AeroVironment Inc

Previous wording

Revenue for LMS product deliveries, customization of UGV transport vehicles and customer-funded research and development contracts is recognized over time as costs are incurred. Contract services revenue is for the provision of services, including repairs and maintenance, training, engineering design, development and prototyping activities, and technical support services. Contract services revenue, which historically included ISR services, is recognized over time as services are rendered. We elected the right to invoice practical expedient in which if an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date, such as flight hours for ISR services, the entity may recognize revenue in the amount to which the entity has a right to invoice. Training services are recognized over time using an output method based on days of training completed. For performance obligations satisfied over time, revenue is generally recognized using costs incurred to date relative to total estimated costs at completion to measure progress. Incurred costs represent work performed, which correspond with, and thereby best depict, transfer of control to the customer. Contract costs include

Current wording

Revenue for LMS product deliveries, customization of UGV transport vehicles and customer-funded research and development contracts is recognized over time as costs are incurred. Contract services revenue is for the provision of services, including repairs and maintenance, training, engineering design, development and prototyping activities, and technical support services. Contract services revenue, including ISR services, is recognized over time as services are rendered. We elected the right to invoice practical expedient in which if an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date, such as flight hours for ISR services, the entity may recognize revenue in the amount to which the entity has a right to invoice. Training services are recognized over time using an output method based on days of training completed. For performance obligations satisfied over time, revenue is generally recognized using costs incurred to date relative to total estimated costs at completion to measure progress. Incurred costs represent work performed, which correspond with, and

Previous wording

labor, materials, subcontractors’ costs, other direct costs, and indirect costs applicable on government and commercial contracts.

Current wording

thereby best depict, transfer of control to the customer. Contract costs include labor, materials, subcontractors’ costs, other direct costs, and indirect costs applicable on government and commercial contracts.

Previous wording

We review cost performance, estimates-to-complete and variable consideration at least quarterly and in many cases more frequently. 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 and six months ended October 26, 2024 and October 28, 2023, 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 ASC 606. Incentives or penalties and awards applicable to performance on contracts are considered in estimating revenue and profit rates, and are recorded when there is sufficient information to assess anticipated contract performance.

Current wording

We review cost performance, estimates-to-complete and variable consideration at least quarterly and in many cases more frequently. 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 and nine months ended January 25, 2025 and January 27, 2024, 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 ASC 606. Incentives or penalties and awards applicable to performance on contracts are considered in estimating revenue and profit rates, and are recorded when there is sufficient information to assess anticipated contract performance.

Previous wording

For the three months ended October 28, 2023, favorable cumulative catch-up adjustments of $4.1 million were primarily due to final cost adjustments on seven contracts. During the three months ended October 28, 2023, we revised our estimates of the total expected costs to complete an LMS variant 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 $1.7 million. For the same period, unfavorable cumulative catch-up adjustments of $1.3 million were primarily related to higher than expected costs on seven contracts, which individually were not material.

Current wording

For the three months ended January 27, 2024, favorable cumulative catch-up adjustments of $4.5 million were primarily due to cost adjustments on three contracts. During the three months ended January 27, 2024, we revised our estimates of the total expected costs to complete an LMS 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 $3.6 million. For the same period, unfavorable cumulative catch-up adjustments of $0.1 million were primarily related to higher than expected costs on three contracts, which individually were not material.

Previous wording

For the six months ended October 26, 2024 and October 28, 2023, favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands):

Current wording

For the nine months ended January 25, 2025 and January 27, 2024, favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands):

Previous wording

For the six months ended October 26, 2024, favorable cumulative catch-up adjustments of $10.3 million were primarily due to final cost adjustments on four contracts. During the six months ended October 26, 2024, we definitized certain LMS undefinitized contract actions. The aggregate impact of these cumulative catch-up revenue adjustments for the contract definitization was an increase to revenue of approximately $9.9 million. The remaining adjustments individually were not material. For the same period, unfavorable cumulative catch-up adjustments of $1.7 million were primarily related to higher than expected costs on 26 contracts, which individually were not material.

Current wording

For the nine months ended January 25, 2025, favorable cumulative catch-up adjustments of $11.6 million were primarily due to cost adjustments on four contracts. During the nine months ended January 25, 2025, we definitized certain LMS undefinitized contract actions. The aggregate impact of these cumulative catch-up revenue adjustments for the contract definitization was an increase to revenue of approximately $9.9 million. The remaining adjustments individually were not material. For the same period, unfavorable cumulative catch-up adjustments of $2.1 million were primarily related to higher than expected costs on 30 contracts, which individually were not material.

Previous wording

For the six months ended October 28, 2023, favorable cumulative catch-up adjustments of $5.6 million were primarily due to final cost adjustments on 10 contracts. During the six months ended October 28, 2023, we revised our estimates of the total expected costs to complete an LMS variant 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 $1.4 million. For the same period, unfavorable cumulative catch-up adjustments of $2.0 million were primarily related to higher than expected costs on 10 contracts, which individually were not material.

Current wording

For the nine months ended January 27, 2024, favorable cumulative catch-up adjustments of $6.5 million were primarily due to cost adjustments on 17 contracts. During the nine months ended January 27, 2024, we revised our estimates of the total expected costs to complete an LMS 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 $1.4 million. For the same period, unfavorable cumulative catch-up adjustments of $1.5 million were primarily related to higher than expected costs on eight contracts, which individually were not material.

Previous wording

As of October 26, 2024, our MUAS reporting unit had a goodwill balance of $135.8 million. The estimated fair value of the MUAS reporting unit does not substantially exceed its carrying value due to the impairment recorded during the fourth quarter ended April 30, 2023. The fair value of the MUAS reporting unit exceeded its carrying value by 10% as of January 28, 2024, the date of the most recent annual goodwill impairment test. Fair value determinations utilized in the quantitative goodwill impairment test require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated future annual net cash flows, income tax rates, discount rates, growth rates, and other market factors. Estimated future annual net cash flows based in part upon our ability to obtain contracts from the U.S. D.o.D. and foreign allied nations and negotiate the estimated pricing are considered the most significant, sensitive assumptions. If current expectations of future growth rates and margins are not met, if market factors outside of our control, such as discount rates, income tax rates, or inflation, change, or if management’s expectations or plans otherwise change, including updates to long-term operating plans, then MUAS may become impaired in the future. Accordingly, the MUAS reporting unit is considered at an increased risk of failing future quantitative goodwill impairment tests. The intangibles included in the MUAS reporting unit of $11.8 million as of October 26, 2024 will also be evaluated for potential impairment during the fourth quarter impairment test. During the most recent annual impairment test during the fourth quarter of fiscal year 2024, the estimated fair value of all reporting units, other than MUAS, substantially exceeded their carrying value. As of October 26, 2024, we have not identified any events or circumstances that could trigger an impairment review prior to the Company’s annual impairment test.

Current wording

As of January 25, 2025, our MUAS reporting unit had a goodwill balance of $135.8 million. The estimated fair value of the MUAS reporting unit does not substantially exceed its carrying value due to the impairment recorded during the fourth quarter ended April 30, 2023. The fair value of the MUAS reporting unit exceeded its carrying value by 10% as of January 28, 2024, the date of the most recent annual goodwill impairment test. Fair value determinations utilized in the quantitative goodwill impairment test require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated future annual net cash flows, income tax rates, discount rates, growth rates, and other market factors. Estimated future annual net cash flows based in part upon our ability to obtain contracts from the U.S. D.o.D. and foreign allied nations and negotiate the estimated pricing are considered the most significant, sensitive assumptions. If current expectations of future growth rates and margins are not met, if market factors outside of our control, such as discount rates, income tax rates, or inflation, change, or if management’s expectations or plans otherwise change, including updates to long-term operating plans, then MUAS may become impaired in the future. Accordingly, the MUAS reporting unit is considered at an increased risk of failing future quantitative goodwill impairment tests. The intangibles included in the MUAS reporting unit of $10.9 million as of January 25, 2025 will also be evaluated for potential impairment during the fourth quarter impairment test. During the most recent annual impairment test during the fourth quarter of fiscal year 2024, the estimated fair value of all reporting units, other than MUAS, substantially exceeded their carrying value. As of January 25, 2025, we have not identified any events or circumstances that could trigger an impairment review prior to the Company’s annual impairment test.

Previous wording

Revenue. Revenue for the three months ended October 26, 2024 was $188.5 million, as compared to $180.8 million for the three months ended October 28, 2023, representing an increase of $7.6 million, or 4%. The increase in revenue was due to an increase in product revenue of $5.4 million and an increase in service revenue of $2.2 million. The increase in product revenue was primarily due to an increase of $47.9 million from the production of our Switchblade products primarily driven by increased global demand for our Switchblade products associated with the current global conflicts as well as U.S. D.o.D. resupply and a cumulative catch-up revenue adjustment for the definitization of LMS contracts of $9.9 million. The increase was partially offset by a decrease in product deliveries of our UxS products of $41.8 million primarily due to a decrease in international sales. The increase in service revenue was primarily due to an increase of $5.1 million in customer funded R&D and engineering services driven by an increase in HAPS return to flight services, partially offset by a decrease of $2.9 million of training and repairs service revenue driven by the decrease in UxS product sales. The increase in the LMS product revenues as compared to the prior year period is expected to continue for the remainder of the fiscal year ending April 30, 2025.

Current wording

Revenue. Revenue for the three months ended January 25, 2025 was $167.6 million, as compared to $186.6 million for the three months ended January 27, 2024, representing a decrease of $18.9 million, or 10%. The decrease in revenue was due to a decrease in product revenue of $16.2 million and a decrease in service revenue of $2.8 million. The decrease in product revenue was primarily due to a decrease in product deliveries of our UxS products of $46.7 million primarily due to a decrease in international sales to Ukraine. The decrease was partially offset by an increase of $28.9 million from the production of our Switchblade products primarily driven by increased global demand for our Switchblade products associated with the current global conflicts as well as U.S. D.o.D. resupply and an increase in product deliveries of our MW products of $1.7 million due to the shift from development to early production of certain new products. The decrease in service revenue was due to a decrease of $1.6 million of training and repairs service revenue driven by the decrease in UxS product sales and a decrease of $1.2 million in customer funded R&D and engineering services driven by a decrease in development programs in part due to delays in the establishment of the government fiscal year 2024 budget. The January 2025 Southern California high winds, fires and resulting blackouts and shutdowns negatively impacted revenue for the three months ended January 25, 2025. The increase in the LMS product revenues as compared to the prior year period is expected to continue for the remainder of the fiscal year ending April 30, 2025.

Previous wording

Cost of Sales. Cost of sales for the three months ended October 26, 2024 was $114.8 million, as compared to $105.5 million for the three months ended October 28, 2023, representing an increase of $9.3 million, or 9%. The increase in cost of sales was a result of an increase in product cost of sales of $8.0 million and service costs of sales of $1.3 million. The increase in product costs of sales was primarily due to an increase of approximately $5 million associated with the increase in product revenue and approximately $3 million due to a mix shift to a higher proportion of lower margin products driven by the increase in Switchblade production. The increase in service cost of sales was primarily due to an increase of approximately $1 million associated with the increase in service revenue. Cost of sales for the three months ended October 26, 2024 included $3.7 million of intangible amortization and other related non-cash purchase accounting expenses as compared to $3.2 million for the three months ended October 28, 2023. As a percentage of revenue, cost of sales increased from 58% to 61% primarily due to an increase in the proportion of LMS product revenue, partially offset by the cumulative catch up adjustment for the definitization of LMS contracts, resulting in gross margin decreasing from 42% to 39%.

Current wording

Cost of Sales. Cost of sales for the three months ended January 25, 2025 was $104.4 million, as compared to $119.3 million for the three months ended January 27, 2024, representing a decrease of $14.9 million, or 12%. The decrease in cost of sales was a result of a decrease in product cost of sales of $18.5 million, partially offset by an increase in service costs of sales of $3.6 million. The decrease in product costs of sales was primarily due to a decrease of approximately $10 million associated with the decrease in product revenue and approximately $8 million due to mix shift related primarily to the definitization of LMS contracts. The increase in service cost of sales was primarily due to an increase of approximately $5 million associated with a higher proportion of fixed asset allocated costs, partially offset by a decrease of approximately $2 million associated with the decrease in service revenue. Cost of sales for the three months ended January 25, 2025 included $3.7 million of intangible amortization and other related non-cash purchase accounting expenses as compared to $4.0 million for the three months ended January 27, 2024. As a percentage of revenue, cost of sales decreased from 64% to 62% primarily due to the definitization of LMS contracts, resulting in gross margin increasing from 36% to 38%.

Previous wording

Selling, General and Administrative**.**SG&A expense for the six months ended October 26, 2024 was $71.7 million, or 19% of revenue, as compared to SG&A expense of $52.0 million, or 16% of revenue, for the six months ended October 28, 2023. The increase in SG&A expense was primarily due to an increase of $8.8 million of sales and marketing expense primarily driven by an increase in bid and proposal efforts, an increase of $8.3 million in employee related expenses primarily driven by an increase in average headcount to support our growth and expansion of our global business development team, and an increase of $1.8 million in acquisition related expenses. Sales and marketing expense includes commissions on certain direct commercial sales to international customers, and an increase in revenue results in an increase in commission expense.

Current wording

Selling, General and Administrative**.**SG&A expense for the three months ended January 25, 2025 was $43.8 million, or 26% of revenue, as compared to SG&A expense of $27.8 million, or 15% of revenue, for the three months ended January 27, 2024. The increase in SG&A expense was primarily due to an increase of $10.1 million in acquisition related expenses related to the BlueHalo merger and an increase of $2.5 million of sales and marketing expense primarily driven by an increase in bid and proposal efforts. Sales and marketing expense includes commissions on certain direct commercial sales to international customers, and an increase in revenue results in an increase in commission expense.

Previous wording

Research and Development. R&D expense for the six months ended October 26, 2024 was $53.3 million, or 14% of revenue, as compared to R&D expense of $37.5 million, or 11% of revenue, for the six months ended October 28, 2023. The increase was primarily due to an increase in development activities regarding enhanced capabilities for our products, development of new product lines and support for our acquired businesses.

Current wording

Research and Development. R&D expense for the three months ended January 25, 2025 was $22.5 million, or 13% of revenue, as compared to R&D expense of $25.1 million, or 13% of revenue, for the three months ended January 27, 2024. The decrease was primarily due to an acceleration of R&D activity in the second quarter of fiscal year 2025.

Previous wording

Interest Expense, net. Interest expense, net for the three months ended October 26, 2024 was $0.7 million compared to interest expense, net of $2.0 million for the three months ended October 28, 2023. The decrease in interest expense, net was primarily due to lower average outstanding balances on our debt facility.

Current wording

Interest Expense, net. Interest expense, net for the three months ended January 25, 2025 was $0.2 million compared to interest expense, net of $0.1 million for the three months ended January 27, 2024.

Previous wording

Benefit from Income Taxes. Our effective income tax rate was (3.5)% for the three months ended October 26, 2024, as compared to 5.6% for the three months ended October 28, 2023. The decrease in our effective income tax rate was primarily due to an increase in FDII deductions and excess tax benefits from equity awards. The effective income tax rate for the three months ended October 26, 2024 was primarily impacted by expected federal R&D tax credits and FDII deductions and excess tax benefits from equity awards.

Current wording

(Benefit from) Provision for Income Taxes. Our effective income tax rate was 25.6% for the three months ended January 25, 2025, as compared to 8.3% for the three months ended January 27, 2024. The increase in our effective income tax rate was primarily due to an increase in FDII deductions and excess tax benefits from equity awards. The effective income tax rate for the three months ended January 25, 2025 was primarily impacted by expected federal R&D tax credits and FDII deductions and excess tax benefits from equity awards.

Previous wording

Equity Method Investment Income (Loss), net of Tax. Equity method investment income, net of tax for the three months ended October 26, 2024 was $1.0 million as compared to equity method investment loss, net of tax of $(1.4) million for the three months ended October 28, 2023.

Current wording

Equity Method Investment Loss, net of Tax. Equity method investment loss, net of tax for the three months ended January 25, 2025 was $0 as compared to equity method investment loss, net of tax of $0.1 million for the three months ended January 27, 2024.

Previous wording

Revenue. LMS revenue for the six months ended October 26, 2024 was $129.7 million, as compared to $61.2 million for the six months ended October 28, 2023, representing an increase of $68.5 million, or 112%. The increase in revenue was due to an increase in product revenue of $69.8 million, partially offset by a decrease in service revenue of $1.3 million. The increase in product revenue was primarily due to increased production of our LMS systems primarily due to increased global demand for our loitering munitions systems associated with the current global conflicts as well as U.S. D.o.D. resupply and a cumulative catch-up revenue adjustment for the definitization of LMS contracts of $9.9 million. The decrease in service revenue was primarily due to decreases in customer-funded R&D activities primarily associated with the shift from development to production of certain Switchblade products.

Current wording

Revenue. LMS revenue for the three months ended January 25, 2025 was $83.9 million, as compared to $57.7 million for the three months ended January 27, 2024, representing an increase of $26.2 million, or 45%. The increase in revenue was due to an increase in product revenue of $28.9 million, partially offset by a decrease in service revenue of $2.6 million. The increase in product revenue was primarily due to increased production of our LMS systems primarily due to increased global demand for our loitering munitions systems associated with the current global conflicts as well as U.S. D.o.D. resupply. The decrease in service revenue was primarily due to decreases in customer-funded R&D activities primarily associated with the shift from development to production of certain Switchblade products.

Previous wording

in adjusted cost of sales of $46.8 million. The increase in adjusted cost of sales was primarily due to an increase in sales volume of approximately $38 million and mix shift of approximately $9 million primarily due to an increase in the proportion of LMS product revenue. LMS is operating under multiple unpriced change orders, or UCO's, which we recognize revenue based upon estimates of the final price negotiations. In the period these contracts are definitized a cumulative catch-up revenue adjustment will be recorded. For the full fiscal year, we anticipate LMS adjusted gross margin as a percentage of revenues to trend toward the prior year levels.

Current wording

LMS Segment adjusted gross margin. LMS segment adjusted gross margin for the three months January 25, 2025 was $33.0 million, as compared to $18.0 million for the three months ended January 27, 2024, representing an increase of $15.0 million, or 83%. The increase in LMS segment adjusted gross margin was primarily due to an increase in revenue of $26.2 million, partially offset by an increase in adjusted cost of sales of $11.2 million. The increase in adjusted cost of sales was primarily due to an increase in sales volume of approximately $18 million, partially offset by a mix shift of approximately $7 million to related primarily to the definitization of LMS contracts. LMS is operating under multiple unpriced change orders, or UCO's, for which we recognize revenue based upon estimates of the final price negotiations. In the period these contracts are definitized a cumulative catch-up revenue adjustment may be recorded.

Previous wording

UxS Segment adjusted gross margin. UxS segment adjusted gross margin for the three months October 26, 2024 was $41.4 million, as compared to $65.6 million for the three months ended October 28, 2023, representing a decrease of $24.2 million, or 37%. The decrease in UxS segment adjusted gross margin was primarily due to a decrease in revenue of $47.4 million, partially offset by a decrease of $23.1 million in adjusted cost of sales. The decrease in adjusted cost of sales was primarily due to a decrease in sales volume of approximately $23 million. Adjusted cost of sales is defined as cost of sales before intangible amortization expense including amortization of purchase accounting adjustments.

Current wording

UxS Segment adjusted gross margin. UxS segment adjusted gross margin for the three months January 25, 2025 was $29.4 million, as compared to $50.1 million for the three months ended January 27, 2024, representing a decrease of $20.7 million, or 41%. The decrease in UxS segment adjusted gross margin was primarily due to a decrease in revenue of $49.5 million, partially offset by a decrease of $28.8 million in adjusted cost of sales. The decrease in adjusted cost of sales was primarily due to a decrease in sales volume of approximately $29 million. Adjusted cost of sales is defined as cost of sales before intangible amortization expense including amortization of purchase accounting adjustments.

Previous wording

Revenue. MW revenue for the six months ended October 26, 2024 was $42.9 million, as compared to $41.0 million for the six months ended October 28, 2023, representing an increase of $1.8 million, or 4%. The increase in revenue was due to an increase in service revenue of $3.4 million, partially offset by a decrease in product revenue of $1.6 million. The increase in service revenue was primarily due to an increase of $3.4 million in customer funded R&D efforts and engineering services in part due to HAPS return to flight services. The decrease in product revenue was primarily due to timing of contracts.

Current wording

Revenue. MW revenue for the three months ended January 25, 2025 was $19.9 million, as compared to $15.6 million for the three months ended January 27, 2024, representing an increase of $4.3 million, or 28%. The increase in revenue was due to an increase in service revenue of $2.7 million and an increase in product revenue of $1.6 million. The increase in service revenue was primarily due to an increase of $2.7 million in customer funded R&D and engineering services efforts primarily due to HAPS return to flight services. The increase in product revenue was primarily driven by the shift from development to production of certain new product lines.

Previous wording

MW Segment adjusted gross margin. MW segment adjusted gross margin for the three months October 26, 2024 was $5.8 million, as compared to $3.6 million for the three months ended October 28, 2023, representing an increase of $2.2 million or 62%. The increase in MW adjusted gross margin was primarily due to an increase in revenue of $7.5 million, partially offset by an increase in adjusted cost of sales of $5.3 million. The increase in adjusted cost of sales was primarily due to an increase in sales volume of approximately $6 million.

Current wording

MW Segment adjusted gross margin. MW segment adjusted gross margin for the three months January 25, 2025 was $4.5 million, as compared to $3.3 million for the three months ended January 27, 2024, representing an increase of $1.2 million or 36%. The increase in MW adjusted gross margin was primarily due to an increase in revenue of $4.3 million, partially offset by an increase in adjusted cost of sales of $3.1 million. The increase in adjusted cost of sales was primarily due to an increase in sales volume of approximately $3 million.

Previous wording

Six Months Ended October 26, 2024 Compared to Six Months Ended October 28, 2023

Current wording

Nine Months Ended January 25, 2025 Compared to Nine Months Ended January 27, 2024

Previous wording

The following tables (in thousands) sets forth our revenue, gross margin and adjusted operating income (loss) from operations generated by each reporting segment for the periods indicated. Adjusted operating income is defined as operating income before intangible amortization, amortization of purchase accounting adjustments, and acquisition related expenses. All corporate and headquarter expenses are allocated to the reportable segments.

Current wording

The following tables (in thousands) sets forth our revenue, gross margin and adjusted gross margin generated by each reporting segment for the periods indicated. Adjusted margin is defined as gross margin before intangible amortization, amortization of purchase accounting adjustments. All corporate and headquarter expenses are allocated to the reportable segments.

Previous wording

Revenue. Revenue for the six months ended October 26, 2024 was $377.9 million, as compared to $333.2 million for the six months ended October 28, 2023, representing an increase of $44.8 million, or 13%. The increase in revenue was due to an increase in product revenue of $45.5 million, partially offset by a decrease in service revenue of $0.7 million. The increase in product revenue was primarily due to an increase of $69.8 million from the production of our Switchblade products, driven by increased global demand for our LMS associated with the current global conflicts as well as U.S. D.o.D. resupply and a cumulative catch-up revenue adjustment for the definitization of LMS contracts of $9.9 million. The increase was partially offset by a decrease of $24.3 million of product deliveries of our UxS and MW products, primarily due to a decrease in international sales. The decrease in service revenue was primarily due to a decrease of $0.7 million in customer funded R&D and engineering services due to a decrease in development programs in part due to delays in the establishment of the government fiscal year 2024 budget. The increase in the LMS product revenues as compared to the prior year period is expected to continue for the remainder of the fiscal year ending April 30, 2025.

Current wording

Revenue. Revenue for the nine months ended January 25, 2025 was $545.6 million, as compared to $519.7 million for the nine months ended January 27,2024, representing an increase of $25.8 million, or 5%. The increase in revenue was due to an increase in product revenue of $29.3 million, partially offset by a decrease in service revenue of $3.5 million. The increase in product revenue was primarily due to an increase of $98.7 million from the production of our Switchblade products, driven by increased global demand for our LMS associated with the current global conflicts as well as U.S. D.o.D. resupply and a cumulative catch-up revenue adjustment for the definitization of LMS contracts of $9.9 million. The increase was partially offset by a decrease of $69.4 million of product deliveries of our UxS products, primarily due to a decrease in international sales to Ukraine. The decrease in service revenue was primarily due to a decrease of $1.9 million in customer funded R&D and engineering services due to a decrease in development programs in part due to delays in the establishment of the government fiscal year 2024 budget and a decrease of $1.6 million in training and repair services primarily due to the decrease in UxS product revenue. The January 2025 Southern California high winds, fires and resulting blackouts and shutdowns negatively impacted revenue for the three months ended January

Previous wording

Cost of Sales. Cost of sales for the six months ended October 26, 2024 was $222.8 million, as compared to $192.2 million for the six months ended October 28, 2023, representing an increase of $30.7 million, or 16%. The increase in cost of sales was a result of an increase in product cost of sales of $31.9 million, partially offset by a decrease in service costs of sales of $1.2 million. The increase in product costs of sales was primarily due to an increase of approximately $24 million associated with the increase in product revenue and approximately $8 million due to a mix shift to a higher proportion of lower margin products driven by the increase in Switchblade production. The decrease in service cost of sales was primarily due to a decrease of approximately $1 million associated with the decrease in service revenue. Cost of sales for the six months ended October 26, 2024 included $7.4 million of intangible amortization and other related non-cash purchase accounting expenses as compared to $5.6 million for the six months ended October 28, 2023. As a percentage of revenue, cost of sales increased from 58% to 59%, primarily due to an increase in the proportion of LMS product revenue, partially offset by the cumulative catch up adjustment for the definitization of LMS contracts, resulting in gross margin of decreasing from 42% to 41%.

Current wording

Cost of Sales. Cost of sales for the nine months ended January 25, 2025 was $327.3 million, as compared to $311.4 million for the nine months ended January 27, 2024, representing an increase of $15.9 million, or 5%. The increase in cost of sales was a result of an increase in product cost of sales of $13.4 million, partially offset by a decrease in service costs of sales of $2.4 million. The increase in product costs of sales was primarily due to an increase of approximately $16 million associated with the increase in product revenue, partially offset by approximately $3 million due to a mix shift related primarily to the definitization of LMS contracts. The increase in service cost of sales was primarily due to an increase in mix shift of approximately $5 million due to a higher proportion of fixed asset allocated costs, partially offset by a decrease of approximately $3 million associated with the decrease in service revenue. Cost of sales for the nine months ended January 25, 2025 included $11.1 million of intangible amortization and other related non-cash purchase accounting expenses as compared to $9.6 million for the nine months ended January 27, 2024. As a percentage of revenue, cost of sales remained consistent at 60% resulting in gross margin remaining consistent at 40%.

Previous wording

Selling, General and Administrative**.**SG&A expense for the three months ended October 26, 2024 was $37.9 million, or 20% of revenue, as compared to SG&A expense of $28.1 million, or 16% of revenue, for the three months ended October 28, 2023. The increase in SG&A expense was primarily due to an increase of $4.3 million in employee related expenses primarily driven by an increase in average headcount to support our growth and expansion of our global business development team, an increase of $3.0 million of sales and marketing expense primarily driven by an increase in bid and proposal efforts, and an increase of $2.5 million in acquisition related expenses. Sales and marketing expense includes commissions on certain direct commercial sales to international customers, and an increase in revenue results in an increase in commission expense.

Current wording

Selling, General and Administrative**.**SG&A expense for the nine months ended January 25, 2025 was $115.5 million, or 21% of revenue, as compared to SG&A expense of $79.8 million, or 15% of revenue, for the nine months ended January 27, 2024. The increase in SG&A expense was primarily due to an increase of $12.0 million in acquisition related expenses, $11.3 million of sales and marketing expense primarily driven by an increase in bid and proposal efforts and an increase of $9.0 million in employee related expenses primarily driven by an increase in average headcount to support our growth and expansion of our global business development team. Sales and marketing expense includes commissions on certain direct commercial sales to international customers, and an increase in revenue results in an increase in commission expense.

Previous wording

Research and Development. R&D expense for the three months ended October 26, 2024 was $28.7 million, or 15% of revenue, as compared to R&D expense of $22.0 million, or 12% of revenue, for the three months ended October 28, 2023. The increase was primarily due to an increase in development activities regarding enhanced capabilities for our products, development of new product lines and support for our acquired businesses.

Current wording

Research and Development. R&D expense for the nine months ended January 25, 2025 was $75.8 million, or 14% of revenue, as compared to R&D expense of $62.6 million, or 12% of revenue, for the nine months ended January 27,2024. The increase was primarily due to an increase in development activities regarding enhanced capabilities for our products, development of new product lines and support for our acquired businesses.

Previous wording

Interest Expense, net. Interest expense, net for the six months ended October 26, 2024 was $0.9 million compared to $4.0 million for the six months ended October 28, 2023. The decrease in interest expense, net was primarily due to lower average outstanding balances on our debt facility.

Current wording

Interest Expense, net. Interest expense, net for the nine months ended January 25, 2025 was $1.2 million compared to $4.1 million for the nine months ended January 27,2024. The decrease in interest expense, net was primarily due to lower average outstanding balances on our debt facility.

Previous wording

Other Income, net. Other income, net, for the three months ended October 26, 2024 was $16 thousand compared to other expense, net of $(2.9) million for the three months ended October 28, 2023. The decrease was primarily due to lower net unrealized losses associated with the fair market value of our equity security investments.

Current wording

Other Income, net. Other income, net, for the nine months ended January 25, 2025 was $0.8 million compared to other loss, net of $(3.0) million for the nine months ended January 27, 2024. The increase was primarily due to net unrealized gains associated with the fair market value of our equity security investments.

Previous wording

Provision for Income Taxes. Our effective income tax rate was 4.4% for the six months ended October 26, 2024, as compared to 5.6% for the six months ended October 28, 2023. The decrease in our effective income tax rate was primarily due to an increase in FDII deductions and excess tax benefits from the vesting of equity awards, partially offset by an increase in excess tax benefits from equity awards. The effective income tax rate for the six months ended October 26, 2024 was primarily impacted by expected federal R&D tax credits and FDII deductions and excess tax benefits from equity awards.

Current wording

Provision for Income Taxes. Our effective income tax rate was 2.5% for the nine months ended January 25, 2025, as compared to 6.3% for the nine months ended January 27, 2024. The decrease in our effective income tax rate was primarily due to an increase in FDII deductions and excess tax benefits from the vesting of equity awards. The effective income tax rate for the nine months ended January 25, 2025 was primarily impacted by expected federal R&D tax credits and FDII deductions and excess tax benefits from equity awards.

Previous wording

Equity Method Investment Income (Loss), net of Tax. Equity method investment income, net of tax for the six months ended October 26, 2024 was $1.1 million as compared to equity method investment loss, net of tax of $(1.4) million for the six months ended October 28, 2023.

Current wording

Equity Method Investment Income (Loss), net of Tax. Equity method investment income, net of tax for the nine months ended January 25, 2025 was $1.1 million as compared to equity method investment loss, net of tax of $(1.5) million for the nine months ended January 27,2024.

Previous wording

Revenue. LMS revenue for the three months ended October 26, 2024 was $77.7 million, as compared to $30.2 million for the three months ended October 28, 2023, representing an increase of $47.5 million, or 157%. The increase in revenue was due to an increase in product revenue of $47.9 million, partially offset by a decrease in service revenue of $0.5 million. The increase in product revenue was primarily due to increased production of our LMS systems primarily due to increased global demand for our loitering munitions systems associated with the current global conflicts as well as U.S. D.o.D. resupply and a cumulative catch-up revenue adjustment for the definitization of LMS contracts of $9.9 million. The decrease in service revenue was primarily due to decreases in customer-funded R&D activities primarily associated with the shift from development to production of certain Switchblade products.

Current wording

Revenue. LMS revenue for the nine months ended January 25, 2025 was $213.6 million, as compared to $118.8 million for the nine months ended January 25, 2025, representing an increase of $94.8 million, or 80%. The increase in revenue was due to an increase in product revenue of $98.7 million, partially offset by a decrease in service revenue of $3.9 million. The increase in product revenue was primarily due to increased production of our LMS systems primarily due to increased global demand for our loitering munitions systems associated with the current global conflicts as well as U.S. D.o.D. resupply and a cumulative catch-up revenue adjustment for the definitization of LMS contracts of $9.9 million. The decrease in service revenue was primarily due to decreases in customer-funded R&D activities primarily associated with the shift from development to production of certain Switchblade products.

Previous wording

LMS Segment adjusted gross margin. LMS segment adjusted gross margin for the three months October 26, 2024 was $30.2 million, as compared to $9.3 million for the three months ended October 28, 2023, representing an increase of $20.8 million, or 223%. The increase in LMS segment adjusted gross margin was primarily due to an increase in revenue of $47.5 million, inclusive of the cumulative catch-up revenue adjustment of $9.9 million, partially offset by an increase in adjusted cost of sales of $26.7 million. The increase in adjusted cost of sales was primarily due to an increase in sales volume of approximately $26 million. LMS is operating under multiple unpriced change orders, or UCO's, for which we recognize revenue based upon estimates of the final price negotiations. In the period these contracts are definitized a cumulative catch-up revenue adjustment will be recorded. For the full fiscal year, we anticipate LMS adjusted gross margin as a percentage of revenues to trend toward the prior year levels.

Current wording

LMS Segment adjusted gross margin. LMS segment adjusted gross margin for the nine months January 25, 2025 was $76.4 million, as compared to $39.6 million for the nine months ended January 27, 2024, representing an increase of $36.8 million, or 93%. The increase in LMS segment adjusted gross margin was primarily due to an increase in revenue of $94.8 million, inclusive of the cumulative catch-up revenue adjustment of $9.9 million, partially offset by an increase in adjusted cost of sales of $58.0 million. The increase in adjusted cost of sales was primarily due to an increase in sales volume of approximately $62 million, partially offset by mix shift of approximately $4 million related primarily to the definitization of LMS contracts. LMS is operating under multiple unpriced change orders, or UCO's, for which we recognize revenue based upon estimates of the final price negotiations. In the period these contracts are definitized a cumulative catch-up revenue adjustment may be recorded.

Previous wording

Revenue. UxS revenue for the six months ended October 26, 2024 was $205.4 million, as compared to $231.0 million for the six months ended October 28, 2023, representing a decrease of $25.6 million, or 11%. The decrease in revenue was due to a decrease in product revenue of $22.7 million and a decrease in service revenue of $2.9 million. The decrease in product revenue was primarily due to $21.9 million of decreased product shipments of our SUAS family of systems driven by to a decrease in international sales. The decrease in service revenue was primarily due to a decrease of $2.9 million of customer funded R&D and engineering services primarily due to the completion of certain MUAS contracts during the six months ended October 28, 2023.

Current wording

Revenue. UxS revenue for the nine months ended January 25, 2025 was $269.1 million, as compared to $344.3 million for the nine months ended January 27, 2024, representing a decrease of $75.2 million, or 22%. The decrease in revenue was due to a decrease in product revenue of $69.4 million and a decrease in service revenue of $5.7 million. The decrease in product revenue was primarily due to $69.4 million of decreased international sales of our SUAS family of systems, significantly sales to Ukraine. The decrease in service revenue was primarily due to a decrease of $4.8 million of customer funded R&D and engineering services primarily due to the completion of certain MUAS contracts during the nine months ended January 27, 2024.

Previous wording

UxS Segment adjusted gross margin. UxS segment adjusted gross margin for the six months October 26, 2024 was $108.6 million, as compared to $116.0 million for the six months ended October 28, 2023, representing a decrease of $7.4 million, or 6%. The decrease in UxS segment adjusted gross margin was primarily due to a decrease in revenue of $25.6 million, partially offset by a decrease of $18.1 million in adjusted cost of sales. The decrease in adjusted cost of sales was due to a decrease in sales volume of approximately $12 million, partially offset by a mix shift of approximately $6 million primarily due to a lower proportion of international products sales. Adjusted cost of sales is defined as cost of sales before intangible amortization expense including amortization of purchase accounting adjustments.

Current wording

$28.1 million, or 17%. The decrease in UxS segment adjusted gross margin was primarily due to a decrease in revenue of $75.2 million, partially offset by a decrease of $47.1 million in adjusted cost of sales. The decrease in adjusted cost of sales was due to a decrease in sales volume of approximately $40 million and by a mix shift of approximately $7 million primarily due to primarily due to a higher proportion of international products sales. Adjusted cost of sales is defined as cost of sales before intangible amortization expense including amortization of purchase accounting adjustments.

Previous wording

MW Segment adjusted gross margin. MW segment adjusted gross margin for the six months October 26, 2024 was $10.5 million, as compared to $8.9 million for the six months ended October 28, 2023, representing an increase of $1.6 million, or 18%. The increase in MW adjusted gross margin was primarily due to an increase in revenue of $1.8 million, partially offset by an increase in adjusted cost of sales of $0.3 million, primarily due to an increase in sales volume.

Current wording

MW Segment adjusted gross margin. MW segment adjusted gross margin for the nine months January 25, 2025 was $15.0 million, as compared to $12.2 million for the nine months ended January 27, 2024, representing an increase of $2.8 million, or 23%. The increase in MW adjusted gross margin was primarily due to an increase in revenue of $6.2 million, partially offset by an increase in adjusted cost of sales of $3.4 million, primarily due to an increase in sales volume.

Previous wording

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 October 26, 2024, our funded backlog was approximately $467.1 million, as compared to $400.2 million as of April 30, 2024.

Current wording

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 January 25, 2025, our funded backlog was approximately $763.5 million, as compared to $400.2 million as of April 30, 2024. The Department of the Army issued a stop-work order on certain existing U.S. government contracts, previously awarded to us for foreign military sales funded by the U.S. government via foreign military financing. As of January 25, 2025, funded backlog included approximately $13 million impacted by the stop-work order.

Previous wording

In addition to our funded backlog, we also had unfunded backlog of $1,829.1 million as of October 26, 2024. Unfunded backlog does not meet the definition of a performance obligation under ASC 606. We define unfunded backlog as the total remaining potential order amounts under cost reimbursable and fixed price contracts with (i) multiple one-year options and IDIQ contracts, or (ii) 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, if at all. Management believes that unfunded backlog does not provide a reliable measure of future estimated revenue under our contracts. A protest has been filed with the U.S. Government Accountability Office (“GAO”) challenging the U.S Department of the Army’s decision on August 27, 2024 to award an indefinite delivery, indefinite quantity contract with a ceiling value of $990.0 million on a sole source basis to AeroVironment, Inc. (the “Company”) related to the Company’s Switchblade systems, of which $860.0 million is included in unfunded backlog.

Current wording

In addition to our funded backlog, we also had unfunded backlog of $1,429.9 million as of January 25, 2025. Unfunded backlog does not meet the definition of a performance obligation under ASC 606. We define unfunded backlog as the total remaining potential order amounts under cost reimbursable and fixed price contracts with (i) multiple one-year options and IDIQ contracts, or (ii) 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, if at all. Management believes that unfunded backlog does not provide a reliable measure of future estimated revenue under our contracts.

Previous wording

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. A majority of our contracts, specifically our IDIQ contracts, do not currently obligate the U.S. government to purchase any goods or services. Additionally, all U.S.

Current wording

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. A majority of our contracts, specifically our IDIQ contracts, do not currently obligate the U.S. government to purchase any goods or services. 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.

Previous wording

On September 8, 2022, we filed an S-3 shelf registration statement to offer and sell shares of our common stock, including a prospectus supplement in relation to an Open Market Sale Agreement SM, also dated September 8, 2022, with Jefferies LLC relating to the proposed offer and sale of shares of our common stock having an aggregate offering price of up to $200.0 million from time to time through Jefferies LLC as our sales agent. During the three and six months ended October 28, 2023, we sold 807,370 shares for total gross proceeds of $91.3 million, total proceeds received of $88.6 million, net of commission expense and $88.4 million net of equity issuance costs. As of October 28, 2023, we completed the Open Market Sale Agreement SM and sold 1,917,100 of our shares for total gross proceeds of $200.0 million and $194.0 million proceeds received, net of commission expense and $193.1 million net of equity issuance costs.

Current wording

On September 8, 2022, we filed an S-3 shelf registration statement to offer and sell shares of our common stock and other securities, including a prospectus supplement in relation to an Open Market Sale Agreement SM, also dated September 8, 2022, with Jefferies LLC relating to the proposed offer and sale of shares of our common stock having an aggregate offering price of up to $200.0 million from time to time through Jefferies LLC as our sales agent. During the six months ended October 28, 2023, we completed the Open Market Sale Agreement SM. During the six months ended October 28, 2023, we sold 807,370 shares for total gross proceeds of $91.3 million, total proceeds received of $88.6 million, net of commission expense and $88.4 million net of equity issuance costs. As of October 28, 2023, we sold 1,917,100 of our shares for total gross proceeds of $200.0 million and $194.0 million proceeds received, net of commission expense and $193.1 million net of equity issuance costs.

Previous wording

On February 19, 2021, in connection with the consummation of the Arcturus Acquisition, we entered into the Credit Agreement for (i) the Revolving Facility, and (ii) the Term Loan Facility, and together with the Revolving Credit Facility, the “Credit Facilities.” The Term Loan Facility required payment of 5% of the outstanding obligations in each of the first four loan years, consisting of three quarterly payments of 1.25% each, with the remaining outstanding principal amount of the Term Loan Facility due and payable on the final maturity date. Proceeds from the Term Loan Facility were used in part to finance a portion of the cash consideration for the Arcturus acquisition. On October 4, 2024, we amended the Credit Facility agreement to increase the Revolving Facility to $200 million, and the Term Loan Facility was fully repaid in full and removed from the Amended Credit Facility. Our ability to borrow under the Revolving Facility is reduced by outstanding letters of credit of $9.8 million as of October 26, 2024. As of October 26, 2024, approximately $175.2 million was available under the Revolving Facility. Borrowings under the Revolving Facility may be used for working capital and other general corporate purposes, including acquisitions that meet certain parameters. 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 €7.0 million ($7.6 million) available for issuing letters of credit of which €0.3 million ($0.3 million) was outstanding as of October 26, 2024.

Current wording

On February 19, 2021, in connection with the consummation of the Arcturus Acquisition, we entered into the Credit Agreement for (i) the Revolving Facility, and (ii) the Term Loan Facility, and together with the Revolving Credit Facility, the “Credit Facilities.” The Term Loan Facility required payment of 5% of the outstanding obligations in each of the first four loan years, consisting of three quarterly payments of 1.25% each, with the remaining outstanding principal amount of the Term Loan Facility due and payable on the final maturity date. Proceeds from the Term Loan Facility were used in part to finance a portion of the cash consideration for the Arcturus Acquisition. On October 4, 2024, we amended the Credit Facility agreement to increase the Revolving Facility to $200 million, and the Term Loan Facility was fully repaid in full and removed from the Amended Credit Facility. Our ability to borrow under the Revolving Facility is reduced by outstanding letters of credit of $9.5 million as of January 25, 2025. As of January 25, 2025, approximately $165.5 million was available under the Revolving Facility. On February 26, 2025, we borrowed an additional $15.0 million under the Revolving Facility. Borrowings under the Revolving Facility may be used for working capital and other general corporate purposes, including acquisitions that meet certain parameters. 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 €7.0 million ($7.3 million) available for issuing letters of credit of which €0.4 million ($0.4 million) was outstanding as of January 25, 2025.