AeroVironment plans on offering 7.7 million shares (assuming over-allotment) at a range of $14-$16. Insiders plan on selling 2.2 million shares in the deal. Goldman Sachs is lead underwriting this deal, Friedman Billings, Jefferies, Raymond James, Stifel, and Weisel are co-managing. Post-offering AVAV will have 19.2 million shares outstanding for a market cap of $288 million on a $15 pricing. IPO proceeds will be used for general corporate purposes.Founder & Chairman of the Board Paul MacCready and President & Chief Executive Officer Timothy Conver will each own approximately 25% of AVA outstanding shares post-offering. Dr. MacCready, age 81, founded AeroVironment in 1971 and has had a very distinguished career. Dr. MacCready is an inventor and entrepreneur who invented the Gossamer Condor, which in 1977 made the first sustained controlled flight powered solely by its pilot’s muscles. Dr. MacCready has received the Engineer of the Century Gold Medal from the American Society of Mechanical Engineers, the NASA Public Service Grand Achievement Award and Aviation Week’s Aerospace Laureate designation. In addition, Dr. MacCready was selected Graduate of the Decade by the California Institute of Technology and was named one of the 100 greatest minds of the 20th century by Time Magazine. Pretty impressive to say the least. From the prospectus: 'We design, develop, produce and support a technologically-advanced portfolio of small unmanned aircraft systems that we supply primarily to organizations within the U.S. Department of Defense, and fast charge systems for electric industrial vehicle batteries that we supply to commercial customers.' AVAV has two business segments, unmanned aircraft systems [UAS] and fast charge battery systems designed for industrial vehicles such as forklift trucks and airport ground support equipment. The ipo driver here is the UAS segment. Unmanned aircraft systems accounted for 80% of revenues the past 18 months and have been the growth driver for AVAV. AVAV is coming public because of their unmanned aircraft systems, not the fast charge battery systems. Unmanned aircraft systems [UAS] Due to founder Dr. MacCready, AVAV was a pioneer and now a leader in unmanned aircraft systems [UAS]. Nearly all AeroVironment's UAS are sold directly to the US Department of Defense. AVAV's UAS are designed to be launched and operated by a single person through hand held controls. They're electrically powered, configured to carry electro-optical or infrared sensors, provide real-time situational awareness and intelligence, fly quietly at speeds reaching 50 miles per hour and travel up to 20 miles from their launch location on a modular, replaceable battery pack. AVAV believes these features make their UAS optimal for intelligence, surveillance and reconnaissance missions. Thus far the US Department of Defense has awarded two competitively bid small UAS contracts. AVAV has won 100% of both contracts. Just like founder Dr. MacCready's career, pretty impressive. War is good for AVAV's unmanned aircraft systems sales. The bulk of AVAV's UAS sold to the DoD have been deployed in Iraq and Afghanistan. Current funded backlog is $64 million, much of which is in the form long-term, high-volume contracts. Current contracts are sole supplier contracts with the U.S. Army, U.S. Marine Corps and U.S. Special Operations Command, or SOCOM. The U.S. Army projects its total demand for AVAV's Raven small UAS at approximately 1,900 new systems, of which AVAV had delivered approximately 25% as of October 28, 2006. AVAV's small UAS fit nicely with the US Department of Defense initiatives to shift towards information based network-centric warfare, which emphasizes networked and distributed forces with enhanced situational awareness. Currently DoD represents essentially 100% of AVAV's UAS sales. AVAV does believe there is a market for their UAS in local law enforcement, border control and homeland security. Additionally AVAV plans to focus on growing sales to international governments allied with the US. PosiCharge fast charge systems - Account for 14% of AVAV's revenues the past 18 months. Designed to improve productivity and safety for operators of electric industrial vehicles, such as forklifts and airport ground support equipment, by improving battery and fleet management. Using proprietary technology the PosiCharge system recharges electric industrial vehicle batteries rapidly during regularly scheduled breaks or other times the vehicle is not in service, eliminating the need to remove and replacing the battery. PosiCharge is able to recharge a typical electric industrial vehicle battery up to six times faster than a conventional charger. Customers include Ford Motor Company, SYSCO Corporation, Southwest Airlines and IKEA. Financials Nearly $4 per share in cash post-offering. 2.7 X's book value on a $15 pricing. Winning two exclusive DoD UAS contracts have been the revenue driver here. Revenues doubled in FY '05(ending 4/30/05) to $105 million, as the first of those contracts resulted in heavy order flow for AVAV's unmanned aircraft systems. Revenues increased 33% in FY '06(ending 4/30/06) again driven by the increase in order flow of the UAS to the Department of Defense. Through the first 6 months of revenues appear on track to increase 7%-10% in FY '07 to $150 million or so. Note that AVAV's revenues would appear to have plateaued the past four quarters, as there has been very minimal revenue growth during this period. This is indicative in the slowing annual growth rates from 100%+ in FY '05 to 33% in FY '06 to the current pace of 7%-10% for FY '07. Why? The revenue driver for UAS has been winning 100% of the two DoD small unmanned aircraft systems contracts. Both of those contracts hit their stride about four quarters ago. UAS is only 25% or so through fulfilling those contracts so they should each continue to provide steady revenues going forward. However for UAS to take that next step up revenue wise from the $150 million area, they will need to find other revenue streams for their small unmanned aircraft systems. FY '06(ending 4/30/06) - Total revenues of $139 million. Gross margins of 41%. UAS sales accounted for 80% of overall revenues and essentially the entire 33% revenue growth over FY '05. Research & Development as well as SGA both increased at a faster pace then revenues, reducing operating margins from FY '05. It appears UAS ramped up both in an attempt to open up additional sales avenues for their small unmanned aircraft systems. Operating margins were 11% down significantly from FY '05's 19%. Again you do not want to see declining operating margins as the company is growing revenues. Net margins(factoring in full taxes) were 7 1/2%. Earnings per share were $0.57. On a $15 pricing, AVAV would be trading 26 X's FY '06 earnings. FY '07(ending 4/30/06) - Through first 2 quarters(ending 10/28/06) revenues appear on track for $150 million. As noted the slowing growth is due to the two DoD contracts plateauing at a strong level. Gross margins appear on track for 40%. Operating margins look to be in the same ballpark as FY '06 13% or so. Net margins are currently on track for 8%. Earnings per share for FY '07 should be in the $0.65 - $0.70 range. On a $15 pricing AVAV would trade 22 X's FY '07 earnings. Note - there is a chance that FY '07 projections may be a bit conservative. To grow revenues AVAV will need to develop additional customers and contracts for their UAS. AVAV realized this and ramped up R&D and SGA expense lines the past 18 months in an effort to broaden and grow their UAS program. In September/October 2006 there may be initial indications they've made inroads in doing so: 1) AVAV received a full-rate production decision from the U.S. Army/SOCOM for the new Raven B program in October 2006; 2) AVAV entered into a proof of concept development contract with the DoD in October 2006 for a hand-held, lethal small UAS; 3) AVAV entered into an advanced concept technology demonstration contract in September 2006 with the Office of the Secretary of Defense, SOCOM and the U.S. Army to develop advanced UAS technologies; 4) executed two commercial service agreements beginning in October 2006 for oil and gas pipeline and offshore platform monitoring using small UAS; Winning sole providership of the Department of Defense only two open bid small UAS contracts is a key here. Also it appears that with the new development contracts with the DoD in late 2006, the US Department of Defense prefers AVAV's small unmanned aircraft systems technology over the competition. I would go so far to say it appears the DoD believes AVAV's UAS to be superior to the competition. Risks/Concerns - AVAV needs warlike activities to increase Department of Defense contract flow going forward. Taken from AVAV, their UAS are designed to provide intelligence, surveillance and reconnaissance. These activities are more in need during a warlike environment then not. Quarterly revenues have been stagnant the past four quarters and AVAV will need to develop additional revenue streams for their UAS. It does appear they may be in line to be awarded additional contracts with the DoD going forward. To be a successful public company going forward though, AVAV will also need to begin selling to allied governments as well as other US departments and private industry. There are some indications of this beginning to occur with the small sale for energy platform monitoring as well as a pilot program monitoring the US/Mexico border.
Competition - AVAV does have competition. In the small UAS space AVAV competes with Advanced Ceramics Research, Applied Research Associates, Elbit Systems, L-3 Communications Holdings and Lockheed Martin. While Elbit, L-3 and Lockheed are all public companies, there is not a direct pure-play comparable to AVAV. With all three of the public competitors the small UAS is a segment of operations, not the company's primary revenue and earnings driver.
Conclusion - Easy recommend here in pricing range and a bit above. Yes there are a few concerns here with the stagnant revenues the past four quarters. However AVAV has carved out a dominant position in the small unmanned aircraft systems space. The multiple here is also very reasonable for a company with such a promising future. At a projected $288 million initial market cap(assuming a $15 pricing) there is plenty of room for appreciation mid to long term here. Strong IPO overall.