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AeroVironment Climbs Despite Sagging Sales, Pre-Tax Profit

By Dan Caplinger – Mar 8, 2016 at 8:50PM

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A big tax benefit pumped up earnings in the drone-maker's results.


AeroVironment isn't just about drones, as this EV-charging equipment shows. Image: AeroVironment.

Recent advances in unmanned aerial vehicles have inspired many investors to see profit opportunities in the industry, and AeroVironment (AVAV -0.66%) gets a substantial amount of its business from the drone market. Even though defense peers like Northrop Grumman (NOC -0.63%) are also involved in the drone business, AeroVironment's exposure to the industry makes it a purer play for investors. Coming into Tuesday's fiscal third-quarter financial report, AeroVironment shareholders were prepared for falling earnings but modest sales gains. What AeroVironment reported was somewhat the opposite, falling short on revenue but outperforming on the bottom line thanks largely to a big one-time tax item. Let's look more closely at what AeroVironment told investors and what to expect for the remainder of the year and beyond.

AeroVironment gets a lift
AeroVironment's fiscal third-quarter numbers were mixed from most investors' perspective. Revenue fell a bit more than 1% to $67.6 million, defying the consensus forecast for a modest increase to $70.4 million. However, net income nearly tripled from the year-ago period to $6.2 million. That produced earnings of $0.27 per share, easily topping the nickel per share that most investors were expecting to see.

Looking more closely at AeroVironment's numbers, a substantial part of the swing in the bottom line came from income tax related items. For the most recent quarter, AeroVironment brought in a tax benefit of $1.1 million, compared to last year's $2.8 million expenses. Pre-tax income actually slid by about 1%.

Revenue from AeroVironment's two main segments once again followed its usual pattern. The drone segment saw a 5% increase in sales, although an even larger rise in expenses left the division with a slight decrease in gross margin. The relatively small Efficient Energy Systems division once again saw sales plunge, posting a decline of 38%, and only a decline in costs by nearly half managed to limit the decline in gross-margin figures.

Backlogs were also mixed. Current figures of $79.7 million were up by nearly a quarter since April 2015, but the sequential decline since October amounted to $17.5 million. Contract services revenue kept rising but at a slower pace of just 18% than in recent quarters.

CEO Tim Conver pointed to AeroVironment's innovative product line. "The unique advantages of Switchblade and its four emerging variants within our family of Tactical Misile Systems continued to build traction with customers during the quarter," Conver said, and the CEO also noted that strategic investments in the drone arena kept enhancing long-term growth prospects.

Can AeroVironment keep climbing?
Conver also remains optimistic about the future for AeroVironment. "The addition of a lien item for Lethal Miniature Aerial Missile Systems in the fiscal 2017 federal budget request," Conver said, "demonstrates the increasing value of our solutions to our troops and our country."

In terms of financial guidance, AeroVironment expressed guarded optimism. For the full fiscal 2016 year, the company is sticking with its projection of between $260 million and $280 million in sales. However, the company boosted its gross profit margin guidance by about two percentage points to 38% to 39.5%.

AeroVironment also keeps holding out hope for its non-drone business. Expanding its electric-vehicle charging capability in North America has potential for future growth, and Conver also celebrated AeroVironment's industrial EV charging systems as another source of future profit.

Investors were pleased with AeroVironment's results, helping send shares up 7% in after-hours trading following the announcement. If AeroVironment can stay ahead of Northrop Grumman and maintain its focus on the growing drone market, then its stock could continue to give investors the positive performance they want to see.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends AeroVironment. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

AeroVironment Stock Quote
AeroVironment
AVAV
$88.34 (-0.66%) $0.59
Northrop Grumman Stock Quote
Northrop Grumman
NOC
$525.04 (-0.63%) $-3.31

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