Frequency Electronics Inc (FEIM) 2011 Q1 法說會逐字稿

Greetings, and welcome to the Frequency Electronics, Inc. first quarter 2011 earnings release 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.

Any statements made by the Company during the 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, General Joseph Franklin, Chairman of the Board for Frequency Electronics. Thank you. Mr. Franklin, you may now begin.

Thank you very much, Shea. And thanks, everyone, for dialing in for our conference call for the first quarter of fiscal 2011. It's good to have you all on board and also to be able to report to you that we've made our business profitable, even at the lower revenues that we are now experiencing. We are looking ahead from the feedback that our customers have given us. They tell us that growth is coming this year, which means that we will be generating higher revenues, along with the profitable performance that we have reflected to date.

Now, to talk about the details of that, I have with us today Alan Miller, our Chief Financial Officer, and Martin Bloch. I'm pleased to be joining us by phone from Washington, DC. I'll turn it over to these two gentlemen, we will followed by a brief question-and-answer. And then we'll close and look ahead to the next quarters of fiscal 2011. So, Alan, please go ahead.

Thanks, Joe, and good afternoon, everyone. For the first quarter of fiscal 2011, Frequency recorded revenues of $12.1 million compared to $12.4 million a year ago. Consolidated revenues in the first quarter were roughly flat compared to that period a year ago, but the mix continues to shift. Revenues from satellite payload programs, mostly for US Government applications, accounted for more than 30% of revenues, similar to all of last year and the year ago quarter. Telecommunication infrastructure revenues declined from 35% of revenues a year ago to less than 30% in fiscal 2011. However, sales of our wireline sync product US5G increased sequentially over the preceding three quarters.

Revenues from US Government and DOD non-space applications grew from a little over 20% of revenues a year ago to over 25% of revenues in the first quarter of fiscal 2011. Combined with our US Government-related satellite revenues, over half of our consolidated sales are derived from US Government programs. Based on current backlog and recent awards made to our customers, we expect to see continued strength in the US Government sectors of our business, but we also anticipate increased business from commercial satellite payload programs, as well as from sales of our US5G product.

Cost of sales was $7.4 million in the first quarter fiscal 2011 compared to $8.1 million a year ago, yielding gross margin of $4.7 million versus $4.3 million a year ago. The gross margin rate for the first quarter of fiscal 2011 was 39%, up from 35% a year ago and from 36% for all of fiscal 2010. This is due to both a combination of more efficient processes implemented last year, and the mix of programs on which we worked this quarter. As we have previously indicated, at current revenue levels, a high 30% gross margin rate is what we would normally expect to achieve.

SG&A spending for the quarter was $2.8 million compared to $2.6 million a year ago, and in the fiscal 2011 quarter, accounted for 23% of revenues compared to 21% a year ago. R&D spending was $1.2 million compared to $1.1 million a year ago. R&D spending was 10% of revenues in fiscal 2011 compared to 9% of revenues in fiscal 2010. For the full year, we expect R&D spending to be within our range, our target range of less than 10% of revenues.

So operating income was $789,000 in fiscal 2011 compared to $659,000 in the year ago quarter. Other income, which consists of investment and equity income, is offset by interest and other miscellaneous expenses, and netted to $68,000 in the first quarter of this year compared to net expenses a year ago of $5,000. Now this yields pretax income of $850,000 -- $857,000 in the first quarter of fiscal 2011 compared to $654,000 last year.

Now as we have discussed previously, we have a 100% valuation allowance against all deferred tax assets. As long as that allowance is in place, we cannot recognize the tax benefits for book purposes of deferred items. In the year ago quarter, we recognized no tax benefit or provision because we were expecting to offset pretax profits against a sizable net operating loss carry-forward. But Congress changed the law in November 2010 and we were able to fully utilize the NOL during fiscal 2010. Consequently, in the fiscal year 2011 first quarter, we recorded a tax provision of $350,000 an effective rate of 41% as compared to zero last year. So after this $350,000 tax provision, net income for the first quarter of 2011 was $507,000, or $0.06 a share compared to $654,000, or $0.08 a share last year.

For the quarter, we recorded positive operating cash flow of $490,000, and our cash and marketable securities at July 31, increased to $20.9 million. Finally, backlog at July 31, was $32 million, up from $30 million at the end of fiscal 2010. I'll turn the call over now to Martin, and we'll entertain your questions later on. Martin?

Good afternoon, everybody. I'll make my remarks brief and leave most of the time for questions and answers. And I want to address three specific items. As Alan has indicated, we're in a good position through automation and the way we've scaled the Company to be profitable at these levels and would expect significant improvement in performance at the additive levels, because many of the fixed costs are in place for high rail aerospace Company. We have been notified by our customers that three of the programs that we were expecting and have been delayed for over a year will be funded in -- before December 2010. This included long-term multi-year programs and involved tens of millions of dollars and we are very happy that we can see some breaking in the long delays on this. This does not include the large -- one of the largest programs that has been further delayed and we expect to hear in early part of 2011 about the decision on when to proceed.

I was also very happy to report that our Low G ruggedized clocks are getting traction and they are providing very important hardware to our military. The basic keys of those rugged clocks are to provide communication in mobile platforms so we don't have to stop a tank or an -- or a vehicle in order to communicate. We can communicate, get direction, get accuracy while in motion on this. And they are doing a great job and the Frequency Electronics has done a fantastic job in moving this technology forward. We expect follow-on business in this area.

At this moment, I'm happy with the progress we are making. We are looking forward, as Joe Franklin has mentioned, to increase in revenue and profitability. We have the people, equipment and facility in place to take the next step. I'd like to answer -- to turn this over now to questions and answers. Please, if the audience would be kind enough to address the question either to Joe Franklin, Martin Bloch or Alan Miller if they know who can answer it. If not, we'll do our best. Thank you.

Thank you. We'll now be conducting a question-and-answer session. (Operator Instructions). Our first question comes from Sam Yake from BGB Securities.

Yes, thanks for taking my questions.

Hi. Go ahead.

Yes, you've talked about the potential acquisitions being the number one use of your cash hoard in the future. I was wondering if you could please elaborate on the size of the potential acquisitions you may be looking at?

We are looking at opportunities in the range of, from $10 million to $30 million.

$10 million to $30 million. So that would mean that you'd probably want to keep the cash on the balance sheet for the foreseeable future, then.

You have our plan on the money.

Because, with the way I look at the Company, I mean, I really like the current business you have, and I think you've done a great job positioning the Company. And I think your best investment you have that I see is your own common stock. And I'm not against some people -- I know they have talked about paying a cash dividend, I'm not really against that, but I would much rather see, unless you have an extremely attractive acquisition, I would prefer to see you buy back your own stock. Do you have any thoughts on that?

Well, we have done so in the past when opportunities presented themselves. In fact, we still have an outstanding authorization to acquire up to $5 million, and we've bought back about $4 million over the last three or four years. But we still think that the best utilization of our cash going forward is still going to be in some sort of a-- joining up with somebody else.

Okay, and I have one final question. I think it's great news on the potential satellite business, and I congratulate you on that. I'm just wondering, what makes you feel confident that you can not only get this business, but complete it at acceptable margins, because I know we had a couple years ago, you signed some satellite business, and it was at unfortunate margin levels. So what makes you feel good that this satellite business, you can do it at real good margin rates?

Very good question. This is Martin Bloch, and I have a very good answer. This is repeat business. This-- all of the engineering uncertainties are behind us, so we are very well prepared to plan and execute it on this item. So these programs are basically to use our term, duck soup.

Okay, thanks so much, and best of luck.

Thank you.

Thank you.

Thank you. (Operator Instructions). Our next question comes from Robert Lambert from RLR Capital.

Hi, good morning. Nice report card. Martin, if I could grant you a wish for you developing any new technology that would help us be more unique, what area would you like to see frequency develop?

Well, I think we have the magic technology under our belt, it's a matter of exploring it. And this is -- it's not a technology, it's a multi-faceted technology. It's ruggedized low g clocks, it's very high precision clocks for both military and communication satellite, especially the military, and microwave capability of expanding our product line into a larger share of the satellite that we can get. So, we have the technology under our belt, now it's a matter of gaining the experience and the trust of our customers to be able to supply larger portions of the satellite. That's our goal from within, and we are at the same time looking to achieve these goals by partnering or acquiring outside resources to get there.

And my second question may not even relate to it. Does any -- is any of our clocks, low-frequency clocks, necessary in any of the work? I know AeroVironment is doing a lot with these new munitions, which the soldiers can launch a spy, and then it turns into an actual missile, and you can actually take out a target. Do we go into any of those products?

Not the very tiny ones, but similar missions on larger projectiles, and that's as much as I'm allowed to tell you.

All right. Well, thanks again, and keep up the good work.

Thank you.

Thank you very much.

Thank you. Our next question comes from Michael Wasserman from Moors & Cabot.

Hi. Martin, could you comment please, on what appears to be a further delay in the rollout of 4G, and what impact that might have on frequency?

Very insignificant because our telecommunication business at this time from base stations is very minimal. Major income from our telecommunication comes from deploying of the US 4G and the wireline, and this is only dependent on the monetary resources of the major provider, such as AT&T and the other three big monsters.

And when do you think that that's going to begin to develop more seriously?

Well, we see progress every year. We are gaining traction on this, and I think it's totally dependent on the monetary -- on two factors. First, availability of money on those service providers. And second, how quickly the old equipment will basically fail. And both of them unknown, but we see progress every year.

Thank you.

Thank you. (Operator Instructions). It does appear that we have no further questions at this time. Actually, we do have a question coming from David Starkey from Smith Barney.

Hi, guys. Looks like a good quarter, and looking forward to some more good-- .

Can you speak up, David?

Yes. Can you hear me okay?

Yes, I can hear you now.

Okay. Good quarter, and just wanted to check in with you and see when the next Board meeting is, and whether they will be bringing up the issue of the dividend, which you made us wait for.

We'll always review it, and the next Board meeting is October 6.

And our shareholder meeting.

Yes, shareholders and Board meeting is October 6. And so it's about a month away.

Okay. You appear to be on a lot firmer footing now, and the cash balance has been rising, so hopefully you'll consider reinstating that dividend. My -- .

We'll always bring it up, and review it. At the same time, we review the opportunities that we have been exploring, and make a decision at that time.

Okay, great. And you had said the orders for the satellite would be in the tens of millions. Is that over a period of multiple years?

Yes, it's multiple years, and in the tens of millions.

Okay, great. All right. Thank you.

You're welcome, David.

Thank you. Our next is a follow up from Robert Lambert from RLR Capital.

Discussing the dividend for a second, Alan, what percentage of interest do we get on our $20 million, about?

Some percentage of it is at older rates, 5%. But on the aggregate value, it's probably less than 3%.

3%, so if we did pay out a token dividend of $0.05 a quarter, that would be approximately $1.6 million-something, correct?

No. It's eight million shares, $0.05 would be $400,000.

A quarter?

Oh, you didn't mention the quarter. Yes. That would be $1.6 million, right.

$1.6 million.

Right.

So essentially the interest on our money would almost pay for half -- what would that be, half, almost half the dividend, is that right?

Interest on our money would probably only cover one quarter, if that's what you're suggesting.

Or one third.

Or one third, okay. So in other words, it would still give us a wonderful balance sheet, and yet make shareholders pleased that at least they're getting, and as you know, we're in an era of where dividends are so important, and Barron's has spent a lot of time on that this past weekend, talking to all the big tech companies that are hoarding so much money, and they are, sort of an article. Did you see that about paying a dividend?

No, we didn't. But I'll read it, and I'll bring it up at the next Board meeting.

Okay.

Good point, thank you.

All right. Thank you.

Okay.

Anything else?

Thank you. (Operator Instructions). It appears we have no further questions at this time.

Well, thank you very much, Shea, and thank you all for tuning in. And many thanks, particularly (inaudible) we're reporting to you reflects the really hard work of our officers, our managers, and the men and women who are the [work and worth] of Frequency Electronics. Thanks to you all for your support, our shareholders, and interested folks who have tuned in. We will look forward to seeing you again at our annual shareholder's meeting, stockholder's meeting, which is on the sixth of October at 10 AM in the morning at Frequency Electronics. I wish you all a pleasant fall, and thank you again for tuning in.

And a happy New Year.

And a-- well, we'll be back before the new year.

No, no, I'm talking about the Jewish New Year.

Thank you, Martin.

Okay, Joe.

Stay in touch. Take care, everybody. Bye-bye.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.