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

 
FORM 10-Q

 
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.	
 	 	
 	For the quarterly period ended November 1, 2008	
 	 	
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   þ       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.
 
o   Large accelerated filer	þ   Accelerated filer	o  Non-accelerated filer	o   Smaller reporting company	
 	 	(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). Yes   o           No þ
 
As of November 19, 2008, the number of shares outstanding of the registrant’s common stock, $0.0001 par value, was 21,104,222.

Table of Contents
 
AeroVironment, Inc.
 
Table of Contents
 
PART I. FINANCIAL INFORMATION	 	
 	 	 	
Item 1.	Financial Statements:	 	
 	Consolidated Balance Sheets as of November 1, 2008 (Unaudited) and April 30, 2008	3	
 	Consolidated Statements of Income for the three and six months ended November 1, 2008 (Unaudited) and October 27, 2007 (Unaudited)	4	
 	Consolidated Statements of Cash Flows for the six months ended November 1, 2008 (Unaudited) and October 27, 2007 (Unaudited)	5	
 	Notes to Consolidated Financial Statements (Unaudited)	6	
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15	
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20	
Item 4.	Controls and Procedures	20	
 	 	 	
PART II. OTHER INFORMATION	 	
 	 	 	
Item 1.	Legal Proceedings	21	
Item 1A.	Risk Factors	21	
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22	
Item 3.	Defaults Upon Senior Securities	22	
Item 4.	Submission of Matters to a Vote of Security Holders	23	
Item 5.	Other Information	23	
Item 6.	Exhibits	24	
Signatures	 	25	
Exhibit Index	 	 	
 
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PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
AeroVironment, Inc.
Consolidated Balance Sheets
(In thousands except share data)
 
 	 	November 1,
2008	 	April 30,
2008	 	
 	 	(Unaudited)	 	 	 	
Assets	 	 	 	 	 	
Current assets:	 	 	 	 	 	
Cash and cash equivalents	 	$	116,646	 	$	105,064	 	
Investments	 	—	 	13,375	 	
Accounts receivable, net of allowance for doubtful accounts of $300 at November 1, 2008 and $220 at April 30, 2008	 	29,640	 	29,788	 	
Unbilled receivables and retentions	 	26,456	 	20,590	 	
Inventories, net	 	19,001	 	15,923	 	
Deferred income taxes	 	2,972	 	2,810	 	
Prepaid expenses and other current assets	 	1,455	 	2,014	 	
Total current assets	 	196,170	 	176,189	 	
Investments	 	8,050	 	—	 	
Property and equipment, net	 	13,805	 	10,308	 	
Deferred income taxes	 	2,785	 	2,785	 	
Other assets	 	115	 	122	 	
Total assets	 	$	220,925	 	$	202,779	 	
Liabilities and Stockholders’ Equity	 	 	 	 	 	
Current liabilities:	 	 	 	 	 	
Accounts payable	 	$	13,748	 	$	14,080	 	
Wages and related accruals	 	8,849	 	10,428	 	
Income taxes payable	 	91	 	3,804	 	
Other current liabilities	 	3,699	 	3,786	 	
Total current liabilities	 	26,387	 	32,098	 	
Deferred rent	 	1,153	 	941	 	
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 — 21,102,222 at November 1, 2008 and 20,614,044 at April 30, 2008	 	2	 	2	 	
Additional paid-in capital	 	105,900	 	96,123	 	
Retained earnings	 	87,483	 	73,615	 	
Total stockholders’ equity	 	193,385	 	169,740	 	
Total liabilities and stockholders’ equity	 	$	220,925	 	$	202,779	 	
 
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	 	Six Months Ended	 	
 	 	November 1,	 	October 27,	 	November 1,	 	October 27,	 	
 	 	2008	 	2007	 	2008	 	2007	 	
 	 	 	 	 	 	 	 	 	 	
Revenue:	 	 	 	 	 	 	 	 	 	
Product sales	 	$	37,259	 	$	34,042	 	$	62,586	 	$	63,726	 	
Contract services	 	28,520	 	19,659	 	56,806	 	39,179	 	
 	 	65,779	 	53,701	 	119,392	 	102,905	 	
Cost of sales:	 	 	 	 	 	 	 	 	 	
Product sales	 	22,445	 	20,611	 	36,803	 	38,902	 	
Contract services	 	18,347	 	14,163	 	37,019	 	28,239	 	
 	 	40,792	 	34,774	 	73,822	 	67,141	 	
Gross margin	 	24,987	 	18,927	 	45,570	 	35,764	 	
Selling, general and administrative	 	7,855	 	8,573	 	15,950	 	16,299	 	
Research and development	 	4,896	 	3,802	 	10,156	 	8,102	 	
Income from operations	 	12,236	 	6,552	 	19,464	 	11,363	 	
Other income:	 	 	 	 	 	 	 	 	 	
Interest income	 	369	 	1,143	 	910	 	2,122	 	
Income before income taxes	 	12,605	 	7,695	 	20,374	 	13,485	 	
Provision for income taxes	 	3,546	 	2,531	 	6,506	 	4,477	 	
Net income	 	$	9,059	 	$	5,164	 	$	13,868	 	$	9,008	 	
Earnings per share data:	 	 	 	 	 	 	 	 	 	
Basic	 	$	0.43	 	$	0.26	 	$	0.67	 	$	0.47	 	
Diluted	 	$	0.41	 	$	0.24	 	$	0.64	 	$	0.42	 	
Weighted average shares outstanding:	 	 	 	 	 	 	 	 	 	
Basic	 	20,959,731	 	19,652,095	 	20,833,682	 	19,279,094	 	
Diluted	 	21,869,417	 	21,346,349	 	21,808,061	 	21,218,731	 	
 
See accompanying notes to consolidated financial statements (unaudited).
 
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AeroVironment, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
 	 	Six Months Ended	 	
 	 	November 1,
2008	 	October 27,
2007	 	
Operating activities	 	 	 	 	 	
Net income	 	$	13,868	 	$	9,008	 	
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:	 	 	 	 	 	
Depreciation and amortization	 	2,183	 	1,595	 	
Provision for doubtful accounts	 	80	 	55	 	
Deferred income taxes	 	(162	)	(55	)	
Stock-based compensation	 	404	 	185	 	
Tax benefit from exercise of stock options	 	8,806	 	9,999	 	
Gain on sale of property and equipment	 	(5	)	—	 	
Changes in operating assets and liabilities:	 	 	 	 	 	
Accounts receivable	 	68	 	(18,398	)	
Unbilled receivables and retentions	 	(5,866	)	13,657	 	
Inventories	 	(3,078	)	1,311	 	
Income tax receivable	 	—	 	(4,807	)	
Other assets	 	566	 	(243	)	
Accounts payable	 	(332	)	(5,233	)	
Other liabilities	 	(5,167	)	(5,406	)	
Net cash and cash equivalents provided by operating activities	 	11,365	 	1,668	 	
Investing activities	 	 	 	 	 	
Acquisitions of property and equipment	 	(5,675	)	(5,032	)	
Net sales (purchases) of investments	 	5,325	 	(4,075	)	
Net cash and cash equivalents used in investing activities	 	(350	)	(9,107	)	
Financing activities	 	 	 	 	 	
Transfers to restricted cash	 	—	 	(17	)	
Exercise of stock options	 	567	 	819	 	
Net cash and cash equivalents provided by financing activities	 	567	 	802	 	
Net increase (decrease) in cash and cash equivalents	 	11,582	 	(6,637	)	
Cash and cash equivalents at beginning of period	 	105,064	 	20,920	 	
Cash and cash equivalents at end of period	 	$	116,646	 	$	14,283	 	
 
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 and production 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 of America 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 of America 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 six months ended November 1, 2008 are not necessarily indicative of the results for the full year ending April 30, 2009. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended April 30, 2008, included in AeroVironment, Inc.’s Annual Report on Form 10-K.
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Certain prior year amounts have been reclassified to conform to the current year presentation.
 
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, as defined by Statement of Financial Accounting Standards (“SFAS”) No. 131,  Disclosures about Segments of an Enterprise and Related Information  (“SFAS No. 131”) ,  to reflect the Company’s strategic goals. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company’s CODM is the Chief Executive Officer, who reviews the revenue and gross margin results for each of these segments in order to make resource allocation decisions, including the focus of research and development, or R&D, activities, and assessing performance. The Company’s reportable segments are business units that offer different products and services and are managed separately.
 
Effective May 1, 2008, the Company consolidated the operations of two of its business segments to reflect the change in the management and organizational structure that occurred on May 1, 2008.  The change in the management and organizational structure was made to take advantage of operational synergies and optimize management time by focusing on two as opposed to three business segments.   PosiCharge Systems and Energy Technology Center were consolidated into one segment named Efficient Energy Systems.  As required by SFAS No. 131, the Company has restated its historical segment information for the three and six months ended October 27, 2007, to be consistent with the current reportable segment structure.  The consolidation of the two segments had no effect on the Company’s financial position, results of operations or cash flows for the periods presented.
 
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AeroVironment, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 
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 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 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. The dilutive effect of potential common shares outstanding is included in diluted earnings per share and excludes any anti-dilutive effects of options.
 
The reconciliation of diluted to basic shares is as follows:
 
 	 	Three Months Ended	 	Six Months Ended	 	
 	 	November 1,
2008	 	October 27,
2007	 	November 1,
2008	 	October 27,
2007	 	
Denominator for basic earnings per share:	 	 	 	 	 	 	 	 	 	
Weighted average common shares outstanding	 	20,959,731	 	19,652,095	 	20,833,682	 	19,279,094	 	
Dilutive effect of employee stock options and restricted stock	 	909,686	 	1,694,254	 	974,379	 	1,939,637	 	
Denominator for diluted earnings per share	 	21,869,417	 	21,346,349	 	21,808,061	 	21,218,731	 	
 
During the three and six months ended November 1, 2008 and October 27, 2007 certain options were not included in the computation of diluted earnings per share because their inclusion would have been anti-dilutive. The number of options which met this anti-dilutive criterion was approximately 16,000 and 21,000 for the three and six months ended November 1, 2008, respectively.  The number of options which met this anti-dilutive criterion was approximately 108,000 and 77,000 for the three and six months ended October 27, 2007, respectively.
 
Recently Issued Accounting Standards
 
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements  (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, which is the year beginning May1, 2008 for the Company.  In February 2008, the FASB issued FASB Staff Position Financial Accounting Standard 157-2,  Effective Date of FASB Statement No. 157  (“FSP FAS 157-2”), which permits a one-year deferral of the application of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company adopted SFAS No. 157 for financial assets and liabilities effective May 1, 2008. The adoption of SFAS No. 157 did not have a material effect on the Company’s financial position, results of operations or cash flows. The Company will apply the principles of SFAS No. 157 for non-financial assets and non-financial liabilities on May 1, 2009 and does not expect the provisions to have a material effect on its financial position, results of operations or cash flows.
 
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AeroVironment, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 
In December 2007, the FASB issued SFAS No. 141R (revised 2007), Business Combinations (“SFAS No. 141R”), which is a revision of SFAS No. 141,  Business Combinations . In accordance with the new standard, upon initially obtaining control, the acquiring entity in a business combination must recognize 100% of the fair values of the acquired assets, including goodwill, and assumed liabilities, with only limited exceptions even if the acquirer has not acquired 100% of its target. As a consequence, the current step acquisition model will be eliminated. Also, contingent consideration arrangements will be fair valued at the acquisition date and included on that basis in the purchase price consideration. In addition, all transaction costs will be expensed as incurred. SFAS No. 141R is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008 which is the year beginning May 1, 2009 for the Company. Adoption is prospective and early adoption is not permitted. The Company is currently evaluating the impact that the adoption of SFAS No. 141R will have on its financial statements and notes thereto.
 
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51  (“SFAS No. 160”). SFAS No. 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008, which is the year beginning May 1, 2009 for the Company. The adoption of SFAS No. 160 is not expected to have a material impact on the Company’s financial position, results of operations, or cash flows.
 
2. Accounts Receivable
 
As of November 1, 2008, the Company had a trade receivable from an automotive manufacturing industry customer of approximately $2,900,000.  Subsequent to the balance sheet date, the customer has stated in Securities and Exchange Commission (“SEC”) filings that it may not have the minimum required liquidity to operate its business through its first two quarters of 2009.  As of November 1, 2008, the Company had not reserved any portion of this receivable pursuant to the guidelines of SFAS No. 5,  Accounting for Contingencies .
 
3. Inventories, net
 
Inventories consist of the following (in thousands):
 
 	 	November 1,
2008	 	April 30,
2008	 	
Raw materials	 	$	7,983	 	$	6,855	 	
Work in process	 	6,929	 	4,958	 	
Finished goods	 	5,508	 	5,651	 	
Inventories, gross	 	20,420	 	17,464	 	
Reserve for inventory obsolescence	 	(1,419	)	(1,541	)	
Inventories, net	 	$	19,001	 	$	15,923	 	
 
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AeroVironment, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 
4. Investments
 
The Company’s investments are accounted for under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities  as available-for-sale and reported at fair value, which approximates cost.
 
As of November 1, 2008, the Company’s investments consisted entirely of investment grade auction rate municipal notes and bonds with maturities that could range from 10 to 26 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.
 
Due to the frequent nature of the reset feature, the investment’s market price approximates its fair value; there are no realized or unrealized gains or losses associated with these investments.  Interest earned from investments is recorded in interest income.
 
Management determines the appropriate classification of securities at the time of purchase and re-evaluates such designation as of each balance sheet date.
 
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 November 1, 2008 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 November 1, 2008. 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. The fair value calculated by the Company approximated the recorded value of the securities, therefore there was no impairment of the securities as of November 1, 2008.
 
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.  In prior periods, the Company classified its auction rate securities as current assets. However, due to current financial market conditions, these investments have been reclassified as long-term investments  as of November 1, 2008. The Company will continue to monitor the value of its auction rate securities at each reporting period for a possible impairment if a decline in fair value occurs.
 
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AeroVironment, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 
5. Fair Value Measurements
 
As discussed in Note 1, the Company adopted SFAS No. 157, subject to the deferral provisions of FSP FAS 157-2, on May 1, 2008. This standard defines fair value, establishes a framework for measuring fair value and expands disclosure requirements about fair value measurements. SFAS No. 157 defines fair value as 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 prescribed by SFAS No. 157 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 subject to the disclosure requirements of SFAS No. 157 at November 1, 2008, 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	 	
Cash and cash equivalents	 	$	116,646	 	$	—	 	$	—	 	$	116,646	 	
Auction rate securities	 	—	 	—	 	8,050	 	8,050	 	
Total	 	$	116,646	 	$	—	 	$	8,050	 	$	124,696	 	
 
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 November 1, 2008.  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 May 1, 2008	 	$	13,375	 	
Transfers to Level 3	 	—	 	
Total gains or (losses) (realized or unrealized)	 	 	 	
Included in earnings	 	—	 	
Included in other comprehensive income	 	—	 	
Purchases, issuances and settlements (net)	 	(5,325	)	
Balance at November 1, 2008	 	$	8,050	 	
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 November 1, 2008	 	$	—	 	
 
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AeroVironment, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 
6. Warranty Reserves
 
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 six months ended November 1, 2008 and October 27, 2007 (in thousands):
 
 	 	Three Months Ended	 	Six Months Ended	 	
 	 	November 1,
2008	 	October 27,
2007	 	November 1,
2008	 	October 27,
2007	 	
Beginning balance	 	$	283	 	 $	243	 	$	344	 	 $	263	 	
Warranty expense	 	291	 	262	 	477	 	470	 	
Warranty costs incurred	 	(175	)	(123	)	(422	)	(351	)	
Ending balance	 	 $	399	 	 $	382	 	 $	399	 	 $	382	 	
 
7. Bank Borrowings
 
As of April 30, 2008, the Company had a working capital line of credit with a bank with a borrowing limit of $25,000,000. Borrowings bore interest at the bank’s prime commercial lending rate minus 0.25%, which was 5.00% as of April 30, 2008. The line of credit was secured by substantially all of the Company’s assets. Interest on amounts outstanding under the line of credit was due monthly. All principal plus accrued but unpaid interest on the line of credit would have been due August 31, 2009. The Company had no outstanding balance on the line of credit as of April 30, 2008. Effective June 23, 2008, the Company cancelled the line of credit with the bank to avoid unused commitment fees.
 
8. Stock-Based Compensation
 
For the three and six months ended November 1, 2008 the Company recorded stock-based compensation of approximately $243,000 and $404,000, respectively. For the three and six months ended October 27, 2007, the Company recorded stock-based compensation of approximately $117,000 and $185,000, respectively.
 
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 three and six months ended November 1, 2008 and October 27, 2007:
 
 	 	Three Months Ended	 	Six Months Ended	 	
 	 	November 1,
2008	 	October 27,
2007	 	November 1,
2008	 	October 27,
2007	 	
Expected term (in years)	 	 	—	 	 	6.5	 	 	6.5	 	 	6.5	 	
Expected volatility	 	 	—	 	 	21.25%	 	 	18.43%	 	 	19.74%	 	
Risk-free interest rate	 	 	—	 	 	4.32%	 	 	3.58%	 	 	5.01%	 	
Expected dividend	 	 	—	 	 	—	 	 	—	 	 	—	 	
Weighted average fair value at grant date	 	$	—	 	$	6.45	 	$	9.33	 	$	7.72	 	
 
There were no options granted during the three months ended November 1, 2008.
 
The expected term of stock options represents the weighted average period the Company expects the stock options to remain outstanding, using a midpoint model 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 peer group volatility in the absence of historical market data for the Company’s stock, as permitted under SFAS No. 123(R),  Share Based Payment . The peer group volatility was derived based on historical volatility of a comparable peer group index consisting of companies operating in a similar industry.
 
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AeroVironment, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 
The risk free interest rate is based on the implied yield on a U.S. Treasury zero-coupon bond with a remaining term that approximates the expected term of the option.
 
The expected dividend yield of zero reflects that the Company has not paid any cash dividends since inception and does not anticipate paying cash dividends in the foreseeable future.
 
Information related to the Company’s stock option plans at November 1, 2008 and for the three and six months then ended is as follows:
 
 	 	2006 Plan	 	2002 Plan	 	1992 Plan	 	
 	 	Shares	 	Weighted
Average
Exercise
Price	 	Shares	 	Weighted
Average
Exercise
Price	 	Shares	 	Weighted
Average
Exercise
Price	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Outstanding at April 30, 2008	 	379,310	 	$	21.86	 	1,077,477	 	$	2.20	 	626,895	 	$	0.49	 	
Options granted	 	55,000	 	32.19	 	—	 	—	 	—	 	—	 	
Options exercised	 	(3,000	)	20.75	 	(214,796	)	0.79	 	(48,416	)	0.52	 	
Options canceled	 	(10,000	)	24.09	 	(11,965	)	6.20	 	—	 	—	 	
Outstanding at August 2, 2008	 	421,310	 	$	23.17	 	850,716	 	$	2.50	 	578,479	 	$	0.49	 	
Options granted	 	—	 	—	 	—	 	—	 	—	 	—	 	
Options exercised	 	(4,900	)	20.36	 	(111,202	)	1.64	 	(62,864	)	0.47	 	
Options canceled	 	(12,000	)	20.75	 	(1,408	)	0.78	 	—	 	—	 	
Outstanding at November 1, 2008	 	404,410	 	$	23.27	 	738,106	 	$	2.63	 	515,615	 	$	0.49	 	
Options exercisable at November 1, 2008	 	48,762	 	$	21.37	 	467,493	 	$	1.88	 	515,615	 	$	0.49	 	
 
Information related to the Company’s restricted stock awards at November 1, 2008 and for the three and six months then ended is as follows:
 
 	 	2006 Plan	 	
 	 	Shares	 	Weighted
Average
Grant Date
Fair Value	 	
 	 	 	 	 	 	
Unvested stock at April 30, 2008	 	—	 	$	—	 	
Stock granted	 	44,000	 	32.52	 	
Stock vested	 	—	 	—	 	
Stock canceled	 	—	 	—	 	
Unvested stock at August 2, 2008	 	44,000	 	$	32.52	 	
Stock granted	 	—	 	—	 	
Stock vested	 	—	 	—	 	
Stock canceled	 	(1,000	)	32.52	 	
Unvested stock at November 1, 2008	 	43,000	 	$	32.52	 	
 
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AeroVironment, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 
9. 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 $16,061,000 and $29,072,000 for the three and six months ended November 1, 2008, respectively.  Revenue from customer-funded R&D was approximately $5,817,000 and $10,103,000 for the three and six months ended October 27, 2007, respectively.
 
10. Segment Data
 
The Company’s product segments are as follows:
 
·                 Unmanned Aircraft Systems (“UAS”) — The UAS segment consists primarily of the design, development and manufacture of unmanned aircraft systems solutions.
 
·                 Efficient Energy Systems (“EES”) — The EES segment consists primarily of the design, development and manufacture of system solutions for the clean transportation and clean energy markets.
 
As discussed in Note 1, effective May 1, 2008, the Company consolidated the operations of two of its business segments to reflect the current management and organizational structure that occurred on May 1, 2008.  The change in the management and organizational structure was made to take advantage of operational synergies and optimize management time by focusing on two as opposed to three business segments.  PosiCharge Systems and Energy Technology Center were consolidated into one segment named Efficient Energy Systems.  As required by SFAS No. 131, the Company has restated its historical segment information for the three and six months ended October 27, 2007, to be consistent with the current reportable segment structure.  The consolidation of the two segments had no effect on the Company’s financial position, results of operations or cash flows for the periods presented.
 
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.
 
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AeroVironment, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 
The segment results are as follows (in thousands):
 
 	 	Three Months Ended	 	Six Months Ended	 	
 	 	November 1,	 	October 27,	 	November 1,	 	October 27,	 	
 	 	2008	 	2007	 	2008	 	2007	 	
 	 	 	 	(Restated)	 	 	 	(Restated)	 	
Revenue:	 	 	 	 	 	 	 	 	 	
UAS	 	$	56,456	 	$	46,604	 	$	102,532	 	$	88,477	 	
EES	 	9,323	 	7,097	 	16,860	 	14,428	 	
Total	 	65,779	 	53,701	 	119,392	 	102,905	 	
Gross margin:	 	 	 	 	 	 	 	 	 	
UAS	 	19,946	 	16,910	 	36,589	 	31,001	 	
EES	 	5,041	 	2,017	 	8,981	 	4,763	 	
Total	 	24,987	 	18,927	 	45,570	 	35,764	 	
Selling, general and administrative	 	7,855	 	8,573	 	15,950	 	16,299	 	
Research and development	 	4,896	 	3,802	 	10,156	 	8,102	 	
Income from operations	 	12,236	 	6,552	 	19,464	 	11,363	 	
Interest income	 	369	 	1,143	 	910	 	2,122	 	
Income before income taxes	 	$	12,605	 	$	7,695	 	$	20,374	 	$	13,485	 	
 
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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, 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, 2008.
 
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 2009 fiscal year ends on April 30, 2009 and our fiscal quarters end on August 2, 2008, November 1, 2008 and January 31, 2009.
 
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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 November 1, 2008 Compared to Three Months Ended October 27, 2007
 
 	 	Three Months Ended	 	
 	 	November 1,	 	October 27,	 	
 	 	2008	 	2007	 	
 	 	 	 	(Restated)	 	
Revenue:	 	 	 	 	 	
UAS	 	$	56,456	 	$	46,604	 	
EES	 	9,323	 	7,097	 	
Total	 	65,779	 	53,701	 	
Gross margin:	 	 	 	 	 	
UAS	 	19,946	 	16,910	 	
EES	 	5,041	 	2,017	 	
Total	 	24,987	 	18,927	 	
Selling, general and administrative	 	7,855	 	8,573	 	
Research and development	 	4,896	 	3,802	 	
Income from operations	 	12,236	 	6,552	 	
Interest income	 	369	 	1,143	 	
Income before income taxes	 	$	12,605	 	$	7,695	 	
 
Revenue.Revenue for the three months ended November 1, 2008 was $65.8 million, as compared to $53.7 million for the three months ended October 27, 2007, representing an increase of $12.1 million, or 22%.  UAS revenue increased $9.9 million, or 21%, to $56.5 million for the three months ended November 1, 2008, primarily due to increased UAS customer-funded research and development work and product deliveries partially offset by lower service revenue. The increase in UAS customer-funded research and development revenue was primarily due to increased activity on the Global Observer program.  EES revenue increased by $2.2 million, or 31%, to $9.3 million for the three months ended November 1, 2008.  The increase in EES revenue was primarily due to increased deliveries of Electric Vehicle (“EV”) test systems.
 
Cost of Sales.Cost of sales for the three months ended November 1, 2008 was $40.8 million, as compared to $34.8 million for the three months ended October 27, 2007, representing an increase of $6.0 million, or 17%. The increase in cost of sales was caused primarily by higher UAS cost of sales of $6.8 million partially offset by lower EES cost of sales of $0.8 million.
 
Gross Margin.Gross margin for the three months ended November 1, 2008 was $25.0 million, as compared to $18.9 million for the three months ended October 27, 2007, representing an increase of $6.1 million, or 32%. UAS gross margin increased $3.1 million, or 18%, to $19.9 million for the three months ended November 1, 2008. As a percentage of revenue, gross margin for UAS decreased from 36% to 35%. EES gross margin increased $3.0 million, or 150%, to $5.0 million for the three months ended November 1, 2008.  As a percentage of revenue, EES gross margin increased from 28% to 54%, primarily due to operating improvements and product mix.
 
Selling, General and Administrative.  SG&A expense for the three months ended November 1, 2008 was $7.9 million, or 12% of revenue, compared to SG&A expense of $8.6 million, or 16% of revenue, for the three months ended October 27, 2007.  SG&A expense decreased $0.7 million primarily due to lower bid and proposal costs.
 
Research and Development.R&D expense for the three months ended November 1, 2008 was $4.9 million, or 7% of revenue, which was higher than R&D expense of $3.8 million, or 7% of revenue for the three months ended October 27, 2007.  R&D expense increased $1.1 million largely due to increased investment in various development initiatives for UAS.
 
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Income Tax Expense.Our effective income tax rate was 28.1% for the three months ended November 1, 2008, as compared to 32.9% for the three months ended October 27, 2007. This decrease was caused primarily by the renewal of the federal research and development tax credit, which expired in December 2007. The renewal of the research and development tax credit allowed us to recapture the unused portion of the credit from January 1, 2008 through April 30, 2008.
 
Six Months Ended November 1, 2008 Compared to Six Months Ended October 27, 2007
 
 	 	Six Months Ended	 	
 	 	November 1,	 	October 27,	 	
 	 	2008	 	2007	 	
 	 	 	 	(Restated)	 	
Revenue:	 	 	 	 	 	
UAS	 	$	102,532	 	$	88,477	 	
EES	 	16,860	 	14,428	 	
Total	 	119,392	 	102,905	 	
Gross margin:	 	 	 	 	 	
UAS	 	36,589	 	31,001	 	
EES	 	8,981	 	4,763	 	
Total	 	45,570	 	35,764	 	
Selling, general and administrative	 	15,950	 	16,299	 	
Research and development	 	10,156	 	8,102	 	
Income from operations	 	19,464	 	11,363	 	
Interest income	 	910	 	2,122	 	
Income before income taxes	 	$	20,374	 	$	13,485	 	
 
Revenue.Revenue for the six months ended November 1, 2008 was $119.4 million, as compared to $102.9 million for the six months ended October 27, 2007, representing an increase of $16.5 million, or 16%.  UAS revenue increased $14.1 million, or 16%, to $102.5 million for the six months ended November 1, 2008, primarily due to increased UAS customer-funded research and development work partially offset by lower product deliveries and service revenue. The increase in UAS customer-funded research and development revenue was primarily due to increased activity on the Global Observer program.  EES revenue increased by $2.4 million, or 17%, to $16.9 million for the six months ended November 1, 2008.  The increase in EES revenue was primarily due to increased deliveries of EV test systems.
 
Cost of Sales.Cost of sales for the six months ended November 1, 2008 was $73.8 million, as compared to $67.1 million for the six months ended October 27, 2007, representing an increase of $6.7 million, or 10%. The increase in cost of sales was caused primarily by higher UAS cost of sales of $8.5 million partially offset by lower EES cost of sales of $1.8 million.
 
Gross Margin.Gross margin for the six months ended November 1, 2008 was $45.6 million, as compared to $35.8 million for the six months ended October 27, 2007, representing an increase of $9.8 million, or 27%. UAS gross margin increased $5.6 million, or 18%, to $36.6 million for the six months ended November 1, 2008. As a percentage of revenue, gross margin for UAS increased from 35% to 36%.  EES gross margin increased $4.2 million, or 89% to $9.0 million for the six months ended November 1, 2008.  As a percentage of revenue, EES gross margin increased from 33% to 53%, primarily due to operating improvements and product mix.
 
Selling, General and Administrative.  SG&A expense for the six months ended November 1, 2008 was $15.9 million, or 13% of revenue, compared to SG&A expense of $16.3 million, or 16% of revenue, for the six months ended October 27, 2007.  SG&A expense decreased $0.4 million primarily due to lower bid and proposal costs.
 
Research and Development.R&D expense for the six months ended November 1, 2008 was $10.2 million, or 9% of revenue, which was higher than R&D expense of $8.1 million, or 8% of revenue, for the six months ended October 27, 2007.  R&D expense increased $2.1 million largely due to increased investment in various development initiatives for UAS.
 
Income Tax Expense.Our effective income tax rate was 31.9% for the six months ended November 1, 2008, as compared to 33.2% for the six months ended October 27, 2007.
 
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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 November 1, 2008 and April 30, 2008, our funded backlog was approximately $86.6 million and $82.0 million, respectively.
 
In addition to our funded backlog, we also had unfunded backlog of $580.5 million and $384.3 million as of November 1, 2008 and April 30, 2008, 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. Unfunded backlog does not include the value of options to purchase additional aircraft included in our Global Observer contract. 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.
 
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 industry 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 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.
 
As a result of recent volatility in the capital markets, 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 funding to borrowers. Continued turbulence in the U.S. and international markets and economies may adversely affect our ability to obtain financing on terms acceptable to us, or at all. If these market conditions continue, they may limit 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.
 
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Cash Flows
 
The following table provides our cash flow data for the six months ended November 1, 2008 and October 27, 2007 (in thousands):
 
 	 	Six Months Ended	 	
 	 	November 1,
2008	 	October 27,
2007	 	
 	 	(Unaudited)	 	
Net cash provided by operating activities	 	$	11,365	 	$	1,668	 	
Net cash used in investing activities	 	$	(350	)	$	(9,107	)	
Net cash provided by financing activities	 	$	567	 	$	802	 	
 
Cash Provided by Operating Activities.Net cash provided by operating activities for the six months ended November 1, 2008 increased by $9.7 million to $11.4 million, compared to net cash provided by operating activities of $1.7 million for the six months ended October 27, 2007. This increase in net cash provided by operating activities was primarily due to higher income of $4.9 million and lower working capital needs of $5.3 million, partially offset by lower tax benefits from stock option exercises of $1.2 million.
 
Cash Used in Investing Activities.Net cash used in investing activities decreased by $8.8 million to $0.3 million for the six months ended November 1, 2008, compared to net cash used in investing activities of $9.1 million for the six months ended October 27, 2007. The decrease in net cash used in investing activities was primarily due to higher net redemption of tax exempt municipal auction rate securities of $9.4 million partially offset higher capital expenditures of $0.6 million.
 
Cash Provided by Financing Activities.Net cash provided by financing activities decreased by $0.2 million to $0.6 million for the six months ended November 1, 2008, compared to $0.8 million for the six months ended October 27, 2007.  During the six months ended November 1, 2008, we received proceeds from stock option exercises of $0.6 million.
 
Off-Balance Sheet Arrangements
 
During the second 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, 2008.
 
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
 
See Note 1 to our unaudited consolidated financial statements included elsewhere in this quarterly report for disclosure on new accounting pronouncements.
 
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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. Please refer to Item 7A — Quantitative and Qualitative Disclosures About Market Risk, contained in our Annual Report on Form 10-K for the fiscal year ended April 30, 2008, for further discussion on quantitative and qualitative disclosures about market risk.
 
Interest Rate Risk
 
It is our policy not to enter into interest rate derivative financial instruments. We do not currently have any significant interest rate exposure.
 
Foreign Currency Exchange Rate Risk
 
Since a significant part of our sales and expenses are denominated in U.S. dollars, we have not experienced significant foreign exchange gains or losses to date, and do not expect to incur significant foreign exchange gains or losses in the future. We occasionally engage in forward contracts in foreign currencies to limit our exposure on non-U.S. dollar transactions.
 
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 November 1, 2008, 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, 2008, other than with respect to the risk factor set forth below in this Item 1A entitled “Our investment portfolio includes investments in auction rate securities. Failures in the auctions for these securities affect our liquidity, while deterioration in credit ratings of issuers of such securities and/or third parties insuring such investments may require us to adjust the carrying value of our investment through an impairment of earnings,” which has been revised to reflect our current holdings of auction rate securities, and the new risk factor set forth below in this Item 1A entitled “We face a number of risks related to the recent financial crisis and severe tightening in the global credit markets.”  Please refer to that section of our Annual Report on Form 10-K for disclosures regarding the risks and uncertainties related to our business.
 
Our investment portfolio includes investments in auction rate securities. Failures in the auctions for these securities affect our liquidity, while deterioration in credit ratings of issuers of such securities and/or third parties insuring such investments may require us to adjust the carrying value of our investment through an impairment of earnings.
 
As of November 1, 2008, our $8.0 million of investments consisted entirely of auction rate municipal bonds with maturities that range from approximately 10 to 26 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.
 
In 2008, we experienced several 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 November 19, 2008, including the securities involved in failed auctions, we held approximately $8.0 million of these auction rate securities, all of which carry investment grade ratings. 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 significantly 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 26 years) to realize our investments’ recorded value. 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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We face a number of risks related to the recent financial crisis and severe tightening in the global credit markets.
 
The ongoing global financial crisis affecting the banking system and financial markets has resulted in a severe tightening in credit markets, a low level of liquidity in many financial markets, and extreme volatility in credit and equity markets. This financial crisis could impact 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 the financial crisis, 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 our products, or otherwise meet their payment obligations to us could adversely impact our financial condition and results of operations. In addition, if the financial crisis results in insolvencies for our customers, it could adversely impact our financial condition and results of operations.
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None.
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None.
 
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
On September 25, 2008, we held our 2008 annual meeting of stockholders.  As of the date of the meeting, there were 20,880,255 shares of common stock entitled to vote.  There were 19,380,940 shares (92.8% of the shares entitled to vote) represented at the meeting in person or by proxy.  Immediately prior to and following the meeting, our board of directors consisted of Joseph F. Alibrandi, Kenneth R. Baker, Timothy E. Conver, Arnold L. Fishman, Murray Gell-Mann and Charles R. Holland.  The following summarizes vote results for those matters submitted to our stockholders for action at the annual meeting:
 
1.              Proposal No. 1 To elect Joseph F. Alibrandi, who currently services as director and was previously appointed by our board of directors, as a Class II director for a three year term:
 
Director	 	For	 	Withheld	 	
Joseph F. Alibrandi	 	19,203,082	 	177,858	 	
 
2.              Proposal No. 2 To ratify the selection of the accounting firm of Ernst & Young LLP to service as our independent registered public accounting firm for the fiscal year ending April 30, 2009.
 
For	 	Against	 	Abstain	 	
19,089,435	 	273,678	 	17,827	 	
 
ITEM 5. OTHER INFORMATION
 
None.
 
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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.	
 
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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: December 4, 2008	 	AEROVIRONMENT, INC.	
 	 	 	
 	By:	/s/ Timothy E. Conver	
 	 	Timothy E. Conver	
 	 	Chairman, Chief Executive Officer and President	
 	 	(Principal Executive Officer)	
 	 	 	
 	 	/s/ Stephen C. Wright	
 	 	Stephen C. Wright	
 	 	Chief Financial Officer	
 	 	(Principal Financial and Accounting Officer)	
 
25

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: December 4, 2008
 
 	/s/ Timothy E. Conver	 	
 	Timothy E. Conver	
 	Chairman, Chief Executive Officer and Director	

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, Stephen C. Wright, 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: December 4, 2008
 
 	/s/ Stephen C. Wright	 	
 	Stephen C. Wright	
 	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 November 1, 2008 (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 780(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/ Stephen C. Wright	 	
 	Stephen C. Wright	
 	Chief Financial Officer	
 
Dated: December 4, 2008
 
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.