Frequency Electronics Inc (FEIM) 2021 Q3 法說會逐字稿

Greetings, and welcome to the Frequency Electronics Third Quarter Fiscal Year 2021 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 release 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, Stanton Sloane. President and CEO.

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 our significant success capturing new contracts for Space Systems. FEI's unique capability to deliver high-performance and high reliability, timing and 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?

Thank you, Stan, and good afternoon. For the 9 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 are recorded only in the New York segment. Revenues from nonspace, 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. Inter-segment revenues are eliminated in consolidation. For the 9-month period ending January 31, 2021, gross margin and gross margin rate increased significantly as compared to the same period in fiscal year '20. 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 development phase that have since been completed or are near completion.

For the 9 months ending January 31, '21 and '20, 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 9 months ending January 31, '21 and '20, 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 9 months ended January 31, 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. For the 9 months period ending January 31, 2021, investment income included $105,000 dividend from Morion compared to a $250,000 dividend from Morion in the same period in fiscal '20. This yields pretax loss of approximately $695,000 compared to a pretax loss of approximately $7 million for the prior year. For the 9 months ending January 31, 2021, the company recorded a tax provision of $37,000 compared to $48,000 for the same period of fiscal '20. Consolidated loss for the 9 months ending January 31, 2021, was $732,000 or $0.08 per diluted share compared to a consolidated net loss of $7.1 million or $0.78 per diluted share in the previous year.

Our fully funded backlog at the end of January 2021 was approximately $41 million, up approximately $5 million from the previous year-end April 30, '20. The company's balance sheet continues to reflect a strong working capital position of approximately $39 million at January 31, '21, at a current ratio of approximately 6.6:1. 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 Stan, and we look forward to your questions.

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 1 question. Thank you. Anastasia?

(Operator Instructions) The first question comes from Michael Eisner, a private investor.

Elcom's revenue, that would be part of the New York area?

That's correct. It's consolidated with New York.

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

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 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 slowdown.

Is it going to be pushed into the fourth quarter?

Well, it will be pushed. They haven't lost anything. We have not lost any contracts, it's just things are slipping to the right schedules or being delayed.

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

Because of delays.

Yes. It will be -- so that's why you had to lower revenue. All right. I guess I get 1 question. Next thing you -- thank you.

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

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?

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 for, 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 to backlog.

Is this a new customer? Or is this...

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

(Operator Instructions) The next question comes from Brett Reiss with Janney Montgomery Scott.

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

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

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

It's always challenging to get competent 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.

The next question comes from Michael Eisner, a private investor.

The last about half dozen releases all pertain to oscillators. Is that part of GPS IIIF?

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

Well, then how is GPS IIIF coming along?

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

When do you think it will go into production?

As soon as we get an order. We -- you saw the announcement for the 2 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 got -- that was the nature of the announcement that we made a few weeks ago.

Which -- on what date was that? You had a couple of them?

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

The next question comes from Walter Stern,, a private investor.

Yes, there are multiple SPACs acquiring space and satellite companies with multibillion-dollar valuations, they all seem to be involved with satellite, et cetera, Internet from space, et cetera. Are you optimistic that some of those billions might eventually be headed your way?

Well, sure. We're -- we compete in the commercial marketplace as well. And we periodically bid on those jobs. And I'm sure we'll win some of them. So -- yes.

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

Stan, I know you can't comment on the merits of the lawsuit. But where do we stand? Has a trial date been set? When might we hope this thing, unless it's settled, comes to an end?

Very hard for me to speculate. It's in the courts, and I really have no insight as to how long they're going to take. But we're hoping it's resolved soon.

(Operator Instructions) The next question comes from Walter Stern, a private investor.

Cathie Wood of ARK Investments intends to establish a space exploration fund. Do you think your company might be applicable to a fund like that?

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.

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

The next question comes from Michael Eisner, a private investor.

What's bidding -- bids outstanding?

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

Yes.

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.

I think $600 million or something?

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

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

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

Yes. I think you're referring to Needham. So.

Yes.

So it went well. Are we anticipating further research? We get various conversations. I'm not aware of anybody that's planning to pick up research on us right now. But we periodically get calls and discuss that with folks.

Do we expect to hire an Investor Relations firm soon? So to tell our story because the backlog seems to be improving.

Not seems to, it is pretty significantly. So at the moment, Steve and I are the Investor Relations folks. So for at least for the immediate future, we'll handle that.

The next question comes from Joel Girsky, a Private Investor.

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 the numbers would have been better were it not for onerous legal fees. And Steve just mentioned that the professional fees are up. Can you please tell us now what our 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 has finally ended. Whatever that time frame is, obviously?

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

The number as to how many dollars have been spent?

Correct.

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

Yes, they have.

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

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

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

The next question comes from Walter Stern, a private investor.

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

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

In the United States?

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

I see. But for satellites, I'm referring to.

Yes.

You go out to satellites?

Yes. So we do.

And there are many competitors in that arena?

No. There's a few -- there's only -- it depends if you're talking about rubidium. Atomic clocks, there's 2 in the U.S., us and I think the other company is Excelitas.

Okay. And rubidium is the type you use for satellites?

Various -- we say atomic clocks, that would include mercury ion, rubidium, cesium, and there are variations of those things all lying in space. At the moment, most of what is being procured these days is rubidium. We talk 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 a mercury ion clock, which is -- was launched, I think, last year, which is NASA. So it just depends what particular application you're talking about.

Well, they're talking about satellites for Internet communication from space, does that require rubidium atomic clocks?

Depends on the satellite architecture, but not necessarily. Some of that can be done with a precision quarts oscillator.

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

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

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