AeroVironment, Inc. (AVAV) Q2 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. And welcome to the AeroVironment Incorporated's Second Quarter Fiscal Year 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. With us today from the company is Chairman and Chief Executive Officer, Mr. Tim Conver; Chief Financial Officer, Mr. Jikun Kim; Chief Operating Officer, Mr. Tom Herring; and Vice President of Investor Relations, Mr. Steven Gitlin. And now, at this time, I'd like to turn the conference over to Mr. Gitlin. Sir, the floor is yours.

Thank you, Huey. Please note that on this call certain information presented contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties, including, but not limited to, economic, competitive, governmental and technological factors outside of our control that may cause our business, strategy or actual results to differ materially from the forward-looking statements. For a list and description of such risks and uncertainties, see the reports we file with the Securities and Exchange Commission. Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date on which they are made. We do not intend and undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. The content of this conference call contains time-sensitive information that is accurate only as of today, November 26, 2013. The company undertakes no obligation to make any revision to the statements contained in our remarks or to update them to reflect the events or circumstances occurring after this conference call. We will now begin with remarks from Tim Conver. Tim?

Thank you, Steve. Good afternoon, and welcome to our Second Quarter Fiscal 2014 Conference Call. Today, I'll focus on 3 topics: a review of our second quarter results, the positive performance gains from our team year-to-date and an update on the multiple opportunities we are pursuing to drive growth over the next 5 years. Jikun Kim will review our financial performance, after which I'll address our outlook for the balance of the fiscal year and then we'll take your questions. Our second quarter revenue was $64.9 million, bringing first half revenue to $109 million, 45% of the midpoint of our full year guidance, which is better than expected. We are guiding earnings for fiscal '14 based on adjusted EPS, which excludes the noncash effect of changes in the fair value of the conversion option of our CybAero convertible notes. On an adjusted basis, our fully diluted EPS was $0.14, excluding the $0.07 reduction associated with those notes. We booked $122 million in new orders during the quarter and had our second highest quarter-ending backlog of $134 million, up 74% from Q1. This is the important year-over-year comparison because this year Q2 firm backlog exceeds the incremental revenue required to achieve the midpoint of our guidance for the full year. Overall, Q2 financial results kept us on track with our plan and significantly increased our visibility for the balance of the year. Our priorities for this year are staying #1 with our customers, capturing and executing on the key growth opportunities during the year and maintaining target profitability. These priorities continue to guide our performance this year, and I'll discuss a number of examples. A couple of important developments announced during the quarter provided our UAS customers with important capabilities that further expand our value proposition and differentiate our system solutions. First, the block upgrade for the Puma AE system significantly improves performance and value by increasing its payload options, enhancing its ability to operate in extremely rugged terrain and at high altitude, increasing its range and expanding its flight duration by 75% to 3.5 hours. This upgrade also enables an easy cut-in of planned feature enhancements, including the solar wing upgrade that demonstrated over 9 hours of flight time last quarter. With 9 hours of flight time, Puma can address new applications, which -- with much of the performance of Tier 2 systems at a fraction of their cost. We also introduced Pocket DDL this quarter. This little 2 by 3-inch plug-in allows users with smartphones, tablets and laptops to receive video and communicate by voice and text through a secure mobile network enabled by our family of digital small UAS. Second, this quarter, customers continue to choose AeroVironment as a leader in each of our target markets through multiple competitive and sole source awards. Important contracts this quarter include the final portion of the government fiscal '12 Raven contract and multiple Puma and Switchblade orders. In our growing business area of advanced development, we announced an important Phase 1 contract for the DARPA Tactically Exploited Reconnaissance Node or TERN. This is a new development program for a ship-based vertical takeoff and landing mid-altitude, long-endurance UAS. In the small UAS area, we received a competitive $19 million award from the Army from their government fiscal '13 Raven funding. And earlier this month, Canada's Department of National Defence announced an $11 million contract for our Raven systems. Third, as much as we have focused on capturing these key programs, we are equally focused on strong execution to achieve the timely and cost-effective performance on customer requirements. Execution also includes aligning our operations with our target markets for maximum efficiency and effectiveness. In our second quarter, we rebalanced our UAS resources to better align our capabilities and capacity with the requirements of our core business mix and the expected needs of our growth opportunities. We redeployed portions of our workforce to growth areas and reduced our staff in some areas. We also changed our practice of building inventory ahead of government contract receipt to adapt to the less predictable timing of government contract awards. This change will improve our inventory and cost control, which will benefit our customers and our business. However, our lead times have increased as a result. Delivery and revenue recognition on UAS production contracts will occur later after order placement in our historic pattern. In our EES segment, a drop-off in North American EV test equipment demand has resulted in lower revenue recently. However, we have maintained our leading market share. We are very pleased with our EVS product line that has increasingly been effective in competing for home charging units. At the same time, plug-in EV sales have been increasing. Across-the-board, our team is executing well on all of our fiscal '14 priorities, and our Q2 performance in each area was strong. Our backlog is at near-record levels, and our outlook is positive. And now I'd like to update you on the 6 major growth opportunities that we intend to realize over the next 5 years. My primary focus will be on recent activities supporting the 3 opportunities where we expect near- and mid-term revenue acceleration: tactical missile systems, international small UAS and mission services. Switchblade adoption has accelerated sharply with the recent Army procurement of hundreds of systems. We are significantly increasing production volumes as we prepare to deliver these systems in response to increasing demand. During the quarter, we booked over $44 million in Switchblade contracts. The strong order flow has multiple positive implications: it reflects the value the Army places on this unique capability; it demonstrates the potential of initial innovation adoption to surge demand and it also supports our revenue plan for the year. Earlier this month, the Army released its second request for information for the Lethal Miniature Airborne Munition System, or LMAMS, program. This action reinforces our expectation that this will be an enduring need for the Army and is likely to proceed towards a multiyear program of record, possibly in government fiscal '16. The strong demand pull and increased acquisition by the Army has increased awareness in other DoD services, leading to a growing interest from multiple customers in multiple applications for Switchblade. This reinforces our conviction in the growing opportunity for Switchblade and our tactical missile systems business area. International demand and procurement programs for small UAS military systems also continue to move forward. Important Canadian DND contract award that I discussed earlier and another 7 international awards during the quarter support this view. Our teaming success with MacDonald, Dettwiler Associates in Canada, our business development work with Dynamatic Technologies in India and our new MOU with EADS Eurocopter demonstrates our robust approach to the global demand for proven UAS solutions. We're working with Eurocopter, a world-leading helicopter supplier, to identify new avenues for product and market expansion based on our respective technology, customer and market strengths. I look forward to providing more details about all of these collaborations as they progress. The Department of State UAV mission services procurement remains with the same status as last quarter. Customers released no feedback on their recent RFI, although we believe they remain intent on acquiring UAV services. Opportunities for mission services continue to represent significant growth potential, and we remain actively engaged in the development of this business area. We continue to lay the groundwork for 3 additional important growth opportunities that we expect to drive significant revenue growth in 2 to 5 years. These opportunities include commercial UAS, electric vehicle solutions and Global Observer. We are actively engaged now, as we must be, in developing essential market positioning, solution development, customer relationships and early contract wins to ensure our success when large-scale market adoption does accelerate in the future. I'll briefly update each of these long-term global growth opportunities. The recent FAA road map for UAS integration provides an informative view of the issues and the considerations the FAA and industry are currently and will increasingly address as we work towards UAS integration into the National Airspace System. AeroVironment is very well positioned to lead the introduction of UAS with approved civil and military operations, with pathfinder programs in place, lead adopters using our products and compelling new capabilities being demonstrated to a growing number of interested parties. In our EES segment, we continue to pursue solutions to advance the adoption and practicality of plug-in electric vehicles for drivers, governments, businesses, utilities and automakers. We are poised to launch an exciting new solution soon that will make plug-in electric car charging even easier, more cost effective and more flexible than ever. We believe Global Observer can become a major growth opportunity for AV in 3 to 5 years, and we continue to work with multiple customers who are interested in this unique capability. And now I'll turn the call over to Jikun to review our financial performance in more detail.

Thank you, Tim, and good afternoon, everyone. AeroVironment FY '14 Q2 results are as follows: revenue for the second quarter was $64.9 million, a decrease of 19% or $15.4 million over Q2 last year of $80.3 million. Looking at revenue by segment. UAS revenue was $56.1 million, a decrease of 14% over the prior year. The decrease in UAS revenue was largely due to lower service revenues of $10.1 million, driven by lower sUAS logistics and repair activities, as well as lower customer-funded R&D revenues of $4.5 million, driven by Switchblade activities. However, these decreases were offset by higher product deliveries of $5.2 million, driven by higher Puma spares and Switchblade deliveries. EES revenue was $8.8 million, a decrease of 41% from Q2 last year, primarily due to lower hardware deliveries and installation services. Turning to gross margin. Gross margin in the second quarter was $23.9 million, down 33% from Q2 last year of $35.6 million. Gross margin, as a percent of revenue, was 37% versus 44% in the second quarter last year. By segment, UAS gross margin was $20.8 million, down 31% from the second quarter last year, primarily due to lower sales volumes. As a percent of revenue, UAS gross margin was 37% compared to 46% in the second quarter last year. The primary drivers of this decline were less favorable product mix and lower volumes impacting overhead absorption, which also include severance expenses in the quarter. EES gross margin was $3.1 million, down 44% from Q2 last year, primarily due to lower sales volumes and lower absorption of manufacturing and engineering support overhead costs. As a percent of revenue, EES gross margin was 35% versus 37% in the second quarter last year. EES recognized a favorable product mix, offset by lower overhead absorption in the quarter. SG&A investment for the quarter was $13.1 million or 20% of revenue compared to $13.2 million or 16% of revenue in the prior year. R&D investment for the quarter was $6.9 million or 11% of revenue compared to the prior year amount of $9.4 million or 12% of revenue. The decrease is primarily due to lower spending on R&D initiatives, driven by Switchblade activities. Operating income for the quarter was $3.9 million or 6% of revenue compared to the prior year amount of $13.1 million or 16% of revenue. Operating income was lower primarily due to lower sales volumes generating lower gross profits, offset by lower R&D and SG&A investments. Other expense for the quarter was $2.3 million, primarily driven by the unrealized loss in the fair value of the CybAero convertible notes. The effective tax rate for the quarter was 9.1%, a decrease from the prior year period of 34%. The decrease is primarily due to lower taxable income and higher R&D tax credits. Net income for the quarter was $1.7 million or $0.07 per fully diluted share, compared to $8.7 million or $0.39 per fully diluted share in the same quarter last year. On an adjusted basis, which excludes the impact of the CybAero convertible notes, FY '14 Q2 EPS would have been $0.14 fully diluted shares. We have provided an EPS reconciliation table in the press release for your consideration. Now quickly moving through our first half FY '14 results. Revenue for the first 6 months was $109 million, down 22% from the prior year period of $139 million. By segment, UAS revenue was $91.3 million, down 20% from the prior year. The decrease in revenue was largely due to decreased service revenues of $26 million, driven by sUAS logistics and repair activities and lower customer-funded R&D revenues of $0.6 million. However, these decreases were offset by increased product deliveries of $3.6 million, driven by higher Puma spares activities. EES revenue was $17.7 million, down 28% from the prior year period, due to lower hardware deliveries and installation services. Gross margin for the first 6 months was $36.4 million, compared to $55.1 million a year ago. Gross margin, as a percent of revenue, was 33%, 700 basis points lower than the prior year. By segment, UAS gross margin was $34.1 million, down 32% primarily due to lower sales volumes and severance-related expenditures. EES gross margin was $5 million, down 44%, primarily due to lower sales volumes and severance-related expenditures. SG&A investments for the first 6 months was $25.5 million or 23% of revenue compared to the prior year amount of $26.8 million or 19% of revenue. R&D investments for the first half was $14.1 million or 13% of revenue compared to $17.5 million or 13% of revenue in the prior year. Operating loss for the first 6 months was $3.2 million or negative 3% of revenue compared to an operating income of $10.8 million or 8% of revenue last year. Other expenses for the first 6 months was $5.7 million, primarily due to an unrealized loss in the CybAero convertible notes. The effective tax rate for the first 6 months was 33.9%, compared to an effective tax rate for the prior year of 34.1%. Net loss for the first 6 months was $5.6 million or $0.25 per share, compared to a net income of $7.4 million or $0.33 per diluted share last year. On an adjusted basis, which excludes the impact of the CybAero convertible notes, FY '14 Q2 EPS would have been a $0.06 loss per share. Looking at backlog. Funded backlog at the end of the quarter was $133.8 million, up $74.3 million or 125% from April 30, 2013. Turning to our balance sheet. Cash equivalents and investments at the end of the second quarter totaled $195.2 million, down $1.2 million from the prior quarter. The decline in cash equivalents and investments were driven by higher working capital needs and the change in the fair value of the CybAero convertible notes. Turning to receivables. At the end of the second quarter, our accounts receivables, which includes unbilled receivables, totaled $43.5 million, up $14.2 million from the prior quarter. Total days sales outstanding remained unchanged at approximately 60 days. Taking a look at inventory. Inventories were $60.6 million at the end of the quarter, compared to $68.7 million at the end of the prior quarter. Days in inventory were approximately 133 days compared to 196 days at the end of the prior quarter. Turning to capital expenditures. In the second quarter, we invested approximately $1.6 million, or 2% of revenue, in property improvements and capital equipment. AV recognized $2.3 million of depreciation in the quarter. And now an update of our FY '14 visibility. As of today, with Q2 actual revenues of $109 million, Q2 ending backlog that we can execute in our FY '14 of $103 million, Q3 quarter-to-date bookings that we can also execute in our FY '14 of $4 million and assuming an incremental revenues to hold EES revenue flat relative to FY '13 of $19 million, this puts the total FY '14 visibility at $235 million or 98 point -- 98% at midpoint of revenue guidance. Quarter-to-date Q3 -- in quarter-to-date Q3, AV booked $19 million of orders in total, 4 of which we should generate revenues in our FY '14. Now I'd like to turn things back to Tim to discuss AV's expectations for the balance of our FY '14.

Thank you, Jikun. Just to clarify, when I was earlier discussing the FAA road map and civil UAS opportunities, I intended to highlight civil and commercial, not military operations. And now, looking forward. Our team has performed very well against our fiscal '14 priorities, and we are on track to continue that strong performance through the second half. Even though our lead times have increased the time required for us to convert new orders into revenue, our higher backlog has significantly improved our revenue visibility for the second half. With our improved Q2 visibility, we have high confidence in our guidance for fiscal '14 at revenue between $230 million and $250 million and fully diluted adjusted EPS from operations between $0.35 and $0.50. Please remember we are guiding adjusted EPS excluding the effects of noncash fair volume -- fair value change in the CybAero investments. Second half UAS revenue is largely in firm backlog now, and second half bookings will build visibility for our fiscal '15 revenue. Our planning assumes continued pressure on DoD budgets, and until it changes, uncertainty on DoD budget allocations. However, we continue to believe cyber, soft and ISR will remain high priorities for the Defense budget and that 80% solutions at 20% of the costs will be increasingly attractive. Our leadership in both UAS and innovative, cost-effective solutions positions us relatively well in this environment. Beyond our current core business, we are making progress on all of the near-, mid- and long-term growth opportunities in new and adjacent markets. We are well positioned to capture those opportunities over time with unique product solutions, a strong and agile balance sheet and a team of people that are the best in the world at what they do. We continue to serve our customers well, compete effectively and lead in each of the markets that we are pursuing. We expect to finish our second half as planned and enter next year financially strong and well positioned in multiple growth opportunities in multiple markets. We are investing prudently now to establish a leading position in each of these opportunities, and we are prepared to invest aggressively when the time comes to secure the market adoption and the market share that will deliver superior returns from long-term market growth. Now Tom, Jikun and I will look forward to your questions.

[Operator Instructions] And it looks like our first question will come from the line of Andrea James with Dougherty & Company. Andrea James - Dougherty & Company LLC, Research Division: The first one will be just -- first of all, congratulations on the jump in backlog. Was there a large chunk of funding that became available? Or was it driven mostly by Switchblade? I guess, any additional color there would be great.

Well, Andrea, there -- clearly, large volumes of Switchblade, over $44 million in Switchblade orders during the quarter, but we also had multiple orders from the Army on Raven programs finishing off their fiscal '12 funding, as well as orders on their fiscal '13 funding multiple contracts for Raven and/or Puma, and I think, the 7-or-so contracts from international customers were nontrivial in adding to that total. Andrea James - Dougherty & Company LLC, Research Division: And then also is EES tracking to your expectations? And I guess, my question is what do you think gets that segment going again? I know your guidance kind of assumes that it'll be flat year-over-year, but it seems to be year-to-date down year-over-year. So I was just wondering kind of what gets you there in the back half?

The -- as you know, there's 3 different product lines in the EES segment. We're seeing continued strength in the industrial vehicles segment. That's principally electric forklifts and airport utility vehicles that we serve with our PosiCharge fast-charging solutions. There's clearly a recent weakness in the North American EV test systems business. We have some theories about that, that suggests it's probably temporary, but it's not completely clear what's going on there. And then we have the on-road electric car charging infrastructure business that's just emerging. The biggest, long-term growth opportunity we see in that segment at this point is the on-road charging infrastructure, driven primarily by the rate and the timing of adoption of electric cars that will size the market demand. To date, we've been very successful in competing broadly in that infrastructure market and we continue to keep a close eye on where we think that market is going as we develop our long-term strategy and business model for participation there, which we think can drive significant revenues, but probably not for another couple of years until we get material adoption percentages in the automotive market.

And it looks like our next phone question will come from the line of Bill Loomis with Stifel. William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: Just looking at the guidance. So if I kind of like got your numbers right -- and by the way, can you repeat the bookings to date that'll contribute to fiscal '14? I missed that number. But just talking about that, why not raise the guidance because if I interpret you right, if you don't win anything else, you're at the midpoint of the guidance. Am I hearing that correctly? And can you repeat those numbers on the bookings that'll add that you gave earlier?

Sure, sure. So a couple of things. One is you asked about the quarter-to-date bookings. Quarter-to-date, Q3, we booked about $19 million and 4 of that will be calendarized into our FY '14. William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And the fiscal -- and the prior bookings that'll be calendarized in fiscal '14, that figure that you gave?

So at the end of Q2, we had $133.8 million of backlog, of which $103 million will be calendarized into our FY '14 revenues.

Okay. And in terms of the guidance question, Bill, we clearly have much stronger backlog at this point than we typically have at this point in the year. And it gives us a high level of confidence in our guidance. At the same time, we have modified our inventory practice of building ahead of contracts for the government. So that has the effect of extending our lead times and pushing out the period of time that we can begin delivering after contract award to a longer period than historically we've had. We also continue to operate with our very large set of customers within the Defense Department that still work on a continuing resolution with an unresolved sequestration. And the result is an ongoing level of uncertainty in that market that we are conservative about. So I think the balance of all that is a high level of confidence in our existing guidance and a wait-and-see attitude through the next quarter on what's going on in the market.

And it looks like our next question will come from the line of Peter Arment with Sterne Agee. Peter J. Arment - Sterne Agee & Leach Inc., Research Division: Tim, could you maybe provide a little more color on your, I guess, new cooperative agreement with Eurocopter? It seems like this could be an interesting opportunity long term, particularly regarding their progress that they've made on some of their demonstration programs.

Yes, we're quite excited about it, Peter, along with a couple of other initiatives with other organizations outside the country that I mentioned earlier in my comments. The -- there are a couple of specific opportunities that we think our relative strengths might enable us to create some good solutions for customers with. Beyond that, we think there's a broad set of potential opportunities that we intend to explore. I think, going into any details at this point would be premature, but I -- we are excited about the potential. Peter J. Arment - Sterne Agee & Leach Inc., Research Division: Okay. And then just as a follow-up. Regarding Switchblade, it seems like you finally really got some significant momentum there. You mentioned the RFI that was out, the multiyear in Program of Record, is that primarily still a U.S.-based? Or do you see international opportunities for Switchblade when you're looking longer term?

Well, I think, certainly, at this point in time, we're focused on U.S. customers with Switchblade and we're -- that's where our energies are both in responding to their interest for requirements and needs, as well as executing on the significant increase in demand and orders that we have in-house. Long term, it'll-- clearly, this is a munition and that'll be a -- the export environment for that product will be a government decision.

Our next phone question will come from Michael Ciarmoli with KeyBanc Capital Markets.

Jikun, maybe just one on the tax rate in the quarter and then for the full year. Was the lower tax rate baked into the earnings guidance? And can you kind of give us what your expectations are for the full year tax rate?

Sure. Our full year expected tax rate is 15%. And this low 9.1% in the quarter was contemplated.

Okay, perfect. And then maybe, Tim, can you just give us a sense -- you mentioned, obviously, Global Observer as one of the future growth drivers, citing that, I guess, out to maybe a 5-year time period. Can you give us an update in terms of what's happening there? What kind of investments you're making? Maybe what kind of progress you're seeing with either domestic commercial, military or international customers? And maybe just kind of set some expectations for us as how that program might progress.

Well, I think, in terms of expectations, probably a good way to look at it would be the time frame that we put on that in terms of the 3- to 5-year period where we expect to see the significant impact of revenue from that program, as well as the front end of that being probably the time frame that we would expect to see significant capital allocation to that opportunity. We're currently involved in discussions with multiple customers, both domestically and internationally. And there are -- there, for whatever it's worth, appears to be an increase in interest in applications. The primary opportunity here is for this platform to operate much like a geosynchronous satellite, only it's in the stratosphere instead of 22,000 miles up in space. It eliminates latency and it has the ability to upgrade payloads once a week if you wanted to. So doing all that at a fraction of the cost of a satellite has a lot of compelling advantage and offsetting that is it's a capability and a technology that has never been done before. So it results in a lot of appropriate consideration by customers when they look at that level of innovation. But we're increasingly optimistic about it. It's one of 6 major growth opportunities that we are currently pursuing and I would put it in terms of expectations on timing as probably the farthest out in the -- in our 5-year planning window that we look at. Of course, there's more lead time in that program than most from the time we get contracts to the time we actually deliver system solutions and start generating revenue which is what pushes it even farther out in that window.

Our next phone question will come from Brian Ruttenbur with CRT Capital.

On R&D going forward, do you expect R&D to be held flat? And then in terms of gross margins, I would expect as things flow through, depending on the mix of business, your margin should climb in the second half of this year?

So in terms of internal R&D, we really historically have not guided that. But if you look at the historical performance, it's been in the 8% to 10% of revenue range. And so you should expect something like that relative to the guidance range of the revenues that you saw. In terms of gross margin going into the future, keep in mind, Q1, we had an exceptionally low gross margin this year due to the low volume. So we should expect improvement in the second half of the year.

Our next phone question will come from Tyler Hojo with Sidoti & Company. Tyler Hojo - Sidoti & Company, LLC: So I just had a question involving the ES -- EES market. You mentioned that you're launching a new solution within that market. I'm just curious if that launch is tied to kind of the robust increase in revenue expectation in the back half for EES?

It's more -- Tyler, it's more tied to a -- the basic strategy that we've been pursuing in that market. I have mentioned in the past that we have focused our effort and limited our effort to North America. But in that geographical space, we have maximized our participation in the market across all levels of charging hardware and both automotive dealers -- I mean, automotive suppliers, utilities, public and residential applications and software as well as hardware. And we're doing that so that we can get a deep understanding of where each of those customer sets are seeing value and evolving their needs with the long-term intent of getting a lead angle on our view of where that market is headed and where the relative value propositions are so that we can collapse our strategy down onto a more focused business model. And I think a part of that is a growing belief on how we can apply innovation to address the way consumers are currently charging their vehicles and the kind of options they have had historically and we think that innovation in that area could be really helpful for them. And to the extent that we're right, that should be reflected in our revenue over time. Tyler Hojo - Sidoti & Company, LLC: Okay. And just, I guess, my follow-up would be in regards to the new offering that you mentioned that you're rolling out. Is that tied to infrastructure charging? Or is that a home-charging solution?

Well, I think, typical of AeroVironment's approach to innovation, it might have a foot in both camps.

Our next question in queue will come from the line of Josephine Millward with The Benchmark Company.

I wanted to ask about visibility for fiscal year '15. Given the government's fiscal year '14 funding request where small UAS is down significantly, you're really looking at the Switchblade international small UAS and State to drive growth. How good is your visibility for the Switchblade with a lower operating temple? And if you can talk about timing on -- if you accept an award from the State Department before your fiscal year ends?

Thanks, Josephine. Well, I had previously indicated that I thought it was likely we would see an RFP from at -- from the Department of State in our first half and an order in the second half. And we saw an RFI in the first half, but they have not yet released an RFP. So I expect that, that probably slides out the likely timing on -- well, obviously, it slid out the timing on the RFP and probably slides out the likely timing on their contracting as a result of an RFP. But I do have a high expectation that they intend to continue to proceed with that requirement. We know there is a very high demand for Switchblade and I don't see any reason that, that would abate in the near term. And the pipeline for international small UAS continues to look robust, although I always have to hedge on the timing of orders in that arena because it's always been more difficult to predict most other countries' order timing than the U.S. DoD. Even with that, we continue to see a lot of interest and demand in small UAS out of the U.S. government. So I think it's not -- we don't have this and have not seen any abrupt drop-off of demand associated with anticipated events in Afghanistan.

That's very helpful. As a follow-up, can you talk about what the FAA road map to small UAS means to your commercial and civil business, whether we would see meaningful contribution in fiscal year '15?

Well, meaningful contribution in our fiscal '15 is probably in the gray zone of timing. I think the FAA still is pursuing the time line that Congress put in the last FAA appropriation, which was rules published for access to the National Airspace System by government fiscal '15. And so once that happens, then I think there's the beginning of meaningful revenue opportunities. Clearly, we're engaged in that -- the early stages of that market now in multiple areas, as I indicated in my earlier comments. And these pathfinder programs that were identified in their road map, I think, are going to be very helpful in enabling industry to move early, get a lot of experience, have government get experience with that -- those examples. And the recent type certification for Puma for commercial applications in the Arctic is the first of those pathfinder programs. And that's been very exciting as we work with customers up there, demonstrate multiple applications and begin to get feedback on the economic value that they find in those applications. So I think we will -- we are likely to start seeing revenue-generating applications next year, but I wouldn't put it in the meaningful level for another year or 2 out.

And it looks like our next phone question from the line will come from Howard Rubel with Jefferies.

Two questions. The first, going back to EES, Tim. I'm not sure you really answered the prior question in terms of how you see sort of forward demand in the market. I mean, there's sort of 2 parts to it. One is that, I think at one point, you had a definite element of infrastructure, and could you sort of elaborate on that? And then second is your pricing seem to be high relative to some of your competitors and that probably slowed demand. And so how are you dealing with that? And how do you see your market share?

Well, I think, let me split it into long-term and near-term answers, Howard. Long term, I think the key issue will be the rate of adoption of plug-in electric vehicles. We've mentioned before that if that -- if and when that gets up to even mid-single-digit percentages of the automotive market, it's a really big deal for infrastructure, over $1 billion by our -- market opportunity by our calculation in the U.S. alone and much larger than that internationally. Clearly, I don't see that level of adoption happening in the next year or 2, but we think that begins to be feasible, if not probable, thereafter. In the near term, we've got different segments of our products in different markets with some growth in the industrial PosiCharge market and some shrinkage in the test equipment market and a level of uncertainty in the plug-in electric vehicles. There's a mix of pricing, as you indicated, for the EVSE units that are associated with the home-charging application. Our market share and our attach rate on our sales there is actually going up. And -- but there is a breadth of pricing in the market from different suppliers, and I think you're right. I agree with your observation that we're not the low-priced supplier in that market, but we're also not the high-priced and we are gaining a relative share in the last few months. So I find it difficult to provide a reliable prediction in the near term. I mean, I think the -- our revenues could move around one way or the other in the short term. In the long term, we clearly have a leading market position and I think we'll be able to maintain that. And the key thing is the rate of growth in the plug-in electric vehicle market driven by EV adoption.

Fine, appreciate that. And then when you talk to your government customer and you've really unblocked a big logjam and that's very impressive. But what does he tell you about his coffers? And I know you talked about uncertainty, but clearly, some of the program managers are holding some money back and some of them are going to be able to move money around because it is O&M money. How are you sort of approaching that? And what are you doing to get more than your fair share?

Well, we are staying close to our customers. Part of that focus on -- for the year of remaining #1 with our customers and focusing on execution is to make sure that when we do talk with our customers, they want to talk to us. And so far, I think that has enabled us to get a -- put a finer point on short-term timing that's -- that we can expect both from their intent and their ability to execute. The -- in terms of O&M money, it's -- in general, the primary application of O&M to our business mix is repair parts. And we are seeing a lot of empty boxes coming back that need to be replaced and repaired. So that has been an area of, from a revenue perspective, that looks relatively optimistic.

[Operator Instructions] And it looks like our next question will come from the line of Andrea James from Dougherty & Company. Andrea James - Dougherty & Company LLC, Research Division: Real quick housekeeping. What was funded R&D, the actual dollar amount in the quarter?

Let's see, $6.6 million. Andrea James - Dougherty & Company LLC, Research Division: Okay. And then the other one is a little bit longer question. You had the MDA announcement selling Ravens into Canada. Then you had the Eurocopter partnership announcement. And I guess, they came on the heels of each other. I was wondering, should we infer that these are sort of early successes from some realignment and refocusing of your staff? Or were they longer time coming? And I was also wondering if you're just sort of driving at different program areas by geography?

Well, I think they probably are the reflection of a strategic focus in those areas, Andrea. We talked last quarter or possibly the quarter before about realigning our organization structure to put more focus on specific discrete business areas, one of those was advanced development programs and it's in that area that the TERN program with DARPA was managed and captured and is being executed. And we established a separate business area focused on international business to address the unique characteristics of the -- that market in communicating effectively with those customers. And I think the -- it's within that area that we have developed a number of these collaborative relationships that are beginning to bear fruit already.

And it looks like our next phone question will come from Howard Rubel with Jefferies.

Just a quick follow-up. Usually, people end up with some SG&A costs associated with a proxy contest. I don't know how you pulled it off, but it looks like it's pretty clean. And also related to that, what were your severance and sort of your restructuring costs in the quarter?

Well, I think, 2 things: one, if you look at the Q1 SG&A costs relative to Q2 and you see a delta there, that's mostly attributable to the proxy issue; second, I believe we released an 8-K that identified the severance expenses being about $685,000.

[Operator Instructions] Presenters, at this time, I'm showing no additional questions in the queue. I'd like to turn the program over to management for any additional or closing remarks.

Huey, thank you for moderating the call today. And thank you all for your attention and your interest in AeroVironment. An archived version of this call, all SEC filings and relevant company and industry news can be found on our website at www.avinc.com. We look forward to speaking with you again following next quarter's results, and wish you an enjoyable Thanksgiving and holiday season.

Appreciate it, gentlemen, and thank you ladies and gentlemen, this does conclude today's call. You may now all disconnect, and have a wonderful day.