Frequency Electronics Inc (FEIM) 2010 Q2 法說會逐字稿

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 the 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 or revisions or changes after the date of this conference call.

At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, General Joseph Franklin, Chairman of the Board for Frequency Electronics, Inc. Thank you, Mr. Franklin, you may begin.

Thank you, Tracy, and welcome, everyone, to the second quarter conference call of Frequency Electronics. It is a pleasure to have you here on this remarkable day. Remarkable, I say, because as perhaps not everyone noted when we got up this morning the US Army had not revolted, taken over the communications systems of our nation demanding higher pay, better working conditions. And do you realize we are the only nation on earth could make the statement that that has never happened to us, and God willing it never will.

This is our second quarter, as I said, and thank again for joining us. We are going to talk a little bit this morning about where we are going. You have -- if not received our press release, it was out early this morning, and certainly notify us if you haven't had it or haven't been able to pick it up and we will get a copy to you.

We are pleased, as I noted, to be able to have -- report that we are getting on a sounder footing and have recorded a small operating profit for this quarter.

Also pleased to have Alan Miller, our Chief Financial Officer, and Martin Bloch with me. There is quite a storm on Long Island this morning, but everyone had made it in safely. These two gentlemen will have the details on what we are doing and we will have a question and answer to follow. Let me introduce our Chief Financial Officer, Alan Miller.

Thank you, Joe, and good morning, everyone. For the second quarter of fiscal 2010 Frequency reported revenues of $11.4 million compared to $14 million in the year ago quarter of fiscal 2009. As we've discussed in prior quarters, the decrease in wireless telecommunications equipment sales accounted for most of the year-over-year decline in our consolidated revenues. Within our space programs revenues from US government programs increased from last year, while revenues from commercial programs were off by 50% from the year ago period. Our US government DOD non-space revenues increased over 35%, both sequentially and from the second quarter of last year and now accounted for more than 30% of consolidated revenues in the current quarter. By combining our non-space government revenue with the revenues from US government space work, over 60% of Frequency's second quarter revenue was related to government programs.

Our cost of sales for the second quarter were $7 million compared to $11.3 million a year ago. And gross margin was $4.4 million, compared to $2.7 million a year ago. And this results in a gross margin rate of 38.6% this year, compared to 19.4% last year. Now this 39% gross margin rate for the second quarter of fiscal 2010 follows the 35% rate we realized in the first quarter, such that Frequency is now running at a 36% to 37% rate, gross margin rate for the year-to-date. Now this rate approaches our normally expected rate. Prior to this fiscal year, we have struggled to achieve that level of performance due to a now completed challenging satellite programs that we've discussed at length in previous quarters. At the current revenue levels and with the present mix of revenue sources coupled with the Company's achievements in cutting production costs, we anticipate that the gross margin rates for all of fiscal 2010 will be in this upper 30% range.

SG&A expenses were $2.8 million, about flat with the prior quarter. But the fiscal year 2010 G&A rate for the second quarter were 30 -- 24% of revenues, which exceeds the Company's target of 20% or less of revenues. The Company's cost cutting achievements were partially offset by higher operating expenses in our Belgium subsidiary, both in actual spending and from the increase value of the euro to the dollar during the second quarter. Year-to-date it is important to note, though, that G&A expenses are lower by over $600,000.

R&D spending in the quarter was $1.4 million compared to $874,000 last year. During the second quarter the Company engaged in a few intense but short-term development activities, primarily related to new space hardware and the US5G product line. This caused R&D spending to spike above the Company's target of 10% of revenues for the quarter. Year-to-date internal R&D spending is at 10.3% of revenues and we expect internal R&D spending to return to less than 10% of revenues during the balance of fiscal 2010.

This resulted in a operating profit of $242,000 in the second quarter of this year, compared to a loss of $994,000 last year. Other income and expense resulted in net expense of $371,000. And included in this second quarter expense was a $345,000 noncash loss from our equity investment in Elcom Technologies. This loss is composed both of our equity share of Elcom's quarterly loss, as well as a valuation impairment charge based on a re-evaluation of the market value of Elcom, a privately held Company. As have many small companies, Elcom has had a difficult year, however, we continue to believe that they provide a strategic benefit to Frequency. Martin will give some additional color to this a little later on in his discussion. This resulted in a net loss for the quarter of $129,000 or $0.02 per share. Of course, absent the Elcom charges we would have exceeded $200,000 in net income.

As we've discussed in prior quarters, there will be no tax benefit or expense to be recorded in fiscal 2010 as a result of the valuation allowance we placed on deferred tax assets at the end of fiscal 2009.

For the quarter we recorded positive operating cash flow of $1.5 million and we are at $2.7 million year-to-date. Our net cash at October 31st increased to $16.5 million from $13.8 million at year-end and this is after we paid down our credit line during the second quarter. We are aggressively looking for opportunities to employ this cash.

Finally a word on backlog. We are approximately $37 million in backlog, which is compared to the $36 million where we were at the end of fiscal year 2009 in April of 2009. I will now turn the call over to Martin and look forward to your questions a little later on.

Good morning everyone. I would just like to indicate that the diversity of the market that we address, which is a space both military and commercial, the DOD and commercial communication has enabled us to maintain our backlog and our projected sales for the year, which will be higher than the first six months that we have done to date on this, in spite of significant drop in the wireless communication market.

The objective for Frequency Electronics for the rest of the year and for the following year is in the order of importance. We are spending an enormous amount of effort on proposal on this and the number of proposals have increased enormously because of the pent-up demand and because many of the commercial programs moved to the right and they need to be kicked off very aggressively and also some of the vital military programs that are required in order to increase our communication and surveillance safety.

In -- the second most important objective is to respond to existing customers, because they are our lifelines and to meet their needs and to adjust to their demands on this.

Our third objective that I put for everybody here, including myself, is improving our operating model by improving throughput and not skimping on R&D and yet at the same time reduce our overhead and G&A cost in order to stay competitive. We have to accomplish the following tests. We have to improve our existing product line, because our customers demand a more aggressive cost -- price for the unit, at the same time a considerable reduction in shorter time combined with a need for economy on spacecraft to reduce size and weight. So we are -- we have done significantly that on our existing product line in order to meet the future pent-up demand.

We at the same time have aggressively pursued the development of new products, primarily beacon and telemetry transmitters, which we see a large opportunity of a market and to enable us to get a larger share of the satellite, both commercial and military market. Second is to enhance our up-down converter capability. Again, there is enormous demand for this on future satellite, but the requirements are to make smaller size, lower power and considerable reduction in size and that is what we are aggressively development. The third area of products is our bread and butter. Our generic clocks which have been our bread and butter since they existing and we have two very aggressive programs, one is atomic clocks for GPS and other navigational satellites and the second is the advanced development of quartz clock to meet the future demand for secure satellites, deep space exploration and the next generation of commercial satellites, which require significant improvement in stability, performance, reduction in size and power.

All of the above actions will enable FEI to participate on an increased market and enable us to increase our future sales.

I would like at this time to address Elcom and some of our other subsidiaries and partial ownership. We are partnering with Elcom because we think it's a potentially good Company, but more importantly is their technology is important for our new products and space exploration. We have used some of their products and we expect to be able to use more of their technology for space exploration.

The same is our affiliation with Morion, because they are a key building block for commercial communication. Although it's down in the dumps now, we know that it cannot stay there forever, so we want to maintain that partnership.

Our operation in China is key to manufacturing of the wireline and other products, because they are very cost affective and it's a competitive market and they do a great job and enable us to significantly get traction on the US5G and other products for the wireline system.

FEI-Zyfer supplies the secure timing for the military, as well as because of their technology synergy, they have become responsible for the US5G marketing and engineering support on this. They are doing a good job and this is -- the sales that we are usually attributed to FEI are now part of the Zyfer, but that's the right place and they are in right location and have the right technology and I'm sure they will do a great job.

Gillam, our Belgium facility, provides the engineering and support for the US5G and other development equipment. We are, of course, at the same time trying to explore and see what we can get on the European communication market on this side.

So, with this under our belt, I'm looking forward to a profitable fiscal 2010, which ends on April 30, 2010. So we have about what, five months left. Five months left in this cycle.

We are able to utilize our existing backlog, which Alan has mentioned, about 75% of the $37 million are shippable this year and this is our objective to meet on this area. I would also like to report that we have made significant improvement this year in our on-time delivery on this -- from a couple of years ago and that is gaining us good marks from our existing customers and we hope to maintain that and improve to have 100% on-time delivery. We are over 90% on-time delivery on all of our products.

I would like to thank you all for listening and I would like to open it now for questions and answers.

(Operator Instructions)

Tracy, could you please ask them to state their name and affiliation so we know to whom we are talking to.

Sure, that's not a problem. Our first question comes from the line of Michael Amari with [Amari Company Incorporated]. Please state your question.

Hello, people.

Hello, Michael.

Congratulations on two consecutive quarters of profitable quarters.

Thank you.

Just hoping that your remarks here in the release that in the six weeks that you had -- for this quarter you had had a lot of proposals, would this translate into possibly a profitable third quarter, a third consecutive quarter?

We expect to be profitable for this coming quarter and for the year as a whole.

Now, this was in which areas basically?

Our traction is very good in military satellites and some of the commercial satellites and on DOD hardware that is based on our development investment in the low g sensitivity and the ruggedized standards for severe environment. That's where are most, and the next area, which is starting to get traction, is our penetration of the US5G for the wireline communication market.

I know you have been trimming, but what is your headcount right now?

Total?

Approximately.

Around 4 plus, 400 plus.

Worldwide.

Worldwide.

That's still quite a bit. Now do you have 10% customers?

Haven't really measured lately. We did not have anybody that rose to that level of significance last year, primarily because of the decline in the business we did with Motorola. We had some very important customers, the same military related, government related customers, Boeing and Loral and Lockheed Martin, all those guys, but I don't think anybody exceeds the 10% threshold at this point.

But we will take a look, Mike, and see they are close. We will report it in our Q of course.

Okay. Thank you and good luck to you guys.

Happy Holidays.

Happy Holidays.

Our next question comes from the line of Sam Rebotsky with SER Asset Management.

Good morning, gentlemen.

Good morning.

Sam Rebotsky. SER Asset Management. Now, you talk about your -- of the backlog which is $37 million and you say 75% of $30 million should be shipped in the second half.

No, 37% of the -- 75% of the $37 million is shippable.

In the second half.

No.

Within the next 12 months.

Okay, but you said that -- in the next six months you said that 75% of $30 million will be shipped?

No.

I didn't say it but basically we shipped approximately $24 million the first six months and we expect to exceed it in the next six months.

Okay, okay. And so you will be now where in this point you had these -- this extraordinary charge so you won't have that charge in the next. So the question is, can you do --

The noncash charge for Elcom you are referring to?

Yes. You won't have any more charge, you are finished with any charges on the Elcom.

Well, that's unknown at this point in time.

Oh, that's unknown. Okay.

That is a separate independent Company we have really no control of them. If something were to go south with them, obviously, we would have to take another hard look. But that's an unknowable thing at this point.

This is Martin Bloch. But I might add that their prospects look promising, but like I say, as a small Company, they are bearing down to the storm of not having availability of credit lines and businesses stock, but they are working hard.

What percentage do you own of the Company?

About 20% plus.

20 plus, okay.

Just to get us over that threshold we had to report our earnings, our share of their earnings.

Okay, okay. And as far as the proposals, is there a dollar amount of the proposal you have out? Is it comparable to what you had last year at the same time and at the end of the first, the previous quarter?

Well, it's significantly up. I can tell you roughly that just this week we have to send out proposals in excess of $30 million.

Is it because that the government is allocating or people you are working with there is more work that they are doing that you are making these -- is there any rationale for the increased proposals?

Yes, it comes from two sources. First is on the government side, the demand for higher bandwidth is -- higher bandwidth and more surveillance is generating demands for additional satellites and ground specialized equipment. And from the commercial side, many of the programs have moved to the right because of financing and now they are getting desperate because they have to replace dying or decreasing capability assets in space and sooner or later they haven't got a choice, they have to get those satellites in orbit.

So the government is budgeted for a larger dollar amount than the previous year for what you do.

Yes.

Okay. Martin, your book value at the end of the quarter, previous quarter was [7.43], so this quarter you lost a couple of pennies so it's in the same ballpark.

Book value?

Yes. Just a rough number. It's in excess of $7. Your stock is trading, it's moved up. In the balance sheet you talk about the deferred compensation and you have your item of the insurance, life insurance, et cetera. The deferred compensation that has been expensed, when does that expect to be paid, the deferred compensation?

Well, we are currently paying some of it now as the people who are in the benefit program are retiring. So that will be over 20 years perhaps, depends on when the individuals retire.

So this is another as people defer compensation over -- what time frame does that get deferred? 20 years?

It's a benefit as payable to an individual over his lifetime. (multiple speakers)

These are basically the officers?

No, we have -- I think there is roughly about 13 people right now who have retired from the Company. Some of them were former officers, but many of them were substantial engineers for the Company, important engineers. And we have another, I think, non-retirees roughly around another 30, 35 people, I think, in the program.

The program is extended to officers and key employees to the Company.

Okay, okay. And the life insurance that you have, now what is the purpose of the life insurance?

There is a death benefit that the Company guarantees, even for example myself was included in the program. If I were to die today my estate would be entitled to whatever the deferred comp is and the life insurance would help the Company to pay that price to my estate.

But you're carrying this asset and that will fund all the requirements 100%?

Almost all.

Almost. There is a shortfall of probably about $1.5 million or something like that. But we are right now for those who are retired, we are making payments out of our current cash flow.

This insurance, does that -- is adjusted based on any valuation quarter to quarter or how does that work?

Well, we usually get a formal announcement from the insurance companies to tell us what the cash surrender value is, so that we would adjust formally at the end of each fiscal year. But we make an estimate each quarter.

And is this fund needed -- if you needed this for business, can you utilize this in any way?

Well, it gets a little complicated, but the assets are actually in a rabbi trust but they are, the assets are available in the case of a bankruptcy, for example.

Bankruptcy, okay. Okay. And I guess as far as the operations, we just expect to improve over the previous first six months. We don't see -- do we see any significant improvement that we could have any significant earnings improvement going forward where that people would really say you've turned the corner and you really going to grow?

This is Martin Bloch. Yes, the answer to that is a positive yes. We see improvement in earnings over the next six months and for the foreseeable future. The basic idea is to overcome the market pressures at this time that are slowing down our business.

I must remark and express my congratulations to the whole family of FEI and the people that have worked very, very hard to do a great job during very difficult times. And our motto has always been then, when the going gets tough the tough get going.

But I mean do you have the ability to see like a $15 million sales quarter? I mean you have to move from here, where you are, on a regular basis where you're higher -- you get higher sales and therefore higher profits. Do you see that?

Yes.

Okay, okay. All right, good luck, Martin and the whole team.

Thank you.

Okay.

Our next question comes from the line of Michael Eisner, who is a private investor. Please state your question.

Hi, how are you guys doing?

Hi, Michael.

One question, if you get a contract with the satellites are you allowed to announce it?

Well, depends on the magnitude and the size of -- some contracts they are big enough we have to announce it. And some secure contracts we might not be able to announce it. But we try to keep our stockholders informed of any significant changes that changes the nature of our business.

Because it sounds like you are having changes now after all this time, so I'm wondering even if it's a large contract, you may not even be able to announce it if it's government.

We have to take it one at a time, Mike.

All right, thank you.

Our next question comes from the line of Anthony Chiarenza with Key Equity Investors. Please state your question.

Good morning, gentlemen.

Good morning.

Question for you, Alan. On the stockholders equity from the first to the second quarter, the stockholders equity actually went up despite having a GAAP loss. I guess what affected comprehensive income that increased the stockholders equity?

I don't have the quarter to quarter, I have it about $1.5 million, though, as in the comprehensive income from the foreign currency translation adjustments, as well as the unrealized holding gains on our marketable securities. That's from the end of fiscal year.

Yes. So you had some of the -- so it was foreign exchange.

Yes.

And probably unrealized.

Yes. Our -- some of our marketable securities increased in value, so there was a valuation adjustment that goes along with that as well.

Okay. All right, so that makes sense. Can you update us a little bit, you mentioned briefly that you were looking for ways to use the cash that the Company had. Have you come closer to looking at some acquisitions that actually would make some sense at this point?

This is Martin Bloch. We are looking at acquisitions on a week to week basis and at this moment, we are actively pursuing a few, but it's hard to give a positive opinion on this, are they a good match. There are lots of properties available. The important thing is to find something that's a good match to FEI and that will be accretive in -- within a very short period of time. There is lots of shopping around and I spend a lot of my personal time looking at it on a week to week basis.

How would you say the valuations are, are the prices reasonable at least at this point?

Yes, the prices are reasonable, but you got to know what you are buying.

Okay, thank you very much, good luck.

Thank you.

Gentlemen, there are no further questions in the queue. I would like to turn the floor back over to you for closing comments.

Very well. Thank you very much, Tracy, we appreciate it. Thank you all for listening, thanks to also to our employees whose good work is making all of this happen for us. Never forget our soldiers, folks. Until the next time, keep well, thanks again for being with us.

And a Happy Holiday to everybody.

This concludes today's teleconference, you may disconnect your lines at this time. Thank you for your participation