Frequency Electronics, Inc. (NASDAQ:FEIM) Q1 2024 Earnings Call Transcript

Frequency Electronics, Inc. (NASDAQ:FEIM) Q1 2024 Earnings Call Transcript September 15, 2023

Operator: Greetings, and welcome to the Frequency Electronics First Quarter 2024 Earnings Release Conference Call. At this time all participants are on a listen-only mode. [Operator Instructions] 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 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, Thomas McClelland, President and Chief Executive Officer.

Thomas McClelland: Good afternoon, everyone. I have a very positive message for shareholders today. From a financial point of view, we have very encouraging numbers to report. But even more importantly, there are a number of signs that we’re on a sustainable path of growth and profitability. We have a lot of exciting new business as well as several very exciting programs, which we anticipate in the near future. In fact, we’re really transitioning from a challenging period of cost cutting and reorganization to a period of growth. And we see the very real potential for acceleration of that growth over the next year. We now begin to face a different and frankly, more pleasant challenge of effectively managing this growth such that we maintain profitability and positive momentum over the long term.

We’ve transitioned out of a period of workforce reduction and are now beginning to hire at all our facilities. And in fact, we faced the particular challenge of a very tight labor market, especially in advanced engineering fields, which are very important for our future. Well, let me briefly highlight the financial results before Steve fills you in on the details. Our revenue and gross margin have increased substantially compared to the first quarter of fiscal 2023 and the company is reporting an operating profit of $2.12 million compared to an operating loss of over $3 million in the same quarter of last year. Although the operating profit for the quarter is affected by several one-time items, even without these items, the company would have reported an operating profit of slightly over $1 million.

The backlog of $51.8 million at the end of Q1 is close to the historic high at the end of fiscal 2023, and is up dramatically compared to $39.7 million at the end of Q1 last year. More importantly, bookings are expected to increase the backlog significantly over the next two quarters. So in summary, I believe our efforts have put us on a sustainable positive trajectory of growth in our core business. The company remains committed to achieving sustained profitability and cash generation going forward. So at this time, I’d like to turn things over to Steve Bernstein who will go through the financial details. Steve?

Steven Bernstein: Thank you, Tom, and good afternoon. For the three-months ended July 31, 2023, consolidated revenue was $12.4 million compared to $8.2 million for the same period of the prior fiscal year. The components of revenue are as follows. Revenue from commercial and U.S. government satellite programs was approximately $5.1 million or 39% compared to $5.2 million or 51% in the same period of the prior fiscal year. Revenues on satellite payload contracts are recognized primarily under the percentage of completion method and are recorded only in the FEI-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 $6.9 million compared to $4.1 million in the same period of the prior fiscal year and accounted for approximately 55% of consolidated revenue compared to 50% for the prior fiscal year.

Other commercial industrial revenues were approximately $672,000 compared to approximately $664,000 in the prior fiscal year. The increase in revenue for the three months ending July 31, ’23 was mainly due to government non-space programs. For the three months ended July 31, ’23, gross margin and gross margin rate increased compared to the same period in the prior fiscal year. The gross margin dollars increase is a direct result of the increase in revenue. The gross margin rate increased significantly due to two main factors. First, many of the technical challenges faced in early part of last fiscal year have been resolved. And as a result, the related programs are now moving forward. Second, during the three months ended July 31, ’23, there were onetime contractual and other adjustments that also benefit the gross margin rate by approximately 8%.

For the three months ending April — July ’23 and ’22, SG&A expenses were approximately 19% and 24%, respectively of consolidated revenues. The consolidated decrease in SG&A expense of 5% for the three months ending July 31, ’23 as compared to prior year period was largely due to the increase in revenue. R&D expense for the three months ending July 31, ’23 decreased to approximately $506,000 from $1.1 million for the three months ending July 31, ’22, a decrease of approximately $604,000 and were approximately 4% and 14%, respectively of consolidated revenue. R&D decrease for the three months ending July 31, ’23 were due to dedicated R&D resources working on production orders to meet scheduled deadlines. The company plans to continue to invest in R&D in the future and keep its products at the state-of-the-art.

For the three months ending July 31, ’23, the company recorded operating income of approximately $2.1 million compared to an operating loss of approximately $3.1 million in the prior year. Operating income increased due to a combination of increase in revenue over the three months ended July 31, ’22, increased gross margin and the effects of certain cost-cutting measures instituted by management beginning in fiscal year ’23. Other income expense net is derived from various sources. The income can come from reclaiming of metal, refunds, interest on deferred trust assets or the sale of fixed assets. Interest expense is related to the deferred compensation payments made to retired employees. This yields pretax income of approximately $2 million for the three months ended July 31, ’23 compared to an approximately $3.1 million pretax loss for the three months ended July 31, ’22.

For the three months ended July 31, ’23, the company recorded a tax provision of $7,000 compared to a $1,000 provision for the same period in the prior fiscal year. Consolidated net income for the three months ending July 31, ’23, was approximately $2 million or $0.22 per share compared to an approximate $3.1 million loss or negative $0.33 per share for the same period of the previous fiscal year. Our fully funded backlog at the end of July ’23 was approximately $52 million compared to $56 million for the previous fiscal yearend, April 30, ’23. In addition, this is the fourth consecutive quarter in which backlog is greater than $50 million level, a level the company has not seen in over 10 years. While some of this will turn into revenue and thus come out of backlog this year, we expect additional significant contract awards to be added to backlog in the coming quarters.

The company’s balance sheet continues to reflect a strong working capital position of approximately $23 million at July 31, ’23 and a current ratio of approximately 1.9 to 1. Additionally, the company is debt free. The company believes that its liquidity is adequate to meet its operating and investing needs for the next 12 months and the foreseeable future. I will turn the call back to Tom and we look forward to your questions later.

Thomas McClelland: Thanks, Steve. And I’d like to now open this up to questions.

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Q&A Session

Operator: Certainly. At this time we’ll be conducting a question-and-answer session [Operator Instructions]. Your first question is coming from Brett Reiss from Jenny Montgomery Scott. Please proceed with your question.

Brett Reiss: Hi, Tom. Hi, Steve. Another good quarter.

Thomas McClelland: Hi, Brett.

Brett Reiss: Hi. Your statement that you expect additional contract awards, can you give us a feel for what you’re seeing that gives you this confidence that we’ll see these additional awards?

Thomas McClelland: Yes. Let me talk to that. I think we have a lot of things frankly, several that we thought would come in the first quarter, but haven’t. We are somewhat frustrated by delays in initiating some of these programs. But we see no indication that they’re not going to happen. I think, primarily, it ends up being sort of slowness on the part of our federal government, primarily. But these are programs that are definitely going to happen. And we’re just very positive. Unfortunately, I can’t make any specific statements about specific programs. But yes, it looks quite good. And I think we’re in a period of time where we’re frankly, kind of inundated with new requests for proposals and so forth.

Brett Reiss: Why is there this briskness of new proposals? What is going on in your world that things are percolating if you can describe it to us laymen out here?

Thomas McClelland: Well, I think fundamentally, there’s a long-term growth in the space market. I think that’s the real fundamental thing. And more specifically, I think there’s just a fair amount of activity. I think, to some extent, the sort of global events, challenges in Ukraine and things have stimulated an interest in space and there are classified programs that have gotten sort of a kick because of concerns about availability of satellites and so forth and so on. So a number of things, but I think fundamentally it’s long-term growth in space.

Brett Reiss: Great. One last one, the headwind you face with a tight labor market for advanced engineering talent. How much of a headwind is that? And is there maybe a way around it? Since things are going along so swimmingly, could you do a small bolt-on acquisition to not only get a good accretive business, but kill two birds with one stone and acquire some of this advanced engineering talent you need?

Thomas McClelland: Yes. Well, we’re pursuing several paths in parallel in this regard. Of course, we are trying to directly hire people. And that I think is important in the long run because we really want to sustain a really talented, capable workforce. But in the short run, we are investigating working with outside sources of engineering talent that we can utilize on our particular programs. And of course for manufacturing activities, we’re also looking at outsourcing some of that work. Yes, so I think that’s the basic strategy. And yes, let me leave it at that.

Brett Reiss: Thank you. I’ll drop back in queue. Thank you very much.

Thomas McClelland: Okay, bye.

Operator: Thank you. [Operator Instructions] Your next question is coming from Michael Eisner [ph]. Please proceed with your question.

Unidentified Analyst: Great job, Tom and Steve. Things are going well.

Thomas McClelland: Hi, Mike. Thank you.

Unidentified Analyst: Just a follow-up on Greg’s question. If you use temporary people for engineering, they wouldn’t be on your books, so you wouldn’t have to pay all the overhead like health insurance and all that?

Thomas McClelland: Yes. That’s correct.

Unidentified Analyst: So that could work out nicely.

Thomas McClelland: There are pros and cons.

Unidentified Analyst: Yes, because when you could need them in the future, you have to pay more. The Office of Naval Research, are you getting some grants from them?

Thomas McClelland: We have several contracts, R&D contracts with the Office of Naval Research.

Unidentified Analyst: So they cover the expense and you keep the technology?

Thomas McClelland: That’s correct. All right.

Unidentified Analyst: All right. That’s nice. And you mentioned something about patented low acceleration sensor technology, which offers a 100 times improvement in performance. Are we the only ones that make this?

Thomas McClelland: We’re not the only ones that make it, but I think it’s a technology that we understand and execute better than anybody else. I think it’s like most of our technology. It’s very specialized and it’s not so much a question of having patents, but it’s a question of having the expertise to implement these technologies effectively.

Unidentified Analyst: All right. The gross margins, I think you’re at 39%. Do you feel you — last quarter, as you kind mentioned that you’re going to try to keep the 35% to 40% gross profit level? Do you think you’ll be able to do that through ’24?

Thomas McClelland: That’s certainly the goal.

Unidentified Analyst: All right. And years ago, there was inventory write-downs because it wasn’t accounted for properly. Is everything going good with that?