LONG RANGE
Thinking
®
2 0 1 4 C O R P O R AT E OV E R V I E W
Think about
what makes us
human.
Think what distinguishes our species from every
other. It’s the power of the human mind and spirit. It’s the
story of human history, of imagining, testing, learning and
building. It’s that distinctly human power to learn from our
past to better shape our future. It’s everything we rely on
today to live our lives and understand our surroundings.
But most of all, it’s caring for our children and the world
they’ll inherit years from now. As humans, we must always
think long range.
Now, think about AeroVironment. Think what
distinguishes this company from every other. It’s more
than big ideas. It’s over 40 years of working tenaciously
to solve some of the biggest challenges of our day—from
achieving the first human powered flight to deploying the
most widely used portfolio of small unmanned aircraft
systems; from developing ground breaking solar and
electric powered cars to leading the charge in today’s
Electric Vehicle revolution. At AeroVironment, it’s long
range thinking that is transforming the way we live, work,
protect ourselves and preserve our planet.
MAKING It Fly
GOSSAMER CONDOR
From time immemorial, we humans have wanted to fly. Flying, we understood, would speed our travels,
extend our vision and give us reign over the earthly world below. Still, it wasn’t until 1977–three-quarters
through the 20th Century–that one man’s idea for human-powered flight took off. Inspired by studying
the flight of birds, the aircraft’s expansive wings wrapped in the thinnest of material inspired its name–
Gossamer Condor. Powered by a single cyclist, the large but simple looking structure belied the challenges
that faced its builders, AeroVironment founder Dr. Paul MacCready and his team. The Gossamer Condor
hangs in the Smithsonian. Then as now, finding elegant and practical solutions to complex problems has
been our passion and a tenet of our company.
HARNESSING The Sun
SUNRAYCER
Applying the same “spiral” development process of design, build, test and learn, the AeroVironment team,
would go on to develop a string of groundbreaking vehicles and efficient energy systems to drive them–like
harnessing the sun to speed the Sunraycer to victory across the Australian Outback in the first ever solar-
powered car race. From human power to solar power to electric power, AeroVironment continues to deliver
powerful solutions that empower our customers to succeed–solutions that can only come from our nearly
half-century of trying and learning until we get it right.
PRESERVING Our Resources
GM IMPACT
Everyone knew this vehicle was an important milestone. Largely based on an idea informed by building
Sunraycer, the GM Impact was designed as the predecessor to the world’s first mass-produced, purely electric
car. But while these early EVs didn’t go far, the minds at AeroVironment refused to let the electric vehicle
stall. Looking down the road, we could see the power of the electric vehicle transforming our lives, resources
and environment for the better. Now, despite others hurrying to join the EV revolution, global automakers
continue to look no further than AeroVironment because they know–we’ve been on this road for a long time.
PROTECTING
Our Troops
RAVEN®
There wasn’t anything like Pointer or its successor,
Raven, or anything that was so easy to use–a man
packable, hand-launched, unmanned aircraft
equipped with a sophisticated camera that could
reconnoiter the battlefield ahead without putting
a scout in harm’s way. With a range of more than 6
miles and the ability to fly upwards of 50 miles per
hour, Raven’s eyes in the sky represented some of
our most important long range thinking yet–giving
our ground troops a game-changing tool to protect
themselves. The Raven has proven so effective
that it’s become the most widely adopted UAS in
the world, with nearly 20,000 aircraft deployed.
And as with every technology we’ve developed,
we designed Raven to accommodate the latest
upgrades–like our new gimbaled sensor payload
that generated $20 million in orders from the U.S.
Army just this year. Longer range, Raven and other
AeroVironment small UAS will deliver more than real
solutions for real warfighters. Raven will deliver real
solutions for real rescuers, real firefighters and more.
TURBOCHARGING EV Drivers
TurboCord™
After more than two decades of creating charging systems and test systems designed to make EVs and EV
charging more practical, AeroVironment this year released a truly groundbreaking product for the coming
EVolution–a power cord. Well, not just any cord–AeroVironment’s TurboCord. Plug one end into an outlet,
120 or 240 volts, plug the other end into your electric vehicle or EV hybrid, charge and go. There is no base
or wall charger to install, no “pigtail” or bulky transformer box attached to the cord. Everything is in the
plug module itself that fits easily into the palm of the hand. Weighing less the five pounds, waterproof and
packed with safety features, the convenient TurboCord empowers EV drivers, and gas-powered drivers
considering an electric vehicle, with a new range confidence. Plug in anywhere and go anywhere, as long
as you’re going with AeroVironment and TurboCord.
POWERING
Tomorrow’s
Homes
Home Charging Station EVSE
The long range consensus is finally turning in the
direction of the electric vehicle. More than 200,000
plug-in electric vehicles now ply America’s roads,
largely because owning and driving an EV is easier
than ever. More and more major automakers are
building them. More and more charging stations are
springing up along major highways, on city streets,
at the workplace and in people’s homes. Still, the
challenge remains getting even more EV drivers, a
challenge AeroVironment has been working on since
we helped put the first EV driver behind the wheel
of the GM Impact. That’s why in 2013 both Ford
and Chrysler/Fiat added themselves to the growing
list of what is now five global automakers who
have made AeroVironment’s EVSE Home Charging
Station the choice for their EV driving customers.
SEEING Hidden Danger
WASP®AE
We know the solution is out there. Discovering it, however, is never easy, and predicting the timing of
customer acceptance is rarely accurate. Still, at AeroVironment we continue to push into unknown territory,
searching for the right solutions today that will help our customers win tomorrow. Only sometimes the big
solution is the small solution–like AeroVironment’s Wasp AE MAV (micro air vehicle). Incredibly quiet and
virtually undetectable, the Wasp AE is an all environment version of our battle proven WASP III. Featuring
hand-launch and deep stall landing capabilities, Wasp AE’s mechanically stabilized EO/IR gimbaled payload
transmits advanced imagery even in adverse conditions. So whatever the environment, whatever the
situation, with Wasp AE our customers are seeing the hidden danger before the danger can see them.
BRAVING
The Elements
Puma™ AE
Just a short time ago, few could foresee a role for small
UAS outside the military. At AeroVironment, however, we
saw the tremendous possibilities for good that our small
unmanned aircraft could provide–including our QUBE® and
our Puma AE. That’s AE for “All Environment”, because
sometimes the battlefield isn’t a battlefield at all. Sometimes
it’s a volcano where scientists measure particulates in the
air, or rugged wilderness where firefighters race to contain
a wildfire, or it’s the Arctic tundra where we scan North
America’s largest oil field with advanced sensors to deliver
high resolution, engineering-quality information to BP. And
sometimes the battlefield is an ocean and Puma AE, capable
of braving the elements, is hard at work there too, tracking
endangered species and ice floes. Thinking long range, we
introduced an upgrade to Puma AE that increased its flight
duration by 75%, and developed a long range Puma AE that
achieved nine hours of continuous flight using the sun’s
rays. AeroVironment has even received the first FAA Type
Certificate for commercial use over American soil for the
Puma AE, while QUBE is quickly proving itself a remarkable
tool for police, paramedics, firefighters and other rescue
personnel. Considering the environment out there, we think
there’s no other manufacturer of small UAS to consider.
OPENING Our Eyes
Global Observer®
Today, our more than a quarter-century of
work in the small UAS market has us soaring
above and beyond our competition. Tomorrow,
we’ll be climbing higher than ever with our
high-altitude, long endurance Global Observer
unmanned aircraft system. Thinking long
range, we imagined an entirely new category
of unmanned aircraft system, a stratospheric
satellite capable of extreme flight duration and
altitude to provide low-cost, rapidly deployable,
persistent communications and surveillance over
any global location. Thinking longer range, Global
Observer will provide critical information, imaging
and mapping for defense and homeland security
missions, environmental monitoring, agriculture
crop management and harvesting optimization,
wildfire detection, hurricane and storm tracking,
and sustained support for relief operations. As the
Human Power® company, our customers already
know we are empowering them to overcome
those challenges, open their eyes to future
possibilities, and succeed.
SAFEGUARDING
Our Future
Switchblade®
Every day brings new challenges, dilemmas and the
potential for conflict. Our population is growing, our
climate is changing and the strain on our resources
is increasing. But with every challenge, there is the
opportunity to make the world better, safer and
healthier–and in many ways and for many of us,
we are doing just that. It is the great human story
and for more than 40 years now it has been the
AeroVironment story, as we apply our thinking and
our technology to confront the realities and conflicts
of the day, even as we think long range about the
bigger solutions. Perhaps then no technology we’ve
developed so captures this reality better than the
Switchblade tactical missile system. Within minutes,
the back-packable Switchblade can be launched to
provide troops with beyond line of sight intelligence,
surveillance and reconnaissance, and a precision
strike capability with minimum collateral effect.
Wars will most likely remain a part of our world, but
with Switchblade we can now give our forces the
ability to operate more effectively within the rules of
engagement, and save lives.
AeroVironment®
Dear Stockholders
Fiscal 2014 was productive and exciting for
AeroVironment. During the year, we stayed focused
on our strategy and accomplished what we set out to
do: deliver results by thinking long range and acting
on current data.
Our ongoing commitment to breakthrough
innovation, persistence and agility drove our
commercial accomplishments during the year.
AeroVironment’s unmanned aircraft systems
(UAS) and efficient electric vehicle systems
continue to enable our customers with more timely
and actionable information and with flexible and
convenient recharging options, respectively.
Since our founding in 1971, we have imagined,
experimented, tested, improved, learned, and most
importantly, persisted. We know that customer needs
drive the development of our innovative solutions,
how to time our investments, how to scale with
rapid market adoption and how to succeed despite a
challenging environment.
More than 25 years ago, we developed the first
hand-launched, unmanned aircraft system for
flexible, tactical remote observation. Today our
UAS solutions make up more than 85 percent of the
U.S. Department of Defense’s unmanned aircraft
fleet. We are also the first to deliver FAA-approved
commercial UAS operations over American soil, an
important first step into the next global market for
small UAS. Similarly, more than 20 years ago, we
led the development of the first consumer plug-in
electric vehicle, and today we are a leader in charging
solutions for plug-in vehicles across North America.
This year we are making measured investments to
position three key growth opportunities for adoption:
Tactical Missile Systems, Commercial UAS and
atmospheric satellites via Global Observer®.
We believe our market leadership across our
businesses is a direct result of the positioning and
options we build before markets adopt, and our
persistent commitment to customer success once
they do.
Successfully Executing Our Strategic Plan
and Delivering Strong Results
In fiscal 2014, our team adapted to U.S. Department
of Defense budget changes, maintained market
leadership, advanced key growth opportunities, and
outperformed our guidance. We ended fiscal 2014
with our core business in a strong and considerably
more profitable position than fiscal 2013.
Compared to fiscal 2013, fiscal 2014 revenue grew
5 percent to $252 million, and fully diluted adjusted
EPS grew by 87 percent to $0.56, excluding the
$0.04 increase from CybAero convertible notes1.
We finished fiscal 2014 a more efficient and profitable
organization, and our prospects for long-term
value creation are stronger than ever. Importantly,
throughout the year we achieved several important
financial objectives, including:
• adjusted the organization to lower our breakeven
level from $60 - $65 million per quarter to $50
- $55 million, allowing us to operate profitably
at current Department of Defense procurement
levels;
• increased operating profit from $3.8 million to
$12.4 year-over-year;
• closed fiscal 2014 with approximately $66 million
in backlog and added $65 million in new orders to
date as of July 8;
• increased free cash flow by 72 percent to $22
million2; and
• increased our cash and investments to $248
million, giving us a powerful strategic tool to
accelerate adoption when opportunities emerge.
We also achieved key operational goals. In UAS
we maintained our market leadership in small UAS,
preserving our leading share of the U.S. Department
of Defense unmanned aircraft fleet, garnering more
than 90 percent of the revenue for task orders
issued under the U.S. Army’s small UAS procurement
contract and expanding to a total of more than 30
international UAS customers. We also shipped nearly
1,200 Raven® gimbaled payloads in fiscal 2014, as
customers continue to invest in retrofitting their large
base of existing small UAS.
In Efficient Energy Systems (EES), we launched
TurboCord™ in our third quarter, reflecting our focus
on delivering innovative solutions. This is the smallest
UL-listed Level 2 charging solution available, and it
easily converts to a 120V cord set. We have deployed
a total of nearly 18,000 240-volt charging docks and
more than 450 DC fast chargers in North America,
and have successfully transitioned our first-of-its-
kind West Coast Electric Highway™ charging network
to a subscription model, with a growing roster of
paying customers relying on our system to power
their commutes.
Capitalizing on New Opportunities to Drive
Further Growth
While delivering strong performance in our core
business, we also continued to further advance
our growth initiatives in fiscal 2014. Three of
our key growth areas – Tactical Missile Systems,
Commercial UAS and Global Observer – have
advanced demonstrably in the adoption process and
are moving closer to becoming new, large market
opportunities and drivers of long-term growth.
Ensuring the strongest possible position for
deployment of these opportunities requires the
continued dedication of our team and the measured
deployment of capital. Though timing of customer
adoption can be difficult to predict, we are confident
that these growth initiatives, together with our
strong existing platforms, will continue to enable
AeroVironment to compete effectively on a global
scale.
Focused on Driving Stockholder Value in
2015 and Beyond
We will continue our disciplined, effective
management of capital to support our market-
focused, innovation-driven strategy. This proven
approach supports the execution of our growth
initiatives and positions the Company for continued
success. Our cash position preserves our ability to
move nimbly to capture promising opportunities
while prudent management of our balance sheet and
minimal debt levels maximize return on net assets.
I would like to thank everyone on the AeroVironment
team – our dedicated board of directors, and our
hard-working employees – whose contributions
have allowed us to create substantial value for our
customers and our stockholders.
Every day we are working to deliver enhanced value
to shareholders by executing on our plan, levering
the strength of our businesses and maintaining our
focus on serving our customers. On behalf of all
of us at AeroVironment, thank you for your shared
commitment to our company. We are excited about
the opportunities ahead.
Thank you.
Timothy E. Conver
Chairman,
Chief Executive Officer & President
FINANCIAL HIGHLIGHTS
5%
Revenue Growth
87%
EPS Growth1
on an adjusted basis
Revenue by Segment
in thousands except for share and per share data
2012
2013
2014
UAS
EES
Total Revenue
Income from Operations
Net Income
EPS Fully Diluted
Total Assets
Stockholders’ Equity
$
273,728
51,280
325,008
43,076
30,451
1.36
369,151
299,198
$
$ 194,276
45,876
240,152
3,802
10,426
0.47
361,604
315,186
208,810
42,893
251,703
12,419
13,718
0.60
384,954
342,467
Operating Margin
13%
2%
5%
Share Price
Fiscal Year Ended April 30, 2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended April 30, 2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended April 30, 2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
$
High
23.97
26.50
31.50
41.67
High
27.82
24.88
23.70
23.18
High
36.49
34.28
33.87
31.87
$
$
$
Low
19.24
20.78
26.14
27.34
Low
21.14
21.56
19.25
16.98
Low
26.81
24.01
28.33
23.70
1 GAAP EPS for fiscal 2014 was $0.60, including the $0.04 increase from
CybAero.
2 Calculated as Net Cash Provided by Operating Activities ($29 million) less
Acquisition of Property and Equipment ($7 million) for a total of $22 million.
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
Roy Minson
Senior Vice President and General Manager,
Unmanned Aircraft Systems
Wahid Nawabi
Senior Vice President and General Manager,
Efficient Energy Systems
Doug Scott
Senior Vice President and General Counsel
Stockholder Information
Investor Relations
Steven A. Gitlin
Vice President, Investor Relations
To obtain free copies of this
Overview and 10-K, please
contact AeroVironment’s
Investor Relations Department:
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
Timothy E. Conver
Director
Chairman, Chief Executive Officer and President,
AeroVironment, Inc.
Joseph F. Alibrandi
Director
Chief Executive Officer, Alibrandi Associates
Charles T. Burbage
Director
Former Executive Vice President and General Manager,
Joint Strike Fighter Program,
Lockheed Martin Corporation
Arnold L. Fishman
Director
Chairman,
Lieberman Research Worldwide
Charles R. Holland
Director
General, USAF (Ret),
Former Commander,
U.S. Special Operations Command
(2000-2003)
Edward R. Muller
Director
Vice Chairman, NRG Energy, Inc.
Stephen F. Page
Lead Independent Director
Trustee, Loyola Marymount University
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.”
© 2014 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 BP, FAA, Ford, Chrysler/FIAT,
CybAero, West Coast Electric Highway, Sunraycer, and GM Impact, 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.
A V A V
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TABLE OF CONTENTS
TABLE OF CONTENTS2
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:1)
(cid:2)
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended April 30, 2014
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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)
181 W. Huntington Drive, Suite 202
Monrovia, CA
(Address of Principal Executive Offices)
95-2705790
(I.R.S. Employer Identification No.)
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
Common Stock, par value $0.0001 per share
Name of each exchange on which registered
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:1) No (cid:2)
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)
Accelerated filer (cid:1)
Non-accelerated filer (cid:2)
(Do not check if a smaller reporting
company)
Smaller reporting company (cid:2)
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 26, 2013 was approximately $526.1 million.
As of June 20, 2014, the issuer had 23,176,576 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, 2014, are
incorporated by reference into Part III of this Form 10-K.
Table of Contents
AEROVIRONMENT, INC.
INDEX TO FORM 10-K
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosure
PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6.
Selected Consolidated Financial Data
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
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
Item 15.
Exhibits, Financial Statement Schedules
1
Page
2
24
48
48
48
48
49
51
51
62
63
97
97
98
100
100
100
100
100
101
Table of Contents
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:
unexpected technical and marketing difficulties inherent in major research and product development efforts;
availability of U.S. government funding for defense procurement and research and development programs;
the extensive regulatory requirements governing our contracts with the U.S. government and the results of any audit
or investigation of our compliance therewith;
the potential need for changes in our long-term strategy in response to future developments;
unexpected changes in significant operating expenses, including components and raw materials;
changes in the supply, demand and/or prices for our products and services;
increased competition, including from firms that have substantially greater resources than we have;
changes in the regulatory environment; and
general economic and business conditions in the United States 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
2
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Table of Contents
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 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 to
solve 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, marketing, support and operation
of innovative UAS and tactical missile systems that provide situational awareness, multi-band communications, force
protection and other information and mission effects to increase the safety 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 entering existing
markets and competing against large, incumbent competitors that may possess advantages in scope, scale, resources 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, tactical missile
systems, electric vehicle charging systems and power cycling and test systems enjoy leading positions 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 non-government organizations, including commercial entities. 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
increase internal and customer-funded research and development 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 research and development investments will allow us to deliver innovative new products and services that address
market needs within and outside of our current target markets, and enable us to
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create new opportunities for growth. We view strategic partners as a means by which to further the reach of our innovative
solutions through access to new markets, customers and complementary capabilities.
Foster our entrepreneurial culture and continue to attract, develop and retain highly-skilled personnel. Our
company culture encourages innovation and an entrepreneurial spirit, which helps to attract and retain highly-skilled
professionals. We intend to preserve 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 respond rapidly to evolving markets, solve complicated customer
problems, and deliver new products, services and capabilities quickly, efficiently and affordably. We believe our agility and
flexibility help 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 investment opportunities that we believe will deliver 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, 2014, approximately 45% of our revenue was from the U.S. Army pursuant to
orders placed 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 30% of our sales revenue, while purchases by
foreign, commercial customers and consumers accounted for the remaining 25% of sales revenue during our fiscal year ended
April 30, 2014.
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™, 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, the Nano Hummingbird™, the world's first flapping wing unmanned aircraft system capable of precise hover and
omni-directional flight, and TurboCord™, the smallest, most portable UL-listed 240-volt EV charger. The Smithsonian
Institution has selected seven vehicles developed by our company 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.
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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.
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 our products and services deliver 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, 2014, we had 113 U.S. patents issued; 121 U.S. patent applications pending; 37 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 its use by potential competitors. 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 that 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, 2014, 2013 and 2012, our internal research and development spending amounted to
10%, 15% and 10%, respectively, of our revenue, and customer-funded research and development spending amounted to an
additional 11%, 16% and 9%, respectively, of our revenue. We expect to increase our investment in internal research and
development in the fiscal year ending April 30, 2015 and future years.
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
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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, including for the mark TurboCord.
International Sales
We contract with international sales representatives and team with domestic organizations in a number of foreign
markets and believe that these markets represent growth opportunities for our business. Our international sales accounted for
approximately 14%, 15% and 5%, of our revenue for the fiscal years ended April 30, 2014, 2013 and 2012, respectively.
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 incorporate this input into product designs in an effort to maximize the efficiency and quality of 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 while achieving 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 forge
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 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 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
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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 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.
Contract Mix
The table below shows our revenue for the periods indicated by contract type, including both government and
commercial sales:
Fixed-price contracts
Cost-reimbursable contracts
Time-and-materials contracts
Employees
Fiscal Year Ended
April 30,
2014
2013
2012
85%
15%
0%
75%
25%
0%
76%
23%
1%
As of April 30, 2014, we had 625 full-time employees, of whom 210 were in research and development and engineering,
87 were in sales and marketing, 192 were in operations and 136 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, 2014 and 2013, our funded backlog was approximately
$65.9 million and $59.4 million, respectively. We expect that approximately 95% of our funded backlog will be filled during
our fiscal year ending April 30, 2015.
In addition to our funded backlog, we had unfunded backlog of $22.9 million and $76.6 million as of April 30, 2014 and
2013, 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. Unfunded backlog does not include the remaining
potential value associated with a U.S. Army IDIQ-type contract for small UAS because the contract was awarded to five
companies in 2012, including AeroVironment, and we cannot be certain that we will receive all task orders issued against the
contract.
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.
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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.
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 intelligence,
surveillance and reconnaissance, or 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, then more directly from the demands associated with the global threat environment, and now as an accepted
and enduring capability. 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, Puma and Shrike, serve as integral components of today's 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 precision agriculture,
border surveillance, public safety and infrastructure monitoring, we expect further growth through the introduction of UAS
technology to non-military applications. A critical factor impacting the adoption is establishing rules for the safe and effective
operation and integration of UAS in each country's national airspace system.
High Altitude Long Endurance 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
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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 present over those areas. UAS that are
capable of operating in an affordable manner for extended periods of time over an area of interest without gaps in availability
while carrying a communications relay or observation payload 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. We believe
that embedding a lethal payload into a remotely piloted, man-portable delivery system provides warfighters with a valuable
and more cost-effective alternative to existing airborne and land-based missile systems.
Our UAS Solutions
We supply our UAS products and services to multiple customers in and outside the United States. We had delivered
approximately 89% of the U.S. Army's acquisition objective for new Raven small UAS, which totals 2,358 systems, as of
April 30, 2014. For the fiscal years ended April 30, 2014, 2013 and 2012, our UAS segment products and services accounted
for 83%, 81% and 84%, respectively, of our revenue.
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 or by 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 for military customers 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 replaced 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.
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In military applications, our small UAS enable tactical commanders to observe around the next corner, to the next
intersection or past a 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.
Our small UAS offering also includes 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
Puma
Wingspan
(ft.)
9.2
Weight
(lbs.)
13.5 Vertical autonomous landing
Recovery
capable (ground or water)
Standard
Sensors
Mechanical pan, tilt, zoom and
digital zoom electro-optical and
infrared
Range
(mi.)(1)
9.0
Flight Time
(min.)(1)
210
Raven
4.5
4.5
Vertical autonomous landing
capable
Wasp
AE
Shrike
3.3
2.8
Vertical autonomous landing
capable (ground or water)
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
6.0
3.0
5.0
90
50
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 enable operational modes that 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 the
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orientation of the sensors to view the visual information they produce through real-time, streaming video and metadata. Our
common 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 an advanced 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.
Our line of miniature gimbaled sensor payloads provides 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 video, still images and geographic location 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 for existing solutions that we introduce as retrofits or upgrades. We recognize
customer-funded research and development projects as 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:
lightweight, low speed aerostructures and aerodynamic design;
miniaturized avionics and micro/nano unmanned aircraft systems;
image stabilization and target tracking;
autonomous control systems;
payload design, development, miniaturization and integration;
electric and hydrogen propulsion systems and high-pressure-ratio turbochargers;
high altitude long endurance flight operations;
fluid dynamics;
miniature, low power wireless digital communications; and
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 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 have developed a prototype tier II unmanned helicopter that is
capable of long duration, high altitude and heavier payload flights. Our supplier provided the base aircraft that we
modified significantly. We believe our prototype tier II offering enhances our value proposition to customers
through more capable mission services and hardware sales. Our tier II unmanned helicopter is the only such aircraft
that can be operated from our portable and interoperable common ground control system, increasing the portability,
flexibility and ease of use..
Miniature DDL module. Our digital data link (DDL) is incorporated into each product within our family of
small UAS and has been integrated into other unmanned aircraft systems for testing and demonstration purposes.
We developed an even smaller and lighter DDL module to enable a broad range of devices and users to benefit
from its flexible, low cost and rapidly deployable nature. With this pocket digital radio, 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 market and customer and locate team members 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 maintain our relationships, service
existing contracts effectively and gain vital feedback to improve our responsiveness and product offerings.
UAS Manufacturing and Operations
We have 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 high altitude long
endurance 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.
UAS Competition
The market for military small UAS continues to evolve in response 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
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contractors have significantly greater 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. Some internet technology
companies have acquired small firms that focus on this type of capability and represent potential future competitors.
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 suppliers of UAS mission services include 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. 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 United States 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 emerging non-military market is
attracting numerous additional competitors given perceived lower barriers to entry and a much more fragmented marketplace
as compared to the military market. Potential additional competitors 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.
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
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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 impose substantial penalties for violations, including suspension or debarment from
government contracting or subcontracting for a period of time. We 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 in the United States, by the National Telecommunications and Information Administration and Federal
Communications Commission, which regulate the wireless communications upon which our UAS depend in the United
States, and under the International Traffic in Arms Regulations, which regulates 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. In 2012, the U.S. Congress 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. The FAA recently issued the first restricted type
certificate for the commercial operation of an unmanned aircraft over American soil to our Puma system. Under a COA, we
are operating Puma systems in the Prudhoe Bay area of Alaska to support a major oil and gas customer.
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 U.S. military funds its contracts for our full-rate production UAS 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, for example, 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.
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:
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;
reduce or modify contracts or subcontracts, if its requirements or budgetary constraints change;
cancel multi-year contracts and related orders, if funds for contract performance for any subsequent year become
unavailable;
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;
adjust contract costs and fees on the basis of audits completed by its agencies;
suspend or debar a contractor from doing business with the U.S. government; and
control or prohibit the export of products.
Generally, government contracts are subject to oversight audits by government representatives. 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.
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
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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.
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.
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.
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.
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
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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 an IDIQ
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 and the type of electric service available, 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.
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:
concerns regarding the environmental impact of resource extraction and carbon emissions associated with fossil
fuel-based transportation;
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awareness of the geopolitical and economic costs associated with the current dependence on petroleum imports;
anticipation of future energy price volatility;
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
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 recharge 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 demand for 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 1
Level
Infrastructure Requirement
Recharge Time
Power cord with safety features that
plugs into a dedicated 120-volt AC
outlet
Capable of slow recharge that could
require up to 24 hours or more for
certain battery packs
Level 2, known as Electric Vehicle
Supply Equipment
Level 3, DC or fast/quick charge
A hard-wired or portable device that
requires professional installation of a
dedicated 240-volt AC circuit
Typically requires installation onto a
three-phase, 480-volt AC circuit
Capable of fully recharging most
battery packs in two to six hours
Capable of fully recharging battery
packs designed to accept such a
charge in minutes
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.
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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 served as a driver of increased demand for electric vehicle and
component test systems. Customers include commercial, government, military and university research and development labs
as well as commercial manufacturing facilities as more funding and attention have been focused on clean transportation.
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
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well as battery packs, electric motors and fuel cells. For the fiscal years ended April 30, 2014, 2013 and 2012, EES sales
accounted for 17%, 19% and 16%, 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 portable level II charging cords, 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 PEVs and HEVs.
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 relationships represent a valuable position from which to expand our charging infrastructure footprint
in the United States and globally. We continue to work 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
deployed PEV fast charging systems, which we view as a powerful tool that can help enable the broader adoption of PEVs in
two main categories:
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.
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.
Passenger and Fleet Electric Vehicle Charging Services
We have established broad geographic coverage in North America 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
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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, 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.
The appearance of 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. 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.
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.
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Our line of DC test systems has the flexibility to perform a variety of electric load tests. With a full power range
(+/-5kW to +/-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:
battery management and testing;
power electronics and controls;
efficient electric drive systems and controls;
high-density energy packaging;
efficient electric power generation, storage and management;
charging algorithms and thermal management;
on/off grid controls and controls integration;
system integration and optimization; and
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 broad 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 broad network, is
designed to support our growth as we pursue numerous electric vehicle charging opportunities.
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
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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. and ClipperCreek, Inc. and large industrial electrical device
suppliers such as Bosch Automotive Service Solutions LLC, Delta Electronics, Inc., Eaton Corporation, General Electric
Company, Leviton Manufacturing Co., Inc., Schneider Electric SA, The ABB Group and Siemens AG.
The primary direct competitors to PosiCharge systems are other fast charge suppliers, including Aker Wade Power
Technologies LLC, Minit-Charger and PowerDesigners, LLC. 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 Power Electronics.
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 17 to our consolidated
financial statements, which are included in Item 8, "Financial Statements and Supplementary Data" of this Annual Report.
Item 1A. Risk Factors.
General Business Risks
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
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contractor or subcontractor, represented approximately 75% of our revenue for the fiscal year ended April 30, 2014. The
DoD, our principal U.S. government customer, accounted for approximately 53% of our revenue for the fiscal year ended
April 30, 2014. 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 and
that our business will not decline. 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:
changes in government programs that are related to our products and services;
adoption of new laws or regulations relating to government contracting or changes to existing laws or regulations;
changes in political or public support for security and defense programs;
delays or changes in the government appropriations and budget process;
uncertainties associated with the current global threat environment and other geo-political matters; and
delays in the payment of our invoices by government payment offices.
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.
Over the last decade, operational activity in Afghanistan and Iraq led to adoption and an increase in demand for our
small UAS. More recently, the U.S. military has reduced its presence and operational activity in Afghanistan and Iraq. We
cannot predict whether the reduction in overseas operational levels will continue, how future procurement priorities related to
defense transformation will be impacted or how changes in the threat environment will impact opportunities for our small
UAS business in terms of existing, additional or replacement programs. 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, EV charging systems and other energy technologies are sold in new and rapidly evolving markets. The
commercial UAS market and EV markets are in early stages of customer adoption. 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
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uncertainties frequently encountered by companies in rapidly evolving markets could impact our ability to do the following:
generate sufficient revenue to maintain profitability;
acquire and maintain market share;
achieve or manage growth in our operations;
develop and renew contracts;
attract and retain additional engineers and other highly-qualified personnel;
successfully develop and commercially market new products;
adapt to new or changing policies and spending priorities of governments and government agencies; and
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. However, 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.
The primary direct competitors to our PosiCharge industrial EV charging system business are other fast charge suppliers,
including Aker Wade Power Technologies LLC, PowerDesigners, LLC and Minit-Charger as well as industrial battery
manufacturers that 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 EV charging systems include charging system suppliers
such as ChargePoint, Inc. and ClipperCreek Inc. As the passenger and fleet electric and hybrid EV 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 Bosch
Automotive Service Solutions LLC, Delta Electronics, Inc., Eaton Corporation, General Electric Company, Leviton
Manufacturing Co., Inc., Schneider Electric SA, the ABB Group and Siemens AG. Our EV 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
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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 EV 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, EV 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, 2014, our UAS and EES businesses accounted for 83% and 17% 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 EV 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, EV 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:
customer satisfaction with these types of systems as solutions;
the cost, performance and reliability of our products and products offered by our competitors;
customer perceptions regarding the effectiveness and value of these types of systems;
the availability and adoption of EVs and HEVs;
limitations on our ability to market our UAS products and services outside the United States due to U.S.
government regulations;
obtaining timely regulatory approvals, including, with respect to our small UAS business, access to airspace and
wireless spectrum; and, with respect to our EV charging business, proper certifications and licenses to offer and
perform electrical installation work; and
marketing efforts and publicity regarding these types of systems.
Even if UAS, EV 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.
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If critical components 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 EV fast charging and test systems to large
industrial EV fleet operators primarily in North America, our power cycling and test systems primarily to research and
development facilities in North America, and our EV 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 EV charging and power cycling and test systems and EV 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.
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.
The regulation of small UAS for commercial use in the United States is undergoing substantial change and the ultimate
treatment is uncertain. 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.
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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 is drafting updated regulations specifically for
small UAS commercial operations and is expected to release the proposed regulations for public comment in 2015. 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 EV 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 EV charging systems could lose market share, our
revenue and profits could decline, and we could experience operating losses.
We expect to incur substantial research and development costs and devote significant resources to identifying and
commercializing new products and services, 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 and services 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 services and enhance existing products. We spent
$25.5 million, or 10% of our revenue, in our fiscal year ended April 30, 2014 on research and development activities and
expect to substantially increase our spending on research and development in the next few years. We believe that there are
significant investment opportunities in a number of business areas. Because we account for research and development as an
operating expense, these expenditures will adversely affect
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our earnings in the future. Further, our research and development programs may not produce successful results, and our new
products and services 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 the increasing complexity of our business or achieve or manage our expected growth, our
business could be adversely affected.
The complexity of our business has increased significantly over the last several years. We have expanded the number of
business areas being pursued, shifting from primarily a U.S. government focused business to a business that includes
substantial international product sales and added commercial services. This increased complexity and our expected 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. However, if we are unsuccessful in our efforts, our business could
decline. Our success will depend in part upon the ability of our senior management to manage our increased complexity and
expected 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.
To support our expected 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 involve 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.
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 judgments relative to assessing risks, including risks associated with estimating contract
revenues and costs, assumptions for schedule and technical issues, customer-directed delays and reductions in scheduled
deliveries, and unfavorable resolutions of claims and contractual matters. 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
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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.
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
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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 85% of our
revenue for the fiscal year ended April 30, 2014. 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.
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 EV 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 EV 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 EV
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
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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 EV 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 EV 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 currently produce EV charging systems in Taiwan, China, Mexico, Italy and the
United States. Historically, we have produced PosiCharge industrial EV 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 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 EV 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 EV 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 EV 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
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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. 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 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.
Compliance with the SEC's conflict minerals regulations may increase our costs and adversely impact the supply-chain
for our UAS and EES products.
In August 2012, the SEC adopted disclosure rules regarding a company's use of conflict minerals in their products with
substantial supply chain verification requirements in the event that the conflict minerals come from, or could have come from,
the Democratic Republic of the Congo or adjoining countries. These new rules and verification requirements will impose
additional costs on us and on our suppliers, and may limit the sources or increase the prices of materials used in our products.
Further, if we are unable to certify that our products are conflict minerals free, we may face challenges with our customers,
which could place us at a competitive disadvantage and could harm our business.
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 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.
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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:
fluctuations in revenue derived from government contracts, including cost-plus-fee contracts and contracts with a
performance-based fee structure;
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;
the mix of products that we sell in the period;
seasonal fluctuations in customer demand for some of our products or services;
unanticipated costs incurred in the introduction of new products;
fluctuations in the adoption of our products in new markets;
changes in the level of tax credits available for research and development spending;
cancellations, delays or contract amendments by our governmental agency customers;
changes in policy or budgetary measures that adversely affect our governmental agency customers; and
our ability to obtain the necessary export licenses for sales of our products and services to international 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
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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 EV 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 EV charging systems will depend on
numerous factors which are out of our control.
The passenger and fleet electric and hybrid EV charging systems market is expected to grow rapidly, along with
innovations in fast charging technologies. However, 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 EVs 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. The rate
of EV adoption is difficult to predict and has been slower than many in the industry have predicted to date.
Our industrial EV 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 EV 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 EV charging system customers. Currently, several of our industrial
EV 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 EV 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 EV 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.
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Our electric and hybrid EV charging system business is dependent upon our development of relationships with
automakers, auto dealers, utilities and other participants in the electric and hybrid EV and electricity delivery markets.
We have been selected by several major automakers to support the rollout of new model EVs across the United States
with our home charging system. Accordingly, we depend upon those relationships and the success of the home charging
rollout to those new model EV 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 EV 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 EV 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 EV and electricity delivery markets in the United States
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 on our information
technology infrastructure, attempts to gain access to our proprietary, financial, banking 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 technical, financial or banking information or corruption of data.
Accordingly, any significant operational delays, or any 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:
hire additional engineers and other personnel;
develop new or enhance existing products;
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enhance our operating infrastructure;
fund working capital requirements;
acquire complementary businesses or technologies; or
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, coupled with 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, 2014, 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 5 to 20 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.
Since fiscal 2011, we have 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 20,
2014, 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 20 years) to realize our investments' purchase price of $6.6 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.
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Our investment in convertible bonds and shares issued by CybAero AB may suffer reduced returns or losses which could
adversely affect our financial condition and results of operation.
Our investment portfolio includes a convertible bond and shares issued by CybAero AB, or CybAero, a publicly traded
company in Sweden that develops and manufactures unmanned aerial vehicles. The value of these assets fluctuates with
equity markets, the Swedish economy, the value of the Swedish Kronor and the performance of CybAero. In times of
economic weakness or a decline in CybAero's performance, the market value and liquidity of these assets may decline, which
may in turn adversely affect our financial condition and results of operations. Convertible bonds have both a debt and an
equity component due to the option to convert the fixed income security to an equity form. Therefore, convertible bonds can
be affected by changes in interest rates and credit or default risks as well as equity volatility risk.
Unstable market and economic conditions may have serious adverse consequences on our business, financial condition
and stock price.
As widely reported, global credit and financial markets have experienced extreme disruptions in recent years, including
severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases
in unemployment rates and uncertainty about economic stability. There can be no assurance that renewed deterioration in
credit and financial markets and confidence in economic conditions will not occur. Our general business strategy may be
adversely affected by any economic downturn, volatile business environment or continued unpredictable and unstable market
conditions. If the current equity and credit markets deteriorate, or do not improve, it may make any necessary debt or equity
financing more difficult, more costly and more dilutive. Failure to secure any necessary financing in a timely manner and on
favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could
require us to delay or abandon implementing business initiatives. 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.
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
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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 14% of our revenue from international sales during the fiscal year ended April 30, 2014. 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:
the unavailability of, or difficulties in obtaining any, necessary governmental authorizations for the export of our
products to certain foreign jurisdictions;
regulatory requirements that may adversely affect our ability to operate a in foreign jurisdictions, sell certain
products or repatriate profits to the United States;
the complexity and necessity of using foreign representatives and consultants;
the complexities of operating a business in an international location through a subsidiary or joint venture structure
that may include foreign business partners, subcontractors and suppliers.
difficulties in enforcing agreements and collecting receivables through foreign legal systems and other relevant
legal issues, including fewer legal protections for intellectual property;
potential fluctuations in foreign economies and in the value of foreign currencies and interest rates;
potential preferences by prospective customers to purchase from local (non-U.S.) sources;
general economic and political conditions in the markets in which we operate;
laws or regulations relating to non-U.S. military contracts that favor purchases from non-U.S. manufacturers over
U.S. manufacturers;
the imposition of tariffs, embargoes, export controls and other trade restrictions; and
different and changing legal and regulatory requirements, including those pertaining to data protection and privacy,
employment law, intellectual property and contracts 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.
We could be prohibited from shipping our products to certain countries if we are unable to obtain U.S. government
authorization regarding the export of our products, or if current or future export laws limit or otherwise restrict our
business.
We must comply with U.S. laws regulating the export of our products. In some cases, explicit authorization from the
U.S. government is needed to export our products. The export regulations and the governing policies applicable to our
business are subject to change. We cannot provide assurance that such export authorizations will be available for our products
in the future. Compliance with these laws has not significantly limited our operations or our sales in the recent past, but could
significantly
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limit them in the future. We maintain an export compliance program but there are risks that the compliance controls may be
ineffective, exposing us to legal liabilities. If we cannot obtain required government approvals under applicable regulations or
if our export compliance program is not effective, we may not be able to sell our products in certain international
jurisdictions, which could adversely affect our financial condition and results of operations.
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:
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;
difficulties in supporting and transitioning customers, if any, of the target company;
diversion of financial and management resources from existing operations;
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;
risks of entering new markets in which we have limited or no experience;
potential loss of key employees, customers and strategic alliances from either our current business or the target
company's business;
assumption of unanticipated problems or latent liabilities, such as problems with the quality of the target company's
products or its regulatory compliance; and
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. Given
the increasing focus on environmental compliance by regulators and the general public, any incidence of non-compliance
could result in damage to our reputation beyond the fines and other sanctions that could be imposed. Furthermore, certain
environmental laws, including the U.S. Comprehensive,
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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 later 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 never 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.
Our passenger and fleet EV 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 EV 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:
the Federal Acquisition Regulations and supplemental agency regulations, which comprehensively regulate the
formation and administration of, and performance under, U.S. government contracts;
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the Truth in Negotiations Act, which requires certification and disclosure of all factual cost and pricing data in
connection with contract negotiations;
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;
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;
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 United States;
the Federal Aviation Administration, which is in the process of drafting regulations specifically for small UAS
operation in the United States;
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
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
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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. For example, in February 2010, we were notified by the DOJ that it had initiated a civil investigation into
our billing practices with respect to government contracts. We resolved these claims with the DOJ in October 2013. Under
the settlement agreement, we reimbursed the government for an amount erroneously charged to the government.
Subsequent to the DOJ investigation referenced above and in part based on the same facts involved in the DOJ
investigation, the DCMA disallowed a portion of the our executive compensation and other costs and is seeking interest and
penalties from us. To resolve certain undisputed government's claims, we have agreed to pay a nominal amount which
represents the cost impact to the government of the undisputed claims. However, we are vigorously defending our position on
the government's other claims and have appealed the contracting officer's decision to the Armed Services Board of Contract
Appeals. Based on our current understanding of the amount in dispute, we believe that the outcome of the dispute will not
have a material impact on our business.
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
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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.
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:
the need to bid on programs in advance of the completion of their design, which may result in unforeseen
technological difficulties and cost overruns;
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;
the need to estimate accurately the resources and cost structure that will be required to service any contract we are
awarded; and
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.
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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.
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.
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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.
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:
U.S. government spending levels, both generally and by our particular customers;
the volume of operational activity by the U.S. military;
delays in the payment of our invoices by government payment offices, resulting in potentially reduced earnings
during a particular fiscal quarter;
announcements of new products or technologies, commercial relationships or other events relating to us or our
industry or our competitors;
failure of any of our key products to gain market acceptance;
variations in our quarterly operating results;
perceptions of the prospects for the markets in which we compete;
changes in general economic conditions;
changes in securities analysts' estimates of our financial performance;
regulatory developments in the United States and foreign countries;
fluctuations in stock market prices and trading volumes of similar companies;
news about the markets in which we compete or regarding our competitors;
terrorist acts or military action related to international conflicts, wars or otherwise;
sales of large blocks of our common stock, including sales by our executive officers, directors and significant
stockholders; and
additions or departures of key personnel.
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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 20, 2014, our directors, executive officers and their affiliates collectively beneficially owned 3,560,486
shares, or approximately 15%, 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 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 489,000 square feet. Such leases expire between the end of 2014 and 2021.
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.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases 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,
2013 through April 30, 2014. The following quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended April 30,
2014
2013
High
Low
High
Low
$
$
$
$
23.97 $
26.50 $
31.50 $
41.67 $
19.24 $
20.78 $
26.14 $
27.34 $
27.82 $
24.88 $
23.70 $
23.18 $
21.14
21.56
19.25
16.98
On June 20, 2014, the closing sales price of our common stock as reported on the NASDAQ Global Select Market was
$31.42 per share. As of June 20, 2014, there were 63 holders of record of our common stock.
Dividends
To date we have retained all earnings 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, capital allocation policy, expected return on invested capital, contractual restrictions and such other
factors as our board of directors deems relevant.
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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.
The following table shows the value of $100 invested on April 30, 2009 in AeroVironment, Inc., the Russell 2000 Index
and the SPADES Index.
AeroVironment Stock
Russell 2000 Index
SPADES Index
April 30,
2009
100
100
100
April 30,
2010
111
147
143
Performance Graph Table ($)
April 30,
April 30,
2012
2011
103
121
168
177
150
154
April 30,
2013
82
194
175
April 30,
2014
143
231
244
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.
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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.
2014
2013
Year Ended April 30,
2012
(In thousands, except per share data)
2011
2010
Consolidated Income
Statement Data:
Revenue
Net income
$
$
251,703 $
13,718 $
240,152 $
10,426 $
325,008 $
30,451 $
292,503 $
25,909 $
249,518
20,716
Earnings per common share:
Basic
Diluted
Weighted average common
$
$
0.61 $
0.60 $
0.47 $
0.47 $
1.40 $
1.36 $
1.20 $
1.17 $
0.97
0.94
shares outstanding (basic):
22,354
22,070
21,783
21,591
21,392
Weighted average common
shares outstanding
(diluted):
Balance Sheet Data
22,719
22,390
22,315
22,081
21,977
Total assets
Long-term obligations
$
$
384,954 $
4,752 $
361,604 $
4,231 $
369,151 $
6,854 $
331,747 $
6,175 $
281,971
4,438
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 24, 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
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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.
Revenue
We generate our revenue primarily from the sale, support and operation of our small UAS, tactical missile systems,
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 normally conduct significant
internally funded R&D. We expect our investments in R&D expense to substantially increase over the next few years as we
make investments in our tactical missile systems, Global Observer, and UAS commercial services business. We expect R&D
expenses to increase substantially compared to our historical range of 8% to 12% of revenues. 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. Some SG&A expenses relate to market and business
development activities that support both ongoing business areas as well as new and emerging market areas. These activities
can be directly associated with developing requirements for and applications of capabilities created in our R&D activities.
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.
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Other Income and Expenses
Other income and expenses includes interest income, interest expense and changes in fair value of certain financial
investments.
Income Tax Expense
Our effective tax rates are substantially lower than the statutory rates primarily due to research and development tax
credits. We expect our profitability to decline as a result of the increased R&D and other investments we intend to make over
the next few years.
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.
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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.
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, 2014, 2013 and 2012, changes in accounting estimates on fixed-price
contracts recognized using the percentage of completion method of accounting are presented below. 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.
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For the years ended April 30, 2014, 2013 and 2012, favorable and unfavorable cumulative catch-up adjustments
included in cost of sales were as follows (in thousands):
Gross favorable adjustments
Gross unfavorable adjustments
Net adjustments
Year Ended April 30,
2014
2013
2012
$
$
699 $
(337)
362 $
1,874 $
(106)
1,768 $
6,144
(3,079)
3,065
For the year ended April 30, 2014, favorable cumulative catch-up adjustments of $0.7 million were primarily due to final
cost adjustments on 274 contracts, which individually were not material. For the same period, unfavorable cumulative
catch-up adjustments of $0.3 million were primarily related to higher than expected costs on eight contracts, which
individually were not material.
For the year ended April 30, 2013, favorable cumulative catch-up adjustments of $1.9 million were due to final cost
adjustments on 12 contracts, which individually were not material. For the same period, unfavorable cumulative catch-up
adjustments of $0.1 million were primarily related to higher than expected costs on six contracts, which individually were not
material.
For the year ended April 30, 2012, favorable cumulative catch-up adjustments of $6.1 million were due to final cost
adjustments on 204 contracts relating to our UAS segment. Of the 204 contracts, four contracts accounted for $3.3 million of
the favorable cumulative catch-up adjustments as a result of realized operational improvements. For the same period,
unfavorable cumulative catch-up adjustments of $3.1 million were primarily due to higher than expected costs on 21
contracts. Of the 21 contracts, two EES development contracts accounted for $2.8 million of the unfavorable cumulative
catch-up adjustments due to cost-overruns.
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.
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.
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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.
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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
Gross margin
Selling, general and
administrative
Research and development
Income from operations
Interest income
Other income
Income before income taxes
Income tax expense
Net income
$
$
2014
251,703
158,090
93,613
55,679
25,515
12,419
855
1,622
14,896
1,178
13,718
Fiscal Year Ended April 30,
2013
240,152
147,616
92,536
100% $
61%
39%
100% $
63%
37%
22%
10%
5%
0%
1%
6%
0%
5% $
51,520
37,214
3,802
726
6,245
10,773
347
10,426
21%
15%
2%
0%
3%
4%
0%
4% $
2012
325,008
195,675
129,333
55,280
30,977
43,076
462
—
43,538
13,087
30,451
100%
60%
40%
17%
10%
13%
0%
—
13%
4%
9%
The following table sets forth our revenue and gross margin generated by each operating segment for the periods
indicated:
Revenue:
UAS
EES
Total
Cost of sales:
UAS
EES
Total
Gross margin:
UAS
EES
Total
2014
Fiscal Year Ended April 30,
2013
(In thousands)
2012
$
$
$
$
$
$
208,810 $
42,893
251,703 $
194,276 $
45,876
240,152 $
127,992 $
30,098
158,090 $
115,194 $
32,422
147,616 $
80,818 $
12,795
93,613 $
79,082 $
13,454
92,536 $
273,728
51,280
325,008
157,663
38,012
195,675
116,065
13,268
129,333
Fiscal Year Ended April 30, 2014 Compared to Fiscal Year Ended April 30, 2013
Revenue. Revenue for the fiscal year ended April 30, 2014 was $251.7 million, as compared to $240.2 million for the
fiscal year ended April 30, 2013, representing an increase of $11.5 million, or 5%. The increase in revenue was due to an
increase in product deliveries of $55.2 million offset by lower service revenue of $43.6 million. UAS revenue increased
$14.5 million, or 7%, to $208.8 million for the fiscal year ended April 30, 2014, primarily due to higher product deliveries of
$57.0 million offset by decreases in logistics service revenue of $33.2 million and customer-funded R&D work of
$9.3 million. The increase in product deliveries was primarily due to higher product deliveries of Puma
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AE systems and spares and low-rate production of Switchblade systems. The decrease in logistics service revenue was
primarily due to reduced logistics services for our small UAS system. The decrease in customer-funded R&D was primarily
due to the transition of the Switchblade program from a developmental program into low-rate production. EES revenue
decreased $3.0 million, or 7%, to $42.9 million for the fiscal year ended April 30, 2014, primarily due to decreased product
deliveries of our electric vehicle test systems partially offset by increased deliveries of industrial fast charge systems and
passenger electric vehicle charging systems.
Cost of Sales. Cost of sales for the fiscal year ended April 30, 2014 was $158.1 million, as compared to $147.6 million
for the fiscal year ended April 30, 2013, representing an increase of $10.5 million, or 7%. As a percentage of revenue, cost of
sales increased from 61% to 63%. The increase in cost of sales was a result of higher product costs of $33.5 million due to
higher product deliveries including transition costs related to new products entering low-rate production, offset by lower cost
of services of $23.0 million due to a reduction in logistic services and lower customer-funded R&D work as products
transitioned into low-rate production. UAS cost of sales increased $12.8 million, or 11%, to $128.0 million for the fiscal year
ended April 30, 2014, primarily due to an increase in sales volume. As a percentage of revenue, cost of sales for UAS
increased from 59% to 61%. EES cost of sales decreased $2.3 million, or 7%, to $30.1 million for the fiscal year ended
April 30, 2014 due to lower sales volume. As a percentage of revenue, cost of sales for EES decreased from 71% to 70%.
Gross Margin. Gross margin for the fiscal year ended April 30, 2014 was $93.6 million, as compared to $92.5 million
for the fiscal year ended April 30, 2013, representing an increase of $1.1 million, or 1%. The increase in gross margin was
due to higher product margins of $21.7 million offset by lower service revenue margins of $20.6 million. As a percentage of
revenue, gross margin decreased from 39% to 37%. UAS gross margin increased $1.7 million, or 2%, to $80.8 million for the
fiscal year ended April 30, 2014, primarily due to an increase in sales volume. As a percentage of revenue, gross margin for
UAS decreased from 41% to 39%. EES gross margin decreased $0.7 million, or 5%, to $12.8 million for the fiscal year ended
April 30, 2014. As a percentage of revenue, EES gross margin increased from 29% to 30%.
Selling, General and Administrative. SG&A expense for the fiscal year ended April 30, 2014 was $55.7 million, or
22% of revenue, compared to SG&A expense of $51.5 million, or 21% of revenue, for the fiscal year ended April 30, 2013.
SG&A expense increased by $4.2 million primarily due to impairment costs of Tier-II related assets and higher incentive
compensation as a result of achieving certain measures of financial performance.
Research and Development. R&D expense for the fiscal year ended April 30, 2014 was $25.5 million, or 10% of
revenue, compared to R&D expense of $37.2 million, or 15% of revenue, for the fiscal year ended April 30, 2013. R&D
expense decreased primarily due to decreased investments in various technology development initiatives.
Interest Income. Interest income for the fiscal year ended April 30, 2014 was $0.9 million, as compared to
$0.7 million for the fiscal year ended April 30, 2013.
Other Income. Other income for the fiscal year ended April 30, 2014 was $1.6 million, as compared to $6.2 million
for the fiscal year ended April 30, 2013. Other income primarily represents the change in fair value of the conversion feature
of our investment in convertible bonds.
Income Tax Expense. Our effective income tax expense rate was 7.9% for the fiscal year ended April 30, 2014, as
compared to an effective income expense tax rate of 3.2% for the fiscal year ended April 30, 2013. The increase in the
effective income tax expense rate was primarily due to higher taxable income and lower R&D tax credits.
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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%. The decrease in revenue was due to lower
service revenue of $45.1 million and product deliveries of $39.7 million. 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 logistics service revenue of
$52.1 million and product deliveries of $39.3 million, offset by higher customer-funded R&D work of $11.9 million. The
decrease in logistics service revenue was primarily due to lower DDL retrofits. The decrease in product deliveries was
primarily due to lower product 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 and services of our
electric vehicle test systems and passenger electric vehicle charging systems, partially offset by increased product 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%. The decrease in cost of sales was a
result of lower cost of services of $29.4 million and product costs of $18.7 million. The lower cost of services was primarily
due to lower logistic services, offset by higher customer-funded R&D work. The lower product costs was primarily due to
lower product deliveries. 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%. The decrease in
gross margin was due to lower product margins of $21.0 million and service margins of $15.8 million. 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 certain
measures of 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.
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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.
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. 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:
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Net cash provided by financing activities
60
2014
Fiscal Year Ended April 30,
2013
(In thousands)
2012
$
$
$
28,863 $
15,580 $
7,194 $
24,007 $
(13,107) $
212 $
18,754
(17,329)
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Cash Provided by Operating Activities. Net cash provided by operating activities for the fiscal year ended April 30,
2014 increased by $4.9 million to $28.9 million, compared to net cash provided by operating activities of $24.0 million for
the fiscal year ended April 30, 2013. This increase in net cash provided by operating activities was primarily due to the
change in fair value of the CybAero notes of $4.4 million, impairment of Tier-II related assets of $3.3 million, higher income
of $3.3 million, lower working capital needs of $2.9 million, partially offset by higher deferred income taxes of $7.0 million
and lower depreciation expense of $1.8 million.
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 and higher depreciation expense of $2.0 million, partially offset by lower income
of $20.0 million.
Cash Provided by Investing Activities. Net cash provided by investing activities increased by $28.7 million to
$15.6 million for the fiscal year ended April 30, 2014, compared to net cash used in investing activities of $13.1 million for
the fiscal year ended April 30, 2013. The increase in net cash provided by investing activities was primarily due to net
redemption of U.S. government securities and municipal bonds of $21.1 million and lower capital expenditures of
$4.7 million. During the fiscal years ended April 30, 2014, 2013 and 2012, we used cash to purchase property and equipment
totaling $7.1 million, $11.8 million and $15.0 million, respectively.
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.
Cash Provided by Financing Activities. Net cash provided by financing activities increased by $7.0 million to
$7.2 million for the fiscal year ended April 30, 2014, compared to net cash provided by financing activities of $0.2 million for
the fiscal year ended April 30, 2013. The increase was primarily due to higher exercises of stock options of 6.4 million and
higher excess tax benefits from stock-based compensation of $0.6 million.
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.
Contractual Obligations
The following table describes our commitments to settle contractual obligations as of April 30, 2014:
Total
Less Than
1 Year
Payments Due By Period
1 to 3 Years
(In thousands)
3 to 5 Years
More Than
5 Years
Operating lease obligations
Purchase obligations(1)
Total
$
$
14,954 $
18,836
33,790 $
3,667 $
18,836
22,503 $
5,411 $
—
5,411 $
3,067 $
—
3,067 $
2,809
—
2,809
(1) Consists of all cancelable and non-cancelable purchase orders as of April 30, 2014.
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Off-Balance Sheet Arrangements
As of April 30, 2014, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the SEC's
Regulation S-K.
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, 2013, we adopted changes in accordance with guidance issued by the Financial Accounting Standards Board
("FASB"), which requires additional disclosures for the reclassification of significant amounts from accumulated
comprehensive income to net income. This guidance requires that certain significant amounts be presented either on the face
of the consolidated statements of income or in a single note. For other amounts, we are required to cross-reference disclosures
that provide additional detail about such amounts. The adoption of these changes did not have a material impact on our
consolidated financial statements.
In July 2013, the FASB issued guidance regarding the classification of an unrecognized tax benefit as a reduction of a
deferred tax asset when a net operating loss carry-forward, a similar tax loss, or a tax credit carry-forward exists. This
guidance became effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early
adoption and retrospective application is permitted. The adoption of this change is not expected to 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. We occasionally engage in forward contracts in foreign currencies to limit our
exposure on non-U.S. dollar transactions.
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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, 2014 and 2013
Consolidated Statements of Income for the Years Ended April 30, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income for the Years Ended April 30, 2014, 2013 and 2012
Consolidated Statements of Stockholders' Equity for the Years Ended April 30, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the Years Ended April 30, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
Quarterly Results of Operations (Unaudited)
Financial Statement Schedule: Schedule II—Valuation and Qualifying Accounts
Supplementary Data
Page
64
65
66
67
68
69
70
94
96
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.
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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,
2014 and 2013, 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, 2014. 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, 2014 and 2013, and the consolidated
results of their operations and their cash flows for each of the three years in the period ended April 30, 2014, 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, 2014, based upon criteria established
in Internal Control—Integrated Framework (1992 framework) issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated July 8, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Los Angeles, California
July 8, 2014
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Assets
Current assets:
AEROVIRONMENT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
April 30,
2014
2013
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowance for doubtful accounts of $791 at April 30,
$
126,969 $
70,639
75,332
73,241
2014 and $936 at April 30, 2013
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
Total assets
Liabilities and stockholders' equity
Current liabilities:
Accounts payable
Wages and related accruals
Customer advances
Other current liabilities
Total current liabilities
Deferred rent
Liability for uncertain tax positions
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.0001 par value:
Authorized shares—10,000,000; none issued or outstanding
Common stock, $0.0001 par value:
Authorized shares—100,000,000
Issued and outstanding shares—23,176,576 shares at April 30, 2014 and
22,614,315 at April 30, 2013
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
31,739
10,929
50,699
6,584
5,038
4,260
306,857
50,505
19,997
6,721
874
384,954 $
13,906 $
14,083
2,984
6,762
37,735
1,239
3,513
19,770
11,304
62,561
11,777
5,166
4,303
263,454
68,916
24,429
3,745
1,060
361,604
16,144
12,116
7,519
6,408
42,187
771
3,460
—
—
$
$
2
143,648
(263)
199,080
342,467
384,954 $
2
130,527
(705)
185,362
315,186
361,604
$
See accompanying notes to consolidated financial statements.
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Table of Contents
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:
Basic
Diluted
2014
Year Ended April 30,
2013
2012
$
194,996 $
56,707
251,703
139,813 $
100,339
240,152
119,137
38,953
158,090
93,613
55,679
25,515
12,419
855
1,622
14,896
1,178
13,718 $
0.61 $
0.60 $
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
22,354,444
22,719,218
22,069,842
22,390,420
21,783,496
22,315,474
See accompanying notes to consolidated financial statements.
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AEROVIRONMENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income
Other comprehensive income (loss):
Unrealized gain (loss) on investments, net tax
Total comprehensive income
2014
Year Ended April 30,
2013
2012
$
13,718 $
10,426 $
30,451
442
14,160 $
(11)
10,415 $
90
30,541
$
See accompanying notes to consolidated financial statements.
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AEROVIRONMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands except share data)
Common Stock
Amount
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Balance at April 30, 2011
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
Balance at April 30, 2012
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 liability
compensation to equity
Tax benefit from stock-based compensation
Stock-based compensation
Balance at April 30, 2013
Net income
Unrealized gain 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
Tax benefit from stock-based compensation
Stock-based compensation
Shares
21,949,884 $
—
—
141,536
157,400
(4,917)
—
—
22,243,903
—
—
208,338
163,886
(12,767)
14,926
(3,971)
—
—
—
22,614,315
—
—
460,231
128,500
(35,869)
14,251
(4,852)
—
—
Balance at April 30, 2014
23,176,576 $
2 $
—
—
—
—
—
—
—
2
—
—
—
—
—
—
—
—
—
—
2
—
—
—
—
—
—
119,765 $
—
—
565
—
—
1,428
3,196
124,954
—
—
289
—
—
—
144,485 $
30,451
—
—
—
—
—
—
174,936
10,426
—
—
—
—
—
(77)
—
401
1,490
3,470
130,527
—
—
6,709
—
—
—
—
—
—
185,362
13,718
—
—
—
—
—
—
—
—
2 $
(163)
2,953
3,622
143,648 $
—
—
—
199,080 $
(784) $
—
90
—
—
—
—
—
(694)
—
(11)
—
—
—
—
—
—
—
—
(705)
—
442
—
—
—
—
—
—
—
(263) $
Total
263,468
30,451
90
565
—
—
1,428
3,196
299,198
10,426
(11)
289
—
—
—
(77)
401
1,490
3,470
315,186
13,718
442
6,709
—
—
—
(163)
2,953
3,622
342,467
See accompanying notes to consolidated financial statements.
68
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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
Unrealized foreign currency gain
Gain on sale of equity securities
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 provided by (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
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information
Cash paid during the year for:
Income taxes
Non-cash activities
Unrealized gain (loss) on long-term investments recorded in
accumulated other comprehensive loss, net of deferred taxes of
$261, $37 and $56, respectively
Reclassification from share-based liability compensation to equity
2014
Year ended April 30,
2013
2012
$
13,718 $
10,426 $
30,451
9,155
3,317
(6)
21
(4)
(3,110)
(1,773)
3,622
2,305
(648)
—
(11,963)
375
11,862
5,193
82
(2,238)
(1,045)
28,863
(7,143)
23,113
(750)
—
360
—
15,580
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)
24,007
(11,834)
2,014
(850)
(3,037)
600
—
(13,107)
648
(163)
6,709
7,194
51,637
75,332
126,969 $
—
(77)
289
212
11,112
64,220
75,332 $
$
8,973
—
291
—
—
(2,579)
—
3,196
1,239
(189)
(11)
(12,332)
(5,068)
(5,402)
—
(1,678)
(10,921)
12,784
18,754
(14,992)
(2,575)
—
—
225
13
(17,329)
189
—
565
754
2,179
62,041
64,220
$
2,556 $
15,262 $
13,104
$
$
442 $
— $
(11) $
401 $
90
—
See accompanying notes to consolidated financial statements.
69
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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. Italy, Skytower, LLC, AV GmbH, AV Massachusetts, LLC, AV Rhode Island, LLC, Skytower Inc.,
AILC, Inc., AeroVironment International PTE. LTD. and Regenerative Fuel Cell Systems, LLC (collectively referred to
herein as the "Company"). All intercompany balances and transactions have been eliminated in consolidation.
Investments in Companies Accounted for Using the Equity or Cost Method
Investments in other non-consolidated entities are accounted for using the equity method or cost basis depending upon
the level of ownership and/or the Company's ability to exercise significant influence over the operating and financial policies
of the investee. When the equity method is used, investments are recorded at original cost and adjusted periodically to
recognize the Company's proportionate share of the investees' net income or losses after the date of investment. When net
losses from an investment accounted for under the equity method exceed its carrying amount, the investment balance is
reduced to zero and additional losses are not provided for as the Company is not obligated to provide additional capital. The
Company resumes accounting for the investment under the equity method if the entity subsequently reports net income and
the Company's share of that net income exceeds the share of net losses not recognized during the period the equity method
was suspended.
When an investment accounted for using the equity method issues its own shares, the subsequent reduction in the
Company's proportionate interest in the investee is reflected in equity as an adjustment to paid-in-capital. The Company
evaluates its investments in companies accounted for by the equity or cost method for impairment when there is evidence or
indicators that a decrease in value may be other than temporary.
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
("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.
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AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, available-for-sale
securities, deferred tax assets and liabilities, useful lives of property, plant and equipment, medical and dental liabilities,
warranty 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.
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 bond in which the Company has invested,
which is classified as available-for-sale, contains an embedded conversion feature which is bifurcated from the bond. The
change in the fair value of the embedded conversion feature is 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.
71
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AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 75%, 70% and 83% of the Company's
revenue came from agencies of the U.S. government for the years ended April 30, 2014, 2013 and 2012, respectively. These
agencies accounted for 11% and 39% of the accounts receivable balances at April 30, 2014 and 2013, respectively. One such
agency, the U.S. Army, accounted for 45%, 43% and 42% of the Company's consolidated revenue for the years ended
April 30, 2014, 2013 and 2012, respectively. The U.S. Army accounted for approximately 54%, 53% and 49% of Unmanned
Aircraft Systems ("UAS") reportable segment sales for the years ended April 30, 2014, 2013 and 2012, 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 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:
Machinery and equipment
Computer equipment and software
Furniture and fixtures
Leasehold improvements
2 to 7 years
2 to 5 years
3 to 7 years
Lesser of useful life or term of lease
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AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 ("SG&A") 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.
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.
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, 2014 and 2013, the Company estimated and recorded a self-insurance liability in wages and related
accruals of approximately $1,281,000 and $1,543,000, 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.
73
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AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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
74
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AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(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. Changes in estimates are
recognized using the cumulative catch-up method of accounting. This method recognizes, in the current period, the
cumulative effect of the changes on current and prior periods.
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 ("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.
75
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AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 $28,393,000,
$37,317,000 and $27,852,000 for the years ended April 30, 2014, 2013 and 2012, respectively. The related cost of sales for
customer-funded research and development totaled approximately $18,644,000, $26,496,000 and $22,703,000 for the years
ended April 30, 2014, 2013 and 2012, 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 $1,239,000 and $771,000
as of April 30, 2014 and 2013, respectively.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses included in SG&A expenses were approximately
$225,000, $238,000 and $924,000 for the years ended April 30, 2014, 2013 and 2012, 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:
Numerator for basic earnings per share:
Net income
Denominator for basic earnings per share:
Weighted average common shares
Dilutive effect of employee stock options, restricted
stock and restricted stock units
Denominator for diluted earnings per share
2014
Year Ended April 30,
2013
2012
$
13,718,000 $
10,426,000 $
30,451,000
22,354,444
22,069,842
21,783,496
364,774
22,719,218
320,578
22,390,420
531,978
22,315,474
During the years ended April 30, 2014, 2013 and 2012, 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 51,000, 191,000 and 58,000 for the years ended April 30, 2014, 2013 and 2012, respectively.
76
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AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recently Issued Accounting Standards
On May 1, 2013, the Company adopted changes in accordance with guidance issued by the Financial Accounting
Standards Board ("FASB"), which requires additional disclosures for the reclassification of significant amounts from
accumulated comprehensive income to net income. This guidance requires that certain significant amounts be presented either
on the face of the consolidated statements of income or in a single note. For other amounts, the Company is required to
cross-reference disclosures that provide additional detail about such amounts. The adoption of these changes did not have a
material impact on the Company's consolidated financial statements.
In July 2013, the FASB issued guidance regarding the classification of an unrecognized tax benefit as a reduction of a
deferred tax asset when a net operating loss carry-forward, a similar tax loss, or a tax credit carry-forward exists. This
guidance became effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early
adoption and retrospective application is permitted. The adoption of this change is not expected to have a material impact on
the Company's consolidated financial statements.
2. Investments
Investments consist of the following:
Short-term investments:
Held-to-maturity securities:
Municipal securities
Certificates of deposit
Total short-term investments
Long-term investments:
Held-to-maturity securities:
Municipal securities
Certificates of deposit
Total held-to-maturity investments
Available-for-sale securities:
Auction rate securities
Convertible bonds
Equity securities
Total available-for-sale investments
Total long-term investments
Held-To-Maturity Securities
April 30,
2014
2013
(In thousands)
$
$
$
$
69,898 $
741
70,639 $
73,241
—
73,241
29,759 $
3,889
33,648
5,683
5,865
5,309
16,857
50,505 $
54,158
—
54,158
5,687
9,071
—
14,758
68,916
As of April 30, 2014, the balance of held-to-maturity securities consisted of state and local government municipal
securities and certificates of deposit. As of April 30, 2013 the balance of held-to-maturity securities consisted of state and
local government municipal securities. Interest earned from these investments is recorded in interest income.
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AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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):
2014
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Amortized
Cost
Municipal securities
Certificates of deposit
Total held-to-maturity investments
$
$
99,657 $
4,630
104,287 $
65 $
—
65 $
(9) $
—
(9) $
99,713 $
4,630
104,343 $
2013
Gross
Unrealized
Gains
Gross
Unrealized
Losses
49 $
—
49 $
(23) $
—
(23) $
Amortized
Cost
127,399 $
—
127,399 $
Fair
Value
127,425
—
127,425
The amortized cost and fair value of the Company's held-to-maturity securities by contractual maturity at April 30, 2014,
are as follows:
Due within one year
Due after one year through five years
Total
Available-For-Sale Securities
Auction Rate Securities
Cost
Fair Value
$
$
70,639 $
33,648
104,287 $
70,671
33,672
104,343
As of April 30, 2014 and 2013, 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 5 to 20 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, 2014 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, 2014 and 2013. 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.
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AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2014,
it did not consider these investments to be other-than-temporarily impaired.
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
Fair value
April 30,
2014
2013
$
$
6,575 $
(892)
5,683 $
6,750
(1,063)
5,687
The amortized cost and fair value of the Company's auction rate securities by contractual maturity at April 30, 2014 are
as follows (in thousands):
Due after five through 10 years
Due after 10 years
Total
Convertible Bonds
Cost
Fair Value
$
$
1,300 $
5,275
6,575 $
1,209
4,474
5,683
As of April 30, 2014 and 2013, the entire balance of available-for-sale convertible bonds consisted of one and two
convertible bonds, respectively. The convertible bonds were issued by CybAero AB ("CybAero"), a publicly traded company
in Sweden that develops and manufactures unmanned aerial vehicles. Each bond had the same terms: principal amount of
10 million Swedish Kronor ("SEK"); convertible into one million CybAero shares at the conversion price of 10 SEK per
share; maturity date of November 30, 2017; and interest rate of 5% per annum.
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 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.
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AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2014 and 2013 reflect this reverse stock split.
On February 12, 2014, CybAero adjusted the conversion price of each convertible bond, pursuant to anti-dilution
provisions in the convertible bonds agreement, from 10 SEK to 9.41 SEK and increased the number of shares per bond from
1,000,000 to 1,062,699. The adjusted conversion price and increased share count was effective February 12, 2014.
On February 28, 2014, the Company exercised its conversion right and converted one convertible bond into CybAero
common shares. The convertible bond was in the amount of 10 million SEK and was converted into 1,062,699 common
shares of CybAero at the conversion price of 9.41 SEK. The shares are classified as available-for-sale.
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
Fair value
April 30,
2014
2013
$
$
1,519 $
4,346
—
5,865 $
3,037
6,173
(139)
9,071
The amortized cost and fair value of the Company's convertible bond by contractual maturity at April 30, 2014 are as
follows (in thousands):
Due within five years
Total
Equity Securities
Cost
Fair Value
$
$
1,519 $
1,519 $
5,865
5,865
As of April 30, 2014, the entire balance of available-for-sale equity securities consisted of CybAero common shares. The
shares are classified as available-for-sale. During the year ended April 30, 2014, the Company realized gains of $132,000 on
the sale of CybAero shares.
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:
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.
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
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AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
observable, and inputs that are derived principally from or corroborated by observable market data.
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, 2014, were as follows (in
thousands):
Description
Auction rate securities
Convertible bond
Equity securities
Total
Quoted prices in
active markets for
identical assets
(Level 1)
Fair Value Measurement Using
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
$
$
— $
—
5,309
5,309 $
— $
4,251
—
4,251 $
5,683 $
1,614
—
7,297 $
Total
5,683
5,865
5,309
16,857
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
Balance at May 1, 2013
Transfers to Level 3
Total gains (realized or unrealized)
Included in earnings
Included in other comprehensive income
Purchases, issuances and settlements, net
Balance at April 30, 2014
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, 2014
Fair Value
Measurements Using
Significant
Unobservable Inputs
(Level 3)
$
$
$
8,585
—
—
406
(1,694)
7,297
—
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,
2014, the inputs used in the Company's discounted cash flow analysis included current coupon rates ranging from 0.1% to
0.3%, estimated redemption periods of 5 to 20 years and discount rates of 7.2% to 19.3%. 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.
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AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2014, the inputs used in the Company's discounted cash flow analysis included a coupon rate of 5.0%,
estimated redemption period of 3.6 years and a discount rate of 5.2%.
As of April 30, 2014 the embedded conversion feature of the convertible bond was valued using a binomial option
pricing model, which uses inputs such as CybAero's stock price of 33.90 SEK, contractual term of 3.6 years, conversion price
of 9.41 SEK, volatility of 45% and a risk-free interest rate of 0.94%.
4. Inventories, net
Inventories consist of the following:
Raw materials
Work in process
Finished goods
Inventories, gross
Reserve for inventory obsolescence
Inventories, net
5. Intangibles
April 30,
2014
2013
(In thousands)
$
$
15,102 $
7,542
31,289
53,933
(3,234)
50,699 $
12,845
16,745
36,842
66,432
(3,871)
62,561
Intangibles are included in other assets, long-term, on the balance sheet. The components of intangibles are as follows:
Licenses
Less accumulated amortization
Intangibles, net
April 30,
2014
2013
(In thousands)
856 $
(189)
667 $
850
(35)
815
$
$
The weighted average amortization period at April 30, 2014 and 2013 was 3 years and 9.1 years, respectively.
Amortization expense for the years ended April 30, 2014 and 2013 was $154,000 and $35,000, respectively.
During the year ended April 30, 2014, the Company recorded an impairment charge of $72,000 recorded in SG&A
expenses related to a license for certain technology as the Company determined that it would not be selling any products
containing the licensed technology.
At April 30, 2014, the Company recorded an impairment charge of $672,000 recorded in SG&A expenses related to an
exclusive distribution license. See Note 6, Property and Equipment, net for further details.
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AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Estimated amortization expense for the next five years is as follows:
2015
2016
2017
2018
2019
6. Property and Equipment, net
Property and equipment consist of the following:
Leasehold improvements
Machinery and equipment
Furniture and fixtures
Computer equipment and software
Construction in process
Property and equipment, gross
Less accumulated depreciation and amortization
Property and equipment, net
Year ending
April 30
(In thousands)
223
223
221
—
—
667
$
$
April 30,
2014
2013
(In thousands)
8,611 $
42,025
1,840
24,377
6,344
83,197
(63,200)
19,997 $
8,498
37,873
1,866
23,432
7,142
78,811
(54,382)
24,429
$
$
At April 30, 2014, an analysis of the Company's long-lived assets related to Tier II helicopter demonstration assets and
an exclusive license agreement to sell Tier II helicopters indicated impairment. At April 30, 2014 the Company determined
that the carrying value of the Tier II helicopter demonstration assets and license agreement would not be recovered over the
estimated useful life of the primary assets due to the delay of market adoption resulting in lower than anticipated sales.
Accordingly, the Company completed an impairment test in accordance with the accounting policy for this asset group, which
resulted in an impairment charge of $3,317,000 that was recorded in SG&A costs of which $2,645,000 was allocated to the
Tier II helicopter demonstration assets and $672,000 was allocated to the exclusive distribution license. To determine the
amount of the impairment charge, the Company was required to make estimates of the fair value of the assets in this group,
and these estimates were based on the use of the income approach to determine the fair value of the equipment. The Company
considers these assets "held and used."
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AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Investments in Companies Accounted for Using the Equity Method
In March of 2014, the Company purchased 49% of the outstanding common stock of Altoy Savunma Sanayi ve
Havacilik Anonim Sirketi ("Altoy"), a Turkish corporation founded in February 2014. Altoy aims to develop and manufacture
high altitude long endurance, unmanned aerial platform technologies in Turkey and market and sell such technologies to the
world market. Altoy is considered to be in the start-up phase with no current operations. During the year ended April 30,
2014, the Company recorded 49% of the net loss of Altoy, or $30,000, in "Other income" in the consolidated statement of
earnings. At April 30, 2014, the carrying value of the investment in Altoy was $75,000 and was recorded in "Other assets,
long-term."
Summarized below is aggregated financial information for Altoy, which is accounted for under the equity method.
Current assets
Long-term assets
Current liabilities
Long-term liabilities
Net sales
Gross profit
Operating loss
Net loss
8. Warranty Reserves
Warranty reserve activity is summarized as follows:
Beginning balance
Warranty expense
Warranty costs settled
Ending balance
9. Employee Savings Plan
April 30,
2014
2013
(In thousands)
16
$
36
$
$
69
$ —
$ —
$ —
$ —
$ —
Year Ended
April 30, 2014
(In thousands)
$
$
—
—
(62)
(62)
April 30,
2014
2013
(In thousands)
1,515 $
1,436
(1,671)
1,280 $
2,872
2,169
(3,526)
1,515
$
$
The Company has an employee 401(k) savings plan covering all eligible employees. The Company expensed
approximately $2,757,000, $3,137,000 and $2,629,000 in contributions to the plan for the years ended April 30, 2014, 2013
and 2012, respectively.
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AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Restructuring Charges
On May 29, 2013 and September 26, 2013, the Company implemented two separate and unrelated organizational
realignments and workforce reductions in its UAS and Efficient Energy Systems ("EES") business segments.
The purpose of the organizational realignment and workforce reduction on May 29, 2013, within the Company's UAS
and EES business segments, was to enhance the Company's focus on new product introductions and the adoption of new
solutions designed to support the Company's long-term growth plans. The workforce reduction was necessitated by
continuing delays in U.S. government procurements from the Company's UAS business segment and delays in the growth of
plug-in electric vehicle adoption and associated recharging solution sales in the Company's EES business segment. The cost
of the organizational realignment and workforce reduction was approximately $1,100,000, consisting primarily of severance
payments. The Company recorded this charge in its fiscal first quarter ended July 27, 2013. Of the $1,100,000 recorded
during the first quarter, approximately $1,000,000 was recorded in cost of sales and approximately $100,000 was recorded in
SG&A costs. Of the approximately $1,000,000 recorded in cost of sales, approximately $700,000 related to UAS and
approximately $300,000 related to EES. The Company does not report SG&A costs by segment as the CODM only reviews
the revenue and gross margin results for each of these segments when making resource allocation decisions.
The purpose of the organizational realignment and workforce reduction on September 26, 2013, within the Company's
UAS business segment, was to address shifts in the UAS segment's business mix and align the skills within the UAS business
segment more closely with market requirements to support ongoing programs and emerging growth opportunities. The cost of
the organizational realignment and workforce reduction was approximately $700,000, consisting primarily of severance
payments recorded in cost of sales. The Company recorded this charge in its fiscal second quarter ended October 26, 2013.
11. Stock-Based Compensation
For the years ended April 30, 2014, 2013 and 2012, the Company recorded stock-based compensation expense of
approximately $3,622,000, $3,470,000 and $3,196,000, 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 the compensation 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.
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AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 became 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.
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, 2014, 2013 and 2012:
Expected term (in years)
Expected volatility
Risk-free interest rate
Expected dividend
Weighted average fair value at grant date
2014
Year Ended April 30,
2013
2012
6.08
45.61%
1.64%
—
10.61 $
6.00
45.94%
0.92%
—
8.44 $
5.46
26.75%
1.40%
—
8.01
$
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.
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AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information related to the stock option plans at April 30, 2014, 2013 and 2012, and for the years then ended is as
follows:
Outstanding at April 30, 2011
Options granted
Options exercised
Options canceled
Outstanding at April 30, 2012
Options granted
Options exercised
Options canceled
Outstanding at April 30, 2013
Options granted
Options exercised
Options canceled
Outstanding at April 30, 2014
Options exercisable at April 30, 2014
Restated 2006 Plan
2002 Plan
1992 Plan
Weighted
Average
Exercise
Price
23.51
29.28
21.88
—
25.01
19.07
20.75
—
23.67
23.39
24.45
26.05
23.20
23.10
Shares
535,410 $
175,000
(18,200)
—
692,210
203,000
(3,000)
—
892,210
125,000
(261,900)
(42,200)
713,110
301,910 $
Weighted
Average
Exercise
Price
2.81
—
2.91
—
2.80
—
1.39
—
3.98
—
2.25
11.79
7.18
7.18
Shares
368,059 $
—
(43,073)
—
324,986
—
(147,597)
—
177,389
—
(121,841)
(7,037)
48,511
48,511 $
Weighted
Average
Exercise
Price
0.49
—
0.51
—
0.49
—
0.38
—
0.52
—
0.42
—
0.59
0.59
Shares
319,573 $
—
(80,263)
—
239,310
—
(57,741)
—
181,569
—
(76,490)
—
105,079
105,079 $
The total intrinsic value of all options exercised during the years ended April 30, 2014, 2013 and 2012 was
approximately $9,220,000, $4,329,000, and $3,610,000, respectively. The intrinsic value of all options outstanding at
April 30, 2014 and 2013 was $12,314,000 and $6,369,000, respectively. The intrinsic value of all exercisable options at
April 30, 2014 and 2013 was $7,998,000 and $6,149,000, respectively.
A summary of the status of the Company's non-vested stock options as of April 30, 2014 and the year then ended is as
follows:
Non-vested Options
Non-vested at April 30, 2013
Granted
Expired
Canceled
Vested
Non-vested at April 30, 2014
Weighted
Average
Grant Date
Fair Value
7.91
10.61
—
8.64
7.66
8.75
Options
434,900 $
125,000
—
(28,800)
(119,900)
411,200 $
As of April 30, 2014, there was approximately $9,662,000 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.
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AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The weighted average fair value of options issued for the years ended April 30, 2014, 2013 and 2012 was $10.61, $8.44
and $8.01, respectively. The total fair value of shares vesting during the years ended April 30, 2014, 2013 and 2012 was
$2,168,000, $2,477,000 and $1,654,000, respectively.
Proceeds from all option exercises under all stock option plans for the years ended April 30, 2014, 2013 and 2012 were
approximately $6,709,000, $289,000 and $565,000, respectively. The tax benefit realized from stock-based compensation
during the years ended April 30, 2014, 2013 and 2012 was approximately $2,953,000, $1,490,000, and $1,428,000,
respectively.
The following tabulation summarizes certain information concerning outstanding and exercisable options at April 30,
2014:
Options Outstanding
Weighted
Average
Remaining
Contractual
Life In
Years
5.37
1.47
2.40
6.40
7.69
6.37
As of
April 30,
2014
105,079
23,176
25,335
483,710
229,400
866,700
Weighted
Average
Exercise
Price
$
$
0.59
2.13
11.79
20.67
28.54
19.56
Options Exercisable
As of
April 30,
2014
105,079
23,176
25,335
242,510
59,400
455,500
Weighted
Average
Exercise
Price
$
$
0.59
2.13
11.79
21.62
29.13
16.21
Range of Exercise Prices
$ 0.59
2.13
11.79
18.07-24.65
25.77-32.19
$ 0.59-32.19
The remaining weighted average contractual life of exercisable options at April 30, 2014 was 4.53 years.
Information related to the Company's restricted stock awards at April 30, 2014 and for the year then ended is as follows:
Unvested stock at April 30, 2013
Stock granted
Stock vested
Stock canceled
Unvested stock at April 30, 2014
88
Restated 2006 Plan
Weighted
Average
Grant Date
Fair Value
23.32
24.48
26.16
24.20
23.02
Shares
383,237 $
128,500
(82,955)
(35,869)
392,913 $
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AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information related to the Company's restricted stock units at April 30, 2014 and for the year then ended is as follows:
Unvested restricted stock units at April 30, 2013
Restricted stock units granted
Restricted stock units vested
Restricted stock units canceled
Unvested restricted stock units at April 30, 2014
12. Long-Term Incentive Awards
Restated 2006 Plan
Weighted
Average
Grant Date
Fair Value
24.28
—
24.28
24.28
—
Shares
14,926 $
—
(14,251)
(675)
— $
During each of the years ended April 30, 2014, 2013 and 2012, the Company granted a three-year performance award
under the Restated 2006 Plan to key employees. The performance period for each three-year award is the three-year period
ending April 30, 2016, 2015 and 2014, 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, 2014, 2013 and 2012, the Company recorded compensation expense for the long-term
incentive awards of $160,000, $194,000 and $441,000, respectively. At April 30, 2014 and 2013, the Company had an
accrued liability of $0 for outstanding awards. The maximum compensation expense that may be recorded for outstanding
awards is $11,762,000.
13. Income Taxes
The Company has reclassified $1,861,000 previously presented as an uncertain tax position liability on the April 30,
2013 balance sheet and has netted such amount against the related deferred asset in the accompanying balance sheet to be
consistent with the 2014 presentation.
89
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AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of income tax expense computed using the U.S. federal statutory rates to actual income tax expense is
as follows:
U.S. federal statutory income tax rate
State and local income taxes, net of federal benefit
R&D and other tax credits
Valuation allowance
Uncertain tax position adjustment
Other
Effective income tax rate
2014
Year Ended April 30,
2013
2012
35.0%
(17.0)
(21.5)
8.7
4.4
(1.7)
7.9%
35.0%
1.6
(29.6)
—
(6.7)
2.9
3.2%
35.0%
(0.3)
(3.4)
—
—
(1.2)
30.1%
The components of the provision for income taxes are as follows (in thousands):
Current:
Federal
State
Deferred:
Federal
State
Change in valuation allowance
Total income tax expense
2014
Year ended April 30,
2013
2012
$
$
4,307 $
(1,879)
2,428
(1,694)
(854)
(2,548)
1,298
1,178 $
(3,818) $
(1,527)
(5,345)
5,178
514
5,692
—
347 $
12,814
1,651
14,465
(187)
(1,134)
(1,321)
(57)
13,087
Significant components of the Company's deferred income tax assets and liabilities are as follows (in thousands):
Deferred income tax assets:
Accrued expenses
Allowances, reserves, and other
Fixed asset basis
Capital loss and credit carry-forwards
Intangibles basis
Total deferred income tax assets
Deferred income tax liabilities:
Unrealized gain on securities
Fixed asset basis
Total deferred income tax liabilities
Valuation allowance
Net deferred tax assets
90
April 30,
2014
2013
6,459 $
2,547
196
6,293
276
15,771
(2,714)
—
(2,714)
(1,298)
11,759 $
6,266
2,399
—
3,699
—
12,364
(1,811)
(1,642)
(3,453)
—
8,911
$
$
Table of Contents
AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At April 30, 2014 the Company recorded a valuation allowance of $1,298,000 against state R&D credits as the Company
is currently generating more tax credits than it will utilize in future years.
At April 30, 2014 the Company had state credit carryforwards of $11,292,000 that do not expire and federal tax credit
carryforwards of $1,615,000 that expire in 2044.
At April 30, 2014 and 2013, the Company had approximately $6,334,000 and $5,083,000, respectively, of unrecognized
tax benefits all of which would impact the Company's effective tax rate if recognized. The Company estimates that none of its
unrecognized tax benefits will decrease in the next twelve months due to statute of limitation expiration.
The following table summarizes the activity related to our gross unrecognized tax benefits for the years ended April 30,
2014 and 2013 (in thousands):
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
Balance as of April 30
April 30,
2014
2013
$
$
5,083 $
775
—
1,050
(574)
6,334 $
4,507
539
(19)
1,141
(1,085)
5,083
The Company records interest and penalties on uncertain tax positions to income tax expense. As of April 30, 2014 and
2013, the Company had accrued approximately $233,000 and $238,000, 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 2011, 2012 and 2013 remain open to examination by the IRS for
federal income taxes. The tax years 2008 to 2013 remain open for major state taxing jurisdictions.
14. Changes in Accounting Estimates
During the years ended April 30 2014, 2013 and 2012, the Company revised its estimates at completion of various
fixed-price contracts which resulted in cumulative catch up adjustments during the year in which the change in estimate
occurred. The change in estimate was a result of the Company changing the total costs required to complete the contracts due
to having more accurate cost information as work progressed in subsequent periods on the various contracts. The changes in
estimates resulted in cumulative catch-up adjustments to increase income from continuing operations for the years ended
April 30, 2014, 2013 and 2012 in the amounts of $362,000, $1,768,000 and $3,065,000, respectively. The changes in
estimates resulted in cumulative catch-up adjustments to increase net income for the years ended April 30, 2014, 2013 and
2012 in the amounts of $223,000, $1,081,000 and $1,870,000, respectively. The impact on basic earnings per share for the
years ended April 30, 2014, 2013 and 2012 was an increase of $0.01, $0.05 and $0.09 per share, respectively. The impact on
diluted earnings per share for the years ended April 30, 2014, 2013 and 2012 was an increase of $0.01, $0.05 and $0.08 per
share, respectively.
91
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AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Related Party Transactions
Pursuant to a consulting agreement, the Company paid a board member approximately $96,000, $172,000 and $210,000
during the years ended April 30, 2014, 2013 and 2012, 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. The purchases were made in the ordinary course of business at prices the Company considers
to be at fair market values.
16. Commitments and Contingencies
Commitments
The Company's operations are conducted in leased facilities. Following is a summary of non-cancelable operating lease
commitments:
2015
2016
2017
2018
2019
Thereafter
Year ending
April 30
(In thousands)
3,667
3,136
2,275
1,583
1,484
2,809
14,954
$
$
Rental expense under operating leases was approximately $4,981,000, $4,349,000 and $3,995,000 for the years ended
April 30, 2014, 2013 and 2012, respectively.
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.
92
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AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
17. Segment Data
The Company's product segments are as follows:
Unmanned Aircraft Systems—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.
Efficient Energy Systems—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.
The segment results are as follows (in thousands):
2014
Year Ended April 30,
2013
2012
Revenue:
UAS
EES
Total
Cost of sales:
UAS
EES
Total
Gross margin:
UAS
EES
Total
Selling, general and administrative
Research and development
Income from operations
Interest income
Other income
Income before income taxes
$
208,810 $
42,893
251,703
194,276 $
45,876
240,152
127,992
30,098
158,090
115,194
32,422
147,616
80,818
12,795
93,613
55,679
25,515
12,419
855
1,622
14,896 $
79,082
13,454
92,536
51,520
37,214
3,802
726
6,245
10,773 $
$
93
273,728
51,280
325,008
157,663
38,012
195,675
116,065
13,268
129,333
55,280
30,977
43,076
462
—
43,538
(cid:127)
(cid:127)
Table of Contents
AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Geographic Information
Sales to non-U.S. customers accounted for 14%, 15% and 5% of revenue for each of the fiscal years ended April 30,
2014, 2013 and 2012, respectively.
18. 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, 2014. 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 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 27,
2013
October 26,
2013
January 25,
2014
April 30,
2014
(In thousands except per share data)
Year ended April 30, 2014
Revenue
Gross margin
Net (loss) income
Net (loss) income per share—basic
Net (loss) income per share—diluted
$
$
$
$
$
44,117(1) $
12,545(2) $
$
(7,210)
$
(0.32)
$
(0.32)
$
64,867
23,878(3) $
$
1,655
$
0.07
$
0.07
69,221 $
27,052 $
11,216 $
0.50 $
0.49 $
73,498
30,138
8,057(4)
0.36
0.35
July 28,
2012
Three Months Ended
October 27,
2012
January 26,
2013
(In thousands except per share data)
April 30,
2013
Year ended April 30, 2013
Revenue
Gross margin
Net (loss) income
Net (loss) income per share—basic(8)
Net (loss) income per share—diluted(8)
$
$
$
$
$
58,677 $
19,505 $
(1,386) $
(0.06) $
(0.06) $
80,278 $
35,636 $
8,738 $
0.40 $
0.39 $
$
47,087(5)
19,673(6)
$
3,869(6)(7) $
$
$
0.17
0.17
54,110
17,722
(795)
(0.04)
(0.04)
(1)
(2)
(3)
Includes $2.3 million of revenue for the termination settlement for the Global Observer Joint Capability Technology
Demonstration contract.
Includes $1.0 million in severance costs related to the organizational realignment and workforce reduction on May 29,
2013, within the Company's UAS and EES business segments—see Note 10 for additional information.
Includes $0.7 million in severance costs related to the organizational realignment and workforce reduction on
September 26, 2013, within the Company's UAS business segment—see Note 10 for additional information.
(4)
Includes $3.3 million in pre-tax impairment charges related to Tier II assets—see Note 6 for additional information.
94
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AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(5)
(6)
(7)
Includes $2.1 million reimbursement of costs for the Global Observer Joint Capability Technology Demonstration
contract.
Includes $4.3 million for a change in estimate of the annual incentive bonus plan accrual and as a result reversed
expense recorded in previous quarters.
Includes $2.9 million reduction to income tax expense for a change in estimate of the effective income tax rate. Also
includes $2.1 million in R&D expense for the procurement of government property from the Global Observer Joint
Capability Technology Demonstration contract.
(8) 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.
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SUPPLEMENTARY DATA
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
Description
Allowance for doubtful accounts for the
year ended April 30:
2012
2013
2014
Warranty reserve for the year ended
April 30:
2012
2013
2014
Reserve for inventory excess and
obsolescence for the year ended
April 30:
2012
2013
2014
Reserve for self-insured medical claims
for the year ended April 30:
2012
2013
2014
$
$
$
$
$
$
$
$
$
$
$
$
Balance at
Beginning
of Period
Charged to
Costs and
Expenses
Additions
Charged to
Other
Accounts
(In thousands)
Deductions
Balance at
End of
Period
639 $
921 $
936 $
282 $
15 $
(6) $
1,127 $
2,872 $
1,515 $
4,284 $
2,169 $
1,436 $
2,056 $
1,461 $
2,187 $
9,082 $
8,065 $
8,908 $
1,241 $
2,754 $
3,871 $
898 $
1,448 $
1,543 $
96
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
(139) $
(2,539) $
(3,526) $
(1,671) $
(543) $
(344) $
(2,824) $
(8,532) $
(7,970) $
(9,170) $
921
936
791
2,872
1,515
1,280
2,754
3,871
3,234
1,448
1,543
1,281
Table of Contents
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:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the company;
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
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.
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, 2014, 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
97
(cid:127)
(cid:127)
(cid:127)
Table of Contents
Commission (1992 framework) (COSO). Based on this assessment, management concluded that the Company maintained
effective internal control over financial reporting as of April 30, 2014 based on the specified criteria.
The effectiveness of our internal control over financial reporting as of April 30, 2014 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, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information.
Not applicable.
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Table of Contents
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, 2014, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (1992 framework) (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, 2014, 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, 2014 and 2013, 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, 2014 of AeroVironment, Inc. and subsidiaries and our report dated July 8, 2014 expressed
an unqualified opinion thereon.
Los Angeles, California
July 8, 2014
/s/ Ernst & Young LLP
99
Table of Contents
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 2014 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
2014 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 2014 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 2014 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
2014 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 2014 Annual Meeting of
Stockholders, and that information is incorporated by reference herein.
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) The following are filed as part of this Annual Report:
1. Financial Statements
The following consolidated financial statements are included in Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at April 30, 2014 and 2013
Consolidated Statements of Income for the Years ended April 30, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income for the Years Ended April 30, 2014, 2013 and 2012
Consolidated Statements of Stockholders' Equity for the Years ended April 30, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the Years ended April 30, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The following Schedule is included in Item 8:
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)
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
10.4#(3)
10.5#(3)
AeroVironment, Inc. Directors' Nonqualified Stock Option Plan
Form of Directors' Nonqualified Stock Option Agreement pursuant to the AeroVironment, Inc. Directors'
Nonqualified Stock Option Plan
10.6#(3)
10.7#(3)
10.8#(3)
10.9#(4)
10.10#(3)
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
101
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
Table of Contents
Exhibit
Number
10.11#(3)
10.12#(5)
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
Exhibit
pursuant to the AeroVironment, Inc. 2006 Equity Incentive Plan
10.13(6)
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
10.14(7)
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
10.15(7)
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
10.16(8)
10.17(8)
First Amendment to Lease Agreement (900 Enchanted Way, Simi Valley, CA 93065) dated as of
December 1, 2013, by and between the Company and Hillside III LLC, and related agreements
First Amendment to Lease Agreement (994 Flower Glen Street, Simi Valley, CA 93065) dated as of
December 1, 2013, by and between the Company and Hillside II LLC, and related agreements
10.18(8)
Lease Agreement (996 Flower Glen Street, Simi Valley, CA 93065) dated as of December 1, 2013, by and
between the Company and Hillside II LLC, and related agreements
10.19†(3)
AV Direct Project Request, dated July 7, 2005, between AeroVironment, Inc. and Marine Corps System
Command
10.20†(3)
Award Contract, dated December 22, 2005, between AeroVironment, Inc. and Marine Corps System
Command
10.21†(9)
Award Contract, dated August 15, 2005, between AeroVironment, Inc. and U.S. Army Aviation & Missile
Command
10.22†(3)
10.23†(3)
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
10.24†(10)
Award Contract, dated September 24, 2007, between AeroVironment, Inc. and United States Special
Operations Command, as amended
10.25†(11)
Award Contract, dated December 22, 2006, between AeroVironment, Inc. and the United States Air
Force/Air Force Research Laboratory, Aeronautical Systems Center, as amended
10.26#(2)
Standard Consulting Agreement, dated November 1, 2008, between AeroVironment, Inc. and Charles R.
Holland
10.27(12)
Amendment No. 2 to Standard Consulting Agreement, dated December 17, 2009, between
AeroVironment, Inc. and Charles R. Holland
10.28#(12)
10.29#(13)
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
10.30#(13)
10.31#(13)
10.32#(3)
10.33†(14)
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
Award Contract, dated June 30, 2008, between AeroVironment, Inc. and United States Special Operations
Command, as amended
10.34†(15)
Award Contract, dated March 1, 2011, between AeroVironment, Inc. and United States Army Contracting
Command
10.35†(16)
Contract modification P00015 dated September 5, 2013 under the base contract with the US Army
Contracting Command—Redstone Arsenal (Missile) dated August 30, 2012
10.36
21.1
23.1
Letter agreement dated April 29, 2014, between AeroVironment, Inc. and Thomas E. Herring
Subsidiaries of AeroVironment, Inc.
Consent of Ernst & Young LLP, independent registered public accounting firm
102
Table of Contents
Exhibit
Number
24.1
31.1
31.2
32.1
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
Exhibit
Act of 2002
XBRL Instance Document
101.INS
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Calculation Linkbase Document
101.DEF
101.LAB XBRL Taxonomy Label Linkbase Document
101.PRE XBRL Taxonomy Presentation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
(1)
(2)
(3)
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).
(4)
Incorporated by reference to the exhibits to the Company's Form 8-K filed on October 5, 2011 (File No. 001-33261).
(5)
(6)
(7)
(8)
(9)
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 5, 2014
(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).
(10) 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).
(11) 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).
(12) 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).
(13) Incorporated by reference herein to the exhibits on the Company's Annual Report on Form 10-K filed June 26, 2013
(File No. 001-33261).
(14) 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).
(15) Incorporated by reference to the exhibits to the registrant's Form 8-K filed on October 5, 2011 (File No. 001-33261).
(16) Incorporated by reference herein to the exhibits to the Company's Quarterly Report on Form 10-Q filed November 27,
2013 (File No. 001-33261).
†
#
Confidential treatment has been granted for portions of this exhibit.
Indicates management contract or compensatory plan.
(c) Not applicable.
103
Table of Contents
SIGNATURES
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.
AEROVIRONMENT, INC.
Date: July 8, 2014
/s/ TIMOTHY E. CONVER
By:
Its:
Timothy E. Conver
Chairman, Chief Executive Officer and
President (Principal Executive Officer)
POWER OF ATTORNEY
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
Chairman, President and Chief
July 8, 2014
Timothy E. Conver
/s/ JIKUN KIM
Jikun Kim
/s/ JOSEPH F. ALIBRANDI
Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer (Principal
Financial and Accounting Officer)
July 8, 2014
Joseph F. Alibrandi
Director
July 8, 2014
/s/ EDWARD R. MULLER
Edward R. Muller
Director
July 8, 2014
/s/ ARNOLD L. FISHMAN
Arnold L. Fishman
Director
July 8, 2014
104
Table of Contents
Name
Title
Date
/s/ STEPHEN F. PAGE
Stephen F. Page
Director
July 8, 2014
/s/ CHARLES R. HOLLAND
Charles R. Holland
Director
July 8, 2014
/s/ CHARLES T. BURBAGE
Charles T. Burbage
Director
July 8, 2014
105
Exhibit 10.36
April 29, 2014
Mr. Tom Herring
137 Heath Meadow Place
Simi Valley, CA 93065
Re: Separation of Employment
Dear Tom:
This letter confirms that you and AeroVironment, Inc. (“Company”) have agreed to terminate our employment
relationship and resolve all matters between us in accordance with the following terms.
Your employment as Senior Vice President and Chief Operating Officer is being terminated effective April 30,
2014 (“Termination Date”) as part of a restructuring designed to reduce costs and realign the Company’s business
areas and certain corporate functions.
If you sign and return this letter, the Company will do the following: (a) pay you the gross amount of $215,000,
less payroll deductions, to assist your transition to new employment; and (b) enter into a consulting agreement
with you on terms acceptable to the Company for a six-month period beginning May 1, 2014, with a monthly
retainer of $1,000 per month. Your coverage under any Company-provided medical, dental or vision plan
terminates on your Termination Date, but you will have the right to COBRA continuation coverage as to those
plans in which you currently participate. The Company will make this special payment in (a) above within three
(3) business days after this letter agreement becomes irrevocable. The Company will withhold taxes and report
amounts to tax authorities as it determines it is required to do. You acknowledge that you would not be entitled to
this special payment or to the consulting agreement but for your entering into this letter agreement.
You will cease to be eligible to participate in any bonus, incentive compensation, retirement or other
compensation or benefit plans as of your Termination Date, but you retain your vested benefits under all qualified
plans of the Company, and all rights associated with such benefits, as determined under the official terms of those
plans.
You release (i.e., give up) all known and unknown claims that you presently have against the Company, its current
and former, direct and indirect owners, parents, subsidiaries, and all other affiliates and related entities, and their
current and former owners, partners, directors, officers, employees, agents and all other related parties (“Released
Parties”), except for claims the law does not permit you to waive by signing this letter. The released claims
include, but are not limited to, all contract, tort or other common law claims you might have as well as all claims
you might have under any federal, state or local statute, ordinance and regulation. You expressly
Mr. Tom Herring
April 29, 2014
Page 2
waive the protection of Section 1542 of the California Civil Code regarding the release of unknown claims. By
signing this letter, you acknowledge that you are releasing claims that you might not know that you have and that,
with hindsight, you might regret having released. You have not assigned or given away any of the claims you are
releasing.
You and the Company are entering into this letter agreement in order to end the employment relationship in an
amicable manner, and the letter is not an admission by either party of any wrongdoing toward the other. In signing
this letter, you represent that you have not relied on any statements or representations not expressly included in
this letter. You agree not to seek employment with the Company in the future unless the Company asks you to do
so in writing.
You represent that you have been paid and/or received all wages, compensation, benefits and any other amounts
to which you were entitled from the Company or any Released Party through your Termination Date.
The Company encouraged you to review this letter agreement with an attorney, at your own expense. You have up
to twenty-one (21) days to consider this letter agreement before signing it, though you may waive that period and
choose to sign it at any time during the 21 days. That 21-day period expires on May 20, 2014. You also have the
right to revoke this letter agreement by sending a written notice of revocation addressed to me at AeroVironment,
Inc., 181 West Huntington Drive, Suite 202, Monrovia, California 91016 within seven (7) days (i.e., seven (7),
twenty-four (24) hour periods) after signing it. If you revoke this letter agreement, you will not receive the special
payment or consulting agreement described above. You waive any right to have this 21-day period restarted or
extended by any subsequent changes to this letter agreement.
You represent that you have consulted with an attorney to the full extent you wished to do so before signing this
letter agreement. You further represent that you have carefully read this letter agreement, fully understand what it
means, and are signing it knowingly and voluntarily, and that all your representations in it are true.
You understand and agree that the Patent and Confidentiality Agreement which you signed on November 11,
2008 remains in full force and effect following your Termination Date. Further, before you disclose or use any
information or engage in any other activity that could possibly violate the promises you made in your Patent and
Confidentiality Agreement, you promise to discuss your proposed actions with the Company’s General Counsel
(currently, Doug Scott, Senior Vice President and General Counsel) or his designee at 805 581-2198 ext. 2694,
who will advise you in writing whether your proposed actions would violate these promises. You further agree
that the Company would be irreparably harmed by any actual or threatened violation of your Patent and
Confidentiality Agreement, and that the Company is entitled to an injunction prohibiting you from committing
any such violation.
While we do not expect this to occur, you and the Company agree to resolve any disputes we may have with each
other through final and binding arbitration before JAMS. This includes
Mr. Tom Herring
April 29, 2014
Page 3
arbitration of disputes about the validity of this letter agreement, any discrimination or other statutory claim or any
other matter. Arbitration shall be conducted in Los Angeles, California. Judgment on any award the arbitrator
renders may be entered in any court having jurisdiction over the parties. This agreement to arbitrate does not
apply to government agency proceedings. By initialing the end of this paragraph, you acknowledge your
understanding of these arbitration requirements and that arbitration would be in lieu of a jury trial.
You agree not to criticize, denigrate or otherwise disparage the Company, any other Released Party, or any of
their products, processes, policies, practices, standards of business conduct or research and development. Nothing
in this letter agreement prohibits you from complying with any lawful subpoena or court order or taking other
actions required by law, provided, however, that you agree to notify the Company’s General Counsel within two
(2) business days after receipt of any subpoena or court order that might cause you to disclose information in
violation of this paragraph or of your Patent and Confidentiality Agreement so the Company can determine
whether to take action to preclude such disclosure.
You agree that, as requested by the Company, you will fully cooperate with the Company and its representatives if
in the future there is an investigation, proceeding, administrative review or litigation brought against the Company
or any Released Party pertaining to any matter that occurred during your employment with the Company.
You acknowledge that the Company is committed to complying with all applicable laws and regulations. You
represent and agree that you have disclosed, or before signing this letter agreement will disclose, any information
you have regarding any conduct involving the Company or any affiliate that you have any reason to believe may
be unlawful. You agree to cooperate fully in any investigation the Company or any affiliate undertakes into any
such conduct or other matters that occurred during your employment. Nothing in this letter agreement prevents
you from communicating with any government agency or cooperating in any government investigation. In
addition, to the fullest extent permitted by law, you hereby irrevocably assign to the United States government any
right you may have to proceeds or awards in connection with any proceeding against the Company or any affiliate.
You will return to the Company prior to your Termination Date all files, documents, records, Company-provided
equipment, computers, cell phones, keys, building and security passes, access or identification cards and any other
property of the Company in your possession or control. You represent that you have cleared all expense accounts
and repaid any amounts you owe the Company. You agree not to incur any expenses, obligations or liabilities on
behalf of the Company.
If the Company or you successfully assert that any provision in this letter agreement is void, the rest of the letter
agreement shall remain valid and enforceable unless the other party to this letter agreement elects to cancel it.
Mr. Tom Herring
April 29, 2014
Page 4
This letter contains the complete agreement between you and the Company regarding its subject matter and may
only be amended in a writing signed by both you and an officer of the Company.
Tom, we appreciate your years of service and contributions to the Company and wish you the very best in your
future endeavors.
Sincerely yours,
/s/ Douglas E. Scott
Senior Vice President
I knowingly and voluntarily agree to the terms in this letter.
Dated:
4-29-2014
/s/ Tom Herring
Tom Herring
AeroVironment and Current Entities
Name
AeroVironment, Inc.
AeroVironment International PTE. LTD.
AV S.r.l. Italy
AV GmbH
AV Massachusetts, LLC
AV Rhode Island, LLC
AILC, Inc.
SkyTower, Inc.
SkyTower, LLC
Regenerative Fuel Cell Systems, LLC
Charger Bicycles, LLC (50%)*
Altoy Savunma Sanayi ve Havacilik Anonim Sirketi**
*
inactive, but never officially dissolved
**
the Company has a 49% ownership interest
Exhibit 21.1
Jurisdiction of Organization
Delaware
Singapore
Italy
Germany
Massachusetts
Rhode Island
Delaware
Delaware
Delaware
Delaware
Delaware
Turkey
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-140237) pertaining to the
AeroVironment, Inc. Nonqualified Stock Option Plan, the AeroVironment, Inc. 2002 Equity Incentive Plan, and the
AeroVironment, Inc. 2006 Equity Incentive Plan, as amended and restated, of our reports dated July 8, 2014, with respect to
the consolidated financial statements and schedule of AeroVironment, Inc. and subsidiaries and the effectiveness of internal
control over financial reporting of AeroVironment, Inc. and subsidiaries included in this Annual Report (Form 10-K) for the
year ended April 30, 2014.
/s/ Ernst & Young LLP
Los Angeles, California
July 8, 2014
Exhibit 31.1
Certification of CEO Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Timothy E. Conver, certify that:
1. I have reviewed this annual report on Form 10-K of AeroVironment, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: July 8, 2014
/s/ TIMOTHY E. CONVER
Timothy E. Conver
Chief Executive Officer and President
Exhibit 31.2
Certification of CFO Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Jikun Kim, certify that:
1. I have reviewed this annual report on Form 10-K of AeroVironment, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: July 8, 2014
/s/ JIKUN KIM
Jikun Kim
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, each of the
undersigned officers of AeroVironment, Inc. (the "Company") hereby certifies, to each such officer's knowledge, that:
(i)
the accompanying Annual Report on Form 10-K of the Company for the year ended April 30, 2014 (the "Report")
fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange
Act of 1934, as amended; and
(ii)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: July 8, 2014
Date: July 8, 2014
/s/ TIMOTHY E. CONVER
Timothy E. Conver
Chief Executive Officer and President
/s/ JIKUN KIM
Jikun Kim
Chief Financial Officer