AeroVironment(AVAV) - 2025 Q2 - Quarterly Report

Part I Item 1. Financial Statements (Unaudited) Unaudited Q2 FY2025 financials show total assets at $1.019 billion, revenue growth with declining net income, and improved six-month operating cash flow Condensed Consolidated Balance Sheets Total assets slightly increased to $1.019 billion, liabilities decreased to $160.7 million due to term loan repayment, and equity rose to $858.4 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | Oct 26, 2024 (Unaudited) | Apr 30, 2024 | | :--- | :--- | :--- | | Total Current Assets | $514,845 | $515,581 | | Total Assets | $1,019,085 | $1,015,860 | | Total Current Liabilities | $111,611 | $144,879 | | Total Liabilities | $160,688 | $193,115 | | Total Stockholders' Equity | $858,397 | $822,745 | Condensed Consolidated Statements of Operations Q2 FY2025 revenue grew 4.2% to $188.5 million, but operating income and net income significantly declined, while six-month revenue increased 13.4% Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended Oct 26, 2024 | Three Months Ended Oct 28, 2023 | Six Months Ended Oct 26, 2024 | Six Months Ended Oct 28, 2023 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $188,458 | $180,816 | $377,941 | $333,163 | | Gross Margin | $73,638 | $75,350 | $155,105 | $141,010 | | Income from Operations | $7,006 | $25,178 | $30,065 | $51,545 | | Net Income | $7,543 | $17,840 | $28,709 | $39,735 | | Diluted EPS | $0.27 | $0.66 | $1.02 | $1.50 | Condensed Consolidated Statements of Cash Flows Six-month operating cash flow improved to a $24.7 million inflow, investing cash outflow decreased, and financing cash flow shifted to a $17.5 million outflow Cash Flow Summary for the Six Months Ended (in thousands) | Cash Flow Activity | Oct 26, 2024 | Oct 28, 2023 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $24,709 | $(25,590) | | Net cash used in investing activities | $(11,630) | $(37,635) | | Net cash (used in) provided by financing activities | $(17,471) | $31,544 | | Net decrease in cash and cash equivalents | $(4,341) | $(31,951) | Notes to Condensed Consolidated Financial Statements (Unaudited) Notes detail segment reorganization into UxS, LMS, MW, the BlueHalo acquisition, credit facility amendment, and goodwill impairment risk - Effective May 1, 2023, the company reorganized into three reportable segments: Uncrewed Systems (UxS), Loitering Munitions Systems (LMS), and MacCready Works (MW) to drive operational improvements and synergies[24][25][26] - As of October 26, 2024, the company had approximately $467.1 million of remaining performance obligations (funded backlog), with 72% expected to be recognized as revenue in fiscal 2025[44] - The MUAS reporting unit, with a goodwill balance of $135.8 million, is considered at an increased risk of failing future goodwill impairment tests as its fair value exceeded its carrying value by only 10% at the last annual test[94][188] - On October 4, 2024, the company amended its credit agreement, increasing the revolving credit facility to $200 million and repaying the existing Term Loan Facility in full As of October 26, 2024, $175.2 million was available under the revolving facility[106][109] - On November 19, 2024, the company announced a definitive agreement to acquire BlueHalo in an all-stock transaction, issuing 18,548,698 shares of common stock[155][156] - In connection with the BlueHalo acquisition, the company secured a debt commitment for a new $700 million Term Loan A facility to refinance a portion of BlueHalo's debt[164][252] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 13% six-month revenue growth driven by LMS, offset by UxS decline, decreased gross margin, increased operating expenses, and strong liquidity Results of Operations Q2 revenue grew 4% YoY, driven by LMS segment's 157% increase, offset by UxS decline, with gross margin falling and operating expenses rising Revenue by Segment - Three Months Ended (in millions) | Segment | Q2 FY25 (Oct 26, 2024) | Q2 FY24 (Oct 28, 2023) | % Change | | :--- | :--- | :--- | :--- | | Uncrewed Systems (UxS) | $85.4 | $132.8 | (36%) | | Loitering Munitions (LMS) | $77.7 | $30.2 | 157% | | MacCready Works (MW) | $25.3 | $17.8 | 42% | | Total Revenue | $188.5 | $180.8 | 4% | - The increase in Q2 revenue was primarily driven by a $47.9 million increase in Switchblade product production, reflecting strong global demand and a $9.9 million cumulative catch-up adjustment from the definitization of LMS contracts[196][210] - The decrease in Q2 UxS revenue was primarily due to a $41.8 million drop in product deliveries, mainly from reduced international sales compared to the prior year[196][206] - SG&A expense for Q2 increased by $9.8 million (35% YoY) due to higher employee-related costs, increased sales and marketing efforts, and acquisition-related expenses[199] - R&D expense for Q2 increased by $6.7 million (30% YoY) due to heightened development activities for product enhancements, new product lines, and support for acquired businesses[200] Liquidity and Capital Resources Liquidity is strong with positive operating cash flow and an amended $200 million revolving credit facility, but future indebtedness will increase with the BlueHalo acquisition - Funded backlog increased to $467.1 million as of October 26, 2024, up from $400.2 million as of April 30, 2024 Unfunded backlog stood at $1.83 billion[241][242] - The company amended its credit facility, increasing the revolving credit line to $200 million and repaying the term loan As of October 26, 2024, $175.2 million was available for borrowing[248] - Cash flow from operations for the six-month period was a positive $24.7 million, a $50.3 million improvement from the negative $25.6 million in the prior-year period, primarily due to favorable changes in working capital[255] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate fluctuations on its variable-rate credit facility and foreign currency exposure from Euro-denominated cash - The company has interest rate risk due to its $15.0 million outstanding balance on a variable-rate revolving credit facility[262] - Foreign currency exchange rate risk exists as the acquisition of Telerob resulted in a portion of the company's cash balance being held in Euros[263] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of October 26, 2024, with no material changes to internal controls - The CEO and CFO concluded that as of October 26, 2024, the company's disclosure controls and procedures were effective[267] - No changes occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[268] Part II Item 1. Legal Proceedings The company faces two ongoing legal proceedings in California from former employees regarding alleged labor code violations - The company is facing a class action complaint filed by a former employee in California alleging violations of the state's Labor Code regarding wages, meal breaks, and overtime[271] - A separate complaint was filed by another former employee seeking penalties under California's Private Attorney General Act (PAGA) for similar labor code violations[272] Item 1A. Risk Factors New risk factors include BlueHalo acquisition completion uncertainty, integration challenges, failure to realize synergies, increased indebtedness, and stockholder dilution - The acquisition of BlueHalo is subject to numerous closing conditions, including regulatory and shareholder approvals, and may be terminated, potentially requiring AeroVironment to pay a $200 million termination fee under certain circumstances[275][277][280] - Integrating BlueHalo's business may be more difficult, costly, or time-consuming than expected, and the combined company may fail to realize the anticipated synergies and benefits, which could adversely affect business results[308][311] - The company will incur substantial non-recurring costs associated with the transaction and integration, and its consolidated indebtedness is expected to increase substantially, heightening financial risks[302][337][338] - Current AeroVironment stockholders will experience significant ownership dilution, owning approximately 60.5% of the combined company post-transaction, and may not realize a commensurate benefit if synergies are not achieved[331][336] - Following the closing, funds affiliated with Arlington Capital Partners are expected to own approximately 26.2% of the company's common stock and will have the right to designate up to two directors, allowing them to exert significant influence[326][328] Item 5. Other Information The Compensation Committee approved an amended Executive Severance Plan for top executives and a new Executive Transaction Severance Plan - The company's Board approved an amended and restated Executive Severance Plan for its CEO, CFO, General Counsel, and Chief Accounting Officer[344][346] - A new Executive Transaction Severance Plan was also approved for three Senior Vice Presidents, providing severance benefits upon termination without cause on or before November 18, 2025[348][349] Item 6. Exhibits Key exhibits filed include the BlueHalo merger agreement, credit agreement amendment, and new executive severance plans - Key exhibits filed include the merger agreement with BlueHalo, the third amendment to the credit agreement, and new executive severance plans[354]