Engaged Capital Sends Letter to AeroVironment’s Board of Directors

  Engaged Capital Sends Letter to AeroVironment’s Board of Directors

 - Notes Board of Directors’ failure to engage in constructive dialogue aimed
              at addressing company’s gross valuation discount -

Business Wire

NEWPORT BEACH, Calif. -- August 27, 2013

Engaged Capital, an investment firm specializing in small and mid-cap North
American equities and beneficial owner of approximately 5.1 percent of the
common stock of AeroVironment, Inc. (“AeroVironment” or the “Company”)
(NASDAQ:AVAV), today sent a letter to the Company’s Board of Directors (the
“Board”), included below and also filed today as an amendment to its SEC form

In its letter, Engaged Capital expresses its disappointment with the Board’s
unwillingness to enter into a constructive process, seriously consider its
highly qualified independent director nominee, and its failure to provide
proper governance and protections for the rights of its shareholders. Engaged
believes that the Company lacks a sense of urgency to capitalize on the
Company’s market position, nor explore alternatives that could change the
trajectory of its public market valuation. Engaged believes that recent events
and information disclosed in the attached letter reveals a Board that elevates
self-interest over its fiduciary duty to shareholders.

Glenn Welling, Principal and Chief Investment Officer of Engaged Capital,
commented, “AeroVironment’s failure to deliver meaningful shareholder returns
over any relevant time period is a clear indication of a need for change. We
have spent the last few months working transparently and constructively
towards a solution that would finally elevate the interests of shareholders to
the top of the Board’s priority list. At this point, we feel that we have
exhausted every possible avenue to finding a solution, as the Company’s offers
to address our concerns have no substance. We are resolute in our
determination to ensure the Company is governed for the benefit of its
shareholders. All shareholders should be intently focused on this Board’s lack
of progress in the areas of governance, capital allocation, and long-term

Engaged Capital noted that it had also included, as part of its 13-D filing
but not appearing below, three additional letters: a cover letter to
management, dated July 3, 2013 that accompanied its nominating letter to the
Board, a letter, dated August 7, 2013 expressing disappointment at the lack of
communication or action regarding previous communications to the Board, and a
letter, dated August 12, 2013 expressing further concerns after the meeting
with the Nominating and Governance Committee.

The Company’s 13-D filing can be found in its entirety here:

Full letter text:

August 27, 2013

Members of the Board of Directors
AeroVironment, Inc.
181 W. Huntington Drive, Suite 202
Monrovia, CA 91016

Dear Members of the Board,

As you know, Engaged Capital is a significant shareholder of AeroVironment,
Inc. (“AVAV” or “the Company”) with ownership of approximately 5.1% of the
Company’s outstanding shares. We have explained in prior conversations that we
consider ourselves private equity investors in public equities. We make
long-term investments in undervalued companies and seek to work
collaboratively and constructively with the board of directors and management
to eliminate impediments to value creation and to identify and execute on
opportunities to unlock value for the benefit of all shareholders.

The overriding responsibility of the board of directors and management is to
create value for shareholders. Unfortunately, it has become our considered
position that AVAV’s board of directors (the “Board”) and management team have
each failed to fulfill this basic responsibility and, moreover, have willfully
repudiated their fiduciary duty to shareholders. The Company’s one-, three-,
and five-year returns have been an abysmal (4%), (1%), and (32%),
respectively. In fact, since the close of trading on the day of the Company’s
IPO more than six years ago, the Company’s shares have declined by 5%. Such
long-term underperformance is alarming, especially from a company that is the
dominant participant in a high-return, fast-growing industry. We believe the
Company’s strong competitive position, extensive intellectual property, and
sizable growth opportunities have the potential to create significant value,
and we find it unacceptable that the value ascribed to these attributes goes

From the outset of this process, we have expressed our sincere desire to work
constructively with the current Board to reach a mutually agreeable solution
in the best interest of all shareholders. We have been completely transparent
and constructive in all of our communications with you to date. We have made
it a point to notify management and the Board of any filings, notices, and
press releases, including our nomination notice, and have provided you ample
opportunity to meet us halfway in finding an actionable solution that gives
shareholders a say in the Company’s governance and strategy.

In contrast, the Board has demonstrated its undying commitment to the
unacceptable status quo and, in doing so, has resorted to defensive,
reactionary tactics to avoid shareholder input and real change at AVAV. The
recently announced Board changes were made entirely in reaction to our
nomination notice and involvement at the Company and eschew the interests of
shareholders in favor of the Board’s misguided self-interests. Frankly, we are
surprised and disappointed that the Company chose to take these actions
publicly while we were in the midst of trying to privately reach a mutually
agreeable outcome that would avoid a potential election contest. After the
series of events that have transpired over the last few weeks, the Board has
proven it is not interested in finding a productive solution to the Company’s
longstanding issues and remains close-minded to the introduction of fresh
perspectives through independent representation in the boardroom.

The Board Has Been Unwilling to Communicate Meaningfully with the Shareholders
it Claims to Represent

In a phone call with Tim Conver on June 30, 2013, and in a subsequent letter
to the Board, dated July 3, 2013, we provided notice of our nomination of one
candidate for election to the Company’s Board at the 2013 annual meeting of
shareholders (the “2013 Annual Meeting”). We made a conscious decision to
nominate only one candidate, rather than two or three, in order to avoid
distraction and confrontation. However, after the passage of over one month,
we had not received any direct communication from the Company’s Nominating and
Corporate Governance Committee (the “Committee”). Inaction on the part of the
Committee made it necessary for us to send a letter questioning why, after
over a month’s time, the Committee had made no attempt to engage in a
dialogue. Not until receipt of our August 7, 2013 letter did the Committee
respond by offering to meet with our candidate. On August 11, 2013, the
Committee and the CEO (who himself is not a member of the Committee) finally
met with our candidate. Notably absent, however, was the Committee’s chairman.

The Board is Long-Tenured, Entrenched, and Out of Touch With Shareholders

During the August 11, 2013 meeting, we were shocked to hear Committee member
Joseph Alibrandi state that our criticism of AVAV’s failure to create any
shareholder value since its IPO was unwarranted, as he considered it too short
a time period to properly evaluate the Company’s performance. Mr. Alibrandi
felt that it was necessary to also consider AVAV’s long history as a private
company to appropriately measure the Company’s value creation. It is not
surprising that the Board has displayed no sense of urgency to create value
for shareholders, since the Board believes it is appropriate to measure
performance over multi-decade periods during which the Company had no public
shareholders. This type of thinking is emblematic of an entrenched Board
without a mandatory retirement age or term limits that is entirely out of
touch with reality and shareholders’ best interests.

We were again stunned during a phone call on August 16, 2013 between Mr.
Welling and Messrs. Alibrandi and Conver, when Mr. Alibrandi responded to the
fact that AVAV had not created any shareholder value over either a one-,
three-, or five-year period by stating that this information was not
meaningful as it could be said about most public companies. This is simply
incorrect, as over the last one-, three-, and five-year periods, AVAV has
underperformed the S&P 600 Aerospace & Defense Index by 44%, 79%, and 53%,
respectively, and underperformed its stated peer group by 39%, 59%, and 91%,^1
respectively. Rather, AVAV’s stock performance over the past six and a half
years reflects a recurring pattern of unfulfilled market expectations.
Clearly, Mr. Alibrandi and his fellow directors are out of touch with this
harsh reality. In our opinion, this attitude reflects a clear and alarming
disregard of the Board’s fiduciary duty.

The Board Is Irrationally Insulating Itself from Outside Perspectives on Value

With our nomination of a highly qualified, independent director candidate, we
sought to (i) energize the Board with a deeper understanding of how
professional investors determine value, (ii) provide a fresh and experienced
perspective on capital allocation, and (iii) enhance the clarity and
transparency of the Company’s public disclosures to shareholders. During the
August 16, 2013 call, Messrs. Alibrandi and Conver informed us of the Board’s
decision not to nominate our candidate as part of the Company’s slate at the
2013 Annual Meeting. Messrs. Alibrandi and Conver communicated to Mr. Welling
that they felt this was not the “right time” to add these skill sets to the
Board and that they would be a distraction from the Board’s pursuit of the
Company’s current plan. The Board’s view that disciplined capital allocation
and transparent investor communications are qualities only relevant to public
companies at certain points in time further reflects the Board’s neglect of
its fiduciary responsibilities. Given the current Board’s poor track record in
the areas of capital allocation, transparency/disclosure, and value creation,
the current Board is woefully unqualified to summarily reject the addition of
relevant skill sets and well-informed shareholder perspectives in the

The Nomination of New Director Candidates is a Reactionary, Thinly-Veiled
Attempt to Appear Willing to Embrace Change Which Actually Serves to Preserve
the Status Quo

While in the midst of what we thought were good-faith negotiations, and before
rejecting our alternative proposals, the Board preemptively filed preliminary
proxy materials and announced the appointment of two new directors, Charles
Thomas Burbage and Edward R. Muller. We believe both have problematic ties to
management and the Board. Mr. Muller worked under Mr. Alibrandi at Whittaker
Corp., as did Mr. Conver; we believe Mr. Burbage and Mr. Conver are long-time
friends. These appointments were surreptitiously  designed to give the
appearance of greater Board independence; instead, these actions only serve to
further entrench and insulate the Board. In addition, the Company’s third
nominee this year, Charles R. Holland, by the Board’s own admission, is not
independent given the sizable consulting fees he receives from the Company. It
is abundantly clear that the Board and management seek to enjoy the benefits
of a public company structure (liquidity for founders/management and access to
the capital markets) while at the same time aggressively retaining the
governance model of a private company. We are shocked that the Board would
employ such a tactic and assume shareholders would be so naïve as to not
recognize the true motive behind these actions.

The Board has Rejected Engaged’s Proposed Solutions and Offered Only Hollow
Reforms and Self-Serving Counterproposals

Once the Board communicated its reservations regarding Mr. Welling’s candidacy
this year, Engaged offered multiple solutions to both avoid a contested
situation and bring positive change to the Company, all of which were

  *In exchange for a standstill agreement, Engaged proposed that the Company
    provide us the right to have our candidate nominated as part of the
    Company’s slate at the 2014 annual meeting of shareholders. The idea being
    that we would work closely with management and the Board over the next
    year to address our concerns and hopefully avoid the need to exercise this
    option. On the August 16, 2013 call, Mr. Alibrandi called this proposal
  *Alternatively, Engaged proposed that the Company declassify the Board
    starting this year, electing directors to one-year terms, consistent with
    corporate governance best practices. Mr. Conver communicated that the
    Board’s rejection of this proposal was due to its importance as an M&A
    defense mechanism. Engaged views a tender offer for the Company as
    extremely unlikely; further, to succeed, such a tender would require
    support from a majority of shareholders.
  *Paradoxically, Mr. Conver then suggested that the Company would declassify
    the Board beginning in 2014 if Engaged was willing to withdraw its
    nomination. This is an unacceptable solution as the intent is clearly to
    guarantee the tenure of the Company’s Class I director nominees for three
    years, none of whom we view as independent.
  *The Board offered Engaged the option to review the Company’s plans under
    cover of an NDA. However, the long-term nature of the requisite
    information would result in an NDA of significant and uncertain length.
    Therefore, this “solution” would only serve to isolate us from
    communicating with other shareholders, prevent us from accumulating
    additional shares, constrain our ability to issue public statements, and
    expose us to unnecessary regulatory risk. Such restrictive terms are only
    acceptable in return for board representation.
  *The Company, through its advisors, offered to create a capital allocation
    committee. While Engaged would applaud the formation of such a committee,
    this in and of itself would not sufficiently address our concerns.

We are resolute in our determination to ensure the Company is governed for the
benefit of its shareholders. Our interactions have left us with serious doubt
as to whether a single board seat is sufficient to influence critical
decisions and unbind the decades-long ties that exist amongst the existing and
proposed directors. As our fiduciaries, we consider the extent to which
shareholder value creation opportunities have been ignored to be
objectionable. We intend to exercise our rights on behalf of all shareholders
and are committed to take any and all actions necessary in order to unlock
shareholder value.


Glenn W. Welling

About Engaged Capital:

Engaged Capital, LLC, (“Engaged Capital”) was established in 2012 by a group
of professionals with significant experience in activist investing in North
America and was seeded by Grosvenor Capital Management, L.P., one of the
oldest and largest global alternative investment managers. Engaged Capital is
a limited liability company owned by its principals and formed to create
long-term shareholder value by bringing an owner’s perspective to the
managements and boards of under-valued public companies. Engaged Capital
manages both a long-only and long/short North American equity fund. Engaged
Capital’s efforts and resources are dedicated to a single investment style,
“Constructive Activism” with a focus on delivering superior, long-term,
risk-adjusted returns for investors. Engaged Capital is based in Newport
Beach, California.

^1 Average total return of peer companies listed in AVAV’s 2013 preliminary
proxy statement through August 26, 2013 calculated using FactSet.


Engaged Capital:
ICR, Inc.
Anton Nicholas or Jason Chudoba
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