AeroVironment, Inc.

Good afternoon, ladies and gentlemen, and welcome to Air Environment's fourth quarter and full fiscal year 2021 earnings call. This is Stephen Gitlin, Chief Marketing Officer and Vice President of Investor Relations for Air 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 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 four local 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, June 29, 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 fourth quarter and full fiscal year 2021 earnings conference call. On today's call, I will emphasize an important message included on slide number three of our earnings presentation. That message is this. Air Environment again delivered on its financial, operational, and strategic commitments despite the continued macroeconomic challenges. In fiscal year 2021, we applied Air Environment's unique value proposition of innovation, customer intimacy, and agility to help our customers succeed. We're proud to have delivered a fourth consecutive year of profitable revenue growth in the midst of the global pandemic. We deployed our balance sheet to expand our solutions portfolio and the value of our addressable markets. We successfully executed our growth strategy and created significant value for our three key stakeholders, our customers, employees, and shareholders. And the demand and preference for our innovative, reliable, and battle-proven solutions remain strong, reflecting our continued global leadership and our chosen market segments. Today, I will summarize our fiscal year 2021 performance and discuss our achievements during the fourth quarter and full fiscal year. Next, Kevin will provide a more detailed summary of our financial performance in the year, and then I will follow up with a brief discussion on our goals for fiscal year 2022 before Kevin, Steve, and I take your questions. Now let's move to our fiscal year highlights included on slide number four. Our team has done an incredible job of staying focused on serving our customers and delivering profitable top-line growth, despite a full fiscal year operating during the COVID-19 pandemic. We produced record fourth quarter revenue of $136 million and record full-year revenue of $395 million. Full fiscal year revenue increased by 7.5%, including contributions from the Arcturus UAV and ISG businesses acquired in the year, which I will discuss in a few moments. While we were able to manage the majority of supply chain issues during the pandemic, some isolated issues prevented us from achieving our revenue objectives for the fourth quarter and the full fiscal year, leaving us slightly below our guidance range. Full-year diluted earnings per share, or 96 cents, compared to $1.72 for fiscal year 2020. Fiscal year 2021 included an impairment of $8.4 million related to HAPS Mobile's investments in Loon LLC and $9.3 million for legal accrual related to our former EES business. Non-GAAP earnings per diluted share for fiscal year 2021 were $2.10, compared to $1.84 for fiscal year 2020, an increase of 14%. Record fiscal year ending funded backlog of $211.8 million rose slightly from the prior year. I commend the entire Air Environment team for adapting to new ways of working during the pandemic and achieving these solid financial results. while also acquiring three new businesses and successfully integrating them into our portfolio. Now I will review our business achievements in fiscal year 2021. First and foremost, in fiscal year 2021, we significantly reshaped our portfolio by acquiring our Tourist UAV, Telerob, and Progeny Systems ISG. These acquisitions further expand our offering to provide our customers a portfolio of intelligent multi-domain robotic systems. Beyond defense markets, we're also able to deliver valuable solutions combining air and ground robotic systems to first responders, infrastructure managers, homeland security personnel, and others. Supporting the broader adoption of UAS for commercial use, We were recently appointed to an FAA advisory rulemaking committee focused on beyond visual line-of-sight operations. This ensures we remain in a position to provide recommendations that drive adoption of UAS and the United States. As a result of our strategic acquisitions, we now organize our portfolio in six product lines, which I will now describe. First, our small unmanned aircraft systems product line represented 60% of total revenue in the fiscal year, or $236 million. We continue to secure new procurements and support awards for U.S. and some of our more than 50 international allied customers, reflecting our continued global leadership in this category. During the fiscal year, we received a number of contract awards that included more than $20 million from the U.S. Army for RAVEN radio frequency modification and a number of procurement awards from international allies for RAVEN and PUMA and for support services. In total, our small UAS product line generated approximately $111 million in international revenue during the year, a 6% increase over fiscal year 2020. Second, our new medium UAS product line is the result of our acquisition of ArcTourist UAV, a provider of Group 2 and 3 UAS and services. This transaction closed in our fourth quarter, and the product line contributed 4% or $16 million of full fiscal year revenue. Our end UAS product line addresses a market segment that is even larger than the small UAS opportunity, and the team continued to support our U.S. SOCOM customer on its MEUAS IV services contract. As a reminder, under this contract, AeroVironment provides ISR services to our customer at their overseas basis. This is a contractor-owned, contractor-operated, or COCO, business model in which our personnel operate our Jump 20 VTOL fixed-wing hybrid systems and provide customers with the actionable intelligence they generate. During the fiscal year, we also secured an extension award for one of the customer locations and are gaining share in this program, reflecting our strong operational performance and value proposition. Our Jump 20 system is also a leading candidate for the U.S. Army's Future Tactical UAS, or FTUAS, program. In February, we participated in the Army's FTUAS Rodeo Showcase and successfully demonstrated the advanced capabilities of the Jump 20 to Army officials. We remain confident in our positioning for the FTUAS program and expect the customer to announce prototype awards in calendar year 2022 and procurement awards as soon as government fiscal year 2023. Third, our tactical missile systems product line represented 22% of fiscal year 2021 revenue, or $87 million. During the fiscal year, we secured a new Switchblade 300 procurement award of $45 million under the U.S. Army's $146 million LMAMS contract and a separately funded logistics support award worth up to $41 million over three years for that program. Importantly, the U.S. government granted its first export approval for Switchblade 300 procurement by an allied nation, an order we expect to deliver before the end of fiscal year 2022. We continue to work with additional allied customers who are interested in Switchblade 300's unique capabilities. During the fiscal year, we also introduced the Switchblade 600, The U.S. SOCOM awarded Air Environment a $26 million contract for Switchblade 600 in April. This award is for integration of Switchblade 600 into specialized naval vessels, highlighting the multi-domain capabilities of this unique solution. While we do not win the Marine Corps OPFM Phase II RDT&E Award, We are continuing to track and pursue this and other U.S. DOD programs. Additionally, we will be delivering Switchblade 600 units this fiscal year to another customer who continues to move forward with low-rate initial production and operational deployment of this capability. We're confident in our potential to continue to grow and succeed across our portfolio. In adding to the multi-domain applications for our TMS product line, the U.S. Navy announced their intent to order up to 120 of our Blackwing reconnaissance systems for the submarine-launched unmanned aerial systems, or SLUAS program, as part of its ongoing effort to adopt Blackwing across its submarine fleet. In other platform integration opportunities, we continue to work with General Dynamics land systems on the integration of small UAS and switchblade into their next generation armored vehicles. The recent conflict between Azerbaijan and Armenia highlighted the game-changing capability of armed UAS and loitering missiles to neutralize traditional armored assets. Air environment remains at the forefront of this disruptive capability. and stands ready to support our military and our allies with patented battle-proven loitering missile solutions. Fourth, our new unmanned ground vehicles for UGV product line represents Telerob, the German leader in ground robotic solutions that we acquired in early May. Since we have not closed the transaction prior to the end of our fiscal year 2021, We're not reporting Telerob's financial results for the fiscal year. We retained all Telerob employees, including their leadership team, and we're actively pursuing a number of new programs and cross-selling opportunities in the U.S. and internationally. We're still waiting for the U.S. Air Force to announce a decision on its large EOD robotics contract. Fifth, our HAPS product line represented 11% of fiscal year 2021 revenue, or $42 million. We recently entered into a new five-year master design and development agreement with SoftBank to transition to the next phase of Solar HAPS development and build a third aircraft that will benefit from the learning gained in our five successful test flights. Under this new agreement, Air Environment received a new $52.1 million order to continue our work on the program. We also received an additional $4.7 million order related to the completion of the previous design development agreement. We've made tremendous progress on this potentially transformative development program. In less than three years, we designed the SunGlider solar HABs. established an innovation center and flight test facility, produced two SunGlider Solar HAFs aircraft, conducted five successful low- and high-altitude test flights, and demonstrated broadband LTE communication from the stratosphere. We remain committed to creating value in our HAFs product line and are confident that our recent advancements represent an important step toward the ultimate commercialization of solar haps technology for global connectivity. In our sixth product line, McCready Works Advanced Solutions expanded its capabilities with the acquisition of the Progeny Systems ISG team, a leader in the development of artificial intelligence-enabled computer vision, machine learning, and perceptive autonomy technologies. We plan to introduce new AI capabilities into our small UAS product line this fiscal year with a roadmap for continued enhancements into the future. Also part of McCready Works, we recently celebrated the historic and highly successful flights of the Mars Ingenuity Helicopter, much of which our team designed and built for JPL and NASA. With eight flights completed, JPL has transitioned Ingenuity from a technology demonstration to an operational demonstration. The achievements of Ingenuity speak not only to the ability of our team to develop first of their kind robotic systems for the most extreme environments, but also highlight our culture of partnering with our customers and suppliers to achieve incredible results. We look forward to continued success with Ingenuity on Mars as well as supporting emerging opportunities in the new category of robotic aircraft for planetary exploration. Beyond the business achievements we've made in our six product lines, we have also focused on the diversity of our team and have instituted programs aimed at furthering our culture of inclusion for all team members. Our Diversity and Inclusion Committee has established a series of programs designed to raise awareness of critical issues and implicit biases. Our recruiting team is working with organizations that help us reach more underserved populations, including minority-serving institutions and minority professional organizations. We're focused on finding the best team members based on their skills, experience, and ability to live our values, purpose, and promise while contributing to our customers' success and to AeroVironment's growth. Now I will turn the call over to Kevin MacDonald for a summary of the quarter and full year financials. Kevin?

Thank you, Waheed. Today I will be reviewing the highlights of our fourth quarter and full year financial performance. I'll be referring to both our press release and earnings presentation available on our website. Revenue for the fourth quarter of fiscal 2021 was $136 million, a slight increase from the fourth quarter FY20 revenue of $135.2 million. Slide six of the earnings presentation provides a breakdown of revenue by product line for the quarter. The headlines here are that the newly acquired a tourist business, which now becomes our medium UIS product line, contributed approximately $6 million of revenue to the quarter and the year. This additional revenue was more than offset by a $16.3 million decline in our house revenue versus last year's fourth quarter, which included the build-out of the Joint Ventures Flight Test Facility. TMS revenue was strong in the quarter at $39.2 million, but down slightly versus a very, very strong fourth quarter in FY20. Small UAS also ended the year strong with $70.9 million of revenue, which is a 7.8 million or 12% revenue increase year over year. Other revenue in the quarter was down $3.5 million from the prior year. Revenue for the full fiscal year 2021 was $394.9 million, an increase of 7.5% from the 2020 revenue of $367.3 million. Reflecting continued leadership in our core products, we experienced strong year-over-year organic growth of 12% for the combined TMS and small UAS product lines. However, this was largely offset by a $21.7 million decline in HAPs and other revenue, As a consequence, overall grant revenue growth netted to 3% for the year. The contribution of newly acquired businesses boosted the overall growth to 7.5% level, as previously noted. Turning to gross margin. Gross margin for the fourth quarter was $59.7 million, or 44% of revenue, compared to last year's fourth quarter of $53.2 million, or 39% of revenue, revenue. Gross margins were and will continue to be negatively impacted by intangible amortization expense included as part of cost of sales, which was $2.6 million for the quarter versus just over $600,000 in Q4 of FY20. Excluding the intangible amortization, overall gross margins were strong at 45.8% for the fourth quarter versus 39.8% in last year's fourth quarter. Also excluding intangibles, Product gross margins were very strong at 52% versus 42% a year ago. I should note that we talk about intangible amortization under cost of sales. This also includes other non-cash purchase accounting adjustments. Gross margin for fiscal 2021 was $164.6 million, or 42% of revenue, compared to $153.1 million, which was also 42% of revenue for fiscal 2020. The total margin dollars increased by 7% year-over-year. Total intangible amortization included as part of cost of sales was $4.5 million for fiscal 2021 versus $2.4 million for FY20. Excluding the intangible amortization, overall adjusted gross margins for the year were 43% versus 42% last year. Adjusted product gross margins remained strong for the year at 47%, which is in line with fiscal 2020. Our mix of product to service revenue has been roughly 70% product and 30% service over the last two years. As we move forward, we expect this mix will shift to closer to 60% product and 40% service as a result of our medium UAS product lines COCO ISR operation, which is classified as service revenue. As a result, overall full year gross margins excluding intangible amortization will decline a few percentage points as a result of this mix shift. Including intangible amortization, we expect the drop will be between 5 and 6 percentage points. Accounting effects aside, we expect full-year product margins before intangible amortization to remain fairly stable year-over-year and in the high 40% range. We expect program and product revenue mix in the first quarter to drive lower quarterly margins, significantly below our full-year gross margin expectations. This should normalize in the second quarter. Now I'll turn to operating expenses. SG&A expense for the fourth quarter was $24.8 million compared to $16.3 million for Q4 FY20. Included in SG&A for the quarter were intangible amortization and deal integration costs of $6.7 million compared to just over $600,000 in Q4 FY20 which represented most of the year-over-year increase in SG&A. The remainder of the increase in SG&A for the quarter was a result of newly acquired operations offset by lower travel and other expenses impacted by the pandemic. In terms of the full fiscal year, SG&A expense was $67.5 million compared to $59.5 million for fiscal 2020. SG&A for the full fiscal year 2021 included intangible amortization and deal integration costs of $11.1 million compared to $1.9 million in fiscal 2020. Backing out the increase to intangible amortization deal costs, SG&A expenses actually declined year over year. So when you exclude intangible amortization deal costs, SG&A as a percentage of revenue in fiscal 2021 was 14.3% versus 15.6% in 2020. The year-over-year improvement can be attributed to lower travel and trade show expenses as a result of the pandemic. As business conditions return to normal, we anticipate our SG&A expenses or percentage of revenue before intangibles and deal costs will return to pre-pandemic levels in 2022. As a point of reference, intangible amortization and integration costs are expected to be a combined approximately $18 million for fiscal 2022. Our D expense for the fourth quarter was $17.1 million. or 13% of revenue compared to R&D expense of $15.5 million or 11% of revenue for the fourth quarter of FY20. R&D expense for fiscal 2021 was $53.8 million or 14% of revenue compared to $46.5 million or 13% of revenue in 2020. Looking at the bottom line, GAAP net income from continuing operations for the fourth quarter of fiscal 2021 was $10.9 million or $0.44 per diluted share, compared to net income of $17.8 million, or $0.73 per diluted share for the fourth quarter fiscal 2020. The $6.8 million decrease in net income was largely a result of illegal accrual related to our former EES business of $9.3 million, as well as an additional $8 million of acquisition-related expenses partially offset by higher gross margin lower taxes, and lower equity method investment activities expenses. For the full year of fiscal 2021, net income from continuing operations was $22.3 million, or $0.96 for diluted share, compared to $41.3 million, or $1.72 for diluted share, for fiscal 2020. The $18 million reduction in net income was primarily due to $11 million of additional acquisition-related expenses 9.3 million legal accrual mentioned previously, the $8.4 million loss from our portion of the HAPS mobile impairment of its investment in Loon, partially offset by higher gross margins and lower taxes. 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 fourth quarter of fiscal 2021 was $1.04 per diluted share versus diluted earnings per share for the fourth quarter, of fiscal 2020 of 75 cents. For fiscal 21, non-GAAP diluted earnings per share was $2.10 versus non-GAAP diluted earnings per share for fiscal 2020 of $1.84, a 14% increase year-over-year. Turning to the balance sheet, total cash investments at the end of the quarter was $201.2 million, a decrease of $116.5 million from the end of fiscal 2020, as we deployed our balance sheet for strategic growth opportunities. Total cash flow from operating activities for the fiscal 2021 was $87.2 million, of which $23.8 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. During fiscal 2021, we spent $12 million on capital expenditures. During the fourth quarter, we had total cash outlays from existing cash related to two acquisitions that closed in February of approximately $189 million. In addition, in conjunction with the Arturis 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 Arturis 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 had an additional $55 million of cash outlays related to the Telerob acquisition early in May following the close of that acquisition. Also at the close of the Arcturus transaction, we issued approximately 574,000 shares of AV stock to the selling Arcturus shareholders. Now I'd like to highlight some of our backlog metrics. Our funded backlog at the end of 2021 was $211.8 million, an increase of $107 million from the third quarter of fiscal 2021, and an increase of $3.7 million from the fourth quarter of fiscal 2020 backlog of $208.1 million. Page 8 of the earnings presentation provides a summary of our current FY22 visibility. We picked up over $100 million of bookings since the end of Q4, bringing our total visibility to the midpoint of the guidance range to 61%, which is the highest level for our fourth quarter in the past five years. Now I'd like to turn things back to Waheed.