Frequency Electronics Inc (FEIM) Q1 2023 Earnings Call Transcript

Greetings. And welcome to the Frequency Electronics Q1 Fiscal '23 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. 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, Thomas McClelland, President and Chief Executive Officer.

Thank you. The first quarter of fiscal 2023 continued to be really challenging financially, but aggressive steps to correct things are in progress. The leadership change, which resulted in my participation here was made with 1 month remaining in the first quarter. So the opportunity to impact the first quarter results was clearly limited. However, since the close of the first quarter, we have implemented changes which will result in a 17% reduction in labor costs for FEI-New York. These changes have been carefully planned and designed such that we can still meet or beat program milestones and deliverables, which are necessary to hit our revenue targets. Aggressive steps are also being taken to improve efficiency in FEI's management factoring over the longer term and to accelerate progress wherever possible. Finally, some of the specific delays, which have impacted the fiscal year 2022 and also Q1 2023 results are finally ending. For example, a major atomic clock development program is now generating revenue after almost eight months of government delays in getting the program started. Nonetheless, going forward, delays due to geopolitical events and the COVID-19 pandemic are still a frustrating reality. Everyone is aware of supply chain problems. But for FEI, this now routinely translates into promised deliveries of well over a year for commonly used electronic parts. Similarly, the eight-month delay cited above is not likely to be the last such delay as much of the U.S. government continues to work remotely, a fact which further slows already slow administrative and contractual activities. These challenges are a fact of life, which we must be prepared to deal with for the foreseeable future. Accordingly, we're working hard to implement real-time adaptations to our manufacturing processes which will allow us to be successful in spite of these ongoing challenges. We have a lot of work in front of us, but are optimistic that the changes already made as well as those anticipated over the next three quarters and on into the future will result in a dramatic improvement in results. I'd like to now turn things over to Steve Bernstein, our CFO, who will go through some of the financial numbers.

Thank you, Tom, and good afternoon. For the three months ended July 31, 2022, consolidated revenue was $8.2 million compared to $13 million for the same period of the prior fiscal year. The components of revenue are as follows: Revenue from commercial and U.S. government satellite programs was approximately $3.5 million, or 42%, compared to $6.7 million, or 52%, in the same period of the prior fiscal year. Revenues on satellite payload contracts are recognized primarily under the percentage of completion method and are recorded only in the FEI-New York segment. Revenues from non-space U.S. government and DOD customers, which are recorded in both the FEI-New York and FEI-Zyfer segments were $4.1 million compared to $5.5 million in the same period of the prior fiscal year and accounted for approximately 50% of consolidated revenue compared to 42% for the prior fiscal year. Other commercial and industrial revenues were $664,000 compared to $724,000 in the prior fiscal year. Intersegment revenues are eliminated in consolidation. For the three months ended July 31, 2022, gross margin and gross margin rate decreased as compared to the same period in fiscal year '22. The decrease in gross margin and gross margin rate was due to increased engineering costs on development phase programs that experienced particularly complex technical challenges as well as cost impacts on several programs resulting from supply chain problems. Gross margin was also affected by underabsorption of cost due to the decrease in sales this quarter. For the three months ended July 31, '22 and '21, selling and administrative expenses were approximately 24% and 34%, respectively, of consolidated revenues. The decrease in SG&A expense for the three months ended July 31, '22, as compared to the prior year period end is largely due to a decrease in professional fees as well as a reduction in stock option expense and deferred compensation expense. R&D expense for the three months ended July 31, '22, decreased to $1.1 million from $1.4 million for the three months ended July 31, a decrease of $300,000 and were approximately 14% and 10% of consolidated revenue. R&D decreases for the first quarter of fiscal year '23 are related to focus on projects currently in production phase. The company plans to continue to invest in R&D in the future to keep its products at the state of the art. For the three months ended July 31, '22, the company reported an operating loss of $3.1 million compared to an operating loss of $1.7 million in the prior year. Operating losses resulted largely from the decrease in revenue, coupled with the additional costs mentioned previously regarding gross margin. Other income consisted primarily of investment income derived from the company's holdings and marketable securities. Earnings on securities may vary based on fluctuating interest rates, dividend payout levels and the timing of purchases, sales, redemptions or maturities of securities. This yields a pretax loss of approximately $3.1 million compared to a $1.6 million pretax loss for the prior fiscal year. For the three months ended July 31, '22 and '21, the company recorded a tax provision of $1,000. Consolidated net loss for the 3 months ended July 31, '22 was $3.1 million or $0.33 per share compared to a $1.6 million net loss or $0.17 per share in the prior fiscal year. Our fully funded backlog at the end of July '22 was approximately $40 million, similar to the previous fiscal year-end on April 30, '22. The company's balance sheet continues to reflect the strong working capital position of approximately $31 million at July 31, '22 and a current ratio of approximately 2.3 to 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 Tom, and we look forward to your questions.

Thanks, Steve. We'll now open the floor to your questions.

Certainly. Ladies and gentlemen, the floor is now open for questions. And we have a question from Richard Johns. Richard, your line is now live.

Yes. Thank you. I'm wondering if you fixed the date yet for the annual meeting.

Yes. So we do have a date, it's October 6.

All right. I'll look forward to coming.

It's going to be remote again due to COVID, and it will only be a call-in.

I see. Okay. All right. Investors have been shocked recently by a couple of pretty negative quarters. Can you give us any insight into how long it will be before you'll be profitable again?

Well, that's a good question. I don't think we can give a definitive answer, but we're working hard to get profitable as quickly as possible. Our goal is to break even, if not be profitable by the end of the fiscal year.

Okay. Thank you, good luck.

Thank you.

And we also have a question coming from Michael Eisner. Michael, your line is live. You may go ahead.

Thank you. Did the orders start coming in, in the second quarter that were delayed?

Of course, the second quarter isn't over. But we do have several significant orders that have come in, and we're anticipating more during the second quarter and, in fact, the third quarter.

Well, I'm saying those ones got delayed. Did they start yet?

There's 1 delay that has not started yet.

Okay. Because the press release said now projected for the second and third quarter. So I was wondering if they started again.

They didn't start yet.

All right. The 17% reduction in New York, did that take place?

It's mostly been completed. We anticipate that there will be some voluntary retirements occurring over the next couple of months. However, 90% of it has already been finalized at this point.

Have left.

That's correct.

What percentage of the company is located in New York? Roughly, it doesn't have to be exact.

Based on what, headcount?

Yes. Roughly, it doesn't have to be exact.

It's about two thirds, I think.

All right, two thirds. All right. Did GPS IIIF stop production?

I think it's difficult for us to talk specifics about GPS III. We have non-disclosure agreements in place with our major customers involved in GPS III. That being said, we have some limited production going on global navigation satellite system programs. And we have actually delivered an atomic clock which we anticipate will be flying in the very near future as a test unit on one of those global navigation satellites. I think that's all we can say at this point in time.

All right. I understand. Did you move more people from Zyfer to New York office?

We did not move people from Zyfer in California to New York.

Production rather.

We did move some production from California to New York, although we're reviewing all of that production activity as to where it's most efficient for it to take place either here in New York or in California.

And Elcom, are you moving people from New Jersey to New York also or production?

We are not moving either people or production from New Jersey to New York. The production activity is taking place 100% in New Jersey, and we don't anticipate any change to that.

Just one or two more questions. One is, when do you expect the delays you've mentioned, like those caused by geopolitical issues, parts shortages, and COVID supply chain problems, to be resolved by the end of fiscal year '23?

That's a great question, but unfortunately, we can't provide a clear answer. While we hope that major COVID-related health issues will not be a concern moving forward, there's still uncertainty. We're particularly apprehensive about how the situation will evolve with the start of the school year as we head into fall and winter. Instead of assuming everything will return to normal, we need to find effective ways to manage these ongoing challenges. We're transitioning from a modified just-in-time inventory strategy to maintaining a substantial inventory, especially for space applications where lead times are typically lengthy. We are also making various adjustments to our manufacturing processes to adapt to the current environment. Additionally, the geopolitical situation has impacted us to a degree, particularly with developments in Ukraine, though the full extent of those effects remains unpredictable.

That was Moriond and I think that's over with. In the press release, you said interim CEO FEI. Are you guys looking around for a full-time president or CEO?

Well, I'm not looking. But I guess I can't speak for the Board of Directors. I don't have any plans at this point in time to step down at any particular time in the future. But I'm not a youngster anymore. So it's not likely that I'm still going to be in this position 25 years from now.

And final question. You mentioned changes in manufacturing and operations improvement. Can you comment on anything you are planning to do?

I believe that rather than focusing on specific details, we need to acknowledge that we are a small company that must remain adaptable. The issues we've discussed, whether related to supply chain challenges or other changes, require us to be flexible. Our goal is to cultivate a workforce where individuals can assume various roles and are ready to adjust to these changes swiftly. Instead of adopting a one-size-fits-all approach, which is common in the space manufacturing sector, we must prioritize adaptability. If we don't, we simply won't succeed.

Yes, I understand. Sir, I appreciate your time. Sorry, I had so many questions.

It's okay.

Thank you.

And we have a question coming from Michael Cooper. Michael, your line is live. Please go ahead.

Hello. What happened is Stan Sloane. What happened to the bid book that was reduced from $700 million to $200 million the quarter before Stan Sloane? Do you guys have a mess of engineering problems? Is your technology not what you thought it was? Or is it the market that was not there for you?

First of all, Stan Sloane has retired, and there's not much more to say about that. As for the other questions, they involve a mix of factors. It's challenging to discuss specifics due to the nature of our business, especially with space programs. We have encountered some technical issues, but these are not uncommon in program development. Many things are hard to predict in advance. The poor financial results we are experiencing stem from a combination of factors, which have created a perfect storm of challenges. We can take responsibility for the technical issues in several space programs, but there are other factors we've previously discussed that have made the situation more difficult. We're facing frustrating delays at this time. Additionally, while we weren't the only company affected, the initial impact of the pandemic was minimal compared to what we've seen recently. Supply chain problems have only surfaced in the last year, and business has been affected significantly more now than it was during the early stages of the pandemic. I hope this helps clarify things.

I haven't seen a reduction in revenues of that magnitude with any other companies that I follow. However, you were working on a pulsed optical pumped clock, which I believe will reduce size and weight, opening up various terrestrial and industry opportunities. I understand you had a $20 million or $21 million government contract to develop vertical applications based on that technology. How is that program progressing? Can you provide any specific details about new products that you plan to introduce to the market?

Yeah. So I can talk about that. That development is underway. We're about a year into a five-year development effort and things look very promising at this point in time. We are participating in a three-phase program, the first phase is a demonstration of the basic capability. The second phase is building very preliminary prototypes and the third phase is sort of low-rate initial production phase. I think we're looking forward to that. And yeah, everything looks good. There's no reason to believe that that won't be successful at this point in time. I think just to say a little bit about that technology, the idea there are dozens of advanced atomic clock technologies that are out there that are being investigated by universities and some of the national laboratories. And this program that we're participating in is an effort to bring those things from the laboratory and make commercially viable products. I think we strongly feel that this pulsed optically pumped rubidium standard is one of the most promising, if not the most promising approach and that's because it really utilizes a very refined and mature technologies that we're producing right now but adds just a few little elements in order to provide a big advance in performance. So we're pretty excited about that whole thing.

But it's a five-year time horizon to get to significant revenue.

I think it's fair to say, yes.

And have you interviewed any CEOs for the job? I mean, you don't have a background as a CEO of a turnaround situation, a very needy turnaround situation, a dire, an existential turnaround situation. And then taking that to a growth from whatever you're doing now, $30 million, $40 million in revenue to well in excess of $100 million. You have not done that, correct?

That's correct.

And how many people have you interviewed for this opportunity?

Zero.

Thank you. And there are no further questions in the queue at this time. I'd now like to turn the floor back to management for closing remarks.

All right. Thanks. I think at this point, we will close the call. I appreciate everybody who participated. Thank you very much, and until the next time, so long.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time. And have a wonderful day. Thank you for your participation.