Frequency Electronics, Inc.
Q1 2021 Earnings Call Transcript

Published:

  • Operator:
    Greetings and welcome to the Frequency Electronics First Quarter Fiscal Year 2021 Earnings Release Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. Any statements made by the company during this conference call regarding the future constitutes forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements inherently involve uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that would cause or contribute to such differences are included in the company's press releases and are further detailed in the company's periodic report filings with the Securities and Exchange Commission. By making these forward-looking statements, the company undertakes no obligation to update these statements for revisions or changes after the date of this conference call. It is now my pleasure to introduce your host, Mr. Stanton Sloane, President and CEO.
  • Stanton Sloane:
    Thank you. Hello, everyone. Thank you for joining us today to discuss first quarter '21 results. Steve will cover financial details with you in a minute, but let me first give you my perspectives on the quarter. I'll start by stating that I'm pleased with the direction I am seeing in the business. Our team has been working hard both to pursue new business and work our way through some difficult technical challenges on previous programs. We're starting to see the results from these efforts. FEI has a long history of providing products that go into space. And as the U.S. increases its focus there, FEI is well positioned to service that market. Building electronics that have to operate reliably and effectively in that environment is very difficult. FEI has the benefit of over 50 years of experience with our systems operating in space, and that is a knowledge base that we leverage to ensure better, more reliable products. That's an invaluable FEI asset and one which fosters customer confidence in us as is reflected by the increasing number of awards for precision time and Frequency products for satellite applications. I believe we will see continuing growth in this arena as space becomes an increasingly more important domain to the U.S. Military, and that bodes very well for FEI. Not wanting to slide our terrestrial market, I'm also pleased with recent awards for precision oscillators that will go into various U.S. military airborne platforms, one of which we announced this afternoon. We, at FEI, are proud that our electronics can be found in some of the most important tactical and strategic military assets of the United States and its allies. As we complete a couple of the programs that have been nagging us, I expect that our overall financial performance will continue to improve. We, of course, continue to focus on internal operational improvements and cost reductions. One example is our continuing rollout of a new ERP system that is helping us streamline our manufacturing and program management processes. While this quarter showed a net operating loss on a non-GAAP pro forma basis, taking into account extraordinary legal and insurance expenses and the accounting associated with the problem programs I mentioned above, we would be profitable. I see that as a significant improvement. Now let me turn it over to Steve to take you through the financial details. Steve?
  • Steve Bernstein:
    Thank you, Stan, and good afternoon. For the three months ended July 31, 2020, consolidated revenue was $13 million, up 3% compared to $12.6 million for the same period of the prior fiscal year. The components of revenue are as follows
  • Stanton Sloane:
    Thank you, Steve. We'll take questions now, and let me ask the operator to come back on and tell you how to do that. Operator? Hello, Hector, are you there? Did we lose the line? No.
  • Operator:
    Are you ready to take questions? I apologize about that.
  • Stanton Sloane:
    Yes. Yes. Go ahead, please.
  • Operator:
    [Operator Instructions] Your first question comes from the line of Sam Rebotsky with SER Asset Management. Please proceed with your question.
  • Sam Rebotsky:
    The annual report really looks good, and the improvement this quarter is good. Now where -- you generally mentioned the bids that you have outstanding. And what is the bids? And what is the nonfunded backlog that you presently have?
  • Stanton Sloane:
    We don't report nonfunded. We only report what is funded, which is what the backlog number that Steve gave you is.
  • Sam Rebotsky:
    And what is the bids that we have?
  • Stanton Sloane:
    The total number of bids outstanding?
  • Sam Rebotsky:
    Yes.
  • Stanton Sloane:
    Let's see. It's probably in the 600, 625 range. I haven't checked it this week, but it's around there.
  • Sam Rebotsky:
    Well, that's wonderful. Northrop Grumman won a $13 billion contract for a missile. I know you did 10% of your business with Northrop this past year, and I think this $13 billion could be $85 billion. Do you participate in missile contracts in addition to satellites?
  • Stanton Sloane:
    Yes. So my comments about terrestrial market is the nonsatellite part. So the answer is yes. And we provide various electronics, mostly small quartz oscillators, which are used in high vibration, high G environments, but we do provide products into that market.
  • Operator:
    Your next question comes from the line of Brett Reiss with Janney Montgomery Scott. Please proceed with your question.
  • Brett Reiss:
    The precision oscillator contract you announced today, is that from the same customer from the August 12, $5 million precision oscillator contract? Or is it a different customer?
  • Stanton Sloane:
    That's a different customer.
  • Brett Reiss:
    Okay. Are we going to see other multiple precision oscillator contracts from different customers? Is that a possibility?
  • Stanton Sloane:
    Well, we hope so. We have a lot of things pending that are in the competitive process. But my answer is I would expect to see that, yes.
  • Brett Reiss:
    Okay. And the factors that would lead your customer to go from unfunded to funded backlog, based on what's going on in the world, has the propensity for them to go to funded from unfunded, has it increased, stayed about the same? Can you talk to that at all?
  • Stanton Sloane:
    So let me start by trying to make sure that I articulate these terms because I know there tends to be some confusion. So when we get a contract -- and this is very typical of government contracts. In fact, I would hesitate to say it's universal, but it's very common when you get a government contract that the government will award the contract and -- but they don't fund the entire contract value, they fund it incrementally. And so there's a limitation of liability on the government's part that is associated with the amount of the funding. So you could have a valid contract for, let's say, $10, it could be only funded at the $2 level. And for us, what we do is we record the $2, which is funded in the backlog. So when Steve talks about backlog, that's how we account for that. Now to further confuse things, you can also have a contract with options. So in that case, let's say you have, again, a $10 contract. It includes another option for another $5 million, let's say. So the total contract value might be $15 million, but the $5 million options are not exercised, and then you have the funding limitation also. So you could have a $15 million contract that has $10 million base contract that's funded at $2 million but also has an additional $5 million worth of options. So that is the case on several of our programs. We have contracts which are at a particular value, but the funding has been limited. So what we report to you in public is the backlog. So when we say backlog, that is completely funded. Most of our contracts are either -- if they're not direct with the government, they are to government prime contractors, and the contractual slowdowns associated with those contracts are essentially the same as what the government does for the prime contractor. So that's the way things work. And you asked about trends. So at the moment, we're seeing an increase in the number of contract awards. We've reported probably 5. I think we had maybe 4 or 5 press releases here in the last couple of months, some of them significant. So the trend for contract awards is increasing, and the funding has been flowing pretty readily. So at the moment, all those contracts are adequately funded. And as far as I can tell, they'll continue through to their -- at least to their base values. We would anticipate that the options associated with those will largely get exercised at some point as well. Did that answer your question?
  • Brett Reiss:
    It does. And just tagging on to that, to move -- in your hypothetical $10 million base contract with $2 million funding, that other $8 million that we want to get funded, is that something that's totally out of your control and in the control of the customer? Or is there something that you proactively can do to accelerate or be a catalyst to it being funded?
  • Stanton Sloane:
    Ultimately, it's controlled by the government, but we don't -- usually, there's not a problem. If the government, for example, initiates a contract for a satellite, and they have -- I don't know, they're one-third of the way through construction of the satellite, they're going to fund the completion of the satellite. I mean it'd be very unusual if they didn't do that. Sometimes they do stretch the funding. They'll stretch the schedule so that the funding in any one fiscal year spreads a little bit more. That happens. But by and large, once these programs are underway, they tend to get funded.
  • Operator:
    Your next question comes from the line of [Michael Eaisner], private investor. Please go ahead.
  • Unidentified Analyst:
    Great quarter. Your August and September contracts, none of that is in the backlog, correct?
  • Stanton Sloane:
    No. That's not correct.
  • Steve Bernstein:
    No.
  • Stanton Sloane:
    I'm sorry, what dates did you say again?
  • Unidentified Analyst:
    August and September -- the one today also. They can't be in the backlog, which is up until July 31.
  • Steve Bernstein:
    Right. That is correct.
  • Stanton Sloane:
    We're only talking first quarter here.
  • Steve Bernstein:
    Yes.
  • Unidentified Analyst:
    Yes. So those two -- that was $5 million in August and I think almost $3 million today.
  • Steve Bernstein:
    Right. That has nothing to do with the $37.9 million or $38 million that I reported, correct.
  • Unidentified Analyst:
    Yes. And the way you wrote this, it looks like you started the increase in backlog in part of the first quarter because it looks like revenue is going to go up -- the backlog is going to go up -- continue to go up the way you wrote the press release.
  • Stanton Sloane:
    So the press release is for a contract that was awarded not in the first quarter. So the numbers we're reporting to you today are first quarter numbers. But clearly, other contract awards will go into backlog, but that's not a Q1 -- that's going to do with the Q1 numbers.
  • Unidentified Analyst:
    No. What I'm saying is you wrote in the press release -- let me see. The contracts start off slowly.
  • Stanton Sloane:
    Yes. So yes.
  • Unidentified Analyst:
    So I expect -- the way I took that is you expect backlog to go up higher?
  • Stanton Sloane:
    Yes, you're missing up a couple of things, Mike. Let me explain to you.
  • Unidentified Analyst:
    No. I think I call it myself because you could actually do the same revenue and backlog could go up or down.
  • Stanton Sloane:
    Yes. My point was when you get a large contract award, the revenue is not linear. You -- it takes a little bit of time to do the planning for the project before you see the uptick in the revenue. That was the point I was trying to make.
  • Unidentified Analyst:
    Exactly. If I'm not forgetting, I think you jumped up 30% in revenue from last quarter, roughly.
  • Stanton Sloane:
    Yes.
  • Steve Bernstein:
    Yes.
  • Stanton Sloane:
    Absolutely. Yes.
  • Unidentified Analyst:
    That's a large -- a very large increase because I think you were doing like $10 million every quarter like for the last year.
  • Stanton Sloane:
    Yes.
  • Unidentified Analyst:
    Roughly. I think you did $41 million last year.
  • Steve Bernstein:
    Yes. That's about right.
  • Unidentified Analyst:
    Are all the problem programs, are they over with?
  • Stanton Sloane:
    Not totally, but one of them, we will deliver all the products in about 10 days. That one will be behind us. The other one, we're in -- we have stuff in final test. The deliveries run out through October, but I would anticipate that we'll be finishing up in the time frame.
  • Unidentified Analyst:
    Are they going to cost us money or we're okay on that?
  • Stanton Sloane:
    Well, I am doing my best to avoid additional costs, but we have to get through the test.
  • Unidentified Analyst:
    All right. And without those extra expenses, you would have made money this quarter?
  • Stanton Sloane:
    Yes. That was my point in the commentary in the press release.
  • Unidentified Analyst:
    All right. What about salespeople? Did you hire more salespeople?
  • Stanton Sloane:
    Not in Q1, but we have added folks -- and we've added employees generally. Since May, I think we have probably an additional 14 or 15 people, and we're hiring in another 12 or 14 right now. So employment is increasing.
  • Unidentified Analyst:
    So from last quarter, you added like -- it will be like 28 people?
  • Stanton Sloane:
    No. 14 since probably around May time frame.
  • Unidentified Analyst:
    And then another 14 you plan on?
  • Stanton Sloane:
    I have additional openings was what I meant to say.
  • Unidentified Analyst:
    Is it hard to find people?
  • Stanton Sloane:
    We seem to be having pretty good luck staffing the key positions. I've actually encouraged that we have not had more problem. So I don't know if that's related to COVID situation or the economy or whatever. But at the moment, we're able to find the people we need.
  • Operator:
    [Operator Instructions] Your next question comes from the line of Robert Smith with Center of Performance Investing. Please proceed with your question.
  • Robert Smith:
    What percentage of your funded backlog do you expect to ship in this current fiscal year?
  • Stanton Sloane:
    Give me one second. Give me a second. We actually have that number. Just hold on.
  • Steve Bernstein:
    Somewhere between 70% and 80% of it, we expect.
  • Robert Smith:
    Okay. With an increasing backlog and these problem contracts out of the way, what kind of gross margin target do you have?
  • Stanton Sloane:
    I don't know. I think the business should run north of 35%.
  • Robert Smith:
    And what run rate do you need to have profitability?
  • Stanton Sloane:
    That's a little tricky to answer. It depends on the product mix and other things. But I think at the 35% or north of 35%, the business should be profitable.
  • Robert Smith:
    Okay. And what particularly was the litigation amount?
  • Stanton Sloane:
    Are you referring to Martin Block litigation?
  • Robert Smith:
    Is that what it was? Okay. Got it. The one that you had expense for?
  • Stanton Sloane:
    Yes. Mostly associated with that litigation.
  • Operator:
    Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to management for closing remarks.
  • Stanton Sloane:
    Great. Thank you, everybody. Appreciate you joining us today, and we look forward to talking to you next quarter. With that, we will sign off. Have a great day.
  • Operator:
    This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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