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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 
FORM 10-Q

 
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.	
 	 	
For the quarterly period ended January 26, 2013	
 	 	
OR	
 	 	
o	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	 	95-2705790	
(State or other jurisdiction of incorporation or organization)	 	(I.R.S. Employer Identification No.)	
 	 	 	
181 W. Huntington Drive, Suite 202	 	 	
Monrovia, California	 	91016	
(Address of principal executive offices)	 	(Zip Code)	
 
(626) 357-9983
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)

 
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 x   No o
 
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 x   No o
 
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.
 
Large accelerated filero	 	Accelerated filerx	
 	 	 	
Non-accelerated filero	 	Smaller reporting companyo	
(Do not check if smaller reporting company)	 	 	
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yeso  No x
 
As of February 22, 2013, the number of shares outstanding of the registrant’s common stock, $0.0001 par value, was 22,414,227.

 

Table of Contents
 
AeroVironment, Inc.
 
Table of Contents
 
PART I. FINANCIAL INFORMATION	 	
 	 	 	
Item 1.	Financial Statements:	 	
 	Consolidated Balance Sheets as of January 26, 2013 (Unaudited) and April 30, 2012	3	
 	Consolidated Statements of Income for the three and nine months ended January 26, 2013 (Unaudited) and January 28, 2012 (Unaudited)	4	
 	Consolidated Statements of Comprehensive Income for the three and nine months ended January 26, 2013 (Unaudited) and January 28, 2012 (Unaudited)	5	
 	Consolidated Statements of Cash Flows for the nine months ended January 26, 2013 (Unaudited) and January 28, 2012 (Unaudited)	6	
 	Notes to Consolidated Financial Statements (Unaudited)	7	
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14	
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19	
Item 4.	Controls and Procedures	19	
 	 	 	
PART II. OTHER INFORMATION	 	
 	 	 	
Item 1.	Legal Proceedings	20	
Item 1A.	Risk Factors	20	
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20	
Item 3.	Defaults Upon Senior Securities	20	
Item 4.	Mine Safety Disclosures	20	
Item 5.	Other Information	20	
Item 6.	Exhibits	20	
Signatures	21	
Exhibit Index	 	
 
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PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
AeroVironment, Inc.
Consolidated Balance Sheets
(In thousands except share and per share data)
 
 	 	January 26,
2013	 	April 30,
2012	 	
 	 	(Unaudited)	 	 	 	
Assets	 	 	 	 	 	
Current assets:	 	 	 	 	 	
Cash and cash equivalents	 	$	63,975	 	$	64,220	 	
Short-term investments	 	69,811	 	77,152	 	
Accounts receivable, net of allowance for doubtful accounts of $815 at January 26, 2013 and $921 at April 30, 2012	 	31,600	 	56,417	 	
Unbilled receivables and retentions	 	15,409	 	27,034	 	
Inventories, net	 	63,597	 	43,539	 	
Income tax receivable	 	8,349	 	—	 	
Deferred income taxes	 	9,785	 	9,377	 	
Prepaid expenses and other current assets	 	4,283	 	4,030	 	
Total current assets	 	266,809	 	281,769	 	
Long-term investments	 	60,928	 	58,457	 	
Property and equipment, net	 	21,714	 	23,515	 	
Deferred income taxes	 	5,180	 	5,209	 	
Other assets	 	4,159	 	201	 	
Total assets	 	$	358,790	 	$	369,151	 	
Liabilities and Stockholders’ Equity	 	 	 	 	 	
Current liabilities:	 	 	 	 	 	
Accounts payable	 	$	15,777	 	$	20,213	 	
Wages and related accruals	 	9,652	 	19,076	 	
Income taxes payable	 	—	 	8,788	 	
Customer advances	 	5,915	 	5,124	 	
Other current liabilities	 	6,877	 	9,898	 	
Liability for uncertain tax positions	 	606	 	606	 	
Total current liabilities	 	38,827	 	63,705	 	
Wages and other accruals	 	—	 	1,203	 	
Deferred rent	 	842	 	1,019	 	
Liability for uncertain tax positions	 	4,026	 	4,026	 	
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 — 22,417,427 at January 26, 2013 and 22,243,903 at April 30, 2012	 	2	 	2	 	
Additional paid-in capital	 	129,588	 	124,954	 	
Accumulated other comprehensive loss	 	(652	)	(694	)	
Retained earnings	 	186,157	 	174,936	 	
Total stockholders’ equity	 	315,095	 	299,198	 	
Total liabilities and stockholders’ equity	 	$	358,790	 	$	369,151	 	
 
See accompanying notes to consolidated financial statements (unaudited).
 
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AeroVironment, Inc.
Consolidated Statements of Income (Unaudited)
(In thousands except share and per share data)
 
 	 	Three Months Ended	 	Nine Months Ended	 	
 	 	January 26,	 	January 28,	 	January 26,	 	January 28,	 	
 	 	2013	 	2012	 	2013	 	2012	 	
 	 	 	 	 	 	 	 	 	 	
Revenue:	 	 	 	 	 	 	 	 	 	
Product sales	 	$	23,496	 	$	36,645	 	$	104,601	 	$	113,802	 	
Contract services	 	23,591	 	35,319	 	81,441	 	100,531	 	
 	 	47,087	 	71,964	 	186,042	 	214,333	 	
Cost of sales:	 	 	 	 	 	 	 	 	 	
Product sales	 	14,281	 	23,587	 	63,055	 	69,958	 	
Contract services	 	13,133	 	20,944	 	48,173	 	64,597	 	
 	 	27,414	 	44,531	 	111,228	 	134,555	 	
Gross margin	 	19,673	 	27,433	 	74,814	 	79,778	 	
Selling, general and administrative	 	10,433	 	12,866	 	37,230	 	38,806	 	
Research and development	 	10,306	 	7,238	 	27,828	 	23,640	 	
(Loss) income from operations	 	(1,066	)	7,329	 	9,756	 	17,332	 	
Other income:	 	 	 	 	 	 	 	 	 	
Interest income	 	164	 	129	 	498	 	313	 	
Other income	 	49	 	—	 	49	 	—	 	
(Loss) income before income taxes	 	(853	)	7,458	 	10,303	 	17,645	 	
(Benefit) provision for income taxes	 	(4,722	)	1,714	 	(918	)	4,988	 	
Net income	 	$	3,869	 	$	5,744	 	$	11,221	 	$	12,657	 	
Earnings per share data:	 	 	 	 	 	 	 	 	 	
Basic	 	$	0.17	 	$	0.26	 	$	0.51	 	$	0.58	 	
Diluted	 	$	0.17	 	$	0.26	 	$	0.50	 	$	0.57	 	
Weighted average shares outstanding:	 	 	 	 	 	 	 	 	 	
Basic	 	22,142,917	 	21,797,802	 	22,035,007	 	21,761,927	 	
Diluted	 	22,408,377	 	22,317,015	 	22,375,126	 	22,269,675	 	
 
See accompanying notes to consolidated financial statements (unaudited).
 
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AeroVironment, Inc.
Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)
 
 	 	Three Months Ended	 	Nine Months Ended	 	
 	 	January 26,	 	January 28,	 	January 26,	 	January 28,	 	
 	 	2013	 	2012	 	2013	 	2012	 	
 	 	 	 	 	 	 	 	 	 	
Net income	 	$	3,869	 	$	5,744	 	$	11,221	 	$	12,657	 	
Other comprehensive income:	 	 	 	 	 	 	 	 	 	
Unrealized gain on investments, net of tax	 	15	 	44	 	42	 	87	 	
Total comprehensive income	 	$	3,884	 	$	5,788	 	$	11,263	 	$	12,744	 	
 
See accompanying notes to consolidated financial statements (unaudited).
 
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AeroVironment, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
 	 	Nine Months Ended	 	
 	 	January 26,
2013	 	January 28,
2012	 	
Operating activities	 	 	 	 	 	
Net income	 	$	11,221	 	$	12,657	 	
Adjustments to reconcile net income to cash provided by operating activities:	 	 	 	 	 	
Depreciation and amortization	 	8,340	 	6,418	 	
Provision for doubtful accounts	 	338	 	354	 	
Deferred income taxes	 	(407	)	(510	)	
Unrealized foreign currency gain	 	(53	)	—	 	
Stock-based compensation	 	2,629	 	2,319	 	
Tax benefit from exercise of stock options	 	1,536	 	664	 	
Excess tax benefit from stock-based compensation	 	—	 	(115	)	
Gain on sale of property and equipment	 	—	 	(13	)	
Changes in operating assets and liabilities:	 	 	 	 	 	
Accounts receivable	 	24,479	 	19,809	 	
Unbilled receivables and retentions	 	11,625	 	(2,541	)	
Inventories	 	(20,058	)	(10,310	)	
Income tax receivable	 	(8,349	)	—	 	
Other assets	 	(282	)	(441	)	
Accounts payable	 	(4,436	)	(17,759	)	
Other liabilities	 	(21,518	)	(5,678	)	
Net cash provided by operating activities	 	5,065	 	4,854	 	
Investing activities	 	 	 	 	 	
Acquisitions of property and equipment	 	(6,528	)	(9,856	)	
Proceeds from the sale of property and equipment	 	—	 	13	 	
Acquisition of intangible assets	 	(850	)	—	 	
Investment in CybAero AB convertible notes	 	(3,037	)	—	 	
Net redemptions of held-to-maturity investments	 	4,690	 	7,965	 	
Net sales of available-for-sale investments	 	250	 	225	 	
Net cash used in investing activities	 	(5,475	)	(1,653	)	
Financing activities	 	 	 	 	 	
Excess tax benefit from stock-based compensation	 	—	 	115	 	
Exercise of stock options	 	165	 	508	 	
Net cash provided by financing activities	 	165	 	623	 	
Net (decrease) increase in cash and cash equivalents	 	(245	)	3,824	 	
Cash and cash equivalents at beginning of period	 	64,220	 	62,041	 	
Cash and cash equivalents at end of period	 	$	63,975	 	$	65,865	 	
 	 	 	 	 	 	
Supplemental disclosure:	 	 	 	 	 	
Unrealized gains on long-term investments recorded in other comprehensive income, net of deferred taxes of $28 and $59, respectively	 	$	42	 	$	87	 	
Reclassification from share-based liability compensation to equity	 	$	401	 	$	—	 	
 
See accompanying notes to consolidated financial statements (unaudited).
 
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AeroVironment, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 
1. Organization and Significant Accounting Policies
 
Organization
 
AeroVironment, Inc., a Delaware corporation (the “Company”), is engaged in the design, development, production, support and operation of unmanned aircraft systems and efficient energy systems for various industries and governmental agencies.
 
Basis of Presentation
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation with respect to the interim financial statements have been included. The results of operations for the three and nine months ended January 26, 2013 are not necessarily indicative of the results for the full year ending April 30, 2013. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended April 30, 2012, included in the Company’s Annual Report on Form 10-K.
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions, including estimates of anticipated contract costs and revenue utilized in the revenue recognition process, that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
 
The Company’s consolidated financial statements include the assets, liabilities and operating results of wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
 
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 from 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.
 
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.
 
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.
 
Government Contracts
 
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 (“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 billing rates, may create an additional receivable or liability for the Company.
 
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AeroVironment, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 
For example, during the course of its audits, the DCAA may question the Company’s incurred project costs, and if the DCAA believes the Company has accounted for such costs in a manner inconsistent with the requirements under Federal Acquisition Regulations, the DCAA auditor may recommend to the Company’s administrative contracting officer to disallow such costs. 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.
 
Earnings Per Share
 
Basic earnings per share is computed using the weighted-average number of common shares outstanding, excluding shares of unvested restricted stock. The dilutive effect of potential common shares outstanding is included in diluted earnings per share and excludes any anti-dilutive effects of options, shares of unvested restricted stock and restricted stock units.
 
The reconciliation of basic to diluted shares is as follows:
 
 	 	Three Months Ended	 	Nine Months Ended	 	
 	 	January 26,
2013	 	January 28,
2012	 	January 26,
2013	 	January 28,
2012	 	
Denominator for basic earnings per share:	 	 	 	 	 	 	 	 	 	
Weighted average common shares outstanding, excluding unvested restricted stock	 	22,142,917	 	21,797,802	 	22,035,007	 	21,761,927	 	
Dilutive effect of employee stock options, unvested restricted stock and restricted stock units	 	265,460	 	519,213	 	340,119	 	507,748	 	
Denominator for diluted earnings per share	 	22,408,377	 	22,317,015	 	22,375,126	 	22,269,675	 	
 
During the three and nine months ended January 26, 2013 and January 28, 2012, certain shares reserved for issuance upon exercise of stock options, shares of unvested 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 shares reserved for issuance upon exercise of stock options, shares of unvested restricted stock and restricted stock units that met this anti-dilutive criterion for the three months ended January 26, 2013 and January 28, 2012 was approximately 6,000 and 22,000, respectively. The number of shares reserved for issuance upon exercise of stock options, shares of unvested restricted stock and restricted stock units that met this anti-dilutive criterion for the nine months ended January 26, 2013 and January 28, 2012 was approximately 4,000 and 29,000, respectively.
 
Recently Issued Accounting Standards
 
On May 1, 2012, the Company adopted changes in accordance with guidance issued by the Financial Accounting Standards Board (“FASB”), which requires companies to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. The Company elected to adopt the two-statement option. The new guidance eliminated the option to present the components of other comprehensive income as part of the statement of equity. Other than the change in presentation, the adoption of these changes had no material impact on the Company’s consolidated financial statements. The new guidance also required entities to present reclassification adjustments from accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented, which was indefinitely deferred in December of 2011. In February of 2013, the FASB issued guidance related to the reclassification adjustments and related adoption date, the Company will adopt the guidance regarding reclassification adjustments on May 1, 2013. Other than the change in presentation, the adoption of these changes will have no material impact on the Company’s consolidated financial statements.
 
On May 1, 2012, the Company adopted changes in accordance with guidance issued by the FASB to provide a consistent definition of fair value and to ensure that the fair value measurement and disclosure requirements are similar between U.S. generally accepted accounting principles and International Financial Reporting Standards. The new guidance changed certain fair value measurement principles and enhanced the disclosure requirements, particularly for Level 3 fair value measurements. The adoption of these changes did not have a material impact on the Company’s consolidated financial statements.
 
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AeroVironment, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 
2. Investments
 
Investments consist of the following (in thousands):
 
 	 	January 26,
2013	 	April 30,
2012	 	
Short-term investments:	 	 	 	 	 	
Held-to-maturity securities:	 	 	 	 	 	
Municipal securities	 	$	69,811	 	$	49,263	 	
U.S. government securities	 	—	 	27,889	 	
Total short-term investments	 	$	69,811	 	$	77,152	 	
Long-term investments:	 	 	 	 	 	
Held-to-maturity securities:	 	 	 	 	 	
Municipal securities	 	$	54,912	 	$	52,261	 	
Available-for-sale securities:	 	 	 	 	 	
Auction rate securities	 	6,016	 	6,196	 	
Total long-term investments	 	$	60,928	 	$	58,457	 	
 
Held-To-Maturity Securities
 
At January 26, 2013 and April 30, 2012, the balance of held-to-maturity securities consisted of state and local government municipal securities and U.S. Treasury bills and notes. Interest earned from these investments is recorded in interest income.
 
The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the held-to-maturity investments as of January 26, 2013, were as follows (in thousands):
 
 	 	 	 	Gross	 	Gross	 	 	 	
 	 	Amortized	 	Unrealized	 	Unrealized	 	 	 	
 	 	Cost	 	Gains	 	Losses	 	Fair Value	 	
Municipal securities	 	$	124,723	 	$	66	 	$	(14	)	$	124,775	 	
Total held-to-maturity investments	 	$	124,723	 	$	66	 	$	(14	)	$	124,775	 	
 
The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the held-to-maturity investments as of April 30, 2012, were as follows (in thousands):
 
 	 	 	 	Gross	 	Gross	 	 	 	
 	 	Amortized	 	Unrealized	 	Unrealized	 	 	 	
 	 	Cost	 	Gains	 	Losses	 	Fair Value	 	
Municipal securities	 	$	101,524	 	$	48	 	$	(24	)	$	101,548	 	
U.S. government securities	 	27,889	 	—	 	(1	)	27,888	 	
Total held-to-maturity investments	 	$	129,413	 	$	48	 	$	(25	)	$	129,436	 	
 
The amortized cost and fair value of the Company’s held-to-maturity securities by contractual maturity at January 26, 2013, were as follows (in thousands):
 
 	 	Cost	 	Fair Value	 	
 	 	 	 	 	 	
Due within one year	 	$	69,811	 	$	69,842	 	
Due after one year through three years	 	54,912	 	54,933	 	
Total	 	$	124,723	 	$	124,775	 	
 
Available-For-Sale Securities
 
As of January 26, 2013, the entire balance of available-for-sale securities consisted of four investment grade auction rate municipal bonds with maturities ranging from 7 to 22 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.
 
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AeroVironment, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 
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 January 26, 2013 until a future auction of these securities is successful or a buyer is found outside of the auction process.
 
As a result of the failed auctions, the fair values of these securities are estimated utilizing a discounted cash flow analysis as of January 26, 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 estimated date upon which the security is expected to have a successful auction.
 
Based on the Company’s ability to access its cash and cash equivalents, expected operating cash flows, and other sources of cash, the Company does not anticipate the current lack of liquidity of 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 at maturity and as of January 26, 2013, the Company did not consider these investments to be other-than-temporarily impaired.
 
The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the available-for-sale investments as of January 26, 2013, were as follows (in thousands):
 
 	 	 	 	Gross	 	Gross	 	 	 	
 	 	Amortized	 	Unrealized	 	Unrealized	 	 	 	
 	 	Cost	 	Gains	 	Losses	 	Fair Value	 	
Auction rate securities	 	$	7,100	 	$	—	 	$	(1,084	)	$	6,016	 	
Total available-for-sale investments	 	$	7,100	 	$	—	 	$	(1,084	)	$	6,016	 	
 
The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the available-for-sale investments as of April 30, 2012, were as follows (in thousands):
 
 	 	 	 	Gross	 	Gross	 	 	 	
 	 	Amortized	 	Unrealized	 	Unrealized	 	 	 	
 	 	Cost	 	Gains	 	Losses	 	Fair Value	 	
Auction rate securities	 	$	7,350	 	$	—	 	$	(1,154	)	$	6,196	 	
Total available-for-sale investments	 	$	7,350	 	$	—	 	$	(1,154	)	$	6,196	 	
 
The amortized cost and fair value of the Company’s auction rate securities by contractual maturity at January 26, 2013, were as follows (in thousands):
 
 	 	Cost	 	Fair Value	 	
 	 	 	 	 	 	
Due after five through 10 years	 	$	1,700	 	$	1,579	 	
Due after 10 years	 	5,400	 	4,437	 	
Total	 	$	7,100	 	$	6,016	 	
 
3. Inventories, net
 
Inventories consist of the following (in thousands):
 
 	 	January 26,
2013	 	April 30,
2012	 	
Raw materials	 	$	16,448	 	$	13,969	 	
Work in process	 	18,405	 	7,390	 	
Finished goods	 	32,308	 	24,934	 	
Inventories, gross	 	67,161	 	46,293	 	
Reserve for inventory obsolescence	 	(3,564	)	(2,754	)	
Inventories, net	 	$	63,597	 	$	43,539	 	
 
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AeroVironment, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 
4. Investment in CybAero AB Convertible Notes
 
During the three months ended January 26, 2013, the Company entered into a subscription agreement to invest in two convertible notes to be issued by CybAero AB (“CybAero”), a publicly traded company in Sweden that develops and manufactures unmanned aerial vehicles.  Each note is in the amount of 10 million Swedish Kronor (“SEK”) and is convertible into 10 million CybAero shares at the conversion price of 1 SEK per share. The maturity date of the notes is November 30, 2017 and each note bears an annual interest rate of 5%.
 
As of January 26, 2013, the notes had yet to be registered with the Swedish Companies Registration Office (“SCRO”) and therefore no registered securities had been issued to the Company.  The Company is not entitled to the rights associated with the two convertible notes, including conversion into CybAero shares, until registration occurs with the SCRO.  Upon registration of the notes with the SCRO, the Company can exercise its conversion right at any time through October 31, 2017.  CybAero can prepay the notes with a three month notice to the Company and the Company may exercise its conversion rights during the three month notice.  If certain conditions are satisfied after November 30, 2015, CybAero can require the Company to convert the two notes in their entirety into CybAero shares.
 
Due to the lack of registration and associated rights with registration, the initial investment amount of approximately $3 million for the two convertible notes is recorded in long-term other assets on the balance sheet as of January 26, 2013.  Subsequent to the balance sheet date of January 26, 2013, the two convertible notes were registered with the SCRO on February 8, 2013.
 
5. 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 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 January 26, 2013, were as follows (in thousands):
 
 	 	Fair Value Measurement Using	 	
Description	 	Quoted prices in
active markets
for identical assets
(Level 1)	 	Significant
other
observable
inputs
(Level 2)	 	Significant
unobservable
inputs
(Level 3)	 	Total	 	
Auction rate securities	 	$	—	 	$	—	 	$	6,016	 	$	6,016	 	
Total	 	$	—	 	$	—	 	$	6,016	 	$	6,016	 	
 
Due to the auction failures of the Company’s auction rate securities that began in the fourth quarter of fiscal 2008, there are still no quoted prices in active markets for identical assets as of January 26, 2013.  Therefore, the Company has classified its auction rate securities as Level 3 financial assets.  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):
 
 	 	Fair Value
Measurements Using
Significant
Unobservable Inputs
(Level 3)	 	
Description	 	Auction Rate Securities	 	
Balance at April 30, 2012	 	$	6,196	 	
Transfers to Level 3	 	—	 	
Total gains (realized or unrealized)	 	 	 	
Included in earnings	 	—	 	
Included in other comprehensive income	 	70	 	
Purchases, issuances and settlements, net	 	(250	)	
Balance at January 26, 2013	 	$	6,016	 	
The amount of total gains or (losses) for the period included in earnings (or change in net assets) attributable to the change in unrealized gains or losses relating to assets still held at January 26, 2013	 	$	—	 	
 
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AeroVironment, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 
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 January 26, 2013, the inputs used in the Company’s discounted cash flow analysis included current coupon rates ranging from 0.1% to 0.4%, estimated redemption periods of 7 to 22 years and discount rates of 7.4% to 18.8%. 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. Assuming a higher discount rate, a longer estimated redemption period and lower coupon rates would result in a lower fair market value. Conversely, assuming a lower discount rate, a shorter estimated redemption period and higher coupon rates would result in a higher fair market value.
 
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, allowing the Company to recover the cost of $7.1 million.  The Company will continue to monitor the value of its auction rate securities at each reporting period for a possible other-than-temporary impairment.
 
6. Warranty Reserves
 
The Company accrues an estimate of its exposure to warranty claims based upon both current and historical product sales data and warranty costs incurred.  The warranty reserve is included in other current liabilities. The related expense is included in cost of sales.  Warranty reserve activity is summarized as follows for the three and nine months ended January 26, 2013 and January 28, 2012 (in thousands):
 
 	 	Three Months Ended	 	Nine Months Ended	 	
 	 	January 26,	 	January 28,	 	January 26,	 	January 28,	 	
 	 	2013	 	2012	 	2013	 	2012	 	
 	 	 	 	 	 	 	 	 	 	
Beginning balance	 	$	1,259	 	$	1,344	 	$	2,872	 	$	1,127	 	
Warranty expense	 	500	 	785	 	1,708	 	2,037	 	
Warranty claims settled	 	(390	)	(482	)	(3,211	)	(1,517	)	
Ending balance	 	$	1,369	 	$	1,647	 	$	1,369	 	$	1,647	 	
 
7. Customer-Funded Research & Development
 
Customer-funded R&D costs are incurred pursuant to contracts (revenue arrangements) to perform R&D 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 R&D services are performed. Revenue from customer-funded R&D was approximately $11.1 million and $28.1 million for the three and nine months ended January 26, 2013, respectively. Revenue from customer-funded R&D was approximately $5.9 million and $15.1 million for the three and nine months ended January 28, 2012, respectively.
 
8. Income Taxes
 
For the three and nine months ended January 26, 2013, the Company recorded a benefit for income taxes of $4.7 million and $0.9 million, respectively, yielding an effective benefit tax rate of 553.6%  and 8.9%, respectively.  For the three and nine months ended January 28, 2012, the Company recorded a provision for income taxes of $1.7 million and $5.0 million, respectively, yielding an effective tax rate of 23.0% and 28.3%, respectively. The variance from statutory tax rates for the three and nine months ended January 26, 2013 was primarily due to federal research and development tax credits.  The variance from statutory rates for the three and nine months ended January 28, 2012 was primarily due to federal research and development tax credits.
 
9. Changes in Accounting Estimates
 
At the balance sheet date of January 26, 2013, the Company revised its estimate of its annual incentive bonus plan accrual and as a result reversed expense recorded previously in the current year.   The change in estimate was a result of the Company projecting that thresholds in the annual incentive bonus plan will not be met.  The change in estimate resulted in a cumulative catch-up adjustment to increase income from continuing operations and net income in the amount of $4.3 million.  The impact on basic earnings per share for the three and nine months ended January 26, 2013 was an increase of  $0.19 and $0.20 per share, respectively. The impact on diluted earnings per share for the three and nine months ended January 26, 2013 was $0.19 per share.
 
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AeroVironment, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 
Also at the balance sheet date of January 26, 2013, the Company revised its estimate of its annual effective income tax rate and as a result reversed income tax expense recorded previously in the current year.  The change in estimate was a result of the Company projecting lower than anticipated financial performance for the full fiscal year ending April 30, 2013.  The change in estimate did not have an impact on income from continuing operations.  The change in estimate resulted in a cumulative catch-up adjustment to increase net income in the amount of $2.9 million.  The impact on basic and diluted earnings per share for the three and nine months ended January 26, 2013 was an increase of  $0.13 per share.
 
10. Segment Data
 
The Company’s product segments are as follows:
 
·                                         Unmanned Aircraft Systems (“UAS”) — The UAS segment focuses primarily on the design, development, production, support and operation of innovative UAS that provide situational awareness and other mission effects to increase the security and operational effectiveness of the Company’s customers.
 
·                                         Efficient Energy Systems (“EES”) — The EES segment focuses primarily on the design, development, production, 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 limited financial statement information by segment.
 
The segment results are as follows (in thousands):
 
 	 	Three Months Ended	 	Nine Months Ended	 	
 	 	January 26,	 	January 28,	 	January 26,	 	January 28,	 	
 	 	2013	 	2012	 	2013	 	2012	 	
Revenue:	 	 	 	 	 	 	 	 	 	
UAS	 	$	37,665	 	$	57,247	 	$	151,904	 	$	176,383	 	
EES	 	9,422	 	14,717	 	34,138	 	37,950	 	
Total	 	47,087	 	71,964	 	186,042	 	214,333	 	
Cost of sales:	 	 	 	 	 	 	 	 	 	
UAS	 	20,585	 	34,096	 	88,620	 	105,803	 	
EES	 	6,829	 	10,435	 	22,608	 	28,752	 	
Total	 	27,414	 	44,531	 	111,228	 	134,555	 	
Gross margin:	 	 	 	 	 	 	 	 	 	
UAS	 	17,080	 	23,151	 	63,284	 	70,580	 	
EES	 	2,593	 	4,282	 	11,530	 	9,198	 	
Total	 	19,673	 	27,433	 	74,814	 	79,778	 	
Selling, general and administrative	 	10,433	 	12,866	 	37,230	 	38,806	 	
Research and development	 	10,306	 	7,238	 	27,828	 	23,640	 	
(Loss) income from operations	 	(1,066	)	7,329	 	9,756	 	17,332	 	
Interest income	 	164	 	129	 	498	 	313	 	
Other income	 	49	 	—	 	49	 	—	 	
(Loss) income before income taxes	 	$	(853	)	$	7,458	 	$	10,303	 	$	17,645	 	
 
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ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	
 
This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. In some cases, forward-looking statements can be identified by words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions. Such forward-looking statements are based on current expectations, estimates and projections about our industry, our management’s beliefs and assumptions made by our management. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part II, Item 1A, “Risk Factors.”
 
Unless required by law, we expressly disclaim any obligation to update publicly any forward-looking statements, whether as result of new information, future events or otherwise.
 
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, long-term investments, 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.
 
There have been no material changes made to the critical accounting estimates during the periods presented in the consolidated financial statements from those disclosed in the Form 10-K for the fiscal year ended April 30, 2012.
 
Fiscal Periods
 
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 exactly 13 weeks. Our first three quarters end on a Saturday.  Our 2013 fiscal year ends on April 30, 2013 and our fiscal quarters end on July 28, 2012, October 27, 2012 and January 26, 2013.
 
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Results of Operations
 
Our operating segments are Unmanned Aircraft Systems, or UAS, and Efficient Energy Systems, or EES. The accounting policies for each of these segments are the same. In addition, a significant portion of our research and development, or R&D, selling, general and administrative, or SG&A, and general overhead resources are shared across our segments.
 
The following table sets forth our revenue and gross margin generated by each operating segment for the periods indicated (in thousands):
 
Three Months Ended January 26, 2013 Compared to Three Months Ended January 28, 2012
 
 	 	Three Months Ended	 	
 	 	January 26,	 	January 28,	 	
 	 	2013	 	2012	 	
Revenue:	 	 	 	 	 	
UAS	 	$	37,665	 	$	57,247	 	
EES	 	9,422	 	14,717	 	
Total	 	47,087	 	71,964	 	
Cost of sales:	 	 	 	 	 	
UAS	 	20,585	 	34,096	 	
EES	 	6,829	 	10,435	 	
Total	 	27,414	 	44,531	 	
Gross margin:	 	 	 	 	 	
UAS	 	17,080	 	23,151	 	
EES	 	2,593	 	4,282	 	
Total	 	19,673	 	27,433	 	
Selling, general and administrative	 	10,433	 	12,866	 	
Research and development	 	10,306	 	7,238	 	
(Loss) income from operations	 	(1,066	)	7,329	 	
Interest income	 	164	 	129	 	
Other income	 	49	 	—	 	
(Loss) income before income taxes	 	$	(853	)	$	7,458	 	
 
Revenue.Revenue for the three months ended January 26, 2013 was $47.1 million, as compared to $72.0 million for the three months ended January 28, 2012, representing a decrease of $24.9 million, or 35%.  UAS revenue decreased by $19.6 million, or 34%, to $37.7 million for the three months ended January 26, 2013, primarily due to lower UAS product deliveries of $10.2 million and lower service revenue of $15.2 million, offset by higher customer-funded R&D revenue of $5.8 million. The decrease in UAS product deliveries and service revenue was primarily due to decreased deliveries of small unmanned aircraft systems and related support services.  The increase in customer-funded R&D revenue was primarily due to reimbursement of costs on the Global Observer Joint Capability Technology Demonstration contract.  EES revenue decreased by $5.3 million, or 36%, to $9.4 million for the three months ended January 26, 2013.  The decrease in EES revenue was primarily due to decreased deliveries of passenger electric vehicle charging systems, electrical vehicle test systems and industrial fast charge systems.
 
Cost of Sales.Cost of sales for the three months ended January 26, 2013 was $27.4 million, as compared to $44.5 million for the three months ended January 28, 2012, representing a decrease of $17.1 million, or 38%. As a percentage of revenue, cost of sales decreased from 62% to 58%. UAS cost of sales decreased $13.5 million, or 40%, to $20.6 million for the three months ended January 26, 2013, primarily due to lower sales volume.  As a percentage of revenue, cost of sales for UAS decreased from 60% to 55% due to lower manufacturing and engineering overhead support costs.  EES cost of sales decreased $3.6 million, or 35%, to $6.8 million for the three months ended January 26, 2013.  As a percentage of revenue, cost of sales for EES increased from 71% to 72%, primarily due to lower sales volume.
 
Gross Margin.Gross margin for the three months ended January 26, 2013 was $19.7 million, as compared to $27.4 million for the three months ended January 28, 2012, representing a decrease of $7.8 million, or 28%. UAS gross margin decreased $6.1 million, or 26%, to $17.1 million for the three months ended January 26, 2013 primarily due to lower sales volume.  As a percentage of revenue, gross margin for UAS increased from 40% to 45% due to lower manufacturing and engineering overhead support costs.  EES gross margin decreased $1.7 million, or 39%, to $2.6 million for the three months ended January 26, 2013 primarily due to lower sales volume.  As a percentage of revenue, EES gross margin decreased from 29% to 28%.
 
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Selling, General and Administrative.  SG&A expense for the three months ended January 26, 2013 was $10.4 million, or 22% of revenue, compared to SG&A expense of $12.9 million, or 18% of revenue, for the three months ended January 28, 2012.  SG&A expense decreased by $2.4 million primarily due to lower accrued incentive compensation as a result of not achieving anticipated financial performance.
 
Research and Development.R&D expense for the three months ended January 26, 2013 was $10.3 million, or 22% of revenue, compared to R&D expense of $7.2 million, or 10% of revenue, for the three months ended January 28, 2012.  The increase was primarily due to the procurement of government property associated with Global Observer.
 
Interest Income.Interest income for the three months ended January 26, 2013 was $0.2 million, as compared to $0.1 million for the three months ended January 28, 2012.
 
Income Tax Benefit.Our effective income tax benefit rate was 553.6% for the three months ended January 26, 2013, as compared to an income tax expense rate of 23.0% for the three months ended January 28, 2012.  The decrease is primarily due to higher federal R&D tax credits and lower taxable income.
 
Nine Months Ended January 26, 2013 Compared to Nine Months Ended January 28, 2012
 
 	 	Nine Months Ended	 	
 	 	January 26,	 	January 28,	 	
 	 	2013	 	2012	 	
Revenue:	 	 	 	 	 	
UAS	 	$	151,904	 	$	176,383	 	
EES	 	34,138	 	37,950	 	
Total	 	186,042	 	214,333	 	
Cost of sales:	 	 	 	 	 	
UAS	 	88,620	 	105,803	 	
EES	 	22,608	 	28,752	 	
Total	 	111,228	 	134,555	 	
Gross margin:	 	 	 	 	 	
UAS	 	63,284	 	70,580	 	
EES	 	11,530	 	9,198	 	
Total	 	74,814	 	79,778	 	
Selling, general and administrative	 	37,230	 	38,806	 	
Research and development	 	27,828	 	23,640	 	
Income from operations	 	9,756	 	17,332	 	
Interest income	 	498	 	313	 	
Other income	 	49	 	—	 	
Income before income taxes	 	$	10,303	 	$	17,645	 	
 
Revenue.Revenue for the nine months ended January 26, 2013 was $186.0 million, as compared to $214.3 million for the nine months ended January 28, 2012, representing a decrease of $28.3 million, or 13%.  UAS revenue decreased $24.5 million, or 14%, to $151.9 million for the nine months ended January 26, 2013, primarily due to decreased UAS service revenue of $31.3 million and lower product deliveries of $8.2 million, offset by higher customer-funded R&D work of $15.0 million.  The decrease in UAS product deliveries and service revenue was primarily due to decreased deliveries of small unmanned aircraft systems and related support services, including Digital Data Link retrofits.  The increase in UAS customer-funded R&D revenue was primarily due to increased activity related to Switchblade .  EES revenue decreased by $3.8 million, or 10%, to $34.1 million for the nine months ended January 26, 2013.  The decrease in EES revenue was primarily due to decreased deliveries of electric vehicle test systems and passenger electric vehicle charging systems, offset by increased deliveries of industrial electric vehicle charging systems.
 
Cost of Sales.Cost of sales for the nine months ended January 26, 2013 was $111.2 million, as compared to $134.6 million for the nine months ended January 28, 2012, representing a decrease of $23.3 million, or 17%.  As a percentage of revenue, cost of sales decreased from 63% to 60%.  UAS cost of sales decreased $17.2 million, or 16%, to $88.6 million for the nine months ended January 26, 2013, primarily due to lower sales volume.  As a percentage of revenue, cost of sales for UAS decreased from 60% to 58%.  EES cost of sales decreased $6.1 million, or 21%, to $22.6 million for the nine months ended January 26, 2013, primarily due to decreased sales volume.  As a percentage of revenue, cost of sales for EES decreased from 76% to 66%, primarily due to a favorable product mix and lower manufacturing and engineering overhead support costs.
 
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Gross Margin.Gross margin for the nine months ended January 26, 2013 was $74.8 million, as compared to $79.8 million for the nine months ended January 28, 2012, representing a decrease of $5.0 million, or 6%.  UAS gross margin decreased $7.3 million, or 10%, to $63.3 million for the nine months ended January 26, 2013 due to lower sales volume.  As a percentage of revenue, gross margin for UAS increased from 40% to 42%.  EES gross margin increased $2.3 million, or 25%, to $11.5 million for the nine months ended January 26, 2013, primarily due to a lower sales mix of lower margin products and lower manufacturing and engineering support overhead costs .  As a percentage of revenue, EES gross margin increased from 24% to 34%, primarily due to a favorable product mix and lower manufacturing and engineering overhead support costs.
 
Selling, General and Administrative.  SG&A expense for the nine months ended January 26, 2013 was $37.2 million, or 20% of revenue, compared to SG&A expense of $38.8 million, or 18% of revenue, for the nine months ended January 28, 2012.  SG&A expense decreased by $1.6 million primarily due to lower accrued incentive compensation as a result of not achieving anticipated financial performance.
 
Research and Development.R&D expense for the nine months ended January 26, 2013 was $27.8 million, or 15% of revenue, compared to R&D expense of $23.6 million, or 11% of revenue, for the nine months ended January 28, 2012.  The increase was primarily due to the procurement of government property associated with Global Observer.
 
Interest Income.Interest income for the nine months ended January 26, 2013 was $0.5 million, compared to interest income of $0.3 million for the nine months ended January 28, 2012.
 
Income Tax Benefit.Our effective income tax benefit rate was 8.9% for the nine months ended January 26, 2013, as compared to an effective income tax expense rate of 28.3% for the nine months ended January 28, 2012.  The decrease was primarily due to higher federal R&D tax credits.
 
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 January 26, 2013 and April 30, 2012, our funded backlog was approximately $70.5 million and $93.2 million, respectively.
 
In addition to our funded backlog, we also had unfunded backlog of $76.6 million and $96.1 million as of January 26, 2013 and April 30, 2012, respectively.  We define unfunded backlog as the total remaining potential order amounts under cost reimbursable and fixed price contracts with multiple one-year options, and indefinite delivery indefinite quantity, or IDIQ, contracts. Unfunded backlog does not obligate the U.S. government to purchase goods or services. There can be no assurance that unfunded backlog will result in any orders in any particular period, if at all. Management believes that unfunded backlog does not provide a reliable measure of future estimated revenue under our contracts.
 
Because of possible future changes in delivery schedules and/or cancellations of orders, backlog at any particular date is not necessarily representative of actual sales to be expected for any succeeding period, and actual sales for the year may not meet or exceed the backlog represented. Our backlog is typically subject to large variations from quarter to quarter as existing contracts expire or are renewed, or new contracts are awarded. A majority of our contracts, specifically our IDIQ contracts, do not currently obligate the U.S. government to purchase any goods or services. Additionally, all U.S. government contracts included in backlog, whether or not funded, may be terminated at the convenience of the U.S. government.
 
Liquidity and Capital Resources
 
We currently have no material cash commitments, except for normal recurring trade payables, accrued expenses and ongoing research and development costs, all of which we anticipate funding through our existing working capital and funds provided by operating activities. The majority of our purchase obligations are pursuant to funded contractual arrangements with our customers. In addition, we do not currently anticipate significant investment in property, plant and equipment, and we believe that our existing cash, cash equivalents, cash provided by operating activities and other financing sources will be sufficient to meet our anticipated working capital, capital expenditure and debt service requirements, if any, during the next twelve months. There can be no assurance, however, that our business will continue to generate cash flow at current levels. If we are unable to generate sufficient cash flow from operations, then we may be required to sell assets, reduce capital expenditures or obtain additional financing.  The global credit situation has imposed high levels of volatility and disruption in the capital markets, severely diminished liquidity and credit availability, and increased counterparty risk. Nevertheless, we anticipate that existing sources of liquidity and cash flows from operations will be sufficient to satisfy our cash needs for the foreseeable future.
 
Our primary liquidity needs are for financing working capital, investing in capital expenditures, supporting product development efforts, introducing new products and enhancing existing products and services, and promoting market 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. To the extent we require additional funding, we cannot be certain that such funding will be available to us on acceptable terms, or at all.  Although we are currently not a party to any material 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.
 
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Recent global market and economic conditions have been unprecedented and challenging with tighter credit conditions and recession in most major economies.  As a result of these market conditions, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads.  Concern about the stability of the markets generally and the strength of counterparties specifically has led many lenders and institutional investors to reduce, and in some cases, cease to provide credit to businesses and consumers.  These factors have led to a decrease in spending by businesses and consumers alike, and a corresponding decrease in global infrastructure spending.  Continued turbulence in the U.S. and international markets and economies and prolonged declines in business and consumer spending may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our customers, including our ability to access the capital markets to meet liquidity needs. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits. Given the current instability of financial institutions, we cannot be assured that we will not experience losses on these deposits.
 
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 for the nine months ended January 26, 2013 and January 28, 2012 (in thousands):
 
 	 	Nine Months Ended	 	
 	 	January 26,
2013	 	January 28,
2012	 	
 	 	(Unaudited)	 	
Net cash provided by operating activities	 	$	5,065	 	$	4,854	 	
Net cash used in investing activities	 	$	(5,475	)	$	(1,653	)	
Net cash provided by financing activities	 	$	165	 	$	623	 	
 
Cash Provided by Operating Activities.Net cash provided by operating activities for the nine months ended January 26, 2013 increased by $0.2 million to $5.1 million, compared to net cash provided by operating activities of $4.9 million for the nine months ended January 28, 2012. This increase in net cash provided by operating activities was primarily due to higher depreciation and amortization of $1.9 million, a higher tax benefit from stock-based compensation of $1.0 million and higher stock-based compensation of $0.3 million, partially offset by higher working capital of $1.6 million and lower net income of $1.4 million.
 
Cash Used in Investing Activities.Net cash used in investing activities increased by $3.8 million to $5.5 million for the nine months ended January 26, 2013, compared to net cash used in investing activities of $1.7 million for the nine months ended January 28, 2012. The increase in net cash used in investing activities was primarily due to higher net purchases of investments of $6.3 million, including the $3.0 million investment in CybAero AB convertible notes and the acquisition of intangible assets for $0.9 million, partially offset by lower acquisitions of property and equipment of $3.3 million.
 
Cash Provided by Financing Activities.Net cash provided by financing activities decreased by $0.4 million to $0.2 million for the nine months ended January 26, 2013, compared to $0.6 million for the nine months ended January 28, 2012.  During the nine months ended January 26, 2013, we received net proceeds from stock option exercises of $0.2 million.
 
Off-Balance Sheet Arrangements
 
During the third quarter, there were no material changes in our off-balance sheet arrangements or contractual obligations and commercial commitments from those disclosed in the Form 10-K for the fiscal year ended April 30, 2012.
 
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.
 
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New Accounting Standards
 
Please refer to Note 1 “Organization and Significant Accounting Policies” to our unaudited consolidated financial statements in Part I, Item 1 of this quarterly report for a discussion of new accounting pronouncements.
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
In the ordinary course of business, we are exposed to various market risk factors, including fluctuations in interest rates, changes in general economic conditions, domestic and foreign competition, and foreign currency exchange rates.
 
Interest Rate Risk
 
It is our policy not to enter into interest rate derivative financial instruments. We do not currently have any significant interest rate exposure.
 
Foreign Currency Exchange Rate Risk
 
Since a significant part of our sales and expenses are denominated in U.S. dollars, we have not experienced significant foreign exchange gains or losses to date, and do not expect to incur significant foreign exchange gains or losses in the future. We occasionally engage in forward contracts in foreign currencies to limit our exposure on non-U.S. dollar transactions.
 
ITEM 4. CONTROLS AND PROCEDURES
 
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 provide only 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 carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and 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 assurance level.
 
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 January 26, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
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PART II. OTHER INFORMATION
 
ITEM 1. 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 1A. RISK FACTORS
 
There have been no material changes to the risk factors disclosed under Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended April 30, 2012.  Please refer to that section for disclosures regarding the risks and uncertainties related to our business.
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None.
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4. MINE SAFETY DISCLOSURES
 
None.
 
ITEM 5. OTHER INFORMATION
 
None.
 
ITEM 6. EXHIBITS
 
Exhibit
Number	 	Description	
31.1	 	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.	
31.2	 	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.	
32	 	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	
101.INS*	 	XBRL Instance Document.	
101.SCH*	 	XBRL Taxonomy Extension Schema Document.	
101.CAL*	 	XBRL Taxonomy Calculation Linkbase Document.	
101.DEF*	 	XBRL Taxonomy Extension Definition Linkbase Document.	
101.LAB*	 	XBRL Taxonomy Label Linkbase Document.	
101.PRE*	 	XBRL Taxonomy Presentation Linkbase Document.	

*     Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.
 
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SIGNATURES
 
Pursuant to the requirements 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.
 
Date: March 5, 2013	 	AEROVIRONMENT, INC.	
 	 	 	
 	By:	/s/ Timothy E. Conver	
 	 	Timothy E. Conver	
 	 	Chairman, Chief Executive Officer and President	
 	 	(Principal Executive Officer)	
 	 	 	
 	 	/s/ Jikun Kim	
 	 	Jikun Kim	
 	 	Senior Vice President and Chief Financial Officer	
 	 	(Principal Financial and Accounting Officer)	
 
21

Exhibit 31.1
 
Certification of Principal Executive Officer
Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
 
I, Timothy E. Conver, certify that:
 
1.             I have reviewed this quarterly report on Form 10-Q 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 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 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 15d-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 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 functions):
 
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: March 5, 2013	 	
 	 	
 	/s/ Timothy E. Conver	
 	Timothy E. Conver	
 	Chairman, Chief Executive Officer and President	

Exhibit 31.2
 
Certification of Principal Financial Officer
Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
 
I, Jikun Kim, certify that:
 
1.             I have reviewed this quarterly report on Form 10-Q 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 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 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 15d-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 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 functions):
 
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: March 5, 2013
 
 	/s/ Jikun Kim	
 	Jikun Kim	
 	Senior Vice President and Chief Financial Officer	

Exhibit 32
 
Certification
 
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
 
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) (the “Act”), each of the undersigned officers of AeroVironment, Inc., a Delaware corporation (the “Company”), does hereby certify, to each such officer’s knowledge, that:
 
The Quarterly Report on Form 10-Q for the quarter ended January 26, 2013 (the “Periodic Report”) of the Company fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 	/s/ Timothy E. Conver	
 	Timothy E. Conver	
 	Chairman, Chief Executive Officer and President	
 	 	
 	/s/ Jikun Kim	
 	Jikun Kim	
 	Senior Vice President and Chief Financial Officer	
 
Dated: March 5, 2013
 
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.