AeroVironment, Inc.

Good afternoon, ladies and gentlemen. Welcome to AeroVironment's first quarter fiscal year 2020 earnings call. This is Stephen Gitlin, Vice President of Investor Relations for AeroVironment. At this time, all participants are in a listen-only mode. We will conduct a question and answer session after management's remarks. As a reminder, this conference is being recorded for replay purposes. Before we begin, 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 include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain words such as believe, anticipate, expect, estimate, intend, project, plan, or words or phrases with similar meaning. 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 further information on these risks, we encourage you to review the risk factors discussed in AirVironment's periodic reports on Form 10-K and Form 10-Q filed with the SEC and the Form 8-K filed today with the SEC, along with the associated earnings release and the safe harbor statement contained therein. This afternoon, we also filed a slide presentation with our earnings release and posted the presentation on our website at avinc.com in the Events and Presentations section. The content of this conference call contains time-sensitive information that is accurate only as of today, September 4, 2019. The company undertakes no obligation to make any revision to any forward-looking statements contained in our remarks today or to update them to reflect the events or circumstances occurring after this conference call. Joining me today from AeroVironment are President and Chief Executive Officer, Mr. Wahid Nawabi, and Senior Vice President and Chief Financial Officer, Mrs. Theresa Covington. We will now begin with remarks from Wahid Nawabi. Wahid?

Thank you, Steve, and welcome to our first quarter fiscal year 2020 earnings conference call. Today, I will refer to the supplemental charts we filed with our earnings release and posted to our website to highlight important messages. On today's call, I will emphasize three key messages that appear on slide number three of our supplemental charts. First, our team delivered outstanding first quarter results. Second, we're successfully executing our plan and remain on track to achieve our fiscal year 2020 objectives. and third, we continue to make great progress on our strategic growth initiatives. I will start by summarizing our outstanding first quarter fiscal year 2020 performance and discuss our key achievements during the quarter. Next, Theresa will provide a more detailed summary of financial performance in the quarter and I will discuss our goals for fiscal year 2020 before Theresa, Steve and I take your questions. Now for our first quarter fiscal year 2020 financial highlights. Once again, outstanding financial results reflect our team's focused execution and the sustained market demand for our solutions. Key highlights of our strong first quarter results summarized on page number four of our supplemental charts include the following. Revenue of $86.9 million increased 11% over last year. Gross profit of $41.3 million increased 27% over last year. Earnings per diluted share of 71 cents decreased 14 cents from first quarter fiscal year 2019 diluted EPS of 85 cents. Non-GAAP earnings per diluted share of 74 cents increased 15 cents over first quarter fiscal year 2019 non-GAAP diluted EPS of 59 cents. Funded backlog of $165 million increased 5% over last year. We are continuing a multi-quarter trend of maintaining a high level of funded backlog as compared to our historical averages. Favorable revenue mix and higher volume contributed to strong quarter profit, as illustrated on slide number six with a higher proportion of product versus service revenue. Our strong funded backlog supports a high level of visibility, which Theresa will detail shortly. In addition to strong financial results, our team made great progress across our business, as highlighted on slide number five. We remain the global leader in small UAS for the defense market and for fixed-wing solutions in particular. In the first quarter, we received a $45 million contract award from the U.S. Army for Raven Systems that was included in government fiscal year 2019 appropriations. This award supports the Army's Security Force Assistance Brigades, referred to as SFAB. These specialized Army units conduct training, advising, assisting, enabling, and accompanying operations with allied and partner nations. Exposing more allied and partner nations to the effectiveness of our RAVEN systems helps expand awareness and promote further adoption of our solutions. The Army and its SFAB organization are engaged in a modernization program to provide soldiers with the latest and most capable tools. and the selection of our Raven system serves as further evidence of AirVironment's leadership position in this market and our advanced capabilities. The U.S. military and more than 45 allied nations continue to view AirVironment's family of small UAS as the premier fixed-wing solution in the category with a track record of reliability, effectiveness and ruggedness demonstrated around the world. We are actively pursuing a number of international procurement opportunities and look forward to providing more information when we are able to. We're excited to count our new vapor unmanned helicopter systems as part of our family of small UAS. Our team is on track to fulfill the more than $13 million IDIQ contract for a defense customer while also engaging with other customers to market this capability. In our Tactical Missile Systems product line, the government recently announced the U.S. Army's intent to award a sole source switchblade hardware production contract to AeroVironment for government fiscal years 2020 through 2022. The performance period includes one 12-month base period and two 12-month options. We anticipate receiving this contract award by our fourth fiscal quarter. and federal government fiscal year 2019 defense appropriations, $110 million in funding was specified for LMAMs, or lethal miniature aerial missile systems, and $83 million have been proposed as part of the government fiscal year 2020 budget request. On slide number seven, we illustrate the primary air environment components of U.S. government fiscal year 2019 procurement appropriations, and which of those have already converted to orders. Past awards have demonstrated that government fiscal year appropriations can be spent in subsequent fiscal years. We are preparing our production line based on communication with our customer and anticipated contract timing. In our HAPS program, summarized on slide number eight, we continue to make great progress toward the goal of helping to bridge the world's digital divide by manufacturing, supplying, and supporting Solar HAPS UAS for HAPS Mobile, Inc. In August, HAPS Mobile announced it received FAA authorization for flight testing in Lanai, Hawaii, paving the way for the initiation of our high-altitude flight test program. Before operating in Lanai, we are conducting ground and flight testing in California. We look forward to providing you more updates as we continue to make progress in this exciting and large growth opportunity. Now, Teresa will provide a detailed financial overview of our first quarter. Teresa?

Thank you, Wahid, and good afternoon, everyone. We had a strong financial performance in the first quarter of fiscal 2020. Revenue from continuing operations for the first quarter of fiscal 2020 was $86.9 million, an increase of $8.9 million, or 11%, from the first quarter of fiscal 2019 revenue of $78 million. The increase was due to an increase in product deliveries of $10.5 million, partially offset by a decrease in service revenue of $1.7 million. First quarter fiscal 2020 revenue by major product line slash program is as follows. Small UAS was $66.7 million, or 77%. HAPS was $12.3 million, or 14%. TMS was $5.6 million, or 6%. And other was $2.2 million, or 3%. The inception to date revenue for HAPS Mobile is $89.8 million. The total value of all contracts with HAPS Mobile is $134.4 million, which consists of $125.7 million for the design development agreement and $8.7 million for preliminary design and other related efforts. There is $44.5 million remaining on these contracts, which includes a portion that is currently unfunded. Gross margin from continuing operations for the first quarter of fiscal 2020 was $41.3 million or 47% of revenue compared to $32.6 million or 42% of revenue for the first quarter of fiscal 2019. The increase in gross margin was primarily due to an increase in product margin of $9.9 million, partially offset by a decrease in service margin of $1.2 million. Gross margin as a percentage of revenue increased to 47% from 42% primarily due to a favorable product mix and an increase in the proportion of product revenue to total revenue. Product sales were 76% of total sales in the first quarter fiscal 2020 compared to 71% for the first quarter of fiscal 2019. Looking at the rest of the income statement, SG&A expense from continuing operations for the first quarter of fiscal 2020 was $13.7 million or 16% of revenue and many more. Income from continuing operations for the first quarter of fiscal 2020 was $18.9 million compared to $14.2 million for the first quarter of fiscal 2019. The increase in income from operations was primarily due to an increase in gross margin of $8.7 million, partially offset by an increase in R&D expense of $2.3 million and an increase in SG&A expense of $1.7 million. Net other income for the first quarter of fiscal 2020 was $1.7 million, and a number of other members of the board. Equity method investment activity net of tax for the first quarter of fiscal 2020 was a loss of $1.3 million, or $0.06 for diluted share, compared to a loss of $0.6 million net of tax for the first quarter of fiscal 2019. Net income from continuing operations attributable to ArrowVironment for the first quarter of fiscal 2020 was $17.1 million, or $0.71 for diluted share, compared to a net income from continuing operations attributable to AeroVironment of $20.3 million, or $0.85 per diluted share for the first quarter of fiscal 2019. Non-GAAP diluted earnings per share for the first quarter of fiscal 2020 was $0.74 per diluted share and excludes $0.03 per diluted share for the deal, integration costs, and intangible amortization expense associated with our recent acquisition of Pulse Aerospace. Non-GAAP diluted earnings per share for the first quarter of fiscal 2019 was 59 cents per diluted share and excludes the 26 cents for diluted share gain from a one-time litigation settlement. Our funded backlog as of July 27, 2019 was $165.2 million, an increase of $8.2 million from the first quarter of fiscal 2019 and an increase of $.9 million from the fourth quarter of fiscal 2019 backlog of $164.3 million. Turning to our balance sheet, cash, cash equivalents, restricted cash, and investments at the end of the first quarter fiscal 2020 totaled $310.6 million, a decrease of $22 million from the end of fiscal 2019 cash, cash equivalents, restricted cash, and investments of $332.6 million. The decrease in cash was primarily related to the Pulse Aerospace acquisition, as well as the increased investment in the HAPS mobile joint venture. Net accounts receivable, including unbilled receivables and retention, at the end of the first quarter fiscal 2020, totaled $90.7 million. The unbilled receivables and retention balance was $47.9 million, inclusive of $12.6 million of related party amounts. Total day sales outstanding from continuing operations for the first quarter fiscal year 2020 was approximately 90 days compared to 87 days for the fourth quarter fiscal year 2019. Net inventory at the end of the first quarter fiscal year 2020 was $56.3 million compared to $54.1 million at the end of the fourth quarter fiscal year 2019. Days in inventory outstanding for the first quarter fiscal year 2020 was approximately 109 days compared to 92 days for the fourth quarter fiscal year 2019. Accounts payable at the end of the first quarter fiscal year 2020 was $11.4 million compared to $16 million at the end of the fourth quarter fiscal year 2019. Total days payable outstanding for the first quarter fiscal year 2020 was approximately 27 days compared to 24 days for the fourth quarter fiscal year 2019. Turning to capital expenditures in the first quarter of fiscal year 2020, we invested approximately $1.9 million in property improvements and capital equipment for continuing operations and recognized $2.1 million of depreciation and amortization expense. Now an update to our fiscal 2020 visibility. as highlighted on page 9 of the supplemental charts. As of today, we have year-to-date revenue in fiscal 2020 of $87 million. First quarter ending backlog that we anticipate to execute in fiscal 2020 of $150 million. Q2 quarter-to-date bookings that we anticipate to execute in fiscal 2020 of $18 million. Unfunded backlog from incrementally funded contracts that we anticipate to recognize revenue during the balance of the year of $15 million. This adds up to $270 million, or 75% of our fiscal year 2020 midpoint revenue guidance range. We anticipate a full-year effective tax rate of approximately 11%. This is higher than the fiscal 2019 full-year tax rate of 9%, primarily due to anticipated lower excess tax benefits from equity awards and other tax credit estimates. Now I'd like to turn things back to Wahid.