Frequency Electronics, Inc.
Q3 2021 Earnings Call Transcript

Published: 11 Mar 2021

[Operator:]

Greetings, and welcome to the Frequency Electronics Third 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. As a reminder, this conference is being recorded. Any statements made by the company during this conference call regarding the future constitute 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.

[Stanton Sloane:]

Thank you. Hello, everyone. Thank you for joining us today. I'd like to make a few comments about the quarter and the state of the business, and then we'll turn things over to Steve to take you through the financial details. Following that, we'll take some questions. Let me start by saying that I'm very pleased with the general direction of the business, and in particular, are significant success capturing new contracts for space systems. FEI's unique capability to deliver high performance and high reliability timing in frequency generation systems that can operate in this difficult environment is our core competency. U.S. government investments in new space programs are producing an increasing number of opportunities for FEI, resulting in a growing backlog and improving revenues that we're seeing in the New York operation. We did see some customer and supply chain COVID-related issues in our Elcom and Zyfer subsidiaries in Q3, which impacted their revenues and gross margins. We had a very solid quarter for new business at FEI-New York, with backlog up by $5 million to-date from the end of last fiscal year. And we have won several key opportunities, not to mention the $17 million contract award we announced on February 24 after the end of the quarter. Bookings in our New York operation through the end of Q3 were $53 million, one of the best year-to-date performance new business wins in company history. This amount is not fully funded, but it is on contract. Consistent with our past practices, we only report funded amounts in our backlog. Our performance on new business bodes well for increasing revenue going forward. And as we've said before, increasing revenue is a very good leading indicator for improving margins. We also generated significant cash of $9 million through Q3 and are debt-free. Hiring is continuing as we ramp up to meet anticipated engineering and production commitments associated with these new contracts. Space represents a rapidly expanding opportunity for us and ensuring we deploy shareholders' capital towards continually improving operational efficiency and advancing our product technologies, will continue to remain a focus for us. We will also continue to monitor and address the COVID situation, and I want to thank our employees for their extraordinary efforts in maintaining FEI's customer commitments over this past year. With that, let me turn it over to Steve, and we'll go through some financial details and then we'll take your questions, Steve?

[Steve Bernstein:]

Thank you, Stan, and good afternoon. The nine months ended January 31, 2021 consolidated revenue was $38.6 million, up 24% compared to $31.3 million for the same period of the prior year. The components of revenue are as follows; revenue from commercial and U.S. government satellite programs was $20.1 million compared to $14.7 million for the same period of the prior fiscal year and accounted for approximately 52% of consolidated revenue compared to 47% for the same period of the prior fiscal year. Revenue on satellite payload contracts are recognized primarily under the percentage of completion method and a recorded only in the New York segment. Revenues from non-space U.S. government and DoD customers, which are recorded in both the FEI-New York and FEI-Zyfer segments were $16.3 million compared to $12.7 million in the same period of the prior fiscal year and accounted for approximately 42% of consolidated revenue compared to 41% for the prior fiscal year. Other commercial and industrial revenues were $2.2 million compared to $3.9 million in the prior fiscal year. Intersegment revenues are eliminated in consolidation. For the nine month period ending January 31, 2021, gross margin and gross margin rate increased significantly as compared to the same period in fiscal year 2020. The increase in gross margin and gross margin rate was due to several programs identified in prior periods that had higher engineering costs incurred that were in the development phase, that have since been completed or are near completion. For the nine months ending January 31, 2021 and 2020, selling and administrative expenses were approximately 25% and 27% respectively of consolidated revenues. The increase in SG&A expense was mainly due to an increase in professional fees relating to litigation. R&D expense for the nine months ending January 31, 2021 and 2020 decreased to $3.5 million from $4.8 million, a decrease of $1.3 million and were 9% and 15% of consolidated revenue. The company's R&D expense decreased year-over-year as previous R&D efforts have ended and turned into production. However, the company plans to continue to invest in R&D to keep its products at the state-of-the-art. For the nine months ended January 31st, 2021, the company recorded an operating loss of $1.1 million compared to $7.3 million in the prior year. Operating loss has made a significant improvement from the same period of the prior fiscal year and reflects improvement in revenues, gross margin and gross margin rate. Based upon our bookings and backlog, we are expecting this improving trend to continue. Other income consisted primarily investment income derived from the company's holdings of marketable securities.

[Stanton Sloane:]

Thank you, Steve. So we'll turn this over to the operator, who will explain how to get your questions in. And we ask you to please limit it to one question, thank you. Anastasia?

[Operator:]

Thank you. The first question comes from Michael Eisner a Private Investor. Please go ahead.

[Michael Eisner:]

Hi. Elcom’s revenue that would be part of the New York area?

[Steve Bernstein:]

Yes, that's correct. It's consolidated with New York.

[Michael Eisner:]

All right. So how bad was the COVID in Zyfer? Last quarter you did like almost $3.5 million in revenue.

[Stanton Sloane:]

We've had some employees – I think the way to think about COVID though, it's not just about our employees, although we have had a few folks that that did have – but it's causing some supply chain issues and also some delays from – administrative delays in some of the customers in processing their contracts. So some of that slipped from what was anticipated in the quarter and it's unanticipated of course, and people working remotely sometimes cause administrative slow down.

[Michael Eisner:]

Okay. Is it going to be pushed into the fourth quarter?

[Stanton Sloane:]

Well, it’d be pushed. We haven't lost anything. We have not lost any contracts. It's just things are slipping with the right schedules are being delayed.

[Michael Eisner:]

So your revenue dropped for the quarter, but mostly it was because of the supply chain and Elcom.

[Stanton Sloane:]

Because of delays.

[Michael Eisner:]

Yes, it will be – so that's why you had the lower revenue. All right. I guess I got one question. Thank you.

[Stanton Sloane:]

Sure.

[Operator:]

The next question comes from Sam Rebotsky with SER Asset Management. Please go ahead.

[Sam Rebotsky:]

Yes. The backlog, which was $41 million, didn't think the $17 million contract. Is this a more profitable contract? And are we doing a lot more business? Will our backlog be further increase in the next quarter due to this $17 million?

[Stanton Sloane:]

So we would anticipate that it will be. Of course, keep in mind that we only put into backlog what's funded. So we might win a large contract and that might be, let's say, for $17 million. But if it's only funded at $1, then we only put $1 in the backlog. That's why I wanted to mention the performance on the new business side in my comments so that if you're trying to do the arithmetic, you can't really do it that way. But obviously, if you have a $17 million contract, we would expect barring some unusual circumstance that that would convert the backlog.

[Sam Rebotsky:]

Is this a new customer or is this…

[Stanton Sloane:]

That’s an existing customer.

[Sam Rebotsky:]

Okay. Thank you.

[Stanton Sloane:]

It's a customer that we've been doing business with for many years.

[Sam Rebotsky:]

Okay. Thank you.

[Stanton Sloane:]

Sure.

[Operator:]

The next question comes from Brett Reiss with Janney Montgomery Scott. Please go ahead.

[Brett Reiss:]

Hi, Stanton.

[Stanton Sloane:]

Hi.

[Brett Reiss:]

The hiring you're looking to do, can you just kind of describe, is it engineers? Is it sales people? Just the nature of the type of hiring.

[Stanton Sloane:]

Right now it's mostly engineering and manufacturing. I think we've added something like 20 people so far this year and I have another 15 or 17 opening. So it's mostly technical folks who are on the manufacturing floor or test technicians.

[Brett Reiss:]

Do you think the skill sets you're looking for, you'll have any trouble filling those positions?

[Stanton Sloane:]

Well, it's always challenging to get confident and experienced people, but we've done pretty good this year, like I said, we've hired about 20. And on the manufacturing side also keep in mind that we have the ability to outsource manufacturing. It's a little bit easier to do than the engineering side. So I expect we'll keep up with things. I don't think it's going to be a problem.

[Brett Reiss:]

Great. I'll drop back in queue. Thank you for answering my questions.

[Stanton Sloane:]

Sure.

[Operator:]

The next question comes from Michael Eisner, a Private Investor. Please go ahead.

[Michael Eisner:]

Hi. The last done half dozen releases all pertain to oscillators. Is that part of GPS IIIF or –?

[Stanton Sloane:]

Well, it's part of everything. I mean, that's our core business here, is principally oscillators and related electronics.

[Michael Eisner:]

Well, then how's GPS IIIF coming along?

[Stanton Sloane:]

Doing really well. The quality unit is performing exceptionally well and we got very good customer feedback the other day on it. So I think that's going swimmingly.

[Michael Eisner:]

When do you think it will go into production?

[Stanton Sloane:]

Soon as we get an order. We just got – you saw the announcement for the two units. Those are actually evaluation units. I think when you say production you mean fully flight qualified for the GPS IIIF satellites. So the first part of that is getting the units qualified and we’ve got – that was the nature of the announcement that we made a few weeks ago.

[Michael Eisner:]

Which – what date was that when you had a couple of them?

[Stanton Sloane:]

I don't remember. It was the announcement for digital rubidium atomic clocks.

[Michael Eisner:]

All right, thank you.

[Stanton Sloane:]

Yes.

[Operator:]

The next question comes from Walter Sturm, a Private Investor. Please go ahead.

[Walter Sturm:]

Yes. Hi, happy would if our investments are enhanced to establish a space exploration fund. Do you think your company might be applicable to fund like that?

[Stanton Sloane:]

I'm not sure what you mean applicable. Our products, if you're talking about space exploration, we produce a variety of products that are used by NASA. For example, we have products on the, going back to the Voyager spacecraft, which is still operating has our oscillators on it. We have electronics on various NASA missions, including the Mars Orbiter space station, you name it so. From that point of view, yes we'd be very applicable.

[Walter Sturm:]

Okay. So maybe she'll keep you in mind. Thank you.

[Stanton Sloane:]

Sure.

[Operator:]

The next question comes from Michael Eisner, Private Investor. Please go ahead.

[Michael Eisner:]

What’s the bids outstanding?

[Stanton Sloane:]

Total – you're asking the total dollar of outstanding bids?

[Michael Eisner:]

Yes.

[Stanton Sloane:]

I'm not quite sure today, because I have to subtract some of these awards. So I would expect it's probably not a lot different than what I told you last time. It's typical puts and takes to that.

[Michael Eisner:]

I think 600 million or something?

[Stanton Sloane:]

Yes, I think it was around somewhere between $600 million and $650 million if I remember in the last call.

[Michael Eisner:]

All right. Thank you.

[Operator:]

The next question comes from Sam Rebotsky with SER Asset Management. Please go ahead.

[Sam Rebotsky:]

Yes. You presented frequency at a conference recently. How did that go? Do we expect research or do we expect to present at any other conference in the near future?

[Stanton Sloane:]

Yes, I think you're referring to Needham.

[Sam Rebotsky:]

Yes.

[Stanton Sloane:]

Yes. So it went well. We are anticipating further research, we'll get various conversations. I'm not aware of anybody that's going to pick up research on us right now, but we periodically get calls discuss that with folks.

[Sam Rebotsky:]

Do we expect hiring an Investor Relations firm soon so to tell our story, because the backlog seems to be improving?

[Stanton Sloane:]

That seems to it is pretty significant. At the moment Steve and I are the Investor Relations folks, so we're at least for the immediate future we will handle it.

[Sam Rebotsky:]

Okay, great. Good, good luck.

[Stanton Sloane:]

Thank you.

[Operator:]

The next question comes from Joe Gersky, Private Investor. Please go ahead.

[Joe Gersky:]

Good afternoon, Stan and Steve. Congratulations on the quarter. One question came from Janney Montgomery already and it concerns the block suit. In your last quarterly conversation, Stan you mentioned that how much it would have been better or not for onerous legal fees. And Steve just mentioned that the professional fees are up. Can you please tell us now, what are the professional fees are as they relate to the block suit so that we can get an estimate as to how much more improved our corporation's bottom line will be, when this suit is finally ended, whatever that timeframe is, obviously?

[Stanton Sloane:]

We're not in a position to disclose that number, Joe.

[Joe Gersky:]

The number just how many dollars have been spent?

[Stanton Sloane:]

Correct.

[Joe Gersky:]

Can you tell us whether the insurance company has paid any percentage of the legal fees?

[Stanton Sloane:]

Yes, they have.

[Joe Gersky:]

They have. Would you – can you tell us what percentage?

[Stanton Sloane:]

No, we can't. Steve gave you the SG&A numbers, the legal expenses are in there so.

[Joe Gersky:]

Fine. I don't know if they're identified as legal expenses though versus SG&A. Stan, stay healthy. Steve, you stay healthy also. Thank you.

[Steve Bernstein:]

Thank you.

[Stanton Sloane:]

Thank you, Joe.

[Operator:]

The next question comes from Walter Sturm, Private Investor. Please go ahead.

[Walter Sturm:]

Hi. Regarding atomic clocks, I don't really know that much about, are you at liberty to mention your main competitor in that category?

[Stanton Sloane:]

Well its depending on whether you're talking about in the U.S. or worldwide, there's a lot of people globally that produce atomic clocks in Europe, Russia, China and then in the U.S., so it's a list of people.

[Walter Sturm:]

In the United States.

[Stanton Sloane:]

Yes. Excelitas produces atomic clocks and geez I don't know there's probably 20 or – 15 or 20 other folks that produce atomic clocks. Now that's a pretty broad category of stuff, when you say atomic clocks generally, so includes laboratory instruments, all sorts of things will be classified as atomic clocks.

[Walter Sturm:]

I see, but for satellites referring to?

[Stanton Sloane:]

Yes.

[Walter Sturm:]

Regard to satellites?

[Stanton Sloane:]

So we do…

[Steve Bernstein:]

There are many competitors in that arena.

[Stanton Sloane:]

No, there's a few, there's only – it depends if you're talking about rubidium atomic clocks, there's two in the U.S., us and I think the other company is Excelitas.

[Walter Sturm:]

Okay. And rubidium is the type used for satellites?

[Stanton Sloane:]

Various, we say atomic clocks that would include mercury ion, rubidium, caesium and there are variations of those things, all flying in space. At the moment most of what is being procured these days is rubidium. We are talking about space atomic clocks. There are some mercury ion clocks that are associated with some of the NASA missions, there's an experimental clock called the Deep Space Atomic Clock, which is mercury ion clock, which was launched I think last year, which is NASA. So it just depends what particular application you're talking about.

[Walter Sturm:]

Well, talking about satellites for internet communications from space but that require rubidium atomic clocks?

[Stanton Sloane:]

Depends on the satellite architecture, but not necessarily that some of that can be done with the precision .

[Walter Sturm:]

I see. All right. Thank you very much.

[Stanton Sloane:]

You bet.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session. Now I'd like to turn the call back to Stanton Sloane for any closing remarks.

[Stanton Sloane:]

Again, thank you everybody for joining the call today. We'll look forward to talking to you in next quarter. Thank you. Goodbye.

[Operator:]

This concludes tonight's conference. You may disconnect your lines at this time. Thank you for your participation.