Frequency Electronics, Inc. (NASDAQ:FEIM) Q4 2023 Earnings Call Transcript

Frequency Electronics, Inc. (NASDAQ:FEIM) Q4 2023 Earnings Call Transcript July 14, 2023

Operator: Greetings, and welcome to the Frequency Electronics Fiscal Yearend ’23 Earnings Release Conference Call. [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 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, Thomas McClelland, President and Chief Executive Officer.

Thomas McClelland: Thank you, and welcome everyone. Today, it’s almost exactly one year since I inherited the role of CEO and President of Frequency Electronics. And I find myself reflecting on what has transpired during the last year. It’s certainly been a challenge. Overall, it has been a very positive experience. And I look forward to a continuation of that experience over the next couple of years. There will be more challenges, but I feel confident that the company is on a solid path to continued success and growth. I’d like to start with some non-financial observations, which I think are ultimately very important for the final financial health of the company. Over the past year, we’ve made a number of changes designed to make the company stronger in the long run.

In early September of last year, we had a major layoff and restructuring at our Long Island facility. And before the end of calendar year 2022, we relocated the Zyfer manufacturing capability, which had been moved to Long Island back to their original location in California alongside their engineering team. These moves were understandably traumatic, and also costly in the short run. The layoff was costly in terms of workforce morale and the Zyfer move was costly in dollars and cents. But both of these moves have made us stronger and are now showing positive benefits. Simultaneously, while all of this was going on, we’ve made a conscientious effort to harness our strength in science and engineering, and in fact to bolster it in such a way that we can remain competitive well into the future.

Over the last year, we’ve begun to work collaboratively with several of our major customers to develop new approaches to old problems, which have the potential to improve performance and lower cost in the position, navigation and timing arena. Similarly, we’ve reinvigorated our internal R&D program to target quantum technology and products, which address the move to smaller lower cost satellite systems. Our Zyfer division has made a dramatic comeback. In fiscal year 2022, Zyfer suffered an operating loss of over $2 million, whereas in fiscal year 2023, which ended April 30, Zyfer still had a small overall operating loss of about $160,000. But much more importantly, in the second half of the year, Zyfer made an operating profit of just over $1 million.

This, in spite of the costs associated with the cross-country move of manufacturing. John [indiscernible], Zyfer’s President and his team deserve a lot of credit for making this happen much faster than was originally anticipated. Furthermore, Zyfer’s been awarded several major contracts during fiscal year 2023 which will significantly contribute to the bottom line during fiscal year 2024 and beyond, and several new contracts are expected in the near future. Meanwhile, in New York, FEI has regrouped, is smaller after the layoffs, but it’s coming back strong. Some costly engineering development efforts are finally coming to completion successfully. Some new contracts are in and proceeding profitably and several large satellite program contracts are anticipated over the next six months.

Importantly, after enduring some pretty dramatic changes over the last year, I believe our workforce morale is high. There is a spirit of the success in the air, and I feel we’re all working together, not only in New York, but the entire company to do what’s necessary to make things happen. I believe the whole at FEI is greater than the sum of the parts, and that’s a powerful force. So, okay for the financial portrait, in the fourth quarter of fiscal 2023, we continued to see the results of the cost-cutting efforts and management reorganization, which has taken place over the last year. Revenue and gross margin have increased substantially for the six months period ended April 30, 2023 compared to the six months period ended October 31, 2023, as well as in comparison to the same period in fiscal year 2022.

And the company is reporting an operating profit for the second half of the fiscal year. FEI’s backlog at year-end is at a decade high and several historically large satellite programs are anticipated during the next six months, substantiating our confidence in the growth of our primary markets. Both commercial and government satellite businesses continue to show signs of sustained double-digit growth going forward. Continued vigilance is required to navigate the challenging economic and geopolitical environment, but we’re nonetheless confident that we are progressing in a positive direction and we look forward to continued improvement in the results. The company is committed to moving towards sustained profitability and cash generation going forward.

Further, we remain debt-free, with a very strong balance sheet to fund future growth opportunities. Thank you. And I’d like to turn things over now to Steve Bernstein, our Chief Financial Officer.

Steven Bernstein: Thank you, Tom, and good afternoon. [Technical Difficulty] to the financial results, it is important to mention that I will be comparing Q4 of fiscal ’23 versus Q4 fiscal ’22 results. Our press release has the full fiscal year results and some of the key metrics. I would also like to mention the improvement in results for the second half of the fiscal ’23 compared to the first half of fiscal ’23. Revenue increased from $17.2 million during the first half of fiscal ’23 to $23.6 million during the second half of fiscal ’23. Gross profit percentage went from 2% in the first half of fiscal ’23 to 31.8% in the second half of fiscal ’23, and operating income loss went from an operating loss of $5.4 million in the first half of fiscal ’23 to an operating income of $717,000 in the second half of fiscal ’23.

Additionally, this is the second quarter in row that the company [technical difficulty] operating income. It is evident by the vast improvement in our results from comparing the second half of fiscal ’23 to the first half of fiscal ’23 that the company is heading in the right direction and the changes that have been previously announced are contributing to this improvement. For the three months ended April 30, ’23, consolidated revenue was $13 million compared to $10.2 million for the same period in 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% of consolidated revenue compared to $5.2 million or 51% of consolidated revenue in the same period of the prior fiscal year.

Revenue 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 $7.3 million compared to $4.7 million in the same period of the prior fiscal year, and accounted approximately for 56% of consolidated revenue compared to 46% for the prior fiscal year. Other commercial and industrial revenue was approximately $563,000 compared to approximately $249,000 in the prior fiscal year. The increase in revenue for the three months ending April 30, 23 was mainly due to the increase in revenue at FEI-Zyfer. For the three months ended April 30, ’23, gross margin went down and gross margin rate increased as compared to the same period of fiscal year ’22.

The company is encouraged by the fact that the gross profit percentage for the third and fourth quarter of fiscal year ’23 were both over 30%, and the company anticipates that this trend will continue in fiscal ’24. For the three months ended April 30, ’23 and ’22, SG&A expenses were approximately 23% and 20%, respectively, of consolidated revenues. The increase in SG&A expense for the three months ending April 30, ’23 as compared to prior year was largely due to reversals in fiscal ’22. Full year SG&A expenses decreased over $2 million. The company continues to monitor expenses looking for additional cost effective ways going forward. R&D expense for the three months ending April 30, ’23 decreased to approximately $658,000 from $1.1 million for the three months ending April 30, ’22, a decrease of approximately $450,000 and was approximately 6% and 11%, respectively, of consolidated revenue.

R&D decreased for the three months ending April 30, ’23 due to dedicated R&D resources who are working on two externally funded developmental programs, which would not show up in R&D. The company plans to continue to invest in R&D in the future to keep its products at the state-of-the-art. For the three months ending April 30, ’23, the company recorded operating income of approximately $390,000 compared to an operating loss of approximately $5.9 million in the prior year. Operating income increased due to a combination of an increase in sales over the three months ending April 30, ’22, increased gross margin, and effects of changes management has instituted. For Q4 fiscal ’23, other income consisted primarily of interest expense and miscellaneous income since all marketable securities were sold this year.

During the three months ending April 30, ’22, the company took a $795,000 impairment charge related to the company’s investment in Morion. This yields a pretax income of approximately $313,000 compared to an approximately $6.8 million pretax loss for the three months ending April 30, ’22. For the three months ending April 30, ’23, the company reported a tax provision of $68,000 compared to a $3,000 tax benefit for the same period of the prior fiscal year. Consolidated net income for the three months ending April 30, ’23 was approximately $246,000 or $0.03 per share compared to an approximately $6.8 million loss or $0.74 per share for the same period of the previous fiscal year. Our fully funded backlog at the end of April ’23 was approximately $56 million compared to $40 million for the previous fiscal year ended April 30, ’22.

In addition, this is the third consecutive quarter in which backlog is greater than $50 million, levels 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 $21 million at April 30, ’23 at a current ratio of approximately 1.8:1. Additionally, the company is debt free. The company believes that its liquidity is adequate to meet its operating 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 at this point in time, we will turn over to accept questions from the audience.

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Q&A Session

Operator: Thank you. [Operator Instructions] And our first question comes from Brett Reiss with Janney Montgomery.

Brett Reiss: Hi, Tom. Hi, Stephen. First, applaud and congratulations on the progress. So nice to see that.

Thomas McClelland: Thank you.

Brett Reiss: Now that we’re crossed over to profitability, you mentioned being able to self-fund growth opportunities. Could you give us some more color on what you have in mind?

Thomas McClelland: Well, we plan to significantly increase our R&D funding over the next couple of years. In fact, we’ve budgeted for that in fiscal year 2024. But of course, we’re also working pretty aggressively to get external funding for development efforts. And we’re actually seeing that there’s a lot of stuff out there that’s relevant to our areas of expertise in technology. And we’re vigorously pursuing those development efforts.

Brett Reiss: Right, great. This growth in revenues that you anticipate in the coming quarters, is there anything that can derail that? If we go into a recession, does that become a headwind or — those revenues come in irrespective of what the macro economy does?

Thomas McClelland: Yes. Of course, there are always things out there that can derail stuff. But I think things look very, very positive at this point in time. Our revenue estimates are based on work that we already have, contracts that we already have and also things that we are very, very confident of getting in the very near future. And I think we are working very carefully to pursue those programs in such a way that we can execute them profitably. And so I think because of all of that, we’re really quite confident that we’ll see significant revenue growth and also profitability.

Brett Reiss: Right. Is there a book-to-bill number, Steve?

Steven Bernstein: I don’t have it with me. I can get it to you, starting [ph] printed. It was somewhere in the neighborhood, I believe, of 1.5:1, maybe a little bit higher, but I will get to the exact number when we get off the call. I’ll e-mail it to you.

Brett Reiss: Right. If that’s what it is, it’s consistent with what it was last quarter?

Steven Bernstein: Pretty close, yes.

Brett Reiss: I’m going to drop back in queue. And once again thank you for the progress.

Steven Bernstein: Thank you.

Operator: The next question is from Robert Smith with The Center for Performance Investing. Please proceed.

Robert Smith: Hi, good afternoon. Thanks for taking my questions and thanks for the progress. Tom, how much of the backlog do you feel is deliverable in fiscal ’24?

Thomas McClelland: It’s tough to estimate — to give an exact number, but I think 75% is a reasonable estimate.

Robert Smith: Okay. And in prior calls, you said you were going to mount a distinct effort to tap the small satellite area. Could you kind of give me some color as to the progress you’re making?

Thomas McClelland: Okay, sure. I think we are working closely with some of the major contractors, the prime contractors on satellite systems. And I think the most important part at this point in time is really trying to hone in on exactly how things are going to pan out in the future. There have been moves to — the people have launched — especially there have been experimental satellites launched by universities and things that are the satellites the size of soccer ball and things like that. But we feel pretty strongly that that’s not really where things are going to end up. We feel that there’s a sweet spot that’s a little bit bigger than that. A little bit more costly than that. And we are really trying to home in on this is what we perceive as a sweet spot between low cost and very high performance.