Frequency Electronics Inc (FEIM) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the Frequency Electronics Incorporated second quarter fiscal 2009 earnings release conference call. Today's conference is being recorded. At the request of the Company, we will open the call up for questions and answers after the presentation.

Statements in this release, which are not historical facts are forward-looking and involve risks and uncertainties including but not limited to the impact of competitive products and pricing, increased investment to support product introductions, market acceptance of products, product transitions by the Company and its competitors, currency fluctuations, changes in product sales mix, and other risks described in the Company's registration statement and other Securities and Exchange Commission filings.

At this time, for opening comments and introductions, I will turn the conference over to General Joseph Franklin, Chairman of the Board. Please go ahead, sir.

Thank you very much, Darrell. Good afternoon, everyone. It certainly is a pleasure to be with you this afternoon.

The sun has come out in New York after some very dreary weather and I am pleased to say that we have good financial news for you from Frequency Electronics. We are in very good shape here. Realize there are hard times going on, and we have been through some. And have put those difficult programs particularly now behind us. We have plenty of working capital, around $55 million cash in the bank, exceeding $10 million, positive operating cash flow, and we see the rest of this year as profitable, this fiscal year for Frequency Electronics.

We are in some hard times, as I've just said, but to repeat that is to recognize too that these are also times for more opportunities, external growth particularly, which we can pursue more aggressively now during this downturn. I am triggered by paraphrasing our new Chief of Staff of the White House, [Rob Emanuel's] quote where he said we have got to take advantage of every crisis. And that is what is going to happen here with Frequency Electronics.

I am joined today as you know by our Chief Executive Officer, Martin Bloch and our Chief Financial Officer, Alan Miller both of whom will have extensive comment and then we will have question-and-answers later.

Thanks again for being with us, Martin, up to you.

Thank you, everybody. Welcome. I just will enumerate in bullet form of what I feel is Frequency's strength and where we have to go during this time of stress and time of opportunity.

Fortunately, we addressed diverse markets with a strong product -- state of the art product line and just to go through them and enumerate. It is commercial space and wireless is down and stressed due to financial pressures. And we are going to have to outweigh until better times. Fortunately for us, the other markets that we are addressing have grown and are very promising.

And this is DOD space, Government DOD robot hardware for secure communications, for [ E-lint] and for precision targeting radars. And also the wire line which we have never had any business on. After qualification, we have now gotten significant starting orders in that area. This is the US5G.

I want to thank FEI's employees and our stockholders for sticking with us and for the employees for putting herculean effort to get us behind those difficult (inaudible) programs and looking forward to the future on this. We have been able to significantly reduce our operating costs by better training, better engineering, requiring less [techs] labor in producing the product, and automation in various part of our process that -- so we can maintain the same throughput capacity with significant less personnel. And everybody at Frequency worked very hard to achieve this efficiency and I want to give them my heartiest thanks and appreciation.

I would like to turn it over now to Alan Miller for financial details.

Okay. Thank you, Martin. Revenues for the second quarter of fiscal 2009 were $14 million as compared to $17.5 million in the year ago period. Satellite pay load revenues, which accounted for about 30% of our consolidated revenue, are off almost 40% from last year's level. However, the product mix is noteworthy, as Martin alluded to, as revenues from our US Government satellite programs increased over 90% from last year, while the commercial satellite revenues were lower by about 75%. An example of the impact of the tight credit markets.

Telecommunications revenues, which account for about 40% of fiscal 2009 revenues were up modestly from last year, as we recorded the first large multiple unit sales of our new US5G wire line synchronization systems here in the United States. Revenues from non satellite, US Government DOD programs account for 20% of revenues and were even with last year's sales.

Our cost of sales were $11.3 million in 2009 compared to $12 million last year, yielding a gross margin of $2.7 million in fiscal 2009; a 19% gross margin rate, compared to $5.5 million or 31% last year. Once again, the gross margin rate reflects the higher engineering and manufacturing costs on three major satellite programs. But since the costs on these programs have been absorbed, we expect gross margin rates to improve in the second half of fiscal 2009. Also in the second quarter, we recorded a higher level of inventory reserves as we reviewed our current inventory levels.

SG&A spending was $2.8 million, or 20.2% of revenues, compared to $3.3 million last year. Fiscal year 2009 SG&A is 14% lower than the prior year and is down almost 10% from the first quarter of this fiscal year as we have taken steps to reduce our operating costs.

R&D spending was $874,000 compared to $1.8 million in the year ago period. The comparison of fiscal year 2009 R&D to last year reflects both the completion of the intense development effort on satellite payload products, as well as the allocation in the current year of our engineering and other development resources to our new cost plus programs. Thus, in fiscal year 2009, we continue to engage in R&D, but now a good portion of that effort is funded by our customers. Consequently, internal research and development spending will be lower than in prior years and we expect it to be less than 10% of revenues overall.

For the quarter, we had an operating loss of $994,000 compared to a net profit, operating profit of $376,000 in the year ago period. In net nonoperating expenses, we had a $252,000 expense recorded compared to income last year of $377,000. The single largest element of the current period expense was the recording of our equity in Elcom, the technology company in which we have a 25% interest.

Our net loss for the quarter was $894,000 or $0.11 per share as compared to a net income of $409,000 or $0.05 a share last year. However, for the quarter, Frequency recorded positive operating cash flow of $2.5 million and we are cash flow positive year-to-date. Our unbilled receivables for example decreased by over $5 million from April 30th, reflecting the completion of contract milestones. And we expect to remain cash flow positive for the balance of fiscal year 2009.

Looking at the balance sheet, our cash position is $13.3 million, and this is after using almost $3 million to repurchase approximately 680,000 shares of our stock in the market. As Joe indicated, we have working capital of $55 million and it is important to note, that Frequency is not dependent on any credit facilities for its continuing operations.

Turning to backlog, at the end of October our backlog was $36 million, approximately the same as it was at the end of July, the first quarter. But backlog does not include nearly $10 million on certain Government satellite contracts that have been awarded but have not yet been definitized.

All right, we'll take your questions at this point.

Go right ahead. Will you monitor that for us, Darrell?

Darrell, we have finished our official presentation and we'd like to open it to questions and answers.

Yes, sir, I understand. (Operator Instructions). Yes, sir, I understand. We will take your first question from [Michael Amuri]. Please go ahead.

Am I being called on, Michael Amuri?

Yes. Hello, Michael.

How are you guys?

We are alive and doing well.

Terrific. You just reported that your equity -- working capital is about $55 million -- is above $55 million. Having a healthy cash position. If I am to tell you that your market cap right now is $24 million -- if I ever show you a company that has that kind of fundamentals, wouldn't you jump to acquire it? Meaning are you guys going to be involved in buying more shares because that's the only way to do in this crazy market.

We have been, Michael and we're looking at it all the time and trying to balance between buying shares and making sure that we have enough cash so we don't get beaten up in this credit market. It is a balancing act on this and we'll do the best we can. We understand the position on this.

Do you have a Board authorization to purchase more shares?

Yes, we do.

Great. Another question with the turmoil going on in Russia, is your Morion investment safe?

Well, we got -- as you probably know, we got most of our investment out from Morion a year and a half ago because it was dictated by the Russian Government. And Morion is really in a good position since most of their output is to the export. And I think we have now 8.6% left and this is very safe. I just had a meeting conference with [Yarkov Varikovsky] the President of Morion and looked through his business plan and their cash and they are really in a good position.

Let me ask you one more question. Do you expect the second half with this crazy market to the crazy economic turmoil to be able to make some profits?

Yes.

Great. Well, thank you and good luck to you guys.

Have a good year, Michael.

Thank you, Michael.

We have a question from Sam Bergman, Bayberry Asset Management.

Good afternoon, gentlemen.

Hi, Sam.

A couple of questions. First of all, now that you've got most of.

Can you address -- to whom do you address the question?

Alan, I guess.

Okay, thank you.

Now that you have most of the cost out of the way; out of those projects that were basically at no margins. What do you expect -- how far do you think the margins can increase in the second half from the 18, 19% that you did in the second quarter?

Well, we do anticipate that there will be substantial increases.

Can you give us a ballpark?

Yes, but it is kind of hard to giver you a specific number. It would be somewhere in the 30% range, 30% plus.

Okay. Can you give us any idea right now, what the pipeline looks like, in terms of Government satellite business versus commercial RFPs?

Just a moment and I give you some specifics. The Government pipelines is pretty alive with lots of assets that are right now being under consideration and we expect to benefit from them. The commercial are kind of unknown although we think that some of the programs would really get kicked off this year such as the 70 plus satellites for [Rubidium] that we will try to participate on.

So there's going to be some activity but only God knows the financing and how successful they're going to be. So that is a very unknown. But fortunately, for this year, and beginning of a good portion of next year, plans are primarily dependent on DOD space and that is very solid. And lots of proposals outstanding in that industry.

Who is your biggest competitor in these proposals?

In house on this --

Okay.

It is a Boeing. It's Northrop Grumman, it's Lockheed Martin, it's an SS [Lorale] and there is always the pool on how much they do inside and how much they let out.

So on the critical high impact items such as the master clocks and the low phase noise, we have considerable advantage. On the wrap around electronics there's always a fight. Do you build it at twice the cost in-house or do you let us build it?

The last time you came out with a news release on a contract was back in early October. If the pipeline is that healthy, I am just curious why there's been no other press releases since then?

The contracts were smaller in levels. And there was in some of them we could not talk about.

I see, okay.

But, you can see by the backlog that we are shipped and our backlog is healthy. So, obviously we have to book a lot of business.

Can you give me an idea where R&D is going to be in the second half of the year, now that some of it is being paid by Government work?

Considerably less than 10% of revenue for the year.

For the year because in the last quarter, your R&D was already considerably less. It was 7%.

Yes. And now it is 6% this quarter.

So you feel it is going to fall in the--?

Somewhere in that range, you know, 5%, 6%, 7%, 8%, under ten though.

Visualize that this time, there's opportunity in this market, in this very crazy times and stress, is that this time we need to reengineer the product lines for future and take advantage of this now to really reinforce our ability to address larger markets. So we don't want to fall asleep on the stick just because things are tough.

We want to re-emphasize that we are not stopping spending on R&D because some of it now is going to be funded R&D by our customers. So we will be expending some resources for that but we're [eventually going] to get paid for it. And then any product opportunity that is come out of that will be ours not necessarily the customers.

Yes, definitely ours. We are retaining all the intellectual properties on our R&D. That's our agreement. So that is very fortunate that we got quite a few contracts in house that sponsor our next generation equipment. And we will supplement it by very judiciously analyzing which equipment will have the greatest potential and take advantage in this time of crisis to get them to completion.

In the quarter, you had some obsolete inventory, what was the dollar amount of that obsolete inventory?

We didn't give an exclusive number but it cost us about 2%, a less than 2% on the gross margin.

On the gross margin. How would you categorize the inventory right now?

Well, we think we have -- what we have left unreserved, if you will, is good inventory but we will continue to look at that. And we will probably do some write offs as we go through the year. This is always stuff that we look at on a recurring basis. This was a little bit larger than normal, the process. And we will continue to look at that as we get toward the end of the year as well.

Last question, what is the opportunities with 5G right now?

Very good. On this, we have finally this fiscal year gotten the first multiunit sales and installation. And we are looking forward to that product line to get a good portion of that market.

And one last question for Alan, what is in the -- on the balance sheet in terms of other investments? It shows [6.0] -- other current assets $6.2 million?

Other current assets you said?

Right.

Well some of it is prepaid expenses. We had some deferred income taxes. That's probably the single largest component is about $4.0 million of deferred taxes. That's under current assets.

Okay. Thank you.

Thank you. Have a good year.

We will take a question from [David Starkey], Smith Barney.

Hi, guys.

Hi, David, how are you?

I'm okay. Hanging in there.

Is it raining down there?

A little cloudy today but not too bad. At least it is warm. So, but quick question for you on the balance sheet, Alan.

Yes.

You have got $29.5 million in inventories there. You talked about that a little bit to the previous caller. If you do have some more write offs, do you expect that to be significant or just a few million or how does that look?

We also have inventory reserves.

Okay.

We have reserves in excess of $6 million. So we are taking a good look at that -- those numbers. So if we have the inventory write-offs, they will first come off against the reserves.

Okay, good.

You won't have an impact on the net inventory. But if we need to identify other inventory that needs to be reserved for or written off we will do so. But it is nothing out of the ordinary at this point in time. In this particular quarter we had a little bit higher than normal number.

Okay. That works out. That entire number is about what $3.50 a share in book value. So maybe is one reason why we have got such a significant discount to book here on the balance sheet.

The inventory, you are saying?

Yes.

Well, Dave, I don't think that is the case since everybody is discounted enormously. I think it is just the state of the economic market.

Okay. And, but these aren't obsolete products for the most part?

No, no. Absolutely not.

Okay. The other question on the balance sheet is you have got about $13.3 in accounts receivable is that kind if a normal number for you. You'd expect that recoverable okay?

Oh yes, and most of that is current.

Okay. All right. And with the backlog here, do you expect the revenues for the next couple of quarters to approximate this quarter? I know you can't make forecasts -- or be higher a bit?

Yes, they will be in this range.

Okay. So we have a relatively stable revenue outlook and certainly we are going to have potentially up to 50% higher margins here over the next few quarter based on what you are saying.

Right.

Okay. Well, I guess I don't have anything else to say except I would reiterate an additional stock buy back at these levels. Is there going to be a black out period for any period of time?

No. We are coming out of one now as far as officers are concerned. Now that we have released earnings.

I know Martin you are going to want to average down a bit, right?

I am always averaging down.

Okay. Everybody is lately here.

Whenever they let me, I average down.

Okay, great. Well hopefully we will be able to average up in the next few months, a little bit here for you. Great, thanks guys and keep it going. Okay.

We will. Merry Christmas to you, Dave.

Thank you.

Good to here from you.

Good-bye.

We have a question from Robert Lambert, RLR Capital.

Good afternoon, how are you guys.

Hi, Bob.

One country that has some money, of course is China. And today they were really serious in their announcements about giving out finally the 3G licenses. It looks like it is real this time. Let's assume it is real. Is there a market there for us if they really roll out these 3G licenses? Or is that going to help us at all in China?

I just came back from China. And I know they're going to roll out but they're going to roll out very slowly, much slower than they say. And the answer is yes, there's opportunity for us to get some of the business. The only thing is that you cannot model it, you cannot predict it, because they do it their own way.

Okay. And the other question I had had to do with the 5G and the land line. Is there a way to promote ourselves or is it just going to go on the fact of how well our first units are doing and the installation and everything. In other words, does it sell itself? Or do we have a chance to actually sell this?

At this moment we are done the selling. And the units are operating very well in the field. So, at this moment to get a larger portion of what they are going to buy will strictly depend on the reliability of the units in the field. So far they are doing excellent.

Does it make sense to think about a very small dividend or are you better off conserving capital and buying stock or buying another small company?

Yes.

All of the three?

Yes.

All right. Well, thanks. Congratulations. It sounds like we are finally going down the correct road.

Going up.

Going up, up, up is the word.

That's the word.

All right. Well, Happy Holidays to you.

You too.

Thank you very much.

(Operator Instructions). We have a question from Sam Rebotsky SER Asset Management.

Yes, good afternoon, Martin and Alan.

Hi, Sam.

Hopefully we are on the right road.

We are.

The $36 million backlog, that will be completed in the next 12 months?

Most of it. We typically estimate around 70 to 80% of the backlog can be filled within a 12 month forward period.

70 to 80%? And do we expect the next two quarters to be sort of evenly balanced or do we expect any larger revenue in one quarter versus the other quarter or --?

No, we indicated that we thought revenue levels would be somewhere comparable to this past quarter. It will all be predicated of course on future bookings. Let's see how we respond to those.

And you've cut it down sufficiently to be profitable in the next two quarters and presumably, will this make you profitable for the year?

Yes.

Okay. Okay. Are you looking for opportunities for acquisitions or are you just looking?

You bet your life. We are -- at this time, we are very actively looking for opportunities since a lot of our compatriots are not as fortunate as us. They don't have the necessary credit capital. So we are looking very hard but we want to make sure that we get something that helps our overall technology and business and size at the same time.

And what are you seeing out there? Are you seeing many opportunities, or the price?

Lots of opportunities. It is a matter of sorting out with everything that is all of a sudden available.

You've talked to many analysts and potential investors and presumably, it appears that if there was some kind of clarity of profitability, which you sort of indicate will happen in the second half of the year, and presumably as this year ends all the hedge funds that really want to just get rid of everything presumably would clear the way. Are you sort of getting any comfort level from the potential investors? I mean is that -- they're willing to take positions although it appears that everybody is looking for another shoe to drop.

Well, fortunately, we don't have another shoe to drop, but I have no way of predicting it. And my expertise is in building hardware and hopefully grow the Company. This is above my pay grade.

Well, this market climate is sort of relative to the 75 area where although they didn't have NASDAQ, their people just walked away from significant values. And hopefully, if you could produce profits and if there are profits that you can produce dividends along with the profits, the stock should take care of itself. It's up to you guys.

That's the plan.

It is up to you guys. That's the plan. Good luck.

Thank you.

Thanks, Sam.

We have our next question from Robert Smith, Center for Performance Investing.

Hi. Good afternoon, guys.

Good afternoon, Robert.

So I guess just circling back to the last conference call, I was a little surprised at the extent of the further write downs. I didn't feel that they were going to be that large, but if it isn't one thing, it's another.

Wait a minute. What large -- they were very small.

Well, I thought we were basically done with them.

With the satellite contracts you are talking about?

Yes.

Well, it is very complex hardware and we are happy they're behind us on this item. And it took an awful lot of effort and an awful lot of people. And right now we have been able to maintain the same capacity as we have had before with significant less people. So, it wasn't a waste, it was a matter of building up capability and capacity.

So the people have been trained and all of these guys are still on board?

No, we were able to significantly reduce the number of personnel and still maintain the same capacity by better training the people that we have had, better designs, automation, we have significantly increased the efficiency of throughput.

So, so when all is said and done, what is -- have you at all changed your gross margin target, I mean, going forward or not?

Yes, our gross margin is -- what was it for this first six months? It is --

Yes, it was in the 22% range.

And the target for going forward is to be in the 30s.

Yes, but it was much higher, I mean, I am talking about a longer term target.

Well.

Yes. It all depends on product mix and that sort of thing. Yes, we have talked often times about a 40% target, but at the current sales levels that we have here or better sales levels actually to use the economy of scale here. But yes, we do anticipate that we will be getting into the 30% range at least for the second half of this year and then going forward from there.

Wasn't it even higher than that.

What's that?

Better than 40%, I mean.

Yes, yes we were talking if we were able to get to the $100 million sales level on an annual basis.

Okay. So that is on the back burner now because of what's happening in the commercial sector?

Well we have to get more business, basically.

Yes. Well, okay. I mean, I was on sort of the sidelines watching you guys for a long time and I finally committed some money. And essentially quarter to quarter it has been -- if it hasn't been one thing it has been another thing. So and now we are all kind of rowing in the same boat here.

At least we are -- we have a good amount of working capital, we have cash, we have backlog. And during this difficult times we can move forward.

Yes, that's true. So, I hope the ship can sail straight and we will get some notice here.

That's the plan.

It would be wonderful if we can all average up. I'm all for that.

Okay.

Have a great holiday.

You too.

Our next question comes from Larry Litton, Second Line Capital Management. Please go ahead.

Alan, maybe a couple of questions for you. So what is the share count from an earnings model standpoint with the buy back going forward?

We are just a little over eight million shares outstanding.

Okay. And at the end of the quarter, what was the total debt long term and short term?

Let me get to the balance sheet here a minute. We had including the capital lease, it is $6.8, $6.6 million.

Okay. And then in terms of the intermediate term business model as discussed in the prior question to some extent, gross margins you are saying maybe 30 to 35%, selling expense maybe 20%, and R&D six to eight. So it is a positive margin.

Right.

And potentially as high as 7% operating margin?

Sure.

Now you did say to the previous call and I want to make sure that we all heard it correctly, that you said for the full year, the Company would -- you expect the company would be profitable which would indicate over the next two quarters to earn at least $0.20 per share.

Correct.

All right.

That's our goal.

Okay. That's it. Thank you.

You're welcome.

We have another question from Sam Bergman, Bayberry Assets Management.

Hi there, just one remaining question. The.

Sam, speak up, we can hardly hear you.

Just one remaining question regarding the Elcom 25% interest you have in that Company.

Yes.

What advantages does that bring to Frequency?

You mean what is their technology?

Yes.

They build very high speed switching synthesizers for telecommunication and E-lint. And we are utilizing some of their technology to incorporate in the next generation space product.

What are your long term plans with that 25% interest?

We will see how it develops on this. And the main, our main interest to begin with is to utilize their technology and our product line. That was the name of the game. What happens next is we will see how things develop.

Okay. Thank you.

You're welcome.

We have another question from Larry Litton.

Sorry about that. I forgot one question. The cash is $13.3 million, the total debt is $6.6 million. Looking at -- aside from potential share buybacks, basically looking at working capital, you looking at kind of flat revenues. What type of cash generation net would you expect to generate over the next six months?

It is hard to give you a specific number but it is in the millions.

But I guess my point is do you expect to get anything significantly out of accounts receivable or inventory? Or at this revenue level, they may stay pretty close to where they are?

Well, they're going to come out of the completion of these major contracts. There's a couple of unbilled receivables that we have. (Inaudible) been in accounts receivable just yet. So as we finalize those final pieces, we will have some several million dollars worth of receivables to collect.

But they will be replaced with new programs of equal size, so the question is will there be less working capital intensity in the new programs?

No. I don't think so. One of the differences is we have a couple of these major programs that we are going to be working on are cost plus. And they're -- the unbilled receivables so to speak does not grow nearly as large as what we've experienced in these last couple of major programs.

Okay. So you are going to expect better working capital turnover going forward?

Yes, we would expect to collect cash much more quickly on these programs.

We are obligated to bill on a monthly basis on those cost plus programs and they are, and the customers obligation, their advantage is to pay it down as soon as possible because that's the only way they get paid from Government. So those cost plus significantly help the cash flow.

What's capital spending and depreciation again over the next six months?

Capital spending is maybe a couple million dollars a year and depreciation is roughly about the same.

And going forward, beyond this year, again you expect rough parody?

In CapEx you mean?

CapEx and depreciation.

Yes.

Okay. Thanks a lot.

Gentlemen, we have no further questions in queue at this time.

Okay. Thank you very much, Darryl, and thanks to all of you who listened in. We wish you a joyous, safe and Happy Holiday season. We will be certainly thanking everyone once again. From Martin's words, our employees for wonderful work they've done and how well they've done it. They have positioned us now with a great deal of strength.

And as I said at the end of the statement I sent to you all. Our objective is to get stronger, get bigger and be profitable. And that's what we will be pursuing for the rest of this fiscal year. Thanks again, everyone. That's all.

Have a Happy Holiday.

Thank you. And ladies and gentleman, if you wish to access the replay for this call, you may do so by dialing 1-888-203-1112 or 1-719-457-0820 with the pass code 484-1862. This concludes our conference for today. Thank you for participating. Have a nice day. All parties may now disconnect.