidated Financial Data’’ and our consolidated financial statements
and notes thereto included herein as Item 8. This discussion contains forward-looking statements. Refer
to ‘‘Forward-Looking Statements’’ on page 2 and ‘‘Risk Factors’’ beginning on page 25, for a discussion
of the uncertainties, risks and assumptions associated with these statements.
Overview
We design, develop, produce, support and operate a technologically-advanced portfolio of products.
We supply unmanned aircraft systems, or UAS, tactical missile systems and services primarily to
organizations within the U.S. Department of Defense, or DoD. We also supply charging systems and
services for electric vehicles and power cycling and test systems to commercial, consumer and
government customers. We derive the majority of our revenue from these business areas and we believe
that the markets for these solutions have significant growth potential. Additionally, we believe that
some of the innovative potential products in our research and development pipeline will emerge as new
growth platforms in the future, creating additional market opportunities.
The success we have achieved with our current products and services stems from our investment in
research and development and our ability to invent and deliver advanced solutions, utilizing our
proprietary technologies, to help our government, commercial and consumer customers operate more
effectively and efficiently. We develop these highly innovative solutions by working very closely with our
key customers in each segment of our business and solving their most important challenges related to
our areas of expertise. Our core technological capabilities, developed through more than 40 years of
innovation, include lightweight aerostructures, power electronics, electric propulsion systems, efficient
electric power generation, conversion, and storage systems, high-density energy packaging,
miniaturization, digital data links, aircraft payloads, controls integration, systems integration and
engineering optimization coupled with professional field service capabilities.
51
Our UAS business segment focuses primarily on the design, development, production, support and
operation of innovative UAS and tactical missile systems that provide situational awareness, multi-band
communications, force protection and other mission effects to increase the security and effectiveness of
our customers’ operations. Our Efficient Energy Systems, or EES, business segment focuses primarily
on the design, development, production, marketing, support and operation of innovative efficient
electric energy systems that address the growing demand for electric transportation solutions.
Revenue
We generate our revenue primarily from the sale, support and operation of our small UAS, electric
vehicle charging systems and power cycling and test systems solutions. Support for our small UAS
customers includes training, spare parts, product repair, product replacement, and the customer-
contracted operation of our small UAS by our personnel. We refer to these support activities
collectively as our services operation. We derive most of our small UAS revenue from fixed-price and
cost-plus-fee contracts with the U.S. government, and most of our electric vehicle charging systems and
power cycling and test systems revenue from sales and service to commercial customers.
Cost of Sales
Cost of sales consists of direct costs and allocated indirect costs. Direct costs include labor,
materials, travel, subcontracts and other costs directly related to the execution of a specific contract.
Indirect costs include overhead expenses, fringe benefits and other costs that are not directly charged
to a specific contract.
Gross Margin
Gross margin is equal to revenue minus cost of sales. We use gross margin as a financial metric to
help us understand trends in our direct costs and allocated indirect costs when compared to the
revenue we generate.
Research and Development Expense
Research and development, or R&D, is an integral part of our business model. We conduct
significant internally funded research and development and anticipate that research and development
expense will continue to increase in absolute dollars for the foreseeable future. Our research and
development activities focus specifically on creating capabilities that support our existing product
portfolio as well as new solutions. These activities are funded both externally by customers and
internally.
Selling, General and Administrative
Our selling, general and administrative expenses, or SG&A, include salaries and other expenses
related to selling, marketing and proposal activities, and other administrative costs. SG&A is an
important financial metric that we analyze to help us evaluate the contribution of our selling, marketing
and proposal activities to revenue generation.
Other Income and Expenses
Other income and expenses includes interest income, interest expense and changes in fair value of
certain financial investments.
52
Income Tax Expense
Our effective tax rates are substantially lower than the statutory rates primarily due to research
and development tax credits.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses
our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. When we prepare these consolidated financial
statements, we are required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting period. Some of
our accounting policies require that we make subjective judgments, including estimates that involve
matters that are inherently uncertain. Our most critical estimates include those related to revenue
recognition, inventories and reserves for excess and obsolescence, self-insured liabilities, accounting for
stock-based awards, and income taxes. We base our estimates and judgments on historical experience
and on various other factors that we believe to be reasonable under the circumstances, the results of
which form the basis for our judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Our actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting estimates affect our more significant judgments and
estimates used in preparing our consolidated financial statements. See Note 1 of the Notes to
Consolidated Financial Statements for our Organization and Significant Accounting Policies. There
have been no material changes made to the critical accounting estimates during the periods presented
in the consolidated financial statements.
Revenue Recognition
Significant management judgments and estimates must be made and used in connection with the
recognition of revenue in any accounting period. Material differences in the amount of revenue in any
given period may result if these judgments or estimates prove to be incorrect or if management’s
estimates change on the basis of development of the business or market conditions. Management
judgments and estimates have been applied consistently and have been reliable historically. We believe
that there are two key factors which impact the reliability of management’s estimates. The first of those
key factors is that the terms of our contracts are typically less than six months. The short-term nature
of such contracts reduces the risk that material changes in accounting estimates will occur on the basis
of market conditions or other factors. The second key factor is that we have hundreds of contracts in
any given accounting period, which reduces the risk that any one change in an accounting estimate on
one or several contracts would have a material impact on our consolidated financial statements or our
two reporting segments’ measures of profit.
The substantial majority of our revenue is generated pursuant to written contractual arrangements
to design, develop, manufacture and/or modify complex products, and to provide related engineering,
technical and other services according to customer specifications. These contracts may be fixed price or
cost-reimbursable. We consider all contracts for treatment in accordance with authoritative guidance for
contracts with multiple deliverables.
Revenue from product sales not under contractual arrangement is recognized at the time title and
the risk and rewards of ownership pass, which typically occurs when the products are shipped and
collection is reasonably assured.
53
Revenue and profits on fixed-price contracts are recognized using percentage-of-completion
methods of accounting. Revenue and profits on fixed-price production contracts, whose units are
produced and delivered in a continuous or sequential process, are recorded as units are delivered based
on their selling prices, or the units-of-delivery method. Revenue and profits on other fixed-price
contracts with significant engineering as well as production requirements are recorded based on the
ratio of total actual incurred costs to date to the total estimated costs for each contract, or the
cost-to-cost method. Under percentage-of-completion methods of accounting, a single estimated total
profit margin is used to recognize profit for each contract over its entire period of performance, which
can exceed one year. Accounting for revenue and profits on a fixed-price contract requires the
preparation of estimates of (1) the total contract revenue, (2) the total costs at completion, which is
equal to the sum of the actual incurred costs to date on the contract and the estimated costs to
complete the contract’s statement of work and (3) the measurement of progress towards completion.
The estimated profit or loss at completion on a contract is equal to the difference between the total
estimated contract revenue and the total estimated cost at completion. Under the units-of-delivery
method, sales on a fixed-price type contract are recorded as the units are delivered during the period
based on their contractual selling prices. Under the cost-to-cost method, sales on a fixed-price type
contract are recorded at amounts equal to the ratio of actual cumulative costs incurred divided by total
estimated costs at completion, multiplied by (A) the total estimated contract revenue, less (B) the
cumulative sales recognized in prior periods. The profit recorded on a contract in any period using
either the units-of-delivery method or cost-to-cost method is equal to (X) the current estimated total
profit margin multiplied by the cumulative sales recognized, less (Y) the amount of cumulative profit
previously recorded for the contract. In the case of a contract for which the total estimated costs
exceed the total estimated revenue, a loss arises, and a provision for the entire loss is recorded in the
period that it becomes evident. The unrecoverable costs on a loss contract that are expected to be
incurred in future periods are recorded in the program cost.
Revenue and profits on cost-reimbursable type contracts are recognized as costs are incurred on
the contract, at an amount equal to the costs plus the estimated profit on those costs. The estimated
profit on a cost-reimbursable contract is generally fixed or variable based on the contractual fee
arrangement.
We review cost performance and estimates to complete at least quarterly and in many cases more
frequently. Adjustments to original estimates for a contract’s revenue, estimated costs at completion
and estimated profit or loss are often required as work progresses under a contract, as experience is
gained and as more information is obtained, even though the scope of work required under the
contract may not change, or if contract modifications occur. The impact of revisions in profit estimates
for all types of contracts are recognized on a cumulative catch-up basis in the period in which the
revisions are made. During the fiscal years ended April 30, 2013, 2012 and 2011, changes in accounting
estimates on fixed-price contracts recognized using the percentage of completion method of accounting
were not material to our consolidated financial statements or our two reporting segments’ measure of
profit. Amounts representing contract change orders or claims are included in revenue only when they
can be reliably estimated and their realization is probable. Incentives or penalties and awards applicable
to performance on contracts are considered in estimating revenue and profit rates, and are recorded
when there is sufficient information to assess anticipated contract performance.
Inventories and Reserve for Excess and Obsolescence
Our policy for valuation of inventory, including the determination of obsolete or excess inventory,
requires us to perform a detailed assessment of inventory at each balance sheet date, which includes a
review of, among other factors, an estimate of future demand for products within specific time
horizons, valuation of existing inventory, as well as product lifecycle and product development plans.
Inventory reserves are also provided to cover risks arising from slow-moving items. We write down our
inventory for estimated obsolescence or unmarketable inventory equal to the difference between the
cost of inventory and the estimated market value based on assumptions about future demand and
market conditions. We may be required to record additional inventory write-downs if actual market
conditions are less favorable than those projected by our management.
54
Self-Insured Liability
We are self-insured for employee medical claims, subject to individual and aggregate stop-loss
policies. We estimate a liability for claims filed and incurred but not reported based upon recent claims
experience and an analysis of the average period of time between the occurrence of a claim and the
time it is reported to and paid by us. We perform an annual evaluation of this policy and have
determined that for all prior years during which this policy has been in effect there have been cost
advantages to this policy, as compared to obtaining commercially available employee medical insurance.
However, actual results may differ materially from those estimated and could have a material impact
on our consolidated financial statements.
Impairment of Long-Lived Assets
We review the recoverability of long-lived assets whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. The estimated future cash
flows are based upon, among other things, assumptions about expected future operating performance,
and may differ from actual cash flows. If the sum of the projected undiscounted cash flows (excluding
interest) is less than the carrying value of the assets, the assets will be written down to the estimated
fair value in the period in which the determination is made.
Long-Term Incentive Awards
We grant long-term incentive awards and we establish a target payout at the beginning of each
performance period. The actual payout at the end of the performance period is calculated based upon
our achievement of revenue and operating profit growth targets. Payouts are made in cash and
restricted stock units. Upon vesting of the restricted stock units, we have the discretion to settle the
restricted stock units in cash or stock.
The cash component of the award is accounted for as a liability. The equity component is
accounted for as a stock-based liability as the restricted stock units may be settled in cash or stock. At
each reporting period, we reassess the probability of achieving the performance targets. The estimation
of whether the performance targets will be achieved requires judgment, and to the extent actual results
or updated estimates differ from our current estimates, the cumulative effect on current and prior
periods of those changes will be recorded in the period estimates are revised.
Income Taxes
We are required to estimate our income taxes, which includes estimating our current income taxes
as well as measuring the temporary differences resulting from different treatment of items for tax and
accounting purposes. We currently have significant deferred assets, which are subject to periodic
recoverability assessments. Realizing our deferred tax assets principally depends on our achieving
projected future taxable income. We may change our judgments regarding future profitability due to
future market conditions and other factors, which may result in recording a valuation allowance against
those deferred tax assets.
Fiscal Periods
Our fiscal year ends on April 30. Due to our fixed year end date of April 30, our first and fourth
quarters each consist of approximately 13 weeks. The second and third quarters each consist of
13 weeks. Our first three quarters end on a Saturday.
55
Results of Operations
The following table sets forth certain historical consolidated income statement data expressed in
dollars (in thousands) and as a percentage of revenue for the periods indicated. Certain amounts may
not sum due to rounding.
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$240,152
147,616
100% $325,008
61% 195,675
100% $292,503
60% 175,352
100%
60%
Fiscal Year Ended April 30,
2013
2012
2011
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
Research and development
Income from operations . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . .
92,536
51,520
37,214
3,802
726
6,245
10,773
347
39% 129,333
21% 55,280
15% 30,977
40% 117,151
17% 47,431
10% 35,769
40%
16%
12%
2% 43,076
462
0%
— —
3%
13% 33,951
277
0%
— —
12%
0%
4% 43,538
0% 13,087
13% 34,228
4% 8,319
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 10,426
4% $ 30,451
9% $ 25,909
12%
3%
9%
The following table sets forth our revenue and gross margin generated by each operating segment
for the periods indicated:
Fiscal Year Ended April 30,
2013
2012
2011
(In thousands)
Revenue:
UAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$194,276
45,876
$273,728
51,280
$249,769
42,734
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$240,152
$325,008
$292,503
Cost of sales:
UAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$115,194
32,422
$157,663
38,012
$150,256
25,096
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$147,616
$195,675
$175,352
Gross margin:
UAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 79,082
13,454
$116,065
13,268
$ 99,513
17,638
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 92,536
$129,333
$117,151
56
Fiscal Year Ended April 30, 2013 Compared to Fiscal Year Ended April 30, 2012
Revenue. Revenue for the fiscal year ended April 30, 2013 was $240.2 million, as compared to
$325.0 million for the fiscal year ended April 30, 2012, representing a decrease of $84.9 million, or
26%. UAS revenue decreased $79.5 million, or 29%, to $194.3 million for the fiscal year ended
April 30, 2013, primarily due to decreases in service revenue of $52.1 million and product deliveries of
$39.3 million, partially offset by increased customer-funded R&D work of $11.9 million. The decrease
in service revenue was primarily due to a decrease in DDL retrofits. The decrease in product deliveries
was primarily due to a decrease in deliveries of our digital Puma AE systems. The increase in
customer-funded R&D was primarily due to increased activity on the Switchblade program. EES
revenue decreased $5.4 million, or 11%, to $45.9 million for the fiscal year ended April 30, 2013,
primarily due to decreased product deliveries of our electric vehicle test systems and passenger electric
vehicle charging systems, partially offset by increased deliveries of industrial fast charge systems.
Cost of Sales. Cost of sales for the fiscal year ended April 30, 2013 was $147.6 million, as
compared to $195.7 million for the fiscal year ended April 30, 2012, representing a decrease of
$48.1 million, or 25%. As a percentage of revenue, cost of sales increased from 60% to 61%. UAS cost
of sales decreased $42.5 million, or 27%, to $115.2 million for the fiscal year ended April 30, 2013,
primarily due to a decrease in sales volume. As a percentage of revenue, cost of sales for UAS
increased from 58% to 59%. EES cost of sales decreased $5.6 million, or 15%, to $32.4 million for the
fiscal year ended April 30, 2013. As a percentage of revenue, cost of sales for EES decreased from
74% to 71%, primarily due to a higher sales mix of higher margin products and lower manufacturing
and engineering overhead support costs.
Gross Margin. Gross margin for the fiscal year ended April 30, 2013 was $92.5 million, as
compared to $129.3 million for the fiscal year ended April 30, 2012, representing a decrease of
$36.8 million, or 28%. As a percentage of revenue, gross margin decreased from 40% to 39%. UAS
gross margin decreased $37.0 million, or 32%, to $79.1 million for the fiscal year ended April 30, 2013,
primarily due to a decrease in sales volume. As a percentage of revenue, gross margin for UAS
decreased from 42% to 41%. EES gross margin increased $0.2 million, or 1%, to $13.5 million for the
fiscal year ended April 30, 2013. As a percentage of revenue, EES gross margin increased from 26% to
29%, primarily due to a higher sales mix of higher margin products and lower manufacturing and
engineering overhead support costs.
Selling, General and Administrative. SG&A expense for the fiscal year ended April 30, 2013 was
$51.5 million, or 21% of revenue, compared to SG&A expense of $55.3 million, or 17% of revenue, for
the fiscal year ended April 30, 2012. SG&A expense decreased by $3.8 million primarily due to lower
incentive compensation as a result of not achieving anticipated financial performance.
Research and Development. R&D expense for the fiscal year ended April 30, 2013 was
$37.2 million, or 15% of revenue, compared to R&D expense of $31.0 million, or 10% of revenue, for
the fiscal year ended April 30, 2012. R&D expense increased primarily due to higher investments in
various technology development initiatives.
Interest Income.
Interest income for the fiscal year ended April 30, 2013 was $0.7 million, as
compared to $0.5 million for the fiscal year ended April 30, 2012.
Other Income. Other income for the fiscal year ended April 30, 2013 was $6.2 million, as
compared to $0 the fiscal year ended April 30, 2012. The increase is primarily due to a $6.2 million
change in fair value of the conversion feature of our investment in convertible bonds.
Income Tax Expense. Our effective income tax expense rate was 3.2% for the fiscal year ended
April 30, 2013, as compared to an effective income expense tax rate of 30.1% for the fiscal year ended
April 30, 2012. The decrease in the effective income tax expense rate was primarily due to higher
federal R&D tax credits and lower taxable income.
57
Fiscal Year Ended April 30, 2012 Compared to Fiscal Year Ended April 30, 2011
Revenue. Revenue for the fiscal year ended April 30, 2012 was $325.0 million, as compared to
$292.5 million for the fiscal year ended April 30, 2011, representing an increase of $32.5 million, or
11%. UAS revenue increased $24.0 million, or 10%, to $273.7 million for the fiscal year ended
April 30, 2012, primarily due to an increase in product deliveries of $33.9 million, partially offset by
decreased customer-funded R&D work of $5.9 million and lower service revenue of $4.1 million. The
increase in product deliveries was primarily due to increased deliveries of our digital Puma AE systems.
The decrease in service revenue was primarily due to a decrease in DDL retrofits. The decrease in
customer-funded R&D was primarily due to decreased activity on the Global Observer program. EES
revenue increased $8.5 million, or 20%, to $51.3 million for the fiscal year ended April 30, 2012,
primarily due to increased product deliveries of our electric vehicle charging systems and power cycling
and test systems.
Cost of Sales. Cost of sales for the fiscal year ended April 30, 2012 was $195.7 million, as
compared to $175.4 million for the fiscal year ended April 30, 2011, representing an increase of
$20.3 million, or 12%. As a percentage of revenue, cost of sales remained at 60%. UAS cost of sales
increased $7.4 million, or 5%, to $157.7 million for the fiscal year ended April 30, 2012, primarily due
to an increase in sales volume. As a percentage of revenue, cost of sales for UAS decreased from 60%
to 58%. EES cost of sales increased $12.9 million, or 51%, to $38.0 million for the fiscal year ended
April 30, 2012. As a percentage of revenue, cost of sales for EES increased from 59% to 74%,
primarily due to an increase in sales of new products in low-rate production and with an associated
higher cost of sales, and higher manufacturing and engineering overhead support costs.
Gross Margin. Gross margin for the fiscal year ended April 30, 2012 was $129.3 million, as
compared to $117.2 million for the fiscal year ended April 30, 2011, representing an increase of
$12.1 million, or 10%. As a percentage of revenue, gross margin remained at 40%. UAS gross margin
increased $16.6 million, or 17%, to $116.1 million for the fiscal year ended April 30, 2012, primarily
due to an increase in sales volume. As a percentage of revenue, gross margin for UAS increased from
40% to 42%, primarily due to a higher amount of fixed-price contract revenue compared to cost-
reimbursable contract revenue. EES gross margin decreased $4.4 million, or 25%, to $13.3 million for
the fiscal year ended April 30, 2012. As a percentage of revenue, EES gross margin decreased from
41% to 26%, primarily due to an increase in sales of new products in low-rate production and with an
associated higher cost of sales, and higher manufacturing and engineering support overhead costs.
Selling, General and Administrative. SG&A expense for the fiscal year ended April 30, 2012 was
$55.3 million, or 17% of revenue, compared to SG&A expense of $47.4 million, or 16% of revenue, for
the fiscal year ended April 30, 2011. SG&A expense increased primarily due to higher bid and proposal
costs, selling and marketing expenses and administrative costs.
Research and Development. R&D expense for the fiscal year ended April 30, 2012 was
$31.0 million, or 10% of revenue, compared to R&D expense of $35.8 million, or 12% of revenue, for
the fiscal year ended April 30, 2011. R&D expense decreased primarily due to lower investments in
various technology development initiatives.
Interest Income.
Interest income for the fiscal year ended April 30, 2012 was $0.5 million, as
compared to interest income of $0.3 million for the fiscal year ended April 30, 2011, representing an
increase of $0.2 million. Interest income increased primarily due to higher average cash and short-term
investment balances.
Income Tax Expense. Our effective income tax rate was 30.1% for the fiscal year ended April 30,
2012, as compared to 24.3% for the fiscal year ended April 30, 2011. The increase was caused primarily
by lower R&D tax credits in the fiscal year ended April 30, 2012.
58
Liquidity and Capital Resources
We currently have no material cash commitments, except for normal recurring trade payables,
accrued expenses and ongoing research and development costs, all of which we anticipate funding
through our existing working capital and funds provided by operating activities. The majority of our
purchase obligations are pursuant to funded contractual arrangements with our customers. In addition,
we do not currently anticipate significant investment in property, plant and equipment, and we believe
that our existing cash, cash equivalents, cash provided by operating activities and other financing
sources will be sufficient to meet our anticipated working capital, capital expenditure and debt service
requirements, if any, during the next twelve months. There can be no assurance, however, that our
business will continue to generate cash flow at current levels. If we are unable to generate sufficient
cash flow from operations, then we may be required to sell assets, reduce capital expenditures or obtain
additional financing. The current challenging economic environment continues to create volatility and
disruption in the capital markets, diminished liquidity and credit availability, and increased counterparty
risk. Nevertheless, we anticipate that existing sources of liquidity and cash flows from operations will be
sufficient to satisfy our cash needs for the foreseeable future.
Our primary liquidity needs are for financing working capital, investing in capital expenditures,
supporting product development efforts, introducing new products and enhancing existing products, and
marketing acceptance and adoption of our products and services. Our future capital requirements, to a
certain extent, are also subject to general conditions in or affecting the defense and electric vehicle
industries and are subject to general economic, political, financial, competitive, legislative and
regulatory factors that are beyond our control. Moreover, to the extent that existing cash, cash
equivalents, cash from operations, and cash from short-term borrowing are insufficient to fund our
future activities, we may need to raise additional funds through public or private equity or debt
financing. Although we are currently not a party to any agreement or letter of intent with respect to
potential investment in, or acquisitions of, businesses, services or technologies, we may enter into these
types of arrangements in the future, which could also require us to seek additional equity or debt
financing.
Our working capital requirements vary by contract type. On cost-plus-fee programs, we typically
bill our incurred costs and fees monthly as work progresses, and therefore working capital investment is
minimal. On fixed-price contracts, we typically are paid as we deliver products, and working capital is
needed to fund labor and expenses incurred during the lead time from contract award until contract
deliveries begin.
Cash Flows
The following table provides our cash flow data as of:
Fiscal Year Ended April 30,
2013
2012
2011
Net cash provided by operating activities . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . .
(In thousands)
$ 24,007
$33,486
$ 18,754
$(13,107) $(17,329) $ (933)
823
$
754
212
$
$
Cash Provided by Operating Activities. Net cash provided by operating activities for the fiscal year
ended April 30, 2013 increased by $5.2 million to $24.0 million, compared to net cash provided by
operating activities of $18.8 million for the fiscal year ended April 30, 2012. This increase in net cash
provided by operating activities was primarily due to lower working capital needs of $22.0 million,
lower deferred income taxes of $6.4 million, higher depreciation expense of $2.0 million, partially offset
by lower income of $20.0 million.
59
Net cash provided by operating activities for the fiscal year ended April 30, 2012 decreased by
$14.7 million to $18.8 million, compared to net cash provided by operating activities of $33.5 million for
the fiscal year ended April 30, 2011. This decrease in net cash provided by operating activities was
primarily due to higher working capital needs of $15.9 million, no impairment of long-lived assets of
$2.0 million, and lower depreciation expense of $1.6 million, partially offset by higher income of
$4.5 million.
Cash Used in Investing Activities. Net cash used in investing activities decreased by $4.2 million to
$13.1 million for the fiscal year ended April 30, 2013, compared to net cash used in investing activities
of $17.3 million for the fiscal year ended April 30, 2012. The decrease in net cash used in investing
activities was primarily due to lower capital expenditures of $3.2 million and net redemption of U.S.
government securities and municipal bonds of $5.0 million, partially offset by the purchase of
convertible bonds of $3.0 million. During the fiscal years ended April 30, 2013, 2012 and 2011, we used
cash to purchase property and equipment totaling $11.8 million, $15.0 million, and $10.2 million,
respectively.
Net cash used in investing activities increased by $16.4 million to $17.3 million for the fiscal year
ended April 30, 2012, compared to net cash used in investing activities of $0.9 million for the fiscal
year ended April 30, 2011. The increase in net cash used in investing activities was primarily due to net
purchases of U.S. Treasury bills and municipal bonds of $11.5 million and higher capital expenditures
of $4.8 million. During the fiscal years ended April 30, 2012, 2011 and 2010, we used cash to purchase
property and equipment totaling $15.0 million, $10.2 million and $10.8 million, respectively.
Cash Provided by Financing Activities. Net cash provided by financing activities decreased by
$0.6 million to $0.2 million for the fiscal year ended April 30, 2013, compared to net cash provided by
financing activities of $0.8 million for the fiscal year ended April 30, 2012. The decrease was primarily
due to lower exercises of stock options of $0.4 million and lower excess tax benefits from stock-based
compensation of $0.2 million.
Net cash provided by financing activities remained at $0.8 million for the fiscal years ended
April 30, 2012 and 2011.
Contractual Obligations
The following table describes our commitments to settle contractual obligations as of April 30,
2013:
Payments Due By Period
Total
Less Than
1 Year
Operating lease obligations . . . . . . . . . . . . . .
Purchase obligations(1) . . . . . . . . . . . . . . . . .
$10,188
22,829
$ 4,324
22,829
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$33,017
$27,153
1 to 3 Years
3 to 5 Years
(In thousands)
$4,871
—
$4,871
$993
—
$993
More Than
5 Years
$—
—
$—
(1) Consists of all cancelable and non-cancelable purchase orders as of April 30, 2013.
Off-Balance Sheet Arrangements
As of April 30, 2013, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of
the SEC’s Regulation S-K.
60
Inflation
Our operations have not been, and we do not expect them to be, materially affected by inflation.
Historically, we have been successful in adjusting prices to our customers to reflect changes in our
material and labor costs.
New Accounting Standards
On May 1, 2012, we adopted changes in accordance with guidance issued by the Financial
Accounting Standards Board (‘‘FASB’’), which requires companies to present the total of
comprehensive income, the components of net income, and the components of other comprehensive
income either in a single continuous statement of comprehensive income, or in two separate but
consecutive statements. We elected to adopt the two-statement option. The new guidance eliminated
the option to present the components of other comprehensive income as part of the statement of
equity. Other than the change in presentation, the adoption of these changes had no material impact
on our consolidated financial statements. The new guidance also required entities to present
reclassification adjustments from accumulated other comprehensive income by component in both the
statement in which net income is presented and the statement in which other comprehensive income is
presented, which was indefinitely deferred in December of 2011. In February of 2013, the FASB issued
guidance related to the reclassification adjustments and related adoption date, we will adopt the
guidance regarding reclassification adjustments on May 1, 2013. Other than the change in presentation,
the adoption of these changes will have no material impact on our consolidated financial statements.
On May 1, 2012, we adopted changes in accordance with guidance issued by the FASB to provide
a consistent definition of fair value and to ensure that the fair value measurement and disclosure
requirements are similar between U.S. generally accepted accounting principles and International
Financial Reporting Standards. The new guidance changed certain fair value measurement principles
and enhanced the disclosure requirements, particularly for Level 3 fair value measurements. The
adoption of these changes did not have a material impact on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
It is our policy not to enter into interest rate derivative financial instruments. We do not currently
have any significant interest rate exposure.
Foreign Currency Exchange Rate Risk
Since a significant part of our sales and expenses are denominated in U.S. dollars, we have not
experienced significant foreign exchange gains or losses to date, and do not expect to incur significant
foreign exchange gains or losses in the future. We occasionally engage in forward contracts in foreign
currencies to limit our exposure on non-U.S. dollar transactions.
61
Item 8. Financial Statements and Supplementary Data.
AeroVironment, Inc.
Audited Consolidated Financial Statements
Index to Consolidated Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets at April 30, 2013 and 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income for the Years Ended April 30, 2013, 2012 and 2011 . . . . . . .
Page
63
64
65
Consolidated Statements of Comprehensive Income for the Years Ended April 30, 2013, 2012
and 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
66
Consolidated Statements of Stockholders’ Equity for the Years Ended April 30, 2013, 2012 and
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the Years Ended April 30, 2013, 2012 and 2011 . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quarterly Results of Operations (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
67
68
69
90
Supplementary Data
Financial Statement Schedule: Schedule II—Valuation and Qualifying Accounts . . . . . . . . . . . . .
92
All other schedules are omitted because they are not applicable, not required or the information
required is included in the Consolidated Financial Statements, including the notes thereto.
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
AeroVironment, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of AeroVironment, Inc. and
subsidiaries as of April 30, 2013 and 2012, and the related consolidated statements of income,
comprehensive income, stockholders’ equity and cash flows for each of the three years in the period
ended April 30, 2013. Our audits also included the financial statement schedule listed in the Index at
Item 15(a). These consolidated financial statements and schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of AeroVironment, Inc. and subsidiaries at
April 30, 2013 and 2012, and the consolidated results of their operations and their cash flows for each
of the three years in the period ended April 30, 2013, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), AeroVironment, Inc.’s internal controls over financial reporting as of
April 30, 2013, based upon criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
June 25, 2013 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Los Angeles, California
June 25, 2013
63
AEROVIRONMENT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
April 30,
2013
2012
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance for doubtful accounts of $936 at
April 30, 2013 and $921 at April 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . .
Unbilled receivables and retentions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 75,332
73,241
$ 64,220
77,152
19,770
11,304
62,561
11,777
5,166
4,303
263,454
68,916
24,429
5,606
1,060
56,417
27,034
43,539
—
7,886
4,030
280,278
58,457
23,515
6,700
201
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$363,465
$369,151
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wages and related accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wages and related accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liability for uncertain tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.0001 par value:
$ 16,144
12,116
—
7,519
6,408
42,187
—
771
5,321
$ 20,213
19,076
8,788
5,124
9,898
63,099
1,203
1,019
4,632
Authorized shares—10,000,000; none issued or outstanding . . . . . . . . . . . . .
—
—
Common stock, $0.0001 par value:
Authorized shares—100,000,000
Issued and outstanding shares—22,614,315 shares at April 30, 2013 and
22,243,903 at April 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
130,527
(705)
185,362
2
124,954
(694)
174,936
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
315,186
299,198
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$363,465
$369,151
See accompanying notes to consolidated financial statements.
64
AEROVIRONMENT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except share and per share data)
Revenue:
Product sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contract services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Cost of sales:
Product sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contract services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income:
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share data:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average shares outstanding:
$
$
$
Year Ended April 30,
2013
2012
2011
139,813
100,339
240,152
85,643
61,973
147,616
92,536
51,520
37,214
3,802
726
6,245
10,773
347
10,426
0.47
0.47
$
$
$
$
179,537
145,471
325,008
104,347
91,328
195,675
129,333
55,280
30,977
43,076
462
—
43,538
13,087
30,451
1.40
1.36
$
$
$
$
137,724
154,779
292,503
74,843
100,509
175,352
117,151
47,431
35,769
33,951
277
—
34,228
8,319
25,909
1.20
1.17
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22,069,842
22,390,420
21,783,496
22,315,474
21,591,333
22,081,266
See accompanying notes to consolidated financial statements.
65
AEROVIRONMENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive (loss) income:
Year Ended April 30,
2013
2012
2011
$10,426
$30,451
$25,909
Unrealized (loss) gain on investments, net tax . . . . . . . . . . . . . . . . . .
(11)
90
(24)
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,415
$30,541
$25,885
See accompanying notes to consolidated financial statements.
66
Balance at April 30, 2011 . . . . . . . . . . . . 21,949,884
AEROVIRONMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands except share data)
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Other
Retained Comprehensive
Earnings
Loss
Total
Balance at April 30, 2010 . . . . . . . . . . . . 21,732,413
Net income . . . . . . . . . . . . . . . . . . . .
Unrealized loss on investments . . . . . .
Stock options exercised . . . . . . . . . . .
Restricted stock awards . . . . . . . . . . .
Restricted stock awards forfeited . . . .
Tax benefit from stock-based
compensation . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . .
. . . . .
Unrealized gain on investments
Stock options exercised . . . . . . . . . . .
Restricted stock awards . . . . . . . . . . .
Restricted stock awards forfeited . . . .
Tax benefit from stock-based
compensation . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . .
Unrealized loss on investments . . . . . .
Stock options exercised . . . . . . . . . . .
Restricted stock awards . . . . . . . . . . .
Restricted stock awards forfeited . . . .
Restricted stock units vested . . . . . . . .
Tax withholding payment related to net
share settlement of equity awards . .
Reclassification from share-based
$ 2
— —
— —
120,561 —
98,910 —
(2,000) —
$115,602 $118,576
— 25,909
—
—
—
619
—
—
—
—
$(760)
—
(24)
—
—
—
$233,420
25,909
(24)
619
—
—
— —
— —
1,238
2,306
—
—
2
— —
— —
141,536 —
157,400 —
(4,917) —
119,765
144,485
— 30,451
—
—
—
565
—
—
—
—
— —
— —
1,428
3,196
—
—
2
— —
— —
208,338 —
163,886 —
(12,767) —
14,926 —
(3,971) —
124,954
174,936
— 10,426
—
—
—
289
—
—
—
—
—
—
(77)
401
—
—
—
—
—
—
(784)
—
90
—
—
—
—
—
(694)
—
(11)
—
—
—
—
—
—
—
—
1,238
2,306
263,468
30,451
90
565
—
—
1,428
3,196
299,198
10,426
(11)
289
—
—
—
(77)
401
1,490
3,470
liability compensation to equity . . . .
— —
Tax benefit from stock-based
compensation . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . .
— —
— —
1,490
3,470
Balance at April 30, 2013 . . . . . . . . . . . . 22,614,315
$ 2
$130,527 $185,362
$(705)
$315,186
See accompanying notes to consolidated financial statements.
67
Balance at April 30, 2012 . . . . . . . . . . . . 22,243,903
AEROVIRONMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of conversion feature of convertible bonds . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from stock-based compensation . . . . . . . . . . . . . . . . . . . .
Loss (gain) on disposition of property and equipment . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unbilled receivables and retentions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities
Acquisition of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net redemptions (purchases) of held-to-maturity investments . . . . . . . . . . . . . .
Acquisition of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities
Excess tax benefit from stock-based compensation . . . . . . . . . . . . . . . . . . . . . .
Tax withholding payment related to net settlement of equity awards . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended April 30,
2013
2012
2011
$ 10,426
$ 30,451
$ 25,909
10,937
—
462
3,851
(6,173)
3,470
1,606
—
18
36,185
15,730
(19,022)
(11,777)
(317)
(4,069)
(17,320)
8,973
—
291
(2,579)
—
3,196
1,239
(189)
(11)
(12,332)
(5,068)
(5,402)
—
(1,678)
(10,921)
12,784
10,599
2,043
(105)
(1,343)
—
2,306
1,034
(204)
(51)
(5,626)
(3,256)
(17,209)
—
(543)
10,929
9,003
24,007
18,754
33,486
(11,834)
2,014
(850)
(3,037)
600
—
(14,992)
(2,575)
—
—
225
13
(10,173)
8,931
—
—
200
109
(13,107)
(17,329)
(933)
—
(77)
289
212
189
—
565
754
204
—
619
823
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . .
11,112
64,220
2,179
62,041
33,376
28,665
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 75,332
$ 64,220
$ 62,041
Supplemental disclosures of cash flow information
Cash paid during the year for:
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 15,262
$ 13,104
$ 9,873
Non-cash activities
Unrealized (loss) gain on long-term investments recorded in accumulated other
comprehensive loss, net of deferred taxes of $37, $56 and $16, respectively . . .
Reclassification from share-based liability compensation to equity . . . . . . . . . . .
$
$
(11) $
$
401
90
$
— $
(24)
—
See accompanying notes to consolidated financial statements.
68
AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization
AeroVironment, Inc., a Delaware corporation, is engaged in the design, development, production,
support and operation of unmanned aircraft systems and efficient energy systems for various industries
and governmental agencies.
Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of AeroVironment, Inc.
and its wholly-owned subsidiaries: AV S.r.l., Skytower, LLC, AV GmbH, AV Massachusetts, LLC, AV
Rhode Island, LLC, Skytower Inc., AILC, Inc. and Regenerative Fuel Cell Systems, LLC (collectively
referred to herein as the ‘‘Company’’). All intercompany balances and transactions have been
eliminated in consolidation.
Segments
The Company’s products are sold and divided among two reportable segments to reflect the
Company’s strategic goals. Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the Chief Operating Decision
Maker (‘‘CODM’’) in deciding how to allocate resources and in assessing performance. The Company’s
CODM is the Chief Executive Officer, who reviews the revenue and gross margin results for each of
these segments in order to make resource allocation decisions, including the focus of research and
development, or R&D, activities, and assessing performance. The Company’s reportable segments are
business units that offer different products and services and are managed separately.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Significant estimates made by management include,
but are not limited to, valuation of: inventory, deferred tax assets and liabilities, useful lives of
property, plant and equipment, medical and dental liabilities, and estimates of anticipated contract costs
and revenue utilized in the revenue recognition process. Actual results could differ from those
estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or
less at the time of purchase to be cash equivalents. The Company’s cash equivalents are comprised of
money market funds, certificates of deposit of major financial institutions, and U.S. Treasury bills.
69
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AEROVIRONMENT, INC.
Investments
The Company’s investments are accounted for as held-to-maturity and available-for-sale and
reported at amortized cost and fair value, respectively.
Unrealized gains and losses are excluded from earnings and reported as a separate component of
stockholders’ equity, net of deferred income taxes for available-for-sale investments. The convertible
bonds in which the Company has invested, which are classified as available-for-sale, contain an
embedded conversion feature which is bifurcated from the bond. The changes in the fair value of the
embedded conversion feature are recorded in other income in the income statement.
Gains and losses realized on the disposition of investment securities are determined on the specific
identification basis and credited or charged to income. Premium and discount on investments are
amortized and accreted using the interest method and charged or credited to investment income.
Management determines the appropriate classification of securities at the time of purchase and
re-evaluates such designation as of each balance sheet date.
Investments are considered to be impaired when a decline in fair value is judged to be
other-than-temporary. On a quarterly basis, the Company considers available quantitative and
qualitative evidence in evaluating potential impairment of our investments. If the cost of an investment
exceeds its fair value, the Company evaluates, among other factors, general market conditions, the
duration and extent to which the fair value is less than cost, and our intent and ability to hold the
investment to maturity. The Company also considers potential adverse conditions related to the
financial health of the issuer based on rating agency actions. Once a decline in fair value is determined
to be other-than-temporary, an impairment charge is recorded in earnings and a new cost basis in the
investment is established.
Fair Values of Financial Instruments
Fair values of cash and cash equivalents, accounts receivable, unbilled receivables, retentions and
accounts payable approximate cost due to the short period of time to maturity.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist
primarily of cash, cash equivalents, municipal bonds, U.S. government securities and accounts
receivable. The Company currently invests the majority of its cash in municipal bonds and U.S.
government securities. The Company’s revenue and accounts receivable are with a limited number of
corporations and governmental entities. In the aggregate, 70%, 83% and 83% of the Company’s
revenue came from agencies of the U.S. government for the years ended April 30, 2013, 2012 and 2011,
respectively. These agencies accounted for 39% and 82% of the accounts receivable balances at
April 30, 2013 and 2012, respectively. One such agency, the U.S. Army, accounted for 43%, 42% and
48% of the Company’s consolidated revenue for the years ended April 30, 2013, 2012 and 2011,
respectively. The U.S. Army accounted for approximately 53%, 49% and 56% of UAS reportable
segment sales for the years ended April 30, 2013, 2012 and 2011, respectively. The Company performs
ongoing credit evaluations of its commercial customers and maintains an allowance for potential losses.
Accounts Receivable, Unbilled Receivables and Retentions
Accounts receivable represents primarily U.S. government, and to a lesser extent commercial
receivables, net of allowances for doubtful accounts. Unbilled receivables represent costs in excess of
70
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AEROVIRONMENT, INC.
billings on incomplete contracts and, where applicable, accrued profit related to government long-term
contracts on which revenue has been recognized, but for which the customer has not yet been billed.
Retentions represent amounts withheld by customers until contract completion. The Company
determines the allowance for doubtful accounts based on historical customer experience and other
currently available evidence. When a specific account is deemed uncollectible, the account is written off
against the allowance. The allowance for doubtful accounts reflects the Company’s best estimate of
probable losses inherent in the accounts receivable balance; such losses have historically been within
management’s expectations. An account is deemed past due based on contractual terms rather than on
how recently payments have been received.
Inventories
Inventories are stated at the lower of cost (using the weighted average costing method) or market
value. Inventory write-offs and write-down provisions are provided to cover risks arising from
slow-moving items or technological obsolescence and for market prices lower than cost. The Company
periodically evaluates the quantities on hand relative to current and historical selling prices and
historical and projected sales volume. Based on this evaluation, provisions are made to write inventory
down to its market value.
Long-Lived Assets
Property and equipment are carried at cost. Depreciation of property and equipment, including
amortization of leasehold improvements, are provided using the straight-line method over the following
estimated useful lives:
2 to 7 years
Machinery and equipment . . . . . . . . . . . . . . .
2 to 5 years
Computer equipment and software . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . .
3 to 7 years
Leasehold improvements . . . . . . . . . . . . . . . . Lesser of useful life or term of lease
Maintenance, repairs and minor renewals are charged directly to expense as incurred. Additions
and betterments to property and equipment are capitalized at cost. When the Company disposes of
assets, the applicable costs and accumulated depreciation and amortization thereon are removed from
the accounts and any resulting gain or loss is included in selling, general and administrative expense in
the period incurred.
The Company reviews the recoverability of its long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be recoverable. The estimated
future cash flows are based upon, among other things, assumptions about expected future operating
performance, and may differ from actual cash flows. If the sum of the projected undiscounted cash
flows (excluding interest) is less than the carrying value of the assets, the assets will be written down to
the estimated fair value in the period in which the determination is made. At April 30, 2013, no
indicators of impairment were identified and no impairment charge was recorded.
Product Warranty
The Company accrues an estimate of its exposure to warranty claims based upon both current and
historical product sales data and warranty costs incurred. Product warranty reserves are recorded in
other current liabilities.
71
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AEROVIRONMENT, INC.
Self-Insurance Liability
The Company is self-insured for employee medical claims, subject to individual and aggregate
stop-loss policies. The Company estimates a liability for claims filed and incurred but not reported
based upon recent claims experience and an analysis of the average period of time between the
occurrence of a claim and the time it is reported to and paid by the Company. As of April 30, 2013
and 2012, the Company estimated and recorded a self-insurance liability in wages and related accruals
of approximately $1,543,000 and $1,448,000, respectively.
Income Taxes
Deferred income tax assets and liabilities are computed annually for differences between the
financial statement and income tax bases of assets and liabilities that will result in taxable or deductible
amounts in the future. The provision for income taxes reflects the taxes to be paid for the period and
the change during the period in the deferred income tax assets and liabilities. The Company records a
valuation allowance to reduce the deferred tax assets to the amount of future tax benefit that is more
likely than not to be realized. For uncertain tax positions, the Company determines whether it is ‘‘more
likely than not’’ that a tax position will be sustained upon examination by the appropriate taxing
authorities before any part of the benefit can be recorded in the financial statements. For those tax
positions where it is ‘‘not more likely than not’’ that a tax benefit will be sustained, no tax benefit is
recognized. Where applicable, associated interest and penalties are also recorded.
Customer Advances and Amounts in Excess of Cost Incurred
The Company receives advances, performance-based payments and progress payments from
customers that may exceed costs incurred on certain contracts, including contracts with agencies of the
U.S. government. These advances are classified as advances from customers and will be offset against
billings.
Revenue Recognition
The substantial majority of the Company’s revenue is generated pursuant to written contractual
arrangements to design, develop, manufacture and/or modify complex products, and to provide related
engineering, technical and other services according to the specifications of the buyers (customers).
These contracts may be fixed-price or cost-reimbursable. The Company considers all contracts for
treatment in accordance with authoritative guidance for contracts with multiple deliverables.
Revenue arrangements with multiple deliverables should be divided into separate units of
accounting if the deliverables have value to the customer on a stand-alone basis; there is objective and
reliable evidence of the fair value of the undelivered item(s); and, if the arrangement includes a
general right of return, delivery or performance of the undelivered item(s) is considered probable and
substantially in the control of the vendor. The Company occasionally enters into arrangements that
consist of installation and repair contracts associated with hardware sold by the Company. Such
arrangements consist of separate contractual arrangements and are divided into separate units of
accounting where the delivered item has value to the customer on a stand-alone basis and there is
objective and reasonable evidence of the fair value of the installation contract. Consideration is
allocated among the separate units of accounting based on their relative fair values.
Product sales revenue is composed of revenue recognized on contracts for the delivery of
production hardware and related activities. Contract services revenue is composed of revenue
72
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AEROVIRONMENT, INC.
recognized on contracts for the provision of services, including repairs, training, engineering design,
development and prototyping activities.
Revenue from cost-plus-fee contracts are recognized on the basis of costs incurred during the
period plus the fee earned. Revenue from fixed-price contracts are recognized on the percentage-of-
completion method. Contract costs include all direct material and labor costs and those indirect costs
related to contract performance. Unbilled receivables represent costs incurred and related profit on
contracts not yet billed to customers, and are invoiced in subsequent periods.
Product sales revenue is recognized on the percentage-of-completion method or upon transfer of
title to the customer, which is generally upon shipment. Shipping and handling costs incurred are
included in cost of sales.
Revenue and profits on fixed-price production contracts, where units are produced and delivered
in a continuous or sequential process, are recorded as units are delivered based on their selling prices
(the ‘‘units-of-delivery method’’). Revenue and profits on other fixed-price contracts with significant
engineering as well as production requirements are recorded based on the ratio of total actual incurred
costs to date to the total estimated costs for each contract (the ‘‘cost-to-cost method’’). Accounting for
revenue and profits on a fixed-price contract requires the preparation of estimates of (1) the total
contract revenue, (2) the total costs at completion, which is equal to the sum of the actual incurred
costs to date on the contract and the estimated costs to complete the contract’s statement of work and
(3) the measurement of progress towards completion. The estimated profit or loss at completion on a
contract is equal to the difference between the total estimated contract revenue and the total estimated
cost at completion. Under the units-of-delivery method, sales on a fixed-price type contract are
recorded as the units are delivered during the period based on their contractual selling prices. Under
the cost-to-cost method, sales on a fixed-price type contract are recorded at amounts equal to the ratio
of actual cumulative costs incurred divided by total estimated costs at completion, multiplied by (i) the
total estimated contract revenue, less (ii) the cumulative sales recognized in prior periods. The profit
recorded on a contract in any period using either the units-of-delivery method or cost-to-cost method is
equal to (i) the current estimated total profit margin multiplied by the cumulative sales recognized, less
(ii) the amount of cumulative profit previously recorded for the contract. In the case of a contract for
which the total estimated costs exceed the total estimated revenue, a loss arises, and a provision for the
entire loss is recorded in the period that it becomes evident. The unrecoverable costs on a loss contract
that are expected to be incurred in future periods are recorded in the program cost.
Significant management judgments and estimates must be made and used in connection with the
recognition of revenue in any accounting period. Material differences in the amount of revenue in any
given period may result if these judgments or estimates prove to be incorrect or if management’s
estimates change on the basis of development of the business, market conditions or other factors.
Management judgments and estimates have been applied consistently and have been reliable
historically. The Company believes that there are two key factors which impact the reliability of
management’s estimates. The first of those key factors is that the terms of the Company’s contracts are
typically less than six months. The short-term nature of such contracts reduces the risk that material
changes in accounting estimates will occur on the basis of market conditions or other factors. The
second key factor is that the Company has hundreds of contracts in any given accounting period, which
reduces the risk that any one change in an accounting estimate on one or several contracts would have
a material impact on the Company’s consolidated financial statements or its two reporting segments’
measures of profit.
73
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AEROVIRONMENT, INC.
For the years ended April 30, 2013, 2012 and 2011, changes in accounting estimates on fixed-price
contracts recognized using the percentage of completion method of accounting were not material to the
Company’s consolidated financial statements or its two reporting segments’ measure of profit.
Stock-Based Compensation
Stock-based compensation is measured at the grant date based on the fair value of the award and
is recognized as expense over the requisite service period, which is generally the vesting period of the
respective award. No compensation cost is ultimately recognized for awards for which employees do not
render the requisite service and are forfeited.
Long-Term Incentive Awards
For long-term incentive awards, a target payout is established at the beginning of each
performance period. The actual payout at the end of the performance period is calculated based upon
the Company’s achievement of revenue and operating profit growth targets. Payouts are made in cash
and restricted stock units. Upon vesting of the restricted stock units, the Company has the discretion to
settle the restricted stock units in cash or stock.
The cash component of the award is accounted for as a liability. The equity component is
accounted for as a stock-based liability, as the restricted stock units may be settled in cash or stock. At
each reporting period, the Company reassesses the probability of achieving the performance targets.
The estimation of whether the performance targets will be achieved requires judgment, and, to the
extent actual results or updated estimates differ from the Company’s current estimates, the cumulative
effect on current and prior periods of those changes will be recorded in the period estimates are
revised.
Research and Development
Internally funded research and development costs, or IRAD, sponsored by the Company relate to
both U.S. government products and services and those for commercial and foreign customers. IRAD
costs for the Company are recoverable and allocable under government contracts in accordance with
U.S. government procurement regulations.
Customer-funded research and development costs are incurred pursuant to contracts (revenue
arrangements) to perform research and development activities according to customer specifications.
These costs are direct contract costs and are expensed to cost of sales when the corresponding revenue
is recognized, which is generally as the research and development services are performed. Revenue
from customer-funded research and development was approximately $37,317,000, $27,852,000 and
$33,952,000 for the years ended April 30, 2013, 2012 and 2011, respectively. The related cost of sales
for customer-funded research and development totaled approximately $26,496,000, $22,703,000 and
$33,003,000 for the years ended April 30, 2013, 2012 and 2011, respectively.
Lease Accounting
The Company accounts for its leases and subsequent amendments as operating leases or capital
leases for financial reporting purposes. Certain operating leases contain rent escalation clauses, which
are recorded on a straight-line basis over the initial term of the lease with the difference between the
rent paid and the straight-line rent recorded as a deferred rent liability. Lease incentives received from
landlords are recorded as deferred rent liabilities and are amortized on a straight-line basis over the
lease term as a reduction to rent expense. Deferred rent liabilities were approximately $771,000 and
$1,019,000 as of April 30, 2013 and 2012, respectively.
74
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AEROVIRONMENT, INC.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses included in selling, general and
administrative expenses were approximately $238,000, $924,000 and $979,000 for the years ended
April 30, 2013, 2012 and 2011, respectively.
Earnings Per Share
Basic earnings per share are computed using the weighted-average number of common shares
outstanding and excludes any anti-dilutive effects of options, restricted stock and restricted stock units.
The dilutive effect of potential common shares outstanding is included in diluted earnings per share.
The reconciliation of diluted to basic shares is as follows:
Year Ended April 30,
2013
2012
2011
Numerator for basic earnings per share:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,426,000
$30,451,000
$25,909,000
Denominator for basic earnings per share:
Weighted average common shares . . . . . . . . . . . . . . . . . .
22,069,842
21,783,496
21,591,333
Dilutive effect of employee stock options, restricted stock
and restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . .
320,578
531,978
489,933
Denominator for diluted earnings per share . . . . . . . . . . . . .
22,390,420
22,315,474
22,081,266
During the years ended April 30, 2013, 2012 and 2011, certain options, shares of restricted stock
and restricted stock units were not included in the computation of diluted earnings per share because
their inclusion would have been anti-dilutive. The number of options, restricted stock and restricted
stock units which met this anti-dilutive criterion was approximately 191,000, 58,000 and 36,000 for the
years ended April 30, 2013, 2012 and 2011, respectively.
Recently Issued Accounting Standards
On May 1, 2012, the Company adopted changes in accordance with guidance issued by the
Financial Accounting Standards Board (‘‘FASB’’), which requires companies to present the total of
comprehensive income, the components of net income, and the components of other comprehensive
income either in a single continuous statement of comprehensive income, or in two separate but
consecutive statements. The Company elected to adopt the two-statement option. The new guidance
eliminated the option to present the components of other comprehensive income as part of the
statement of equity. Other than the change in presentation, the adoption of these changes had no
material impact on the Company’s consolidated financial statements.
The new guidance also required entities to present reclassification adjustments from accumulated
other comprehensive income by component in both the statement in which net income is presented and
the statement in which other comprehensive income is presented, which was indefinitely deferred in
December of 2011. In February of 2013, the FASB issued guidance related to the reclassification
adjustments and related adoption date, the Company adopted the guidance regarding reclassification
adjustments on May 1, 2013. Other than the change in presentation, the adoption of these changes will
have no material impact on the Company’s consolidated financial statements.
75
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AEROVIRONMENT, INC.
On May 1, 2012, the Company adopted changes in accordance with guidance issued by the FASB
to provide a consistent definition of fair value and to ensure that the fair value measurement and
disclosure requirements are similar between U.S. generally accepted accounting principles and
International Financial Reporting Standards. The new guidance changed certain fair value measurement
principles and enhanced the disclosure requirements, particularly for Level 3 fair value measurements.
The adoption of these changes did not have a material impact on the Company’s consolidated financial
statements.
2.
Investments
Investments consist of the following:
April 30,
2013
2012
(In thousands)
Short-term investments:
Held-to-maturity securities:
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government securities . . . . . . . . . . . . . . . . . . . . . . . . .
$73,241
$49,263
— 27,889
Total short-term investments . . . . . . . . . . . . . . . . . . . . . .
$73,241
$77,152
Long-term investments:
Held-to-maturity securities:
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$54,158
$52,261
Available-for-sale securities:
Auction rate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,687
9,071
6,196
—
Total long-term investments . . . . . . . . . . . . . . . . . . . . . .
$68,916
$58,457
Held-To-Maturity Securities
As of April 30, 2013 the balance of held-to-maturity securities consisted of state and local
government municipal securities. As of April 30, 2012 the balance of held-to-maturity securities
consisted of state and local government municipal securities and U.S. Treasury bills and notes. Interest
earned from these investments is recorded in interest income.
The amortized cost, gross unrealized losses, and estimated fair value of the held-to-maturity
investments as of April 30, are as follows (in thousands):
2013
2012
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Fair
Value
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Fair
Value
Municipal securities . . . $127,399
U.S. government
$49
$(23)
$127,425 $101,524
$48
$(24)
$101,548
securities . . . . . . . . .
—
—
—
— 27,889
—
(1)
27,888
Total held-to-maturity
investments . . . . . . . . $127,399
$49
$(23)
$127,425 $129,413
$48
$(25)
$129,436
76
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AEROVIRONMENT, INC.
The amortized cost and fair value of the Company’s held-to-maturity securities by contractual
maturity at April 30, 2013, are as follows:
Due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after one year through five years . . . . . . . . . . . . . . . . . .
$ 73,241
54,158
$ 73,258
54,167
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$127,399
$127,425
Cost
Fair Value
Available-For-Sale Securities
Auction Rate Securities
As of April 30, 2013 and 2012, the entire balance of available-for-sale auction rate securities
consisted of three and four investment grade auction rate municipal bonds, respectively, with maturities
ranging from 6 to 21 years. These investments have characteristics similar to short-term investments,
because at pre-determined intervals, generally ranging from 30 to 35 days, there is a new auction
process at which the interest rates for these securities are reset to current interest rates. At the end of
such period, the Company chooses to roll-over its holdings or redeem the investments for cash. A
market maker facilitates the redemption of the securities and the underlying issuers are not required to
redeem the investment within 365 days. Interest earned from these investments is recorded in interest
income.
During the fourth quarter of the fiscal year ended April 30, 2008, the Company began experiencing
failed auctions on some of its auction rate securities. A failed auction occurs when a buyer for the
securities cannot be obtained and the market maker does not buy the security for its own account. The
Company continues to earn interest on the investments that failed to settle at auction, at the maximum
contractual rate until the next auction occurs. In the event the Company needs to access funds invested
in these auction rate securities, the Company may not be able to liquidate these securities at the fair
value recorded on April 30, 2013 until a future auction of these securities is successful or a buyer is
found outside of the auction process.
As a result of the failed auctions, the fair values of these securities are estimated utilizing a
discounted cash flow analysis as of April 30, 2013 and 2012. The analysis considers, among other items,
the collateralization underlying the security investments, the creditworthiness of the counterparty, the
timing of expected future cash flows, and the expectation of the next time the security is expected to
have a successful auction.
Based on the Company’s ability to access its cash and cash equivalents, expected operating cash
flows, and other sources of cash, the Company does not anticipate the current lack of liquidity on these
investments will affect its ability to operate the business in the ordinary course. The Company believes
the current lack of liquidity of these investments is temporary and expects that the securities will be
redeemed or refinanced at some point in the future. The Company will continue to monitor the value
of its auction rate securities at each reporting period for a possible impairment if a further decline in
fair value occurs. The auction rate securities have been in an unrealized loss position for more than
12 months. The Company has the ability and the intent to hold these investments until a recovery of
fair value, which may be maturity and as of April 30, 2013, it did not consider these investments to be
other-than-temporarily impaired.
77
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AEROVIRONMENT, INC.
The amortized cost, gross unrealized losses, and estimated fair value of the available-for-sale
auction rate securities are as follows (in thousands):
Auction rate securities
Amortized cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross unrealized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,750
(1,063)
$ 7,350
(1,154)
Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,687
$ 6,196
April 30,
2013
2012
The amortized cost and fair value of the Company’s auction rate securities by contractual maturity
at April 30, 2013 are as follows (in thousands):
Due after five through 10 years . . . . . . . . . . . . . . . . . . . . . . . . .
Due after 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,350
5,400
$1,256
4,431
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,750
$5,687
Cost
Fair Value
Convertible Bonds
As of April 30, 2013, the entire balance of available-for-sale convertible bonds consisted of two
convertible bonds. The two convertible bonds were issued by CybAero AB (‘‘CybAero’’), a publicly
traded company in Sweden that develops and manufactures unmanned aerial vehicles. Each bond is in
the amount of 10 million Swedish Kronor (‘‘SEK’’) and is convertible into 1 million CybAero shares at
the conversion price of 10 SEK per share. The maturity date of each of the bonds is November 30,
2017 and each bond bears an annual interest rate of 5%.
CybAero can prepay the bonds with three months’ notice to the Company and the Company may
exercise its conversion rights during such three-month period. If certain conditions are satisfied after
November 30, 2015, CybAero can require the Company to convert the two bonds in their entirety into
CybAero shares.
The convertible bonds contain an embedded conversion feature which is bifurcated from the bond.
The changes in the fair value of the embedded conversion feature are recorded in other income in the
income statement. Unrealized gains and losses of the bond are excluded from earnings and reported as
a separate component of stockholders’ equity, net of deferred income taxes.
On May 14, 2013, CybAero effected a reverse stock split whereby every 10 shares of CybAero were
converted into 1 share. All amounts discussed as of April 30, 2013 reflect this reverse stock split.
78
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AEROVIRONMENT, INC.
The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the
available-for-sale convertible bonds are as follows (in thousands):
Convertible bonds
Amortized cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross unrealized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross unrealized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,037
6,173
(139)
$ —
—
—
Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9,071
$ —
April 30,
2013
2012
The amortized cost and fair value of the Company’s convertible bonds by contractual maturity at
April 30, 2013 are as follows (in thousands):
Due within five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,037
$9,071
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,037
$9,071
Cost
Fair Value
3.
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. The fair value hierarchy contains three levels as
follows:
(cid:127) Level 1—Inputs to the valuation based upon quoted prices (unadjusted) for identical assets or
liabilities in active markets that are accessible as of the measurement date.
(cid:127) Level 2—Inputs to the valuation include quoted prices in either markets that are not active, or
in active markets for similar assets or liabilities, inputs other than quoted prices that are
observable, and inputs that are derived principally from or corroborated by observable market
data.
(cid:127) Level 3—Inputs to the valuation that are unobservable inputs for the asset or liability.
The Company’s financial assets measured at fair value on a recurring basis at April 30, 2013, were
as follows (in thousands):
Fair Value Measurement Using
Description
Quoted prices in
active markets for
identical assets
(Level 1)
Auction rate securities . . . . . . . . . . . . . . . . . . . . . .
Convertible bonds . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$—
—
$—
Significant
other
observable
inputs
(Level 2)
$ —
6,173
$6,173
Significant
unobservable
inputs
(Level 3)
$5,687
2,898
$8,585
Total
$ 5,687
9,071
$14,758
79
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AEROVIRONMENT, INC.
The following table provides a reconciliation between the beginning and ending balances of items
measured at fair value on a recurring basis in the table above that used significant unobservable inputs
(Level 3) (in thousands):
Description
Fair Value
Measurements Using
Significant
Unobservable Inputs
(Level 3)
Auction Rate Securities
Balance at May 1, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers to Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gains (realized or unrealized)
Included in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Included in other comprehensive income . . . . . . . . . . . . . . .
Purchases, issuances and settlements, net . . . . . . . . . . . . . . . . .
$6,196
—
—
(48)
2,437
Balance at April 30, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8,585
The amount of total gains or (losses) for the period included in
earnings attributable to the change in unrealized gains or
losses relating to assets still held at April 30, 2013 . . . . . . . . .
$ —
The auction rate securities are valued using a discounted cash flow model. The analysis considers,
among other items, the collateralization underlying the security investments, the creditworthiness of the
counterparty, the timing of expected future cash flows, and the estimated date upon which the security
is expected to have a successful auction. As of April 30, 2013, the inputs used in the Company’s
discounted cash flow analysis included current coupon rates ranging from 0.3% to 0.4%, estimated
redemption periods of 6 to 21 years and discount rates of 7.4% to 18.9%. The discount rates were
based on market rates for municipal bond securities, as adjusted for a risk premium to reflect the lack
of liquidity of these investments.
The bond components of the convertible bonds are valued using a discounted cash flow model.
The analysis considers, among other items, the creditworthiness of the counterparty, the timing of
expected future cash flows, and the maturity of the bonds. As of April 30, 2013, the inputs used in the
Company’s discounted cash flow analysis included a coupon rate of 5.0%, estimated redemption period
of five years and a discount rate of 6.3%.
The embedded conversion features of the convertible bonds are valued using a binomial option
pricing model, which uses inputs such as CybAero’s stock price, conversion price, volatility and risk-free
interest rate.
80
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AEROVIRONMENT, INC.
4.
Inventories, net
Inventories consist of the following:
April 30,
2013
2012
(In thousands)
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,845
16,745
36,842
$13,969
7,390
24,934
Inventories, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for inventory obsolescence . . . . . . . . . . . . . . . . . . . . . .
66,432
(3,871)
46,293
(2,754)
Inventories, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$62,561
$43,539
5.
Property and Equipment, net
Property and equipment consist of the following:
April 30,
2013
2012
(In thousands)
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer equipment and software . . . . . . . . . . . . . . . . . . . . .
Construction in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8,498
37,873
1,866
23,432
7,142
$ 8,471
32,883
2,415
14,894
9,103
Property and equipment, gross . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation and amortization . . . . . . . . . . .
78,811
(54,382)
67,766
(44,251)
Property and equipment, net
. . . . . . . . . . . . . . . . . . . . . . . . .
$ 24,429
$ 23,515
6. Warranty Reserves
Warranty reserve activity is summarized as follows:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty costs settled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,872
2,169
(3,526)
$ 1,127
4,284
(2,539)
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,515
$ 2,872
April 30,
2013
2012
(In thousands)
81
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AEROVIRONMENT, INC.
7. Employee Savings Plan
The Company has an employee 401(k) savings plan covering all eligible employees. The Company
expensed approximately $3,137,000, $2,629,000 and $2,401,000 in contributions to the plan for the years
ended April 30, 2013, 2012 and 2011, respectively.
8.
Stock-Based Compensation
For the years ended April 30, 2013, 2012 and 2011, the Company recorded stock-based
compensation expense of approximately $3,470,000, $3,196,000 and $2,306,000, respectively.
On January 14, 2007, the stockholders of the Company approved the 2006 Equity Incentive Plan,
or 2006 Plan, effective January 21, 2007, for officers, directors, key employees and consultants. On
September 29, 2011, the stockholders of the Company approved an amendment and restatement of the
2006 Plan, or Restated 2006 Plan. Under the Restated 2006 Plan, incentive stock options, nonqualified
stock options, restricted stock awards, stock appreciation right awards, performance share awards,
performance stock unit awards, dividend equivalents awards, stock payment awards, deferred stock
awards, restricted stock unit awards, other stock-based awards, performance bonus awards or
performance-based awards may be granted at the discretion of a committee, which consists of outside
directors. A maximum of 4,884,157 shares of stock may be issued pursuant to awards under the
Restated 2006 Plan. The maximum number of shares of common stock with respect to one or more
awards that may be granted to any one participant during any twelve month period is 2,000,000. A
maximum of $5,000,000 may be paid in cash as a performance-based award during any twelve month
period. The exercise price for any incentive stock option shall not be less than 100% of the fair market
value on the date of grant. Vesting of awards is established at the time of grant.
The Company had an equity incentive plan, or 2002 Plan, for officers, directors and key
employees. Under the 2002 Plan, incentive stock options or nonqualified stock options were granted, as
determined by the administrator at the time of grant. Stock purchase rights were also granted under
the 2002 Plan. Options under the 2002 Plan were granted at their fair market value (as determined by
the board of directors). The options become exercisable at various times over a five-year period from
the grant date. The 2002 Plan was terminated on the effective date of the 2006 Plan. Awards
outstanding under the 2002 Plan remain outstanding and exercisable; no additional awards may be
made under the 2002 Plan.
The Company had a 1992 nonqualified stock option plan, or 1992 Plan, for certain officers and key
employees. Options under the 1992 Plan were granted at their fair market value (as determined by the
board of directors) at the date of grant and became exercisable at various times over a five-year period
from the grant date. The 1992 Plan expired in August 2002.
82
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AEROVIRONMENT, INC.
The fair value of stock options granted was estimated at the grant date using the Black-Scholes
option pricing model with the following weighted average assumptions for the years ended April 30,
2013, 2012 and 2011:
Year Ended April 30,
2013
2012
2011
Expected term (in years) . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average fair value at grant date . . . . . . . . . . .
5.00
6.00
5.46
45.94% 26.75% 24.72%
2.08%
1.40%
0.92%
—
—
—
$6.48
$8.01
$8.44
The expected term of stock options represents the weighted average period the Company expects
the stock options to remain outstanding, based on the Company’s historical exercise and post-vesting
cancellation experience and the remaining contractual life of its outstanding options.
The expected volatility is based on historical volatility for the Company’s stock.
The risk free interest rate is based on the implied yield on a U.S. Treasury zero-coupon bond with
a remaining term that approximates the expected term of the option.
The expected dividend yield of zero reflects that the Company has not paid any cash dividends
since inception and does not anticipate paying cash dividends in the foreseeable future.
Information related to the stock option plans at April 30, 2013, 2012 and 2011, and for the years
then ended is as follows:
Outstanding at April 30, 2010 . . . . . . . . . . . . . . . 493,210 $23.36
405,101 $ 3.10 387,000
$0.48
Restated 2006 Plan
2002 Plan
1992 Plan
Weighted
Average
Exercise
Price
Shares
Shares
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
24.91
Options granted . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . (17,500) 22.27
Options canceled . . . . . . . . . . . . . . . . . . . . . . . (12,800) 27.25
72,500
—
—
(35,634)
(1,408) 11.79
—
5.67 (67,427)
—
Outstanding at April 30, 2011 . . . . . . . . . . . . . . . 535,410
23.51
368,059
2.81 319,573
Options granted . . . . . . . . . . . . . . . . . . . . . . . . 175,000
29.28
Options exercised . . . . . . . . . . . . . . . . . . . . . . (18,200) 21.88
—
Options canceled . . . . . . . . . . . . . . . . . . . . . . .
—
—
(43,073)
—
—
—
2.91 (80,263)
—
—
Outstanding at April 30, 2012 . . . . . . . . . . . . . . . 692,210
25.01
324,986
2.80 239,310
Options granted . . . . . . . . . . . . . . . . . . . . . . . . 203,000
Options exercised . . . . . . . . . . . . . . . . . . . . . .
Options canceled . . . . . . . . . . . . . . . . . . . . . . .
19.07
—
(3,000) 20.75 (147,597)
—
—
—
—
—
1.39 (57,741)
—
—
Outstanding at April 30, 2013 . . . . . . . . . . . . . . . 892,210
23.67
177,389
3.98 181,569
—
0.41
—
0.49
—
0.51
—
0.49
—
0.38
—
0.52
Options exercisable at April 30, 2013 . . . . . . . . . . 457,310 $23.72
177,389 $ 3.98 181,569
$0.52
83
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AEROVIRONMENT, INC.
The total intrinsic value of all options exercised during the years ended April 30, 2013, 2012 and
2011 was approximately $4,329,000, $3,610,000, and $2,904,000, respectively. The intrinsic value of all
options outstanding at April 30, 2013 and 2012 was $6,369,000 and $13,561,000, respectively. The
intrinsic value of all exercisable options at April 30, 2013 and 2012 was $6,149,000 and $13,308,000,
respectively.
A summary of the status of the Company’s non-vested stock options as of April 30, 2013 and the
year then ended is as follows:
Non-vested Options
Non-vested at April 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options
375,262
203,000
—
—
(143,362)
Non-vested at April 30, 2013 . . . . . . . . . . . . . . . . . . . . . . . . .
434,900
Weighted
Average
Grant Date
Fair Value
$7.39
8.44
—
—
7.31
$7.91
As of April 30, 2013, there was approximately $9,629,000 of total unrecognized compensation cost
related to non-vested share-based compensation awards granted under the equity plans. That cost is
expected to be recognized over an approximately five-year period or a weighted average period of
approximately four years.
The weighted average fair value of options issued for the years ended April 30, 2013, 2012 and
2011 was $8.44, $8.01 and $6.48, respectively. The total fair value of shares vesting during the years
ended April 30, 2013, 2012 and 2011 was $2,477,000, $1,654,000 and $1,111,000, respectively.
Proceeds from all option exercises under all stock option plans for the years ended April 30, 2013,
2012 and 2011 were approximately $289,000, $565,000 and $619,000, respectively. The tax benefit
realized from stock-based compensation during the years ended April 30, 2013, 2012 and 2011 was
approximately $1,490,000, $1,428,000, and $1,238,000, respectively.
84
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AEROVIRONMENT, INC.
The following tabulation summarizes certain information concerning outstanding and exercisable
options at April 30, 2013:
Options Outstanding
Weighted
Average
Remaining
Contractual
Life In
Years
0.89
6.35
1.16
2.47
3.40
6.61
7.80
5.97
As of
April 30,
2013
57,415
124,154
53,288
82,766
41,335
620,210
272,000
1,251,168
Weighted
Average
Exercise
Price
$ 0.37
0.59
0.78
2.13
11.79
21.19
29.34
$17.52
Options Exercisable
As of
April 30,
2013
57,415
124,154
53,288
82,766
41,335
373,710
83,600
816,268
Weighted
Average
Exercise
Price
$ 0.37
0.59
0.78
2.13
11.79
22.21
30.43
$14.27
Range of Exercise Prices
$
0.37
0.59
0.78
2.13
11.79
18.07-24.65
25.77-32.19
$ 0.37-32.19
The remaining weighted average contractual life of exercisable options at April 30, 2013 was
4.50 years.
Information related to the Company’s restricted stock awards at April 30, 2013 and for the year
then ended is as follows:
Restated 2006 Plan
Unvested stock at April 30, 2012 . . . . . . . . . . . . . . . . . . . . . .
Stock granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares
326,787
163,886
(94,669)
(12,767)
Unvested stock at April 30, 2013 . . . . . . . . . . . . . . . . . . . . . .
383,237
Weighted
Average
Grant Date
Fair Value
$26.84
18.30
26.11
25.53
$23.32
Information related to the Company’s restricted stock units at April 30, 2013 and for the year then
ended is as follows:
Restated 2006 Plan
Weighted
Average
Grant Date
Fair Value
Shares
Unvested restricted stock units at April 30, 2012 . . . . . . . . . . .
Restricted stock units granted . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units vested . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units canceled . . . . . . . . . . . . . . . . . . . . . . . .
— $ —
24.28
24.28
24.28
30,584
(14,926)
(732)
Unvested restricted stock units at April 30, 2013 . . . . . . . . . . .
14,926
$24.28
85
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AEROVIRONMENT, INC.
9. Long-Term Incentive Awards
During each of the years ended April 30, 2013, 2012 and 2011, the Company granted a three-year
performance award under the Restated 2006 Plan to each of its key employees. The performance
period for each three-year award is the three-year period ending April 30, 2015, 2014 and 2013,
respectively. A target payout was established at the beginning of the performance period. The actual
payout at the end of the performance period will be calculated based upon the Company’s achievement
of revenue and operating profit growth. Payouts will be made in cash and restricted stock units. Upon
vesting of the restricted stock units, the Company has the discretion to settle the restricted stock units
in cash or stock.
During the year ended April 30, 2011, the Company also granted a two-year performance award
under the 2006 Plan to each of its key employees. The performance period for the two-year award was
the two-year period ending April 30, 2012. A target payout was established at the beginning of each
performance period. The actual payout at the end of each performance period was calculated based
upon the Company’s achievement of revenue and operating profit growth. Payouts were made in cash
and restricted stock units. There were no awards granted before the year ended April 30, 2011.
The cash component of the award is accounted for as a liability. The equity component is
accounted for as a stock-based liability, as the restricted stock units may be settled in cash or stock. At
each reporting period, the Company reassesses the probability of achieving the performance targets.
The estimation of whether the performance targets will be achieved requires judgment, and, to the
extent actual results or updated estimates differ from the Company’s current estimates, the cumulative
effect on current and prior periods of those changes will be recorded in the period estimates are
revised.
During the years ended April 30, 2013, 2012 and 2011, the Company recorded compensation
expense for the long-term incentive awards of $194,000, $441,000 and $762,000, respectively. At
April 30, 2013 and 2012, the Company had an accrued liability of $0 and $1,203,000 for outstanding
awards, respectively. The maximum compensation expense that may be recorded for outstanding awards
is $12,518,000.
10. Income Taxes
A reconciliation of income tax expense computed using the U.S. federal statutory rates to actual
income tax expense is as follows:
Year Ended April 30,
2013
2012
2011
U.S. federal statutory income tax rate . . . . . . . . . . . . . . .
State and local income taxes, net of federal benefit . . . . .
R&D and other tax credits . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35.0% 35.0% 35.0%
(0.3)
(9.6)
(3.4)
(29.6)
(1.2)
7.4
1.1
(11.3)
(0.5)
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . .
3.2% 30.1% 24.3%
86
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AEROVIRONMENT, INC.
The components of the provision for income taxes are as follows (in thousands):
Year ended April 30,
2013
2012
2011
Current:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(3,818) $12,814
1,651
334
$ 8,660
641
Deferred:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . . . .
(3,484)
14,465
9,301
5,178
(1,347)
3,831
—
(187)
(1,134)
(1,321)
(57)
859
(1,836)
(977)
(5)
Total income tax expense . . . . . . . . . . . . . . . . . . . . . .
$
347
$13,087
$ 8,319
Significant components of the Company’s deferred income tax assets and liabilities are as follows
(in thousands):
April 30,
2013
2012
Deferred income tax assets:
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowances, reserves, and other . . . . . . . . . . . . . . . . . . . . . . .
Capital loss and credit carry-forwards . . . . . . . . . . . . . . . . . . .
Unrealized loss on securities . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,266
3,050
4,908
—
$ 9,697
763
4,508
454
Total deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . .
14,224
15,422
Deferred income tax liabilities:
Unrealized gain on securities . . . . . . . . . . . . . . . . . . . . . . . . .
Tax over book depreciation . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . .
(1,811)
(1,641)
(3,452)
—
(836)
(836)
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,772
$14,586
At April 30, 2013 and 2012, the Company had approximately $5,083,000 and $4,507,000,
respectively, of unrecognized tax benefits all of which would impact the Company’s effective tax rate if
recognized. The Company estimates that $1,316,000 of its unrecognized tax benefits will decrease in the
next twelve months due to statute of limitation expiration.
87
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AEROVIRONMENT, INC.
The following table summarizes the activity related to our gross unrecognized tax benefits for the
years ended April 30, 2013 and 2012 (in thousands):
April 30,
2013
2012
Balance as of May 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases related to prior year tax positions . . . . . . . . . . . . . . . . .
Decreases related to prior year tax positions . . . . . . . . . . . . . . . .
Increases related to current year tax positions . . . . . . . . . . . . . . .
Decreases related to lapsing of statute of limitations . . . . . . . . . . .
$ 4,507
539
(19)
1,141
(1,085)
$4,655
—
(533)
973
(588)
Balance as of April 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,083
$4,507
The Company records interest and penalties on uncertain tax positions to income tax expense. As
of April 30, 2013 and 2012, the Company had accrued approximately $238,000 and $125,000,
respectively, of interest and penalties related to uncertain tax positions. The Company is currently
under audit by various state jurisdictions but does not anticipate any material adjustments from these
examinations. The tax years 2010, 2011 and 2012 remain open to examination by the IRS for federal
income taxes. The tax years 2008 to 2012 remain open for major state taxing jurisdictions.
11. Related Party Transactions
Pursuant to a consulting agreement, the Company paid a board member approximately $172,000,
$210,000 and $210,000 during the years ended April 30, 2013, 2012 and 2011, respectively, for
consulting services independent of his board service.
During the year ended April 30, 2012, the Company purchased materials in the amount of
$3,433,000 from a vendor with a common board member. As of April 30, 2012, the Company had a
trade payable balance of $32,000 to this vendor.
12. Commitments and Contingencies
Commitments
The Company’s operations are conducted in leased facilities. Following is a summary of
non-cancelable operating lease commitments:
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ending
April 30
(In thousands)
$ 4,324
2,952
1,919
856
137
—
$10,188
Rental expense under operating leases was approximately $4,349,000, $3,995,000 and $3,812,000 for
the years ended April 30, 2013, 2012 and 2011, respectively.
88
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AEROVIRONMENT, INC.
Contingencies
The Company is subject to legal proceedings and claims which arise out of the ordinary course of
its business. Although adverse decisions or settlements may occur, the Company, in consultation with
legal counsel, believes that the final disposition of such matters will not have a material adverse effect
on the consolidated financial position, results of operations or cash flows of the Company.
Contract Cost Audits
Payments to the Company on government cost reimbursable contracts are based on provisional, or
estimated indirect rates, which are subject to an annual audit by the Defense Contract Audit Agency,
or DCAA. The cost audits result in the negotiation and determination of the final indirect cost rates
that the Company may use for the period(s) audited. The final rates, if different from the provisional
rates, may create an additional receivable or liability for the Company.
For example, during the course of its audits, the DCAA may question the Company’s incurred
costs, and if the DCAA believes the Company has accounted for such costs in a manner inconsistent
with the requirements under Federal Acquisition Regulations, or FAR, the DCAA auditor may
recommend to the Company’s administrative contracting officer to disallow such costs. Historically, the
Company has not experienced material disallowed costs as a result of government audits. However, the
Company can provide no assurance that the DCAA or other government audits will not result in
material disallowances for incurred costs in the future.
The Company’s revenue recognition policy calls for revenue recognized on all cost reimbursable
government contracts to be recorded at actual rates unless collectability is not reasonably assured.
13. Segment Data
The Company’s product segments are as follows:
(cid:127) Unmanned Aircraft Systems (‘‘UAS’’)—The UAS segment focuses primarily on the design,
development, production, support and operation of innovative UAS and tactical missile systems
that provide situational awareness, multi-band communications, force protection and other
mission effects to increase the security and effectiveness of the operations of the Company’s
customers.
(cid:127) Efficient Energy Systems (‘‘EES’’)—The EES segment focuses primarily on the design,
development, production, marketing, support and operation of innovative efficient electric
energy systems that address the growing demand for electric transportation solutions.
The accounting policies of the segments are the same as those described in Note 1, ‘‘Organization
and Significant Accounting Policies.’’ The operating segments do not make sales to each other.
Depreciation and amortization related to the manufacturing of goods is included in gross margin for
the segments. The Company does not discretely allocate assets to its operating segments, nor does the
CODM evaluate operating segments using discrete asset information. Consequently, the Company
operates its financial systems as a single segment for accounting and control purposes, maintains a
single indirect rate structure across all segments, has no inter-segment sales or corporate elimination
transactions, and maintains only limited financial statement information by segment.
89
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AEROVIRONMENT, INC.
The segment results are as follows (in thousands):
Year Ended April 30,
2013
2012
2011
Revenue:
UAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$194,276
45,876
$273,728
51,280
$249,769
42,734
Total
Cost of sales:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
240,152
325,008
292,503
UAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
115,194
32,422
157,663
38,012
150,256
25,096
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
147,616
195,675
175,352
Gross margin:
UAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
79,082
13,454
92,536
51,520
37,214
3,802
726
6,245
116,065
13,268
99,513
17,638
129,333
117,151
55,280
30,977
43,076
462
—
47,431
35,769
33,951
277
—
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 10,773
$ 43,538
$ 34,228
Geographic Information
Sales to non-U.S. customers accounted for 15%, 5% and 7% of revenue for each of the fiscal
years ended April 30, 2013, 2012 and 2011, respectively.
14. Quarterly Results of Operations (Unaudited)
The following tables present selected unaudited consolidated financial data for each of the eight
quarters in the two-year period ended April 30, 2013. In the Company’s opinion, this unaudited
information has been prepared on the same basis as the audited information and includes all
adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of the
financial information for the period presented. The Company’s fiscal year ends on April 30. Due to the
90
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AEROVIRONMENT, INC.
fixed year end date of April 30, the first and fourth quarters each consist of approximately 13 weeks.
The second and third quarters each consist of 13 weeks. The first three quarters end on a Saturday.
Three Months Ended
July 28,
2012
October 27,
2012
January 26,
2013
April 30,
2013
(In thousands except per share data)
Year ended April 30, 2013
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) income per share—basic . . . . . . . . . . . . . . . .
Net (loss) income per share—diluted . . . . . . . . . . . . . . .
$58,677
$19,505
$ (1,386)
$ (0.06)
$ (0.06)
$80,278
$35,636
$ 8,738
0.40
$
0.39
$
$47,087
$19,673
$ 3,869
0.17
$
0.17
$
$54,110
$17,722
$ (795)
$ (0.04)
$ (0.04)
Three Months Ended
July 30,
2011
October 29,
2011
January 28,
2012
April 30,
2012
(In thousands except per share data)
Year ended April 30, 2012
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share—basic(1) . . . . . . . . . . . . . . . . . .
Net income per share—diluted(1) . . . . . . . . . . . . . . . .
$61,997
$21,715
326
$
0.02
$
0.01
$
$80,372
$30,630
$ 6,587
0.30
$
0.30
$
$71,964
$27,433
$ 5,744
0.26
$
0.26
$
$110,675
$ 49,555
$ 17,794
0.81
$
0.80
$
(1) Earnings per share is computed independently for each of the quarters presented. The sum of the
quarterly earnings per share do not equal the total earnings per share computed for the year due
to rounding.
15. Subsequent Event
Subsequent to April 30, 2013, the Company’s investment in two convertible bonds classified as
available-for-sale issued by CybAero experienced a decline in fair value. As of June 18, 2013, the most
practical date prior to the issuance of this Annual Report on Form 10-K, the closing stock price was
20.50 SEK. Based on the closing stock price on June 18, 2013, the fair value of the two convertible
bonds held by the Company is $6,351,000 as compared to a fair value of $9,071,000 at April 30, 2013.
91
SUPPLEMENTARY DATA
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
Description
Allowance for doubtful accounts for the year
ended April 30:
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty reserve for the year ended April 30:
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for inventory excess and obsolescence
for the year ended April 30:
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for self-insured medical claims for the
year ended April 30:
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions
Balance at
Beginning
of Period
Charged to
Costs and
Expenses
Charged to
Other
Accounts
Deductions
Balance at
End of
Period
(In thousands)
$ 745
$ 639
$ 921
$ 804
$1,127
$2,872
$1,191
$1,241
$2,754
$1,014
$ 898
$1,448
$ 492
$ 282
15
$
$1,449
$4,284
$2,169
$ 579
$2,056
$1,461
$7,322
$9,082
$7,950
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$ (598)
$ —
$ —
$(1,126)
$(2,539)
$(3,526)
$ 639
$ 921
$ 936
$1,127
$2,872
$1,515
$ (529)
$ (543)
$ (344)
$1,241
$2,754
$3,871
$(7,438)
$(8,532)
$(7,970)
$ 898
$1,448
$1,428
92
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management recognizes that any
controls and procedures, no matter how well designed and operated, can only provide reasonable
assurance of achieving the desired control objectives, and management is required to apply its judgment
in evaluating the cost-benefit relationship of possible controls and procedures. As required by
Rule 13a-15(b) under the Exchange Act, we have carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer and our Chief
Financial Officer, of the effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this report, our disclosure controls and procedures were
effective and were operating at a reasonable level.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f)
promulgated under the Exchange Act as a process designed by, or under the supervision of, our
principal executive and principal financial officers and effected by our board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures that:
(cid:127) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(cid:127) Provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and
(cid:127) Provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
93
Under the supervision and with the participation of management, including our principal executive
and financial officers, we assessed our internal control over financial reporting as of April 30, 2013,
based on criteria for effective internal control over financial reporting established in Internal Control—
Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this assessment, management concluded that the Company maintained
effective internal control over financial reporting as of April 30, 2013 based on the specified criteria.
The effectiveness of our internal control over financial reporting as of April 30, 2013 has been
audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their
report which is included herein.
Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting or in other factors
identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or
15d-15 that occurred during the quarter ended April 30, 2013 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
On February 21, 2013, we and Charles R. Holland, one of its directors, entered into Amendment
No. 3 to Standard Consulting Agreement, or the Amendment, which amended the Standard Consulting
Agreement, or the Consulting Agreement, previously entered into by us and Mr. Holland. Pursuant to
the terms of the Amendment, the term of the Consulting Agreement was extended until January 1,
2016. In addition, also on February 21, 2013, we and Mr. Holland entered into a task order in
accordance with the terms of the Consulting Agreement pursuant to which Mr. Holland shall provide
24 days per year of general marketing support for unmanned air vehicle systems to us over an
anticipated three-year period at a rate of $4,000 per day. The foregoing descriptions of the Amendment
and the task order do not purport to be complete and are qualified in their entirety by reference to the
complete text of the Amendment and the task order, which are filed as Exhibits 10.26 and 10.27 hereto
and incorporated by reference in this item.
94
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of AeroVironment, Inc. and Subsidiaries
We have audited AeroVironment Inc.’s internal control over financial reporting as of April 30,
2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the COSO criteria). AeroVironment Inc.’s
management is responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting included in the
accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, AeroVironment, Inc. maintained, in all material respects, effective internal control
over financial reporting as of April 30, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of AeroVironment, Inc. and
subsidiaries as of April 30, 2013 and 2012, and the related consolidated statements of income,
comprehensive income stockholders’ equity, and cash flows for each of the three years in the period
ended April 30, 2013 of AeroVironment, Inc. and subsidiaries and our report dated June 25, 2013
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Los Angeles, California
June 25, 2013
95
Item 10. Directors, Executive Officers, and Corporate Governance.
PART III
Certain information required by Item 401 and Item 405 of Regulation S-K will be included in the
Proxy Statement for our 2013 Annual Meeting of Stockholders, and that information is incorporated by
reference herein.
Codes of Ethics
We have adopted a Code of Business Conduct and Ethics, or Code of Conduct. The Code of
Conduct is posted on our website, http://investor.avinc.com. We intend to disclose on our website any
amendments to, or waivers of, the Code of Conduct covering our Chief Executive Officer, Chief
Financial Officer and/or Controller promptly following the date of such amendments or waivers. A copy
of the Code of Conduct may be obtained upon request, without charge, by contacting our Secretary at
(626) 357-9983 or by writing to us at AeroVironment, Inc., Attn: Secretary, 181 W. Huntington Dr.,
Suite 202, Monrovia, CA 91016. The information contained on or connected to our website is not
incorporated by reference into this Annual Report and should not be considered part of this or any
reported filed with the SEC.
No family relationships exist among any of our executive officers or directors.
There have been no material changes to the procedures by which security holders may recommend
nominees to our board of directors.
The information required by Item 407(d)(4) and (5) of Regulation S-K will be included in the
Proxy Statement for our 2013 Annual Meeting of Stockholders, and that information is incorporated by
reference herein.
Item 11. Executive Compensation.
The information required by Item 402 and Item 407(e)(4) and (5) of Regulation S-K will be
included in the Proxy Statement for our 2013 Annual Meeting of Stockholders, and that information is
incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The information required by Item 201(d) and Item 403 of Regulation S-K will be included in the
Proxy Statement for our 2013 Annual Meeting of Stockholders, and that information is incorporated by
reference herein.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by Item 404 and Item 407(a) of Regulation S-K will be included in the
Proxy Statement for our 2013 Annual Meeting of Stockholders, and that information is incorporated by
reference herein.
Item 14. Principal Accounting Fees and Services.
The information required by Item 14 will be included in the Proxy Statement for our 2013 Annual
Meeting of Stockholders, and that information is incorporated by reference herein.
96
Item 15. Exhibits, Financial Statement Schedules.
(a) The following are filed as part of this Annual Report:
PART IV
1. Financial Statements
The following consolidated financial statements are included in Item 8:
(cid:127) Report of Independent Registered Public Accounting Firm
(cid:127) Consolidated Balance Sheets at April 30, 2013 and 2012
(cid:127) Consolidated Statements of Income for the Years ended April 30, 2013, 2012 and 2011
(cid:127) Consolidated Statements of Comprehensive Income for the Years Ended April 30, 2013, 2012
and 2011
(cid:127) Consolidated Statements of Stockholders’ Equity for the Years ended April 30, 2013, 2012 and
2011
(cid:127) Consolidated Statements of Cash Flows for the Years ended April 30, 2013, 2012 and 2011
(cid:127) Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The following Schedule is included in Item 8:
(cid:127) Schedule II—Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is not present, or not
present in amounts sufficient to require submission of the schedule, or because the information
required is included in the consolidated financial statements or the Notes thereto.
3. Exhibits
See Item 15(b) of this report below.
(b) Exhibits
Exhibit
Number
3.1(1)
3.3(2)
4.1(3)
10.1#(3)
10.2#(3)
10.3#(3)
10.4#(3)
10.5#(3)
10.6#(3)
10.7#(3)
10.8#(3)
10.9#(4)
10.10#(3)
Exhibit
Amended and Restated Certificate of Incorporation of AeroVironment, Inc.
Second Amended and Restated Bylaws of AeroVironment, Inc.
Form of AeroVironment, Inc.’s Common Stock Certificate
Form of Director and Executive Officer Indemnification Agreement
AeroVironment, Inc. Nonqualified Stock Option Plan
Form of Nonqualified Stock Option Agreement pursuant to the AeroVironment, Inc. Nonqualified
Stock Option Plan
AeroVironment, Inc. Directors’ Nonqualified Stock Option Plan
Form of Directors’ Nonqualified Stock Option Agreement pursuant to the AeroVironment, Inc.
Directors’ Nonqualified Stock Option Plan
AeroVironment, Inc. 2002 Equity Incentive Plan
Form of AeroVironment, Inc. 2002 Equity Incentive Plan Stock Option Agreement
AeroVironment, Inc. 2006 Equity Incentive Plan
AeroVironment, Inc. 2006 Equity Incentive Plan, as amended and restated effective September 29,
2012
Form of Stock Option Agreement pursuant to the AeroVironment, Inc. 2006 Equity Incentive Plan
97
Exhibit
Number
10.11#(3)
10.12#(5)
10.13(6)
10.14(7)
10.15(7)
10.16†(3)
10.17†(3)
10.18†(8)
10.19†(3)
10.20†(3)
10.21†(9)
Exhibit
Form of Performance Based Bonus Award pursuant to the AeroVironment, Inc. 2006 Equity
Incentive Plan
Form of Long-Term Compensation Award Grant Notice and Long-Term Compensation Award
Agreement pursuant to the AeroVironment, Inc. 2006 Equity Incentive Plan
Standard Industrial/Commercial Single-Tenant Lease, dated February 12, 2007, between
AeroVironment, Inc. and OMP Industrial Moreland, LLC, for the property located at 85 Moreland
Road, Simi Valley, California, including the addendum thereto
Standard Industrial/Commercial Single-Tenant Lease, dated March 3, 2008, between
AeroVironment, Inc. and Hillside Associates III, LLC, for the property located at 900 Enchanted
Way, Simi Valley, California, including the addendum thereto
Standard Industrial/Commercial Single-Tenant Lease, dated April 21, 2008, between
AeroVironment, Inc. and Hillside Associates II, LLC, for the property located at 994 Flower Glen
Street, Simi Valley, California, including the addendum thereto
AV Direct Project Request, dated July 7, 2005, between AeroVironment, Inc. and Marine Corps
System Command
Award Contract, dated December 22, 2005, between AeroVironment, Inc. and Marine Corps System
Command
Award Contract, dated August 15, 2005, between AeroVironment, Inc. and U.S. Army Aviation &
Missile Command
Award Contract, dated September 21, 2004, between AeroVironment, Inc. and Natick Contracting
Division
Award Contract, dated January 2, 2004, between AeroVironment, Inc. and U.S. Army Aviation &
Missile Command
Award Contract, dated September 24, 2007, between AeroVironment, Inc. and United States Special
Operations Command, as amended
10.22†(10) Award Contract, dated December 22, 2006, between AeroVironment, Inc. and the United States Air
10.23#(2)
10.24(11)
10.25#(11)
10.26#
10.27#
Force/Air Force Research Laboratory, Aeronautical Systems Center, as amended
Standard Consulting Agreement, dated November 1, 2008, between AeroVironment, Inc. and
Charles R. Holland
Amendment No. 2 to Standard Consulting Agreement, dated December 17, 2009, between
AeroVironment, Inc. and Charles R. Holland
Task Order #FY-10-001, dated December 17, 2009, between AeroVironment, Inc. and Charles R.
Holland
Amendment No. 3 to Standard Consulting Agreement, dated February 21, 2013, between
AeroVironment, Inc. and Charles R. Holland
Task Order FY13-001, dated February 21, 2013, between AeroVironment, Inc. and Charles R.
Holland
Relocation agreement, effective February 21, 2013, between AeroVironment, Inc. and Wahid Nawabi
Retiree Medical Plan
10.28#
10.29#(3)
10.30†(12) Award Contract, dated June 30, 2008, between AeroVironment, Inc. and United States Special
Operations Command, as amended
10.31†(13) Award Contract, dated March 1, 2011, between AeroVironment, Inc. and United States Army
21.1
23.1
24.1
31.1
31.2
32.1
101.INS*
101.SCH*
101.CAL*
101.DEF*
Contracting Command
Subsidiaries of AeroVironment, Inc.
Consent of Ernst & Young LLP, independent registered public accounting firm
Power of Attorney (incorporated by reference to the signature page of this Annual Report)
Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934
Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
98
Exhibit
Number
Exhibit
101.LAB*
101.PRE*
XBRL Taxonomy Label Linkbase Document
XBRL Taxonomy Presentation Linkbase Document
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Incorporated by reference herein to the exhibits to the Company’s Quarterly Report on Form 10-Q filed
March 9, 2007 (File No. 001-33261).
Incorporated by reference herein to the exhibits on the Company’s Annual Report on Form 10-K filed
June 24, 2009 (File No. 001-33261).
Incorporated by reference herein to the exhibits to the Company’s Registration Statement on Form S-1 (File
No. 333-137658).
Incorporated by reference to the exhibits to the registrant’s Form 8-K filed on October 5, 2011 (File
No. 001-33261).
Incorporated by reference herein to the exhibits to the Company’s Current Report on Form 8-K filed July 28,
2010 (File No. 001-33261).
Incorporated by reference herein to the exhibits on the Company’s Annual Report on Form 10-K filed
June 29, 2007 (File No. 001-33261).
Incorporated by reference herein to the exhibits to the Company’s Annual Report on Form 10-K filed
June 26, 2008 (File No. 001-33261).
Incorporated by reference herein to the exhibits to the Company’s Quarterly Report on Form 10-Q filed
March 10, 2010 (File No. 001-33261).
Incorporated by reference herein to the exhibits to the Company’s Quarterly Report on Form 10-Q filed
December 6, 2007 (File No. 001-33261).
(10) Incorporated by reference herein to the exhibits to the Company’s Quarterly Report on Form 10-Q filed
March 4, 2008 (File No. 001-33261).
(11) Incorporated by reference herein to the exhibits to the Company’s Current Report on Form 8-K filed
December 22, 2009 (File No. 001-33261).
(12) Incorporated by reference herein to the exhibits to the Company’s Quarterly Report on Form 10-Q filed
September 10, 2008 (File No. 001-33261).
(13) Incorporated by reference to the exhibits to the registrant’s Form 8-K filed on October 5, 2011 (File
No. 001-33261).
†
Confidential treatment has been granted for portions of this exhibit.
# Indicates management contract or compensatory plan.
*
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a
registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as
amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, and otherwise are not subject to liability under these sections.
(c) Not applicable.
99
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SIGNATURES
AEROVIRONMENT, INC.
Date: June 25, 2013
/s/ TIMOTHY E. CONVER
By:
Its:
Timothy E. Conver
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose signature
appears below hereby constitutes and appoints Timothy E. Conver and Jikun Kim, each of them acting
individually, as his attorney-in-fact, each with full power of substitution, for him in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority
to do and perform each and every act and thing requisite and necessary to be done in and about the
premises as fully to all intents and purposes as he might or could do in person, hereby ratifying and
confirming our signatures as they may be signed by our said attorney-in-fact and any and all
amendments to this Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
Name
Title
Date
/s/ TIMOTHY E. CONVER
Timothy E. Conver
Chairman, President and Chief
Executive Officer and Director
(Principal Executive Officer)
June 25, 2013
/s/ JIKUN KIM
Jikun Kim
/s/ JOSEPH F. ALIBRANDI
Joseph F. Alibrandi
/s/ KENNETH R. BAKER
Kenneth R. Baker
/s/ ARNOLD L. FISHMAN
Arnold L. Fishman
/s/ MURRAY GELL-MANN
Murray Gell-Mann
/s/ CHARLES R. HOLLAND
Charles R. Holland
Chief Financial Officer (Principal
Financial and Accounting Officer)
June 25, 2013
Director
Director
Director
Director
Director
100
June 25, 2013
June 25, 2013
June 25, 2013
June 25, 2013
June 25, 2013