AeroVironment, Inc.

Good afternoon, ladies and gentlemen, and welcome to AeroVironment's fourth quarter and full 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 and more, 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 to our website at avinc.com in the events and presentation section. The content of this conference call contains time-sensitive information that is accurate only as of today, June 23, 2020. 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 in a socially distant manner are President and Chief Executive Officer, Mr. Wahid Nawabi, and Senior Vice President and Chief Financial Officer, Mr. Kevin McDonald. We will now begin with remarks from Wahid Nawabi. Wahid?

Thank you, Steve. Welcome to our fourth quarter and full fiscal year 2020 earnings conference call. Before we discuss our strong fourth quarter and fiscal year 2020 performance, I would like to comment on recent events. We at AirVironment have spent time reflecting on the tragic deaths of George Floyd, Breonna Taylor, Ahmaud Arbery, and too many others and on the protests that have followed. Let us be clear, there is no place for discrimination or racism at AirVironment or in our society at large. We strongly believe that diversity enriches our business and contributes to the best results for our customers, business partners, and other stakeholders. We seek the most talented people to join our team, regardless of race, gender, religious belief, ethnicity, country of origin, sexual orientation, or political view. However, as a country and a company, there is more we can all do to extend justice to all citizens. To that end, we have created an internal committee on inclusion and diversity to evaluate ideas from our people and others to determine the steps we can take that can contribute to positive change. As a global leader in robotics, sensor, software analytics, and connectivity technologies, we believe that we are in a unique position to share our passion for science, technology, engineering, and mathematics, or STEM, with youth, especially those in underserved communities, and help influence the next generation of innovators, engineers, and scientists. As part of our initial efforts, we plan to increase our outreach to African American and other underrepresented groups to further diversify our team. We welcome the input of all our employees to help us achieve an even more diverse and inclusive work environment. Now shifting to our fiscal fourth quarter and full year results, on today's call, I will emphasize three key messages also included on slide number three of our earnings presentation. First, our team delivered record results in a third consecutive year of profitable double-digit top-line growth. Second, we secured several key opportunities which have further strengthened our leadership positions. And third, we have high confidence in our ability to create long-term value by progressing our strategic growth opportunities. I will start by summarizing our strong fiscal year 2020 performance. included on slide number four of our earnings presentation and discuss our notable achievements during the fourth quarter and fiscal year. Next, Kevin will provide a more detailed summary of financial performance in the year, and then I will discuss our goals for fiscal year 2021 before Kevin, Steve, and I take your questions. I am incredibly proud of our team and their efforts to deliver solid growth despite the impact of COVID-19. We delivered record fourth quarter revenue of $135.2 million and produced record full year revenue of $367.3 million. These results represent an increase of 54% and 17% over the prior fourth quarter and fiscal year. Full-year diluted earnings per share from continuing operations was $1.72 compared to $1.74 for fiscal year 2019. As a reminder, fiscal year 2019 included a one-time gain from a litigation settlement of $0.26 per diluted share. Non-GAAP earnings per diluted share from continuing operations for fiscal year 2020 was $1.84 compared to $1.48 for fiscal year 2019, which excludes a one-time gain from a litigation settlement of $0.26 per diluted share. We entered fiscal year 2021 with record-funded backlog of $208.1 million. providing strong momentum toward a fourth consecutive year of profitable growth. Across the board, our outstanding results reflect excellent execution of our plans by our team and strong global demand for AirVironment's highly differentiated solutions. Now I will review our business achievements in fiscal year 2020, many of which we've highlighted in slide number six of our earnings presentation. Our small unmanned aircraft systems product line represented 62% of total revenue in the fiscal year, and we introduced new products that reinforce and expand our leadership position. In October, we introduced PUMA LE, which offers Group 2 capabilities and an economical Group 1 footprint. We have already received orders for PUMA LE and have delivered them to multiple customers. We are actively engaged with several additional customers who are interested in Puma LE's unmatched performance capabilities. Continuing on our new product introductions, in April we unveiled Quantix Recon, which offers fully automated mapping and the option of radio silent operation to minimize detectability. We recorded our first order for this new product before the end of the fiscal year. Based on our Quantix mapper, Quantix Recon provides unique capabilities for gaining situational awareness at the battlefield's edge while minimizing the cognitive load on frontline troops. We secured a number of significant contract awards during the fiscal year. These include the Large Raven System Award from the U.S. Army Security Forces Assistance Brigade, or SFAB, which we announced last year. This award contributed to a very strong year for Small UAS, totaling $226 million in revenue. In addition, we won the Flight Control Systems, or FCS, Domain Award for the U.S. Army's Small UAS program in June 2019, with a potential value of up to $55 million. The competitive bid was part of the Army's $248.5 million five-year IDIQ small UAS sustainment contract announced in April of 2018. In February, the U.S. Marine Corps awarded us a $10.7 million contract for PUMA III-AE systems, expanding their fleet of air-environment small UAS. In August, we secured a $5.2 million follow-on order from the U.S. Customs and Border Patrol for PUMA-3 AE systems, providing another tool to help secure our border and protect our Border Patrol agents. We successfully transitioned the production of our vapor unmanned helicopters to our Simi Valley manufacturing facility during the fiscal year following our acquisition of Pulse Aerospace. We also successfully delivered on a portion of the existing $13 million contract for Vapor 35 and 55 systems to a defense customer. We are pursuing follow-on opportunities with that and multiple other customers. In our international business, we now have a total of 50 international allied customers and have won numerous contract awards in both foreign military sales and direct commercial sales contracts. Military sales and direct commercial sales contracts. We continue to see sustained demand for our solutions with multiple international customers and multiple continents. For example, the United Kingdom is now our largest international customer in terms of revenue and orders and represents a significant long-term adoption opportunity. In our tactical missile systems product line, we secured the first year of a $146 million multi-year U.S. Army contract for lethal miniature aerial missile systems, or LMAMs, with our switchblade loitering missile system. The first year of this contract is valued at $76 million, making it the largest LMAMs award, our largest switchblade award, and the largest single award in AeroVironment's history. This is a very significant milestone because it establishes Switchblade as the LMAM solution with a contract vehicle and funding for a multi-year period, institutionalizing Switchblade into the planning and operations of the Army and Marine Corps. We continue to position ourselves for U.S. government approval of Switchblade exports to international allies. An important part of that positioning includes our ongoing engagements with multiple U.S. allies regarding future exports of Switchblade to their military forces. As part of the expansion of our family of tactical missile systems that is disrupting the multibillion-dollar legacy missile market, we achieved more success in critical user evaluations of our larger Switchblade variant during the fiscal year. As I have stated before, This larger variant is capable of addressing larger targets, delivering more significant effects on those targets, and flying longer and further as compared to our original switchblade. As a result, this variant enables us to address a much larger market segment currently served by legacy missiles such as Javelin, Tow, and Hellfire. This game-changing new capability represents significant new potential opportunity for AeroVironment in the years to follow. Also within our TMS product line, our engagements with Kratos and General Dynamic Land Systems continue to advance. Both of these efforts are long-term in nature and we look forward to supporting our teammates in these initiatives. As you can see from our progress, we are well on our way to disrupting the legacy missile business with our patented, disruptive switchblade family of loitering missile systems. Moving now to HAFs, which represented 17% of fiscal year 2020 revenue, we successfully completed the first phase of Hawk 30 flight tests in fiscal year 2020. We established a test facility at Spaceport America in New Mexico. for the next phase of HAWC-30's low-altitude and high-altitude flight testing. While Spaceport America will host our next series of flight tests this summer, Hawaii remains in our mid- and long-term testing and operational plans. The value of our HAFSS program was also increased by $18 million in April to an inception-to-date total of $166 million. We plan to transition this program to a testing and certification phase within the next fiscal year, which, if successful, should maintain our current annual run rate of customer-funded R&D revenue. HAFSS continues to represent a potentially transformational growth opportunity for AirVironment as we and our partner move forward toward the goal of providing commercial connectivity using networks of HAWC-30 aircraft. Introduced in February, the HAPS Alliance represents a broad global consortium of telecom, aerospace, and technology companies, including AirVironment as one of its founding members, committed to delivering the benefits of HAPS and creating value from it. Over the last few months, the COVID-19 pandemic brought great uncertainty to us all. but it also brought out the very best in our company's leaders and in our people as they adapted quickly to the new normal. Like all companies, AirVironment was affected by the global pandemic and I am extremely proud of the way our team has responded to these unprecedented events. AirVironment qualifies as an essential business with customers who rely on the solutions we produce and support. In March, we transitioned quickly to a hybrid work structure, where roughly 80% of our workforce shifted to working remotely. Being an agile technology company, we had already implemented telepresence tools, which enabled us to move rapidly to a productive remote work arrangement. For those employees who were unable to work remotely, we enhanced safety procedures throughout our facilities. including temperature scanning, social distancing, and continuous standardization activities. By minimizing the number of people working on site, we were able to safely balance our commitments to our team members, our customers, and our community. Not only did we continue to execute on our strategy during these unprecedented times, but we also contributed to the fight against COVID-19. Our fast prototyping teams quickly began producing medical face shields More than 1,000 to date, and we have donated them to local medical facilities and professionals on the front line. In addition, our strong relationship with NASA JPL resulted in an air environment engineering team supporting the development of VITAL, an innovative, new, lower cost, and much lower parts count ventilator design that the government has made available for commercial manufacturers to produce. This new and innovative ventilator was designed in less than two months and we are proud to have been part of the NASA and JPL team in this important effort. Additionally, we take great pride in the fact that our products have also played a role in combating COVID-19. For example, in the Netherlands, public safety officials are operating AeroVironment's PUMA-AE Tactical UAS as part of an integrated multi-domain response team. In another example, in Italy, officials are deploying AeroVironment's Raven unmanned systems in a similar fashion to monitor traffic in areas heavily impacted by the coronavirus pandemic. We believe our solutions offer compelling value in the fight against this pandemic. In summary, despite all the challenges Our team remained focused on executing our fiscal year 2020 plans and delivered outstanding results that met our heightened objectives for the year and positioned us for success in fiscal year 2021 and beyond. Now, I will turn the call over to Kevin McDonnell for a summary of the quarter and full year financials. Kevin?

Thank you, Wahid. Revenue for the fourth quarter of fiscal 2020 was $135.2 million. An increase of $47.3 million, or 54%, from the fourth quarter of fiscal 2019 revenue of $87.9 million. The increase was due to an increase in product revenue of $37.4 million and an increase in contract services revenue of $9.9 million. Fourth quarter fiscal 2020 revenue by major product line is as follows. Small UAS was $63 million, or 47% of the total revenue, TMS was $42.4 million, or 31%, HAPS was $23.4 million, or 17%, which includes the one-time revenue from the construction of a flight test facility, as Wahid mentioned in his remarks, and other was $6.5 million, or 5%. Let me take a moment to outline the current status of the HAPS program. Inception's date revenue under contracts for the HAPS program is $138.4 million, The total value of all contracts for the HAPS program is $166.1 million, or a $17.5 million increase from last quarter. Turning back to the financial performance for the quarter. Gross margin for the fourth quarter of fiscal 2020 was $53.2 million, compared to $37 million for the fourth quarter of fiscal 2019. Gross margin as percentage of revenue decreased from 42% to 39%, primarily due to an unfavorable product mix. In addition, we had an increase in intangible asset amortization expense associated with our acquisition of Pulse Aerospace in fiscal 2020. Looking at the rest of the income statement, SG&A expense for the fourth quarter of fiscal 2020 was $16.3 million or 12% of revenue compared to SG&A expense of $20.3 million or 23% of revenue for the fourth quarter of fiscal 2019. The decrease in SG&A was primarily due to a $4.4 million fixed asset impairment charge booked in the fourth quarter of fiscal 2019. R&D expense for the fourth quarter of fiscal 2020 was $15.5 million or 11% of revenue compared to R&D expense of $11.6 million or 13% of revenue for the fourth quarter of fiscal 2019. Net other income for the fourth quarter of fiscal 2020 was $1.2 million compared to net other income of $2.8 million for the fourth quarter of fiscal 2019. The decrease in net other income was due to the lower transition services income for services performed for the buyer of our former efficient energy systems business coupled with lower interest income on our investments. We expect the lower interest income trend to continue in FY21 as a result of lower interest rates and a more conservative portfolio strategy. In terms of bottom line results, Net income from continuing operations attributable to AV for the fourth quarter of fiscal 2020 was $17.7 million, or 73 cents per diluted share, compared to income from continuing operations attributable to AV of $6.1 million, or 26 cents per diluted share for the fourth quarter of fiscal 2019. Non-GAAP diluted earnings per share from continuing operations for the fourth quarter of fiscal 2020 was 75 cents per diluted share, and Excludes 2 cents for diluted share for intangible amortization expense associated with our acquisition of Pulse Aerospace. Non-GAAP diluted earnings per share from continued operations for the fourth quarter of fiscal 2019 was 26 cents. Now moving through to our results for the full fiscal year of 2020. Revenue for fiscal 2020 was $367.3 million, an increase of $53 million compared to $314.3 million for fiscal 2019. The increase in revenue is due to an increase in product revenue of $44.7 million and an increase in contract service revenue of $8.3 million. Fiscal 2020 revenue by major product line is as follows. Small UAS was $225.9 million, or 62% of total revenue. TMS was $63.8 million, or 17%. HAPS was $60.9 million, or 17%. and other with $16.8 million or 5%. Gross margin for fiscal 2020 was $153.1 million as compared to $128.4 million for fiscal 2019. Gross margin as a percentage of revenue increased from 41% to 42% primarily due to an increase in the proportion of product revenue to total revenue, partially offset by a $2.5 million increase in intangible Asset amortization expense associated with our acquisition of Pulse Aerospace. Gross product margins did decline from 46.5% in fiscal 2019 to 45.8% in fiscal 2020. We expect product margins to continue to decline as a result of product mix in fiscal 21. In terms of fiscal 2020 bottom line, net income from continuing operations attributable to AV was $41.3 million, or $1.72 per diluted share. compared to $41.9 million, or $1.74 per diluted share for fiscal 2019. However, fiscal 2019 included a one-time gain from a litigation settlement equal to 26 cents per diluted share. I should also note that the tax rate for fiscal 2020 ended up at 11.1%, up from 9.2% in fiscal 2019. We expect a full-year tax rate of approximately 12% in fiscal 2021. Non-GAAP diluted earnings per share from continuing operations attributable to AV for the full year of fiscal 2020 was $1.84 per share and excludes $0.12 per share for intangible amortization expense, as well as deal and integration costs associated with our acquisition of Pulse Aerospace. Non-GAAP diluted earnings per share from continuing operations attributable to AV for the full year of fiscal 2019 was $1.48 and excludes the $0.26 per share from a one-time litigation settlement gain in fiscal 2019, as noted above. Our funded backlog as of April 30th, 2020 was an AV record $208.1 million, an increase of $43.7 million from the fourth quarter of fiscal 2019, and an increase of $82.1 million from the third quarter of fiscal 2020 backlog of $126 million. Turning to our balance sheet. Cash, cash equivalents investments at the end of the fourth quarter of fiscal 2020 totaled $317.7 million, a decrease of $14.9 million from the end of fiscal 2019 of $332.6 million. The decrease in cash, cash equivalents investments was primarily related to our acquisition of Pulse Aerospace, as well as our increased investment in the HAPS Mobile Joint Venture. Net accounts receivable including unbilled receivables and retention at the end of fiscal 2020 totaled $149.5 million. Unbilled receivables and retentions was $75.8 million, inclusive of $15.8 million of related party amounts. The increase in accounts receivable and unbilled receivables was driven by the timing of revenue during the fourth quarter of fiscal 2020. Total days outstanding for the fourth quarter of fiscal 2020 was approximately 85 days compared to 87 days for the fourth quarter of fiscal 2019. Net inventory at the end of fiscal 2020 was $45.5 million compared to $54.1 million at the end of fiscal 2019. The decrease in inventory in Q4 reflects a significant increase in product revenue that occurred in the fourth quarter of fiscal 2020. Days in inventory outstanding for the fourth quarter fiscal 2020 was approximately 61 days Compared to 92 days for the fourth quarter of fiscal 2019. Turning to capital expenditures, in fiscal 2020, we invested approximately $11.2 million in property improvements and capital equipment to support our growth. This is an increase of 26% over the $8.9 million we capitalized in fiscal 2019. We expect capital expenditures to increase in FY21, primarily as a result of investment in facilities, manufacturing, and IT. We expect capital expenditures to be Four to five percent of revenue in fiscal 2021. Now for our fiscal 2021 visibility as highlighted on page seven of the supplemental charts. As of today, we have ending backlog that we anticipate to execute in fiscal 2021 of $200.3 million. Q1 quarter-day bookings that we anticipate to execute in fiscal 2021 of $9.1 million. and unfunded backlog from incrementally funded contracts that we anticipate to recognize revenue during the balance of year of $31.1 million. This adds up to $240.5 million or 60% of our fiscal 2021 midpoint revenue guidance range. Now I'd like to turn it back, call it back to Wahid.