AeroVironment, Inc.

Good afternoon, ladies and gentlemen, and welcome to Arrow Environment's third quarter fiscal year 2021 earnings call. This is Stephen Gitlin, Chief Marketing Officer and Vice President of Investor Relations for Arrow Environment. 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 call is being recorded for replay purposes. Before we begin, please note that in 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 Air Environment'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 presentation section. The content of this conference call contains time-sensitive information that is accurate only as of today, March 9th, 2021. 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 Air Environment are President and Chief Executive Officer, Mr. Waheed Nawabi, and Senior Vice President and Chief Financial Officer, Mr. Kevin McDonald. We will now begin with remarks from Waheed Nawabi. Waheed?

Thank you, Steve. Welcome to our third quarter fiscal year 2021 earnings conference call. On today's call, I will emphasize three key messages included on slide number three of our earnings presentation. First, our team continues to deliver strong results despite the continued challenges presented by the COVID-19 pandemic. Second, we're on track to achieve our fiscal year 2021 objectives while delivering our fourth consecutive year of profitable double-digit top-line growth. And third, we're successfully executing our long-term growth strategy through our recent transformative acquisitions that will accelerate our success over the near and long term. Now let's review our financial performance in the quarter, which is outlined on slide number four of our earnings presentation. We delivered third quarter revenue of $78.8 million, an increase of 27 percent year-over-year, and consistent with our expectations. Earnings per diluted share of one cent increased from a loss of four cents in the prior year, primarily due to an increase in revenue and product margin. Non-GAAP earnings per diluted share for the third quarter was 14 cents, an increase of 15 cents as compared to the prior year. Our team continued to build on our positive momentum, supporting our U.S. and more than 50 allied customers and simultaneously executing on transformative acquisitions. While the pandemic continued to shift some orders due mainly to travel restrictions, we're still delivering on our commitments and and working toward a fourth consecutive year of profitable growth. During and shortly after the end of our third quarter, we announced three acquisitions that we're confident will significantly strengthen our company and extend Air Environment's track record of operational and financial success. With the acquisition of Telerob, we're expanding our portfolio of solutions with a leading family of unmanned ground vehicles. Based in Germany, Telerob has been in business for almost three decades and serves defense and public safety customers in 45 countries. We see significant opportunities across our customer base for cross-selling and await a decision from the U.S. Air Force on the large EOD robotics program, which we recently bid as a prime contractor. we expect to close the Telerab acquisition and learn the result of the Air Force competition by the end of our fiscal year 2021. Next, our acquisition of our tourist UAV, which closed on February 19th, provides us with class-leading medium UAS that can fly longer and further while carrying significantly larger payloads as compared to our small UAS. We now refer to PUMA LE JUMP-20 and T-20 as our medium UAS or MUAS solutions, providing endurance ranging from 6.5 hours to 24 hours. Our MUAS team continues to deliver intelligence as a service on the U.S. SOCOM ME UAS-4 program. In addition, Jump 20 is well-positioned for the U.S. Army's Future Tactical UAS Program, or FTUAS, a multi-year opportunity for the replacement of the Army's legacy Group 3 solution. We participated in a competitive FTUAS demonstration last week, providing the Army with a better understanding of the Jump 20's capabilities and suitability for this program. Our system performed extremely well in this demonstration, which should improve our competitive position for this program. Last, on February 24th, we announced our acquisition of Progeny Systems Corporation's Intelligence Systems Group, or ISG. ISG is a best-in-class developer and supplier of machine vision and perceptive autonomy software solutions. ISG's Virginia office will become Air Environment's artificial intelligence innovation center, serving as a focal point for our accelerated development of advanced capabilities that will significantly enhance the intelligence and autonomy of our entire solution set. For example, ISG's technology automatically processes imagery from any source to search for specific objects, detect changes over time, and develop pattern of life analysis. Once the ISG software identifies an object, a mission profile can be loaded into our unmanned systems, enabling them to search for and identify the object in the field, then modify their missions autonomously to take appropriate actions. I cannot overstate the value of the ISG team's ability to increase the capabilities of our solutions while also increasing our revenue from customer-funded R&D projects. ISG also helps us deepen our relationships with key U.S. government customers. The ISG team will merge with our McCready Works Advanced Solutions team and drive even more innovation into our portfolio for defense and non-defense customers. Our new Artificial Intelligence Innovation Center will also enhance our presence in the Washington, D.C. area. These are three exciting transactions that expand our business, our team, and our ability to drive shareholder value over the near and long term. Now, shifting to our business results, our small unmanned aircraft systems product line represented 64% of total revenue in the third quarter, and we remain the leader in the global market for small UAS. During the quarter, we announced a new extended range antenna for our small UAS that expands the command and control range of our solution set up to 40 kilometers. The international market for our small UAS remains strong, contributing to our healthy pipeline. While we are experiencing limitations in our ability to travel during the COVID-19 pandemic, which delayed some customer orders, we're confident in our ability to continue delivering strong results. In our tactical missile systems product line, which represented 25% of third quarter revenue, we received the first U.S. government approval for the export of Switchblade 300. We do not intend to identify the customer for this export. This is an important milestone for us as we market Switchblade's unique capabilities to international customers. We believe additional demand from close U.S. allies will also be forthcoming. We expect switchblade exports to take place within the U.S. government's Foreign Military Sales, or FMS, program as opposed to direct commercial sales. We previously stated that Switchblade 600 would compete for the United States Marine Corps Organic Precision Fires Mounted, or OPFM, program. A key competitive demonstration took place in February for this program. We're very proud of the performance of Switchblade 600 over numerous launches and harsh environmental conditions. The multi-pack launcher we developed for Switchblade 600 also performed as expected, providing the ability to transport and launch multiple loitering missiles from a mobile platform. Due to the impact of the pandemic on program timelines, we now expect a customer down select on this program by the end of our fiscal year 2021. We are building the demand pipeline for a switchblade product line as we continue to develop additional variants and as the U.S. Navy proceeds with its adoption of Blackwing. Moving now to HAPS, which represented 9% of third quarter revenue, SoftBank Corporation and AeroVironment remain committed to this opportunity and its value creation potential. we have collected a large volume of data from our first five successful test flights and are incorporating our learning into the design of the next aircraft. We're confident that the next version of SunGlider will facilitate the certification process and demonstrate both enhanced performance and improved manufacturability. Now I would like to discuss the ongoing impact of the COVID-19 pandemic on our business. We continue to experience some delays in customer contracting decisions on our domestic and international customers who operate largely in remote work configurations. We're also experiencing minor delays in limited areas of our supply chain without impact to our production timelines. While the rate of vaccination continues to rise, we're assuming that the current remote work situation is likely to continue through and beyond the summer. Now I will turn the call over to Kevin McDonald for a summary of third quarter and year-to-date financials. Kevin?

Thank you, Waheed. Today I will be reviewing the highlights of our third quarter and year-to-date financial performance. I'll be referring to both our press release and earnings presentation available on our website. Revenue for the third quarter of fiscal 2021 was $78.8 million, an increase of 27%. from the third quarter of fiscal 2020 revenue of $61.9 million. The breakdown of revenue by product area is contained on slide six of the quarterly earnings presentation. During the quarter, we showed especially strong performance in our TMS product line, which was up 148 percent from the same period last year. Small UAS was also up 37 percent from the same period last year. These higher sales were partially offset by lower HAPs and other revenue. Revenue for the first three quarters of fiscal 2021 was $258.9 million, an increase of 12% from the first three quarters of fiscal 2020 revenue of $232.1 million. Again, the revenue growth was largely due to the 125% year-over increase in TMS sales, which were partially offset by reduced HAPS revenue. Turning to gross margin, slide 7 of the quarterly earnings presentation shows our product-service mix and overall gross margin trends over the past five quarters. Gross margin for the third quarter was $28.6 million, or 36% of revenue, compared to $23.5 million, or 38% of revenue, for the prior year third quarter. The lower year-over-year gross margin percentage was primarily due to an unfavorable product mix, which was partially offset by a higher proportion of product versus service revenues. Gross margin for the first three quarters of fiscal 2021 was $104.9 million, or 41% of revenue, compared to $99.9 million, or 43% of revenue, for the first three quarters of 2020. Again, the lower year-over-year gross margin was primarily due to an unfavorable product mix. Looking forward, we expect gross margin percentage to decline as a result of increasing intangible amortization expense from the announced acquisitions. While we are still in the process of completing the purchase accounting, we expect the decline in gross market percentage to be as much as four percentage points from increased intangible amortization. Next, I will turn to operating expenses. SG&A expense for the third quarter was $15.7 million, or 20% of revenue, compared to SG&A expense of $13.2 million, or 21% of revenue for the third quarter of fiscal 2020. SG&A expense for the first three quarters of fiscal 2021 was $42.6 million, or 16% of revenue, compared to $43.1 million, or 19% of revenue, for the first three quarters of fiscal 2020. The current quarter increase in SG&A expense was driven by an increase in acquisition-related expenses of $3.4 million, partially offset by a reduction in travel and trade show expenses resulting from COVID-related restrictions. We expect significant acquisition-related expenses in the fourth quarter as we complete and integrate the recently announced acquisitions. In addition, we should see higher SG&A as we consolidate the acquisitions and recognize a portion of the intangible amortization expenses as part of SG&A. Integration costs will also continue into fiscal 2022. Overall SG&A expense as a percentage of revenue will increase in fiscal 2022 as a result of the intangible intangible amortization and integration costs. R&D expense for the third quarter was $13.6 million, or 17% of revenue, compared to R&D expense of $11.4 million, or 18% of revenue, for the third quarter of fiscal 20. R&D expense for the first three quarters of fiscal 2021 was $36.7 million, or 14% of revenue, compared to $30.9 million, or 13% of revenue, for the first three quarters of fiscal 2020. We continue to make R&D investments across our product lines. In absolute dollars, this investment will increase as we absorb the acquisitions, but we expect a decline to approximately 10% of revenue on a full-year basis in fiscal 2022. Looking at the bottom line, net income attributable to Arrow Environment for the third quarter of fiscal 2021 was $211,000, or one cent per diluted share, compared to a loss of $1 million, or 5%. or minus 4 cents per alluded share for the third quarter of fiscal 2020. The $1.2 million increase in net income was largely a result of higher gross margins of $5.1 million, a higher benefit from income taxes of $.9 million, and a reduction in equity investment loss of $1.1 million. These improvements were largely offset by higher SG&A and R&D spending. For the first three quarters of fiscal 2021, Net income was $12.4 million, or 51 cents per diluted share, compared to $23.6 million, or 98 cents per diluted share, for the first three quarters of fiscal 2020. The $11.2 million reduction in net income was primarily due to the $8.4 million loss from our portion of the HAPS mobile impairment of its investment loon, together with higher R&D spending of $5.8 million and lower interest income of $3.3 million. These reductions in net income were partially offset by higher gross margin of $5 million. In terms of adjusted EPS, slide 11 shows the reconciliation of GAAP and adjusted or non-GAAP diluted EPS. Non-GAAP diluted earnings per share for the third quarter of fiscal 2021 was 14 cents per diluted share versus a diluted loss per share for the third quarter of fiscal 2020 of one cent. For the first three quarters of 2021, Non-GAAP diluted earnings per share was $1.06 per diluted share versus non-GAAP diluted earnings per share for the first three quarters of fiscal 2020 was $1.07 per diluted share. Turning to our balance sheet, our cash position was strong at the end of the third quarter of fiscal 2021 with cash, cash equivalents, and investments totaling $384.3 million, an increase of $66.6 million from the end of fiscal 2020. Total cash from operating activities during the first three quarters of the year was 79 million, of which 40.1 million was a result of working capital improvements and the remainder from operating activities. The working capital improvement came primarily from the collection of accounts receivables. In terms of capital expenditures, we spent 8.5 million during the first three quarters of 2021. Subsequent to the end of the third quarter, We had total cash outlays from our existing cash related to the acquisitions that closed in February of approximately $196 million. In addition, in conjunction with the Arturas acquisition, we entered into a $200 million term loan facility and a $100 million revolving credit facility with a group of banks. At the close of the Arturas transaction, we drew down $200 million on the term loan facility, which was used to fund the acquisition. the $100 million revolving credit facility remains unused. We expect an additional $54 million of cash outlays related to the Telerob acquisition, which is expected to close during the fourth quarter. Also at the close of the Arturas transaction, we issued approximately 574,000 shares of AV stock to the selling Arturas shareholders. This stock issuance is restricted and will become sellable in tranches over an 18-month period. I'd also like to note that we are adding adjusted EBITDA as a non-GAAP measure on a go-forward basis to better inform our investors, particularly given the fact that we now have significant intangible amortization and debt on our balance sheet. Now I'd like to highlight some of our backlog metrics. Our funded backlog at the end of Q3 was $103.9 million, a decrease of $22.1 million from the third quarter of fiscal 2020, and an increase of $103.9 and a decrease of $104.2 million from the fourth quarter fiscal 2020 backlog of $208.1 million. The backlog decline is primarily due to delays in orders resulting from the impact of the COVID pandemic. In terms of fiscal 2021 visibility, which is highlighted on slide eight of the earnings presentation, as of today, we have year-to-date revenue in fiscal 2021 of $259 million. Third quarter ending backlog that we anticipate to execute in fiscal 2021 of $76 million. Quarter to date bookings, including acquisition backlog assumed that we anticipate to execute in fiscal 2021 of $28 million. An unfunded backlog from incrementally funded contracts that they anticipate to recognize revenue during the balance of the year of $20 million. This adds up to $383 million. or 95% of our fiscal 2021 midpoint revenue guidance range. Now I'd like to turn things back to Wahid.