AeroVironment, Inc. (AVAV) Earnings

Management highlights

### Overall Financial Performance - Delivered record fourth quarter 2026 results: revenue of $642 million (31% organic year-over-year growth), adjusted EBITDA of $140 million (22% of revenue), bookings of $572 million, and funded backlog of $1.2 billion. - Full fiscal year 2026 results: revenue of nearly $2 billion (30% full year organic growth), bookings of $2.7 billion, full year adjusted EBITDA of $286 million (above the high end of guidance, 14% margin), and non-GAAP adjusted EPS of $3.31 (above the high end of guidance). ### Strategic and Operational Milestones - Completed the transformational acquisition of Blue Halo, nearly doubling company size and adding counter UAS, space technology, cyber, and advanced solution capabilities. - Launched multiple new products: Switchblade 400 loitering munition for the U.S. Army LASSO program, Mayhem 10 multi-role launched effects system for the U.S. Army Launched Effects program, Locust X3 directed energy counter UAS platform, and two new AV Halo software modules (AV Halo Instinct and AV Halo Detect). - Secured key major contract awards: $117 million U.S. Army LRR program contract for P-550 Group II drone (post-quarter close), $17 million production contract for Red Dragon one-way attack drones, $43 million DOW contract for the PANTHER product, $20 million U.S. Air Force ceramic materials research contract, and $25 million Air Force Research Laboratory warfighter health technology award. Titan counter UAS sales more than doubled full year 2026 pro forma. - Achieved key technical milestones: 100% successful drone shootdown rate for Locust during operational testing aboard the USS George H.W. Bush, FAA approval for domestic national airspace operation of Locust directed energy systems, and inclusion of the AV Halo Shield solution (combining Locust, Titan counter UAS, and AV Halo software) in the U.S. Golden Dome homeland defense program. ### Capacity Expansion Investments - On track to begin production at the new Switchblade solid acidic manufacturing facility (capacity for over $2 billion annual production) in spring 2027. - Investing in facility expansions across multiple sites: Salt Lake City (Switchblade production), Huntsville Alabama (Freedom Eagle One production), Albuquerque New Mexico (Locust full-rate production expansion, $30 million investment), and Dayton Ohio. - Streamlined the U.S. government Switchblade acceptance testing process to shorten the cash conversion cycle and improve future working capital efficiency.

Guidance

- Fiscal year 2027 revenue guidance is set at $2.125 billion to $2.225 billion, representing ~10% year-over-year growth at the midpoint of the range, and excludes any SCAR program-related revenue. - Adjusted EBITDA guidance for fiscal 2027 is $305 million to $325 million (14.5% margin at midpoint, flat year-over-year adjusted EBITDA margin), with non-GAAP adjusted EPS guidance of $3.02 to $3.34 per share (flat year-over-year due to a projected $37 million (77%) year-over-year increase in depreciation and amortization expense from recent large capital investments). - Revenue is expected to be concentrated in the second half of fiscal 2027, with a 45/55 first half/second half split, and 45% of first half revenue expected in Q1. Adjusted EBITDA is expected to split 1/3 first half / 2/3 second half, matching the 2026 distribution pattern. - Planned fiscal 2027 investment levels: 7% to 9% of revenue allocated to R&D, 12% to 14% of revenue allocated to CAPEX (primarily for production capacity expansion), and 14% to 16% of revenue for adjusted SG&A (the year-over-year increase reflects strategic investments in international sales expansion and organizational scaling). - Guidance does not assume early passage of the U.S. government fiscal 2027 defense budget; management expects budget approval in December 2026/January 2027, with funding not available to the company until March 2027. Free cash flow is not expected to be positive in fiscal 2027 due to high planned capital expenditure.

Segment performance

1. Autonomous Systems (AXS) Segment: Fourth quarter 2026 revenue was $492 million, accounting for 76% of total company revenue. Full fiscal year 2026 revenue was $1.3 billion, accounting for 69% of total company revenue. Full year adjusted EBITDA was $289 million, with a 21% adjusted EBITDA margin. Within AXS, the Precision Strike and Defense Systems Operating Group generated $333 million in fourth quarter revenue (80% pro forma year-over-year growth), driven by strong sales of Switchblade loitering munitions, Red Dragon one-way attack drones, and Titan counter UAS products. The Uncrewed Aircraft Systems Operating Group grew 17% pro forma year-over-year, led by JUMP20X, PUMA, and P-550. 2. Space, Cyber, and Directed Energy (SCDE) Segment: Fourth quarter 2026 revenue was $150 million, down 8% pro forma year-over-year due to the SCAR program termination and government funding delays. Full fiscal year 2026 revenue was $619 million. Full year adjusted EBITDA was negative $3 million, driven by lower revenue and fixed cost underabsorption in the SCAR program and Cyber Mission Solutions. Within SCDE, the Space and Directed Energy Operating Group grew sales 23% pro forma year-over-year, driven by demand for Locust directed energy counter UAS systems. Cyber and Mission Solutions revenue declined 26% pro forma year-over-year due to discontinued programs and government shutdown-related funding delays.

Risks & headwinds

- An $89 million incremental non-cash goodwill impairment charge was recorded related to the terminated SCAR program, resulting from a third-party calculation error in Q3 2026. A material weakness in internal controls over goodwill impairment testing was identified, and enhanced controls have been implemented but require additional testing to fully remediate the SOX control deficiency. - Uncertainty around the timing of U.S. government fiscal 2027 budget passage and the release of new funding creates near-term quarterly revenue visibility risk, as awards and new revenue recognition are expected to be delayed until after the budget is approved. - Cyber Mission Solutions within the SCDE segment faced ongoing revenue declines due to government shutdown-related funding delays and discontinued programs, creating near-term pressure on segment profitability. - Large-scale manufacturing capacity expansion to meet anticipated future demand involves significant upfront capital expenditure, creating risk if projected demand growth does not materialize as expected.

Analyst Q&A

• Q: What is the current size and growth outlook for ArrowVironment's counter UAS business, and can you provide context on the recent goodwill impairment?

  A: AV's total counter UAS business was roughly a couple hundred million dollars in fiscal 2026, in the early stages of market adoption. The company offers a layered defense portfolio: Titan RF detect/jam systems (which doubled sales in 2026), Locust directed energy systems (early adoption, large long-term potential), and Freedom Eagle One kinetic interceptor missiles (fills a cost gap vs traditional million-dollar missiles). Management expects counter UAS could grow to $0.5B to $1.5B+ in annual revenue within 3-5 years. The additional goodwill impairment stemmed from a third-party calculation error in the Q3 goodwill impairment analysis for the SCAR program termination, not from changed long-term cash flow projections for the space segment. New internal controls have been implemented to prevent future errors, with $291 million of goodwill remaining in the space business unit.

• Q: How dependent is AV's 2027 performance on passage of a full U.S. defense reconciliation bill, and what is the expectation for 2027 free cash flow given the large planned CapEx increase?

  A: Management assumes a continuing resolution will delay full fiscal 2027 defense budget approval until December 2026 or January 2027, with funding not available until March 2027. Guidance is set assuming no early funding arrival, though the company expects strong full-year growth regardless, drawing on its existing backlog while waiting for new awards. Given the 12-14% of revenue planned for production capacity expansion CapEx across multiple facilities, AV does not expect full-year 2027 free cash flow to be positive.

• Q: How does AV view the funding outlook for its low-cost lethal drone/missile platforms amid Department of War plans to ramp production of high-end exquisite missile systems, and is there funding competition between the two categories?

  A: Management expects low-cost lethal platforms (Switchblade, Red Dragon, Mayhem 10, Freedom Eagle One) will see higher percentage funding growth than traditional high-end missiles, as this is a new mission category born out of recent conflict experience that did not exist at scale before. AV is investing heavily in expanding production capacity (including $2 billion annual capacity at the new Salt Lake City Switchblade facility) because demand growth is expected regardless of exquisite missile production ramps. The U.S. and allied governments need to increase inventories of all types of missile and drone systems, so there is no zero-sum competition for funding.

• Q: Is AV's supply chain prepared to support the planned aggressive production ramp, and what are the key bottlenecks?

  A: Management confirms supply chain is prepared to support growth: AV is not just expanding internal manufacturing, but is also working with suppliers to increase their throughput and diversify the supplier base. AV has a 20-year track record of scaling production reliably and profitably (to tens of thousands of units annually), which management notes is a key competitive advantage over newer market entrants. While growth creates ongoing supply chain challenges, AV is ahead of peers in this area and continues to invest to expand its advantage.

• Q: What is the long-term opportunity for AV in the growing commercial and government satellite constellation market?

  A: AV holds strong differentiated technology in phased array antennas and long-haul laser optical communications for satellites, and already secured a $240 million contract for laser communication terminals in fiscal 2026. Virtually all new satellites in all orbital classes will require laser communications upgrades, and AV is uniquely positioned as a leading supplier in this early-stage market. The company is actively engaged as a merchant supplier with multiple commercial and government satellite programs, and expects this business to grow meaningfully over time.