AeroVironment : Quarterly Report for Quarter Ending August 1, 2026 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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The following is a discussion and analysis of our financial condition and the results of operations as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the "Condensed Consolidated Financial Statements" and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. 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 I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended April 30, 2026, as updated by our subsequent filings under the Securities and Exchange Act of 1934, as amended (the "Exchange Act").

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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.

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Critical Accounting Estimates

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The following should be read in conjunction with the critical accounting estimates presented in our Annual Report on Form 10-K for the fiscal year ended April 30, 2026.

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Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. When we prepare these condensed 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, inventory reserves for excess and obsolescence, intangible assets acquired in a business combination, goodwill, 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.

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Revenue Recognition

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Adjustments to original estimates for a contract's revenue, estimated costs at completion and estimated profit or loss are often required as work progresses under a contract, as experience is gained and as more information is obtained, even though the scope of work required under the contract may not change, or if contract modifications, including the finalization of undefinitized contract actions, occur. The impact of revisions in estimate of completion and variable consideration for all types of contracts are recognized on a cumulative catch-up basis in the period in which the revisions are made. Changes in variable consideration associated with the finalization of undefinitized contract actions could result in cumulative catch up adjustments to revenue that could be material. During the three months ended August 1, 2026 and August 2, 2025, changes in accounting estimates on contracts recognized using the over time method are presented below. Amounts representing contract change orders or claims are included in revenue if the order or claim meets the criteria of a contract or contract modification in accordance with ASU 2014-09, Revenue from Contracts with Customers ("ASC 606").

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For the three months ended August 1, 2026 and August 2, 2025, favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands):

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For the three months ended August 1, 2026, favorable cumulative catch-up adjustments of $8.2 million were primarily due to cost adjustments on 7 contracts. During the three months ended August 1, 2026, we revised our estimates of the total expected costs to complete a Space and Directed Energy contract. The aggregate impact of these adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was an increase to revenue of approximately $2.3 million. For the same period, unfavorable cumulative catch-up adjustments of $(11.5) million were primarily related to higher than expected costs on 34 contracts, which individually were not material.

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For the three months ended August 2, 2025, favorable cumulative catch-up adjustments of $2.3 million were primarily due to cost adjustments on 13 contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments of $6.5 million were primarily related to higher than expected costs on 13 contracts, which individually were not material.

Goodwill

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Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. We test goodwill for impairment annually during the fourth quarter of our fiscal year or when events or circumstances change in a manner that indicates goodwill might be impaired. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business or political climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends or significant underperformance relative to projected future results of operations.

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Our evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. For the impairment test, we first assess qualitative factors, macroeconomic conditions, industry and market considerations, triggering events, cost factors, and overall financial performance, to determine whether it is necessary to perform a quantitative goodwill impairment test. Alternatively, we may bypass the qualitative assessment for some or all of our reporting units and apply the quantitative impairment test. If determined to be necessary, the quantitative impairment test shall be used to identify goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any). For the quantitative impairment test, we estimate the fair value by weighting the results from the income approach and the market approach. These valuation approaches consider a number of factors that include, but are not limited to, prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our industry and require us to make certain assumptions and estimates regarding industry economic factors and future profitability of our business.

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In January 2026, a stop-work order was received on the Company's Other Transaction Agreement for the delivery of BADGER phased array antenna systems to support Space Force's SCAR program. We concluded that the stop-work order represented a trigger event that indicated the carrying value of the Space reporting unit exceeded its fair value. As a result, we updated our estimates of the long-term cash flows of the Space reporting unit to reflect the reduced revenue associated with the stop-work order as well as an increase in expected research and development and capital investments to achieve product commercialization, which is expected to result in expanded opportunities and improve long term product margins. The changes in estimates resulted in the recognition of a goodwill impairment charge of approximately $240 million in the Space reporting unit. Due to the trigger event, we also performed a recoverability test on the long-lived assets, inclusive of the intangibles, of the Space reporting unit for impairment in accordance with ASC 360 during the fiscal year ended April 30, 2026. The undiscounted cash flows exceeded the carrying value and no impairment was recorded. As of August 1, 2026, we have not identified any events or circumstances since the prior year's annual impairment test that could trigger an impairment review.

The Space reporting unit, included in the SCDE reportable segment, is considered to have an increased risk of failing future quantitative goodwill impairment tests as an impairment was recorded during the quarter ended January 31, 2026. The Company's annual impairment test for the fiscal year ending April 30, 2027 will be performed during the fourth quarter of fiscal year 2027.

The estimates and assumptions used to determine the fair value of our reporting units are highly subjective in nature. Actual results can be materially different from the estimates and assumptions. If actual market conditions are less favorable than those projected by the industry or by us, or if events occur or circumstances change that would reduce the estimated fair value of our indefinite-lived intangible assets below the carrying amounts, we could recognize future impairment charges, the amount of which could be material.

Fiscal Periods

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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 2027 fiscal year ends on April 30, 2027 and our fiscal quarters end on August 1, 2026, October 31, 2026 and January 30, 2027, respectively.

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Results of Operations

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The following tables set forth our results of operations for the periods indicated (in thousands):

Three Months Ended August 1, 2026 Compared to Three Months Ended August 2, 2025

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Revenue. Revenue for the three months ended August 1, 2026 was $480.5 million, as compared to $454.7 million for the three months ended August 2, 2025, representing an increase of $25.8 million, or 6%. The increase in revenue was due to an increase in product revenue of $15.5 million and an increase in service revenue of $10.3 million. The increase in product revenue was driven by an increase in UAS products of $39.1 million due to an increase in the global demand for UAS products, partially offset by a decrease in Space and Directed Energy product sales of $18.1 million primarily related to the termination of the SCAR program in the prior year and a decrease in Precision Strike and Defense Systems ("PSDS") of $6.8 million. The decrease in PSDS was driven by decrease of $56.9 million of Switchblade product revenue due to order delays, partially offset by revenue from the ESAero acquisition of $41.8 million and increased demand for defense systems of $18.5 million. The increase in service revenue was primarily driven by increases in AxS service customer funded R&D services of $34.1 million, partially offset by decreases to Cyber and Mission Solutions ("CMS") service revenue of $18.3 million driven by reduced scope on certain contracts.

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Cost of Sales. Cost of sales for the three months ended August 1, 2026 was $355.9 million, as compared to $359.6 million for the three months ended August 2, 2025, representing a decrease of $3.7 million, or 1%. The decrease in cost of sales was a result of a decrease in product cost of sales of $17.1 million, partially offset by an increase in service cost of sales of $13.4 million. The decrease in product cost of sales was primarily due to a shift in mix of product sales of approximately $28 million, partially offset by approximately $11 million due to the increase in product revenue. The increase in service costs of sales was primarily due to an increase of approximately $9 million due to the increase in sales volume and approximately $4 million due to shift in mix of services provided. Cost of sales for the three months ended

August 1, 2026 included $18.6 million of intangible amortization and other related non-cash purchase accounting expenses as compared to $37.4 million for the three months ended August 2, 2025. As a percentage of revenue, cost of sales decreased from 79% to 74% primarily due to decreased amortization and other non-cash purchase accounting expenses, resulting in gross margin increasing from 21% to 26%.

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Gross Margin. Gross margin is equal to revenue minus cost of sales.

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Selling, General and Administrative. SG&A expense for the three months ended August 1, 2026 was $111.5 million, or 23% of revenue, as compared to SG&A expense of $131.3 million, or 29% of revenue, for the three months ended August 2, 2025. The decrease in SG&A expense was primarily due to a decrease of $17.4 million of intangible amortization expense and a decrease of $22.5 million in acquisition related expenses resulting from the prior year acquisition of BlueHalo, partially offset by an increase of approximately $9 million of employee related expenses related to increases in headcount and an increase of $4.4 million of bad debt expense.

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Research and Development. R&D expense for the three months ended August 1, 2026 was $24.0 million, or 5% of revenue, as compared to R&D expense of $33.1 million, or 7% of revenue, for the three months ended August 2, 2025. The decrease was primarily related to timing of planned expenditures. R&D expense is expected to continue to be 7% to 9% of revenue for fiscal year ended April 30, 2027.

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Interest Income (Expense), net. Interest income, net for the three months ended August 1, 2026 was $4.1 million compared to interest expense, net of $17.4 million for the three months ended August 2, 2025. The increase in interest income was due to a combination of higher cash and investment balances and lower interest bearing debt balances. The decrease in interest expense related to the Fourth Amendment Term Loan Facility and Revolver Facility obtained on May 1, 2025 in conjunction with the BlueHalo acquisition and the unamortized debt issuance costs allocated to the Fourth Amendment Term Loan Facility of $6.7 million, which were expensed upon repayment of the Fourth Amendment Term Loan Facility in July using the proceeds from the Notes and common stock issuances in July 2025.

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Other (Expense) Income, net. Other expense, net, for the three months ended August 1, 2026 was $0.6 million as compared to other income, net of $2.4 million for the three months ended August 2, 2025. The decrease in other income, net was driven by unrealized gains in equity security investments for the three months ended August 2, 2025. The equity security investments were subsequently sold during the fiscal year ended April 30, 2026.

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Benefit from Income Taxes. Our effective income tax rate was 5.4% for the three months ended August 1, 2026, as compared to 18.0% for the three months ended August 2, 2025. The change in our effective income tax rate was primarily attributable to a reduction in loss before income taxes and an increase in Section 162(m) limitation on executive compensation, partially offset by an increase in federal R&D credits. The effective income tax rate for the three months ended August 1, 2026, was primarily attributable to the current quarter loss before income taxes relative to the projected full year income before income taxes, state valuation allowances, Section 162(m) limitation on executive compensation, partially offset by federal R&D credits.

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Equity Method Investment Income, net of Tax. Equity method investment income, net of tax for the three months ended August 1, 2026 was $1.9 million as compared $1.8 million for the three months ended August 2, 2025.

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Autonomous Systems

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AxS Revenue. AxS revenue for the three months ended August 1, 2026 was $346.0 million, compared to $285.3 million for the three months ended August 2, 2025, representing an increase of $60.7 million, or 21%. The increase in revenue

was due to an increase in product revenue of $33.2 million and an increase in service revenue of $27.5 million. The increase in product revenue was driven by an increase in UAS products of $39.1 million due to an increase in the global demand for UAS products, partially offset by a decrease in PSDS of $6.8 million. The decrease in PSDS was driven by decrease of $56.9 million of Switchblade product revenue due to order delays, partially offset by revenue from the ESAero acquisition of $41.8 million and increased demand for defense systems of $18.5 million. The increase in service revenue was primarily driven by increases in AxS customer funded R&D services of $34.1 million.

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AxS Segment Adjusted EBITDA. AxS segment adjusted EBITDA for the three months August 1, 2026 was $62.3 million, as compared to $52.8 million for the three months ended August 2, 2025, representing an increase of $9.5 million, or 18%. The increase in AxS segment adjusted EBITDA was primarily due to an increase in revenue of $60.7 million and a decrease in R&D of $7.6 million, partially offset by an increase in cost of sales of $25.2 million and a decrease in adjusted EBITDA add backs of $34.6 million for depreciation, amortization, cloud computing related amortization, stock-based compensation, and acquisition related expenses. The increase in cost of sales was primarily due to an increase of approximately $37 million due to the increase in sales volume, approximately $1 million due to mix shift to a higher proportion of services, partially offset by a decrease of approximately $13 million in intangible amortization expense.

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Space, Cyber and Directed Energy

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SCDE Revenue. SCDE Revenue for the three months ended August 1, 2026 was $134.5 million, as compared to $169.4 million for the three months ended August 2, 2025, representing a decrease of $34.9 million, or 21%. The decrease in revenue was due to a decrease in product revenue of $17.6 million and a decrease in service revenue of $17.3 million. The decrease in product revenue was driven by a decrease in Space and Directed Energy product sales of $18.1 million primarily due to the termination of the SCAR program in the prior year. The decrease in service revenue was driven by a decrease to CMS service revenue of $18.3 million driven by reduced scope on certain contracts.

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SCDE Segment Adjusted EBITDA. SCDE segment adjusted EBITDA for the three months August 1, 2026 was $(8.9) million, as compared to $3.8 million for the three months ended August 2, 2025, representing a decrease of $12.7 million, or 334%. The decrease in SCDE segment adjusted EBITDA was primarily due to a decrease in revenue of $34.9 million and a decrease in adjusted EBITDA add backs of $26.6 million for depreciation, amortization, cloud computing related amortization, stock-based compensation, and acquisition related expenses, partially offset by a decrease in cost of sales of $28.7 million, a decrease in SG&A of $19.0 million and a decrease in R&D of $1.6 million. The decrease in cost of sales was primarily due to a decrease of approximately $30 million due to the decrease in sales volume and approximately $5 million decrease in intangible amortization expense, partially offset by approximately $7 million due to mix shift to a higher proportion of lower margin services.

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Backlog

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Consistent with ASC 606, we define funded backlog as remaining performance obligations under firm orders for which funding is currently appropriated to us under a customer contract. As of August 1, 2026, our funded backlog was approximately $1,457.8 million, as compared to $1,183.0 million as of April 30, 2026.

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In addition to our funded backlog, we also had unfunded backlog of $1,366.5 million as of August 1, 2026. Unfunded backlog does not meet the definition of a performance obligation under ASC 606. We define unfunded backlog as the total remaining value of awarded Cost Plus and FFP contracts with incremental funding. Unfunded backlog does not obligate the customer to purchase goods or services. There can be no assurance that unfunded backlog will result in any orders in any particular period, or at all.

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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. Additionally, all U.S. government contracts included in backlog, whether or not they are funded, may be terminated at the convenience of the U.S. government.

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Liquidity and Capital Resources

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In May 2025, in connection with the consummation of the BlueHalo acquisition, the Company entered into the Fourth Amendment to Credit Agreement with BofA NA, the administrative agent and the swingline lender, JPM, U.S. Bank, and Citibank. The Amended Credit Agreement provides for an aggregate $700.0 million term loan and an aggregate $350.0 million revolving credit facility. Upon effectiveness of the Amended Credit Agreement, we drew $225.0 million from the amended Revolving Facility and the full $700.0 million of the Fourth Amendment Term Loan Facility. The proceeds from the Fourth Amendment Term Loan Facility and the Revolving Facility were used to repay certain outstanding indebtedness of BlueHalo and to pay for certain related transaction costs. In June 2025, we drew an additional $10.0 million under the Revolving Facility.

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In July 2025, we issued 4,057,460 shares of common stock at a public offering price of $248.00 per share and issued $747,500,000 aggregate principal amount of 0% convertible senior notes due 2030. The aggregate net proceeds from the Common Stock Offering and the Notes Offering, after deducting underwriting discounts and debt and equity issuance costs, was approximately $1.70 billion. The Company used approximately $965.3 million of the net proceeds from the Common Stock Offering and the Notes Offering to repay indebtedness under the Fourth Amendment Term Loan Facility and outstanding borrowings under the Revolving Facility. The remainder can and has been used for general corporate purposes, including to increase manufacturing capacity.

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Our ability to borrow under the Revolving Facility is reduced by outstanding letters of credit of $13.0 million as of August 1, 2026. As of August 1, 2026, approximately $337.0 million was available under the Revolving Facility. Refer to Note 9-Debt to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details. In addition, Telerob has a line of credit of €9.0 million ($10.5 million) available for issuing letters of credit of which €2.2 million ($2.6 million) was outstanding as of August 1, 2026.

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We anticipate funding our normal recurring trade payables, accrued expenses, ongoing R&D costs and obligations under the Credit Facilities through our existing working capital and funds provided by operating activities including those provided by our acquisitions. The majority of our purchase obligations are pursuant to funded contractual arrangements with our customers. 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 requirements, and future obligations related to the acquisition 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 draw on our Credit Facilities. We anticipate that existing sources of liquidity, Credit Facilities, and cash flows from operations will be sufficient to satisfy our cash needs for the foreseeable future.

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The Company is party to receivables purchase agreement with Citibank, N.A., with an aggregate capacity of $100 million. As of August 1, 2026, no receivables have been sold, proceeds collected, or purchase discount fees incurred.

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Our primary recurring liquidity needs are for financing working capital, investing in capital expenditures, supporting product development efforts, introducing new products and enhancing existing products, marketing acceptance and adoption of our products and services, and possible acquisitions of entities or strategic assets. 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 our Credit Facilities are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing, subject to the limitations specified in the Amended Credit Agreement. In addition, we may also

need to seek additional equity funding or debt financing if we become a party to any agreement or letter of intent for potential investments in, or acquisitions of, businesses, services or technologies.

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Our working capital requirements vary by contract type. On Cost Plus and T&M contracts, we typically bill our incurred costs and fees monthly as work progresses, and therefore working capital investment is minimal. On FFP 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. Certain contracts have negotiated progress payments, which facilitates billing and collection as work is completed.

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In August 2026, we closed on our purchase of a new campus facility in Southern California for $29.3 million.

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Cash Flows

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The following table provides our cash flow data for the three months ended August 1, 2026 and January 25, 2025 (in thousands):

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Cash Provided by (Used in) Operating Activities. Net cash provided by operating activities for the three months ended August 1, 2026 increased by $137.2 million to $13.5 million, as compared to $(123.7) million for the three months ended August 2, 2025. The increase in net cash used in operating activities was primarily due to an increase in cash as a result of changes in operating assets and liabilities of $112.7 million, largely related to decreases in accounts receivable and increases in accounts payable, partially offset by increases in unbilled receivables and retentions due to year over year timing differences. The increase in cash provided by operating activities was also driven by a decrease in net loss of $62.3 million, partially offset by a decrease in depreciation and amortization of $34.2 million.

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Cash Used in Investing Activities. Net cash used in investing activities decreased by $768.4 million to $(108.2) million for the three months ended August 1, 2026, as compared to $(876.6) million for the three months ended August 2, 2025. The decrease in net cash used in investing activities was primarily due to the cash consideration for the acquisition of BlueHalo, net of cash acquired of $844.6 million in the prior year, partially offset by the net purchase of available-for-sale securities of $58.8 million.

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Cash (Used in) Provided by Financing Activities. Net cash used in financing activities decreased by $1,649.5 million to $(4.1) million for the three months ended August 1, 2026, as compared to net cash provided by financing activities of $1,645.4 million for the three months ended August 2, 2025. The decrease in net cash provided by financing activities was primarily due to proceeds from issuance of common shares of $968.5 million, net of underwriter costs and proceeds from the issuance of Notes of $726.9 million, net of underwriter costs in the prior year. Part of the proceeds were used to repay the outstanding balances of the Fourth Amendment Term Loan Facility and Revolving Facility drawn in conjunction with the acquisition of BlueHalo.

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