AeroVironment, Inc.

Today's conference is scheduled to begin shortly. Please continue to stand by. Thank you for your patience. Thank you. Thank you. Ladies and gentlemen, thank you for standing by, and welcome to the Environment Fiscal Year 2022 Third Quarter Conference Call. At this time, all participants are in the listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press Star 1 on your telephone. Please be advised that today's conference is being recorded for replay purposes. If you require any further assistance, please press Star 0. I would now like to hand the conference over to Jonah Teeter-Baylen. Thank you. Please go ahead, sir.

Great. Thank you, and good afternoon, ladies and gentlemen. Welcome to Air Environment's fiscal year 2022 third quarter earnings call. This is Jonah Teeter-Baylen, Senior Director of Corporate Development and Investor Relations for Air Environment. Before we begin, please note that certain information presented on this call 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, which 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 other filings with the SEC, along with the associated earnings release and 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 3rd, 2022. 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 Chairman, 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, Jonah.

Welcome to our fiscal year 2022 third quarter earnings conference call. I will start by summarizing last quarter's performance and discuss recent achievements. Next, Kevin will provide a more detailed summary of our financial results, after which I will follow up with a discussion of goals for the remainder of fiscal year 2022 before Kevin, Jonah, and I take your questions. Let me emphasize a few key messages which are included on slide number three of our earnings presentation. Air Environment, like many other businesses in our industry, faced continued headwinds last quarter as anticipated, notably with regards to supply chain constraints, the federal government's continuing resolution, and tire labor market. Second, that said, third quarter results were largely in line with our expectations, and we are maintaining our previously stated guidance for fiscal year 2022. Historically, our fourth fiscal quarter has been our strongest, and we expect that trend to continue this year. Third, we continue to make strides in reducing costs, managing working capital, and increasing operational efficiency during this challenging period. And fourth, with a solid backlog and multiple expense reduction actions, we're positioned to deliver a strong fiscal year 2022 performance and even better performance in fiscal year 2023. Before going through these themes in more detail, let me summarize our financial results for the third quarter. We delivered revenue of $90.1 million compared to $78.8 million last year, a 14% increase year over year. The revenue growth was primarily due to increased sales in our medium unmanned aircraft systems and unmanned ground vehicle segment. This, along with other organic and acquisition-led increases, offset the negative impact from lower small unmanned aircraft systems product line shipments, which we had already anticipated. We ended the quarter with a backlog of $226 million, compared to $252 million in Q2, with winds tempered due to the ongoing continuing resolution. Despite the lower backlog, we have higher visibility to meet our current fiscal year guidance. Further, we're seeing additional contract opportunities both here and abroad, that are helping lay the foundation for growth in fiscal year 2023. Gross profit for the third quarter was $21.4 million, a decrease of 25% year-over-year. Gross margin percentage decreased to 24% from 36%, reflecting a heavier mix of service revenue. We're not content with this margin performance, and we'll touch on some of our cost-saving initiatives in a moment. Net income for the third quarter was break-even, or $0 per diluted share, as compared to net profit of $0.2 million, or $0.01 per diluted share, for the third quarter of fiscal year 2021. As I noted earlier, we're continuing to deal with the issues discussed on our last earnings call, but I would like to provide an update on these dynamic conditions. First and foremost are supply chain constraints, which have impacted product shipments and the company's underlying results. The overall situation has not changed materially, as certain areas have recovered, while others remain challenging. The bottom line is that we're having difficulty getting certain components in the quantities or lead times that we would like. Despite the uncertainty, we're attacking the various supply chain issues in every conceivable way to improve order fulfillment and ensure customer satisfaction. This is a work in progress, but we took several steps in the quarter. These steps include developing new tools to help us with marketplace component visibility, pre-ordering material when appropriate, paying additional logistics expenses where necessary, and working with our suppliers under long-term agreements to consolidate demand. Not surprisingly, this disruption is negatively impacting our working capital, including higher inventory levels. We believe such near-term costs will result in better revenue visibility, along with expanded margins as prices and lead times stabilize. Last quarter, I also spoke about hiring constraints in a tight labor market, which continues to impact our ability to recruit top talent in certain engineering disciplines. While this has improved, there are still gaps in staffing, particularly in the engineering arena. In response, we have increased our use of select outsourced talent firms, which in near term have enabled us to achieve our goals. At the same time, we remain focused on managing our general and administrative expenses, which includes reducing headcount and non-core functions. During the quarter, we initiated cost savings actions, totaling more than $10 million of annual savings in both headcount and facilities footprint. In summary, we're taking an active approach to ensure we can achieve our future growth objectives while operating our business efficiently. Lastly, the continuing resolution in Washington continues to impact decision making on projects and contract awards. We are closely monitoring the situation and are hopeful that a budget will pass soon. Nevertheless, Our products and programs are prioritized in the 2022 Defense Authorization Act, reflecting sustained demand. While the company continues to cope with headwinds and changing industrial conditions, we are confident in our ability to meet our previously stated guidance. Our recent acquisitions are performing well, and we're taking multiple steps to manage our business efficiently in this challenging environment. Even though challenges persist, we believe Air Environment is positioned well to capitalize on the long-term growth potential and value creation opportunities presented by our unique portfolio of intelligent multi-domain robotic systems. Let me briefly comment on the significant world event that is currently unfolding in Europe. We at Air Environment are truly saddened by the Russian invasion of Ukraine. Our hearts go out to all those impacted by the ongoing crisis, and especially the citizens of Ukraine who are heroically defending their nation against a superior force. Moreover, this event is a stark reminder that our country and our allies need to be prepared to defend ourselves against such unpredictable and unreasonable authoritarian regimes. Our family of loitering missiles and other products are ideal in helping defend against such current and future aggressions, and we stand ready to assist our country and our allies around the world in any way necessary. Now, before turning the call over to Kevin, I would like to provide some updates on current developments within each of our product lines. I'll start with our Small Unmanned Aircraft Systems, or SUAS, product line, our largest franchise. As discussed above, this segment's revenue has declined this year, driven primarily by lower domestic demand. We believe this is due to both the continuing resolution environment and the Army's focus on the next generation of small UAS, which we expect to be completed in the next few years. On the other hand, our PUMA and Raven systems are benefiting from enduring demand overseas. As an example, we recently booked two international orders from new European and Asian allies, totaling nearly $20 million. To address the weaker domestic demand and position this franchise for continued success, we're investing in developing new capabilities for our platforms, especially those that allow us to leverage our installed base of tens of thousands of units across the globe while competing against near-peer adversaries. On this note, we recently announced the launch of our I-45 night gimbal, which has seen strong interest from customers. We're also excited about the enhanced sensor-to-shooter capabilities, which are achieved by integrating our small UAS products with our tactical missile systems products. We continue to allocate a healthy portion of our R&D investment to realize our future SUAS solution roadmap and look forward to sharing additional developments over the coming quarters. That brings me to our Tactical Missile Systems, or TMS, product line, where we continue to see strong demand for our solutions both domestically and internationally. We believe there are growing opportunities for TMS products to replace traditional munitions in ground, air, and sea applications, especially with our new and larger Switchblade 600 variant. Deliveries of the first international order for Switchblade 300 are expected to take place this month, reflecting increased interest from international customers for this innovative technology. Additionally, we are actively engaged with multiple international customers, who have both the interest and the need for Switchblade's unique capabilities. We recently met with the U.S. export authorities, who support enabling our allies with our Switchblade family of loitering missiles. In addition, we recently introduced the Switchblade 300 sensor-to-shooter solution, which enables operators to instantly and seamlessly transfer target coordinates from our small UAS to Switchblade loitering missile systems. By implementing this solution, we're able to provide end-to-end interoperability that significantly reduces the cognitive load on soldiers handling the processing, evaluation, and dissemination, or PED, of our UAS data. The Switchblade 300 sensor-to-shooter solution includes everything needed to quickly update mission planning applications with the sensor-to-shooter software. Target coordinates are instantly transferred from our small UAS to Switchblade 300, creating an automated mission plan and launch sequence with no chance of data entry error. Upon launch, the Switchblade 300 can autonomously navigate to the designated coordinate position, allowing operators to match full motion video from both assets to ensure positive identification of the target. Finally, our small UAS provides overwatch that can verify mission success. The Switchblade 300 sensor-to-shooter solution builds on Air Environment's commitment to deliver innovative, streamlined, interoperable solutions that elevate the warfighter's situational awareness, reduce engagement timelines and cognitive load, and increase mission success and operational safety. Further, this solution demonstrates how interoperability between our different product lines can lead to better customer outcomes and builds upon our prior integration of the switchblade with the JUM20 medium UAS, thus expanding the breadth of our capabilities available to our customers. I will now move to our medium unmanned aircraft systems, or MUAS, product line. As previously announced, we submitted a Jump 20 proposal for the U.S. Army's Future Tactical UAS, or FTUAS, Increment 1, and more recently, Increment 2. This contract serves as the proving ground for our technology by placing a half a dozen Jump 20 systems in the hands of the U.S. Army Combat Brigades for testing. We look forward to hearing back on this award any day now. Assuming all goes well, we believe a win on increment one will put us in a favorable position to win increment two later this year, which could be worth up to $50 million in new contract value. As a reminder, the FTUS program, in aggregate, is expected to be valued at over $1 billion over a 10-year period after full testing is complete. The U.S. Army's proposed fiscal year 2022 budget called for over $140 million of funding for advancing this potential program of record. In the meantime, we're submitting proposals to U.S. allies across the globe and are upgrading our Jump 20 with a new autopilot to improve its ability to operate in environments with limited GPS availability. We currently have several RFPs being evaluated by European and Middle Eastern countries and have conducted demonstrations for numerous US allies overseas. So far, we have built a healthy sales pipeline since this acquisition and expect first awards from these international efforts in fiscal year 2023. It's exciting to see the level of interest our Jump 20 systems have generated with our international customers and install base validating a key synergy of the acquisition. Moving to our unmanned ground vehicles, or UGV product line, the business is performing well. We have seen strong customer interest, especially in Europe and the Southern Pacific. And we're continuing to position the business to compete for domestic programs over the coming years. Further, our team has been working to expand the market opportunities and chemical, biological, radiological, nuclear, or CBRN and tactical use cases. We are pleased with the expanding interest in our UGV products and believe in the solid value potential for our shareholders. Within our HABS product line, we continue to move ahead in designing the next generation aircraft under the terms of our five-year master design and development agreement with SoftBank. As we said last quarter, we're progressing with phase two of our partnership, during which we will build a third aircraft to perform further flight testing, demonstrate longer duration flights, and progress through FAA certification. At the same time, we continue to assess various U.S. DoD opportunities that can leverage SunCollider's unique capabilities. And finally, our MacReadyWorks Advanced Solutions Group continues to develop new applications in autonomy and artificial intelligence. In the quarter, we secured multiple new programs to advance the autonomy and swarming capabilities of AV's existing products. One of these programs leverages technology from our progeny ISG acquisition to automatically detect and classify targets before transmitting target coordinates to a swarm of switchblades. As a reminder, our ISG team is a leader in the development of AI-enabled computer vision, machine learning, and perceptive autonomy technologies. We're also a provider of related autonomy and computer vision services to U.S. government customers. We're excited that our ISG acquisition is bearing fruit and look forward to creating further value in our core products through these advanced technologies. In summary, we're taking the steps within our control to manage the global headwinds impacting our industry and company. We've had to make some difficult decisions in the quarter, but believe these decisions were better positioning us for even stronger growth in the years ahead. While there is more work to be done, our portfolio of intelligent multi-domain robotic systems provide a unique competitive advantage for our company. which should generate long-term shareholder value. With that, I would like to now turn the call over to Kevin McDonald for a review of third quarter financials. Kevin? Thank you, Waheed.