Frequency Electronics Inc (FEIM) 2013 Q2 法說會逐字稿

Greetings, and welcome to the Frequency Electronics Incorporated second-quarter 2013 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 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 than 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 the conference call. It is now my pleasure to introduce your host, General Joe Franklin, Chairman of the Board for Frequency Electronics. Thank you, General Franklin. You may begin.

Thank you so much, and thank you all for tuning in with us this afternoon. We are delighted to be with you bring your news today. I am joined by our President and CEO, Martin Bloch, and our Chief Financial Officer, Alan Miller, who will do all the talking with the details. This is just an opportunity to wish all of you a fine holiday season, and our comments, I think, will fit right in with that.

Without further ado, let me introduce Alan Miller as our (multiple speakers) -- oh, Martin, you are going first, Martin? Okay, Martin will be our first and take it away.

Good afternoon, everybody. I would like to make a brief announcement, and after my announcement, I'll turn over to Alan Miller for details. And when he is finished, I'll have some closing remarks on Frequency Electronics, and of course, General Joe Franklin, as always, has to say the last word.

Without further ado, today, the Board of Directors of Frequency Electronics Incorporated declared a special cash dividend of $0.20 per share payable on December 31, 2012 to shareholders of record as of December 24, 2012. The Board took this action in recognition of the Company's current financial strength, its recent performance and outlook for continued profitability. And I want to thank the Board and our stockholders for being with us.

I'd like to turn over now to Alan Miller for financial details.

Thank you, Martin, and good afternoon, everyone. For the second quarter of Frequency's fiscal 2013, revenues were $17.6 million compared to last year's $15.1 million. Revenues from satellite payloads remained approximately the same as the year ago and accounted for about half of consolidated revenues. With the Elcom acquisition, revenues from US Government and DoD non-space accounted for just under 30% of consolidated revenues.

Total revenues for US Government, DoD and use, both for space and non-space programs, rose during the quarter and year-to-date account for 54% of consolidated revenues. Network infrastructure revenues recorded in FEI-New York, FEI-Zyfer and Gillam-FEI were less than 20% of consolidated revenues.

As anticipated, Elcom's second-quarter revenues increased by more than $1 million over the preceding quarter, and we expect to see continuing revenue increases from FEI-Elcom for the balance of fiscal 2013. We expect fiscal 2013 consolidated revenues to continue to grow compared to the prior fiscal year of 2012. This is based on our current backlog, over three fourths of which represent satellite payload business, plus the potential for new orders.

Higher revenues resulted in increased gross margin dollars to $6.7 million in the second quarter of this current fiscal year compared to last year's $6.1 million. The gross margin rate of 38% in Q2 of this year is compared to 41% last year, and that rate was impacted primarily by product mix, with lower than target margins realized at Gillam-FEI and FEI-Elcom. As revenues increase and with a favorable product mix, we expect to achieve our target gross margin rate of 40% or better during fiscal year 2013.

SG&A expenses were $3.5 million, almost the same as the prior year, but were at 20% of revenues this year compared to 23% of revenues last year. For the second half of fiscal 2013, we expect SG&A expenses to remain at about the same level or around 20% of revenues.

R&D spending was $1.2 million in the fiscal 2013 quarter, or about 7% of revenues, compared to $900,000, or 6% of revenues, last year. For the full fiscal 2013, we expect R&D spending to be less than 10% of consolidated revenues.

Our increased revenues and higher gross margin resulted in a 14% increase in operating profit of $2 million or 11.5% of revenues compared to last year's $1.8 million and 11.8% of revenues. For the quarter, FEI-Elcom made a positive nominal contribution to operating profit, as opposed to operating losses recorded in the previous two fiscal quarters. We expect these trends to continue and anticipate that fiscal 2013's consolidated operating profit will exceed that of the prior year.

Other income, which consists of investment income, offset by interest and other expense, netted to an income amount of $93,000 compared to net expenses of $369,000 a year ago. So this yields pretax income of $2.1 million compared to $1.4 million last year.

In the current quarter, taxes are recorded at $670,000, which is an effective rate of 32%. Now, this rate is impacted by the pretax income or loss of our foreign subsidiaries, which are nontaxed. We expect the fiscal 2013 effective tax rate to remain in the low 30% range.

As a reminder, Frequency's trailing 12 months' operating results include the reversal of a tax valuation allowance which skewed the tax position and net income for that period. We do not anticipate any similar occurrence in this current fiscal year. Therefore, net income for the fiscal 2013 second quarter is $1.4 million or $0.17 a diluted share compared to last year's $776,000 or $0.09 per diluted share.

For the quarter, we use cashed in operations in the amount of $580,000. Our cash and marketable securities are at $23.9 million and offset by borrowings under our line of credit of $8.5 million. The interest rate on this credit line continues to be less than the yields in our investment portfolio.

Year-to-date bookings exceeded revenue and our funded backlog at October 31 rose to $63 million as compared to $58 million last quarter. About 70% of the backlog is realizable over the next 12 months, and as I mentioned previously, over three fourths of the backlog is for our long-term satellite programs. I will now turn it over to Martin and we will look forward to your questions a little later.

Good afternoon, everybody. As I said before, the Company is doing very well, and we are at the crossroads where our technology of high-precision ruggedized timing and our low-phase-noise microwave sources, receivers and down converters which is going to come down the line founded their niche, and to accomplish on the necessary slogan that everybody is saying that we have to accomplish more with less.

By this, I mean if we can use better precision but to use an existing platform to perform the function of this rather than to build a new, complex platform, it is a lot cheaper to do. So ruggedized low-g sensitivity clock do a great job on existing platforms, such as airplanes, remote pilotless vehicles, helicopter, ships and moving vehicles on the ground. And our low-phase-noise and high-precision timing do a similar function to enable to put more dense -- more channels in a given satellite rather than to build a new one.

So we are looking forward to continuous increasing bookings, we have lots of proposals outstanding, and we are spending a concentrated effort to complete the development of the next generation of receivers, down converters on this, which will enable us to capture a larger portion per satellite on this.

Our challenge is just to make sure that we produce our hardware on time and everybody is signed up at frequency to accomplish this task.

We are continuing to utilize the new acquisition, Elcom, in helping us in completing the development on the next-generation hardware for top-down converters for space use, as well as adopting their technology to satellite application (inaudible). And since everything is great, I don't have a lot to say, so I would like to open at this time to questions and answers.

(Operator Instructions)

Could you please ask that they address the question either to Martin Bloch or Alan Miller, so we know who has to answer them?

Absolutely. Please remember to address your question to the person that it is intended for. Our first question comes from the line of Nick Halen, Sidoti & Company.

Good afternoon, guys. A few questions here. I guess the first one probably more so for Alan. Could you guys give us a sense maybe of how much revenue Elcom contributed in the quarter and I guess whether or not they were profitable?

As I said, they were nominally profitable, a little above breakeven. But for the quarter -- we will disclose this in our 10-Q as well -- they did 2.1 third-party sales.

Okay. So just looking at it, I guess, on the FEI-New York side, the majority of the increase came from that acquisition, right?

Yes.

Okay. And if I heard you correct, you said also that there was -- year over year, there was pretty much no growth in the satellite payload business. I guess what caused that and I guess what are you guys expecting for the remainder of fiscal 2013?

As we kept on continuously saying, the satellite payload business doesn't come on a quarterly to quarterly basis. It is quite lumpy. And we expect for the year to have an increase in satellite payload, the hardware delivered to the industry. We have a good backlog, as Alan has mentioned and everything in that area is probably as rosy as it can be described.

Got you. So I guess with the lumpiness of that, I know you guys don't give guidance or anything like that, but you would expect revenue from that to be a little higher in the second half of the fiscal year than the first, I'd imagine?

Yes.

Okay. And then just one more from me, I guess another kind of housekeeping question, I guess for Alan. In terms of the gross margin, I know you mentioned that you still are anticipating a 40% gross margin in fiscal 2013, which I guess kind of implies some pretty drastic expansion in the back half of the year. I was kind of wondering where you are expecting that to come from, and I guess why the gross margin hasn't been 40% so far in the year. Thanks.

Well, first of all, the first part of the year, it was quite a bit lower primarily because of the Elcom transaction, because of the low volume that they were doing. And as we see that accelerate, that should fill up our gross margin from that particular arena.

And it is product mix dependent from some of the other subsidiaries that we have. But as our volumes increase, and we do expect to see some increased sales volumes, as Martin just indicated, that should cover more of the overhead. So it doesn't take that much more of gross margin to get to the 40% for the full fiscal year. We are pretty close.

Got you. Great. Thanks, guys.

[Sam Rebotsky, SER Asset Management].

Good afternoon, Martin and Alan, and good afternoon, Joe. Let me -- I didn't have to ask this question. The Board gave the $.20, and hopefully, besides the possibility of higher taxes, we consider in the new year, if we show improved profits, to give a regular either semiannual or quarterly dividend. But this is good.

Now as far as the pipeline, I think it was around $100 million that you were bidding or something like that. What is the pipeline like of what you are bidding on now with the additional Elcom, et cetera?

About the same. It's about $100 million of various proposals that we have outstanding, and it is a continuously revolving process. We book some and new programs come into view, so it stays about at that level.

Okay. And I think -- is it $10 million per satellite with a goal of 25? And what kind of timeframe do we expect to get to the upper range?

Okay, at this moment, as we have stated in the past, depending on the satellite, we have gone from $0.5 million to $5 million to $10 million per satellite. And when we extend to the up-down converters receivers, it is going to be between $20 million and $30 million.

And our timeline is to complete the (inaudible) development before the end of this fiscal year, which means by May 1 of 2013, and then to build EQM, the qualification models, by the end of 2013, and hopefully do some bookings by the end of fiscal -- calendar 2013 or beginning 2014.

Okay, that sounds very good. Now, I think you basically have said that you didn't expect to see [Guestra] to have an impact on your backlog and your business, et cetera. Is that still the way you're looking at it, or --?

What is (multiple speakers) --

The US government issue.

The US government issue? Yes, well basically, most of the programs that we have, especially in the satellite and the low-g sensitivity [hardened] clocks for DoD, those are not luxury items and we see a minimum impact at this time. That is why our backlog is up, not down, and we expect this to continue in the same trend.

Okay. And as far as appearing before various conferences, as far as brokers conference, what is your plan for the rest of the year -- or the new year, I mean?

We are scheduled to present at the Needham Conference in early January, around the 15th or 16th, I believe.

Okay.

And we did present at a conference back in DC last month.

Okay. Well, it sounds like everything is good. Keep up the good work.

Thank you so much. Have a good holiday.

(Operator Instructions) Lawrence Goldstein, private investor.

I find it very interesting that when you put out your results today the stock went up, and then when you announced the dividend around the hour, the stock went down. So I'm glad to see we do have some intelligent investors.

I never understood that chap on the calls who constantly calls for paying a dividend. I mean, dividends make no sense at all. They serve no purpose. When you pay a fat dividend, it reduces your book value and should reduce your share price.

Incidentally, all these companies, these major companies paying big, fat special dividends of several dollars a share, and then you'll see the stock goes up, I mean, it just shows you how -- I hate to say people are stupid or dumb -- but just stupid and dumb so-called investors are, because obviously, the company is worth that much less.

So I'm not thrilled with dividends for two reasons. The first is the Company -- I would rather see the Company plow the cash -- and you've got substantial cash -- into the business and make it grow. And that leaves me to wondering, after all, the stock has been selling for years under book value. The last I looked, intangible book was about $9.40 a share. And with the special dividend and the current earnings, the book value is not going to change much from the last quarter.

And you consistently sell under book, which is the oddest thing. So I'm wondering -- I mean, after all, if you are going to be a growth company, you should sell at a multiple of book. Do you have -- I'm not asking you to tell me what it is, unless you care to -- do you maintain a five-year business plan, a three-year business plan? And if you could share anything with us; fine, if not. But I was just wondering if you keep one going and update it as time passes.

Let me take a few of your points involved on there. Obviously, the Board at Frequency Electronics is neutral on dividends. We just felt that we are at a time where we had extra cash without taking away any of our ability to continue development and plowing into the business. And that is a good token to the stockholders and to express that we are in great financial shape on this item. This just the answer for the dividend.

With respect to the plans, yes, we have an internal three-year plan which we update continuously, and we look at the opportunities for business and growth, and at the same time, identify any partnering that we might want, acquisitions or merging with another company, that can boost our growth in our specialty area.

Do you care to share anything with us about what your long-range plan is? Let's put it this way (multiple speakers). I'm sorry, go ahead.

I can share with you that we plan to have continuous growth in revenue and profitability.

And what period of time do you think it reasonable that you might double the size of the business, the revenues and the profits, both, either/or?

In less than five years.

Okay. I thank you.

You are welcome.

Sam Rebotsky.

I just want to respond to Lawrence Goldstein. He is a very smart and bright investor, very long-term oriented. And the rationale for paying a dividend at this point is to attract a new investor to frequency. Unfortunately, the stock has traded rather erratically, and the spreads have been wide. And I would think it is a rather smart approach at this time to get more investors into the stock, to get a more rational valuation for frequency.

And I commend the Board at this point for declaring a dividend. The possibility is the tax rate will go up next year; that's the way it appears. And some type of format will attract new investors into the stock, hopefully. And if your performance continues, you will get a much higher valuation relative to what you had a long time ago, as you may -- as you know, Martin.

Well, thank you. I'll tell you our mission over here is to create wealth and not to pay too much attention to the day-to-day fluctuation of the shares, for which we have no control of. What we do have control is to put our energies to grow the Company both in revenue and profitability and to continue with our excellent mission that we have performed for the United States Government, their space industry and our DoD -- now DoD effort.

Well, you are doing a good job. When you were buying the stock when it was lower, that was -- gave a smart attention to it. And hopefully, you can continue to improve and find some acquisitions, as the Elcom you were aware of and familiar with, and things that fit into you, could get more of a payload into the satellites or whatever and get a greater valuation. Let's have a happy new year.

Happy new year. Thank you.

There appear to be no further questions at this time. I'd like to turn the floor back over to management for closing comments.

Okay. General Joe Franklin had to leave to catch a plane. So it's Martin Bloch. I want to wish everybody a happy and a healthy new year and a happy holiday. I want to express my appreciation to all our stockholders and especially to the employees of Frequency Electronics that are working very hard to generate continued growth in revenue and profitability, and have a happy new year. Thank you.

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