Frequency Electronics Inc (FEIM) Q1 2024 Earnings Call Transcript

Greetings, and welcome to the Frequency Electronics First Quarter 2024 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 releases and 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.

Good afternoon, everyone. I have a very positive message for shareholders today. From a financial point of view, we have very encouraging numbers to report. But even more importantly, there are a number of signs that we're on a sustainable path of growth and profitability. We have a lot of exciting new business as well as several very exciting programs, which we anticipate in the near future. In fact, we're really transitioning from a challenging period of cost cutting and reorganization to a period of growth. And we see the very real potential for acceleration of that growth over the next year. We now begin to face a different and frankly, more pleasant challenge of effectively managing this growth such that we maintain profitability and positive momentum over the long term. We've transitioned out of a period of workforce reduction and are now beginning to hire at all our facilities. And in fact, we faced the particular challenge of a very tight labor market, especially in advanced engineering fields, which are very important for our future. Well, let me briefly highlight the financial results before Steve fills you in on the details. Our revenue and gross margin have increased substantially compared to the first quarter of fiscal 2023 and the company is reporting an operating profit of $2.12 million compared to an operating loss of over $3 million in the same quarter of last year. Although the operating profit for the quarter is affected by several one-time items, even without these items, the company would have reported an operating profit of slightly over $1 million. The backlog of $51.8 million at the end of Q1 is close to the historic high at the end of fiscal 2023 and is up dramatically compared to $39.7 million at the end of Q1 last year. More importantly, bookings are expected to increase the backlog significantly over the next two quarters. So in summary, I believe our efforts have put us on a sustainable positive trajectory of growth in our core business. The company remains committed to achieving sustained profitability and cash generation going forward. So at this time, I'd like to turn things over to Steve Bernstein who will go through the financial details. Steve?

Thank you, Tom, and good afternoon. For the three months ended July 31, 2023, consolidated revenue was $12.4 million compared to $8.2 million for the same period last year. The breakdown of revenue is as follows: revenue from commercial and U.S. government satellite programs was about $5.1 million, or 39%, compared to $5.2 million, or 51%, in the same period last year. Revenue from satellite payload contracts is primarily recognized using the percentage of completion method and is recorded only in the FEI-New York segment. Revenue from non-space U.S. government and DoD customers, recorded in both the FEI-New York and FEI-Zyfer segments, amounted to $6.9 million, up from $4.1 million in the same period last year, accounting for approximately 55% of consolidated revenue compared to 50% previously. Other commercial industrial revenues were around $672,000, compared to about $664,000 last year. The increase in revenue for the three months ending July 31, 2023, was mainly due to government non-space programs. For this period, gross margin and gross margin rate increased compared to the same period last year. The increase in gross margin dollars is directly linked to the revenue rise. The gross margin rate grew significantly because of two main factors: many of the technical challenges from earlier last fiscal year have been resolved, allowing related programs to advance, and there were one-time contractual adjustments that improved the gross margin rate by approximately 8%. For the three months ending July 31 for both 2023 and 2022, SG&A expenses were approximately 19% and 24% of consolidated revenues, respectively. The consolidated decrease in SG&A expenses by 5% for the three months ending July 31, 2023, compared to the previous year was largely due to the revenue increase. R&D expenses for the three months ending July 31, 2023, dropped to around $506,000 from $1.1 million in the same period last year, a decrease of about $604,000, representing approximately 4% and 14% of consolidated revenue, respectively. The R&D decrease for this period was because dedicated R&D resources were focused on production orders to meet scheduled deadlines. The company plans to continue investing in R&D to keep its products cutting-edge. For the three months ending July 31, 2023, the company reported operating income of about $2.1 million compared to an operating loss of around $3.1 million in the previous year. The operating income increase was due to higher revenue, increased gross margin, and certain cost-cutting measures implemented by management starting in fiscal year 2023. Other income or expense net comes from various sources, including metal reclamation, refunds, interest on deferred trust assets, or the sale of fixed assets. Interest expenses relate to deferred compensation payments to retired employees. This results in pretax income of about $2 million for the three months ending July 31, 2023, compared to a pretax loss of approximately $3.1 million for the same period last year. For the three months ending July 31, 2023, the company recorded a tax provision of $7,000 compared to a $1,000 provision for the same period last year. Consolidated net income for the three months ending July 31, 2023, was about $2 million or $0.22 per share compared to a net loss of approximately $3.1 million or negative $0.33 per share from the previous fiscal year period. Our fully funded backlog at the end of July 2023 was around $52 million compared to $56 million at the end of the previous fiscal year on April 30, 2023. Notably, this is the fourth consecutive quarter where backlog exceeds $50 million, a level the company hasn't experienced in over a decade. While some of this backlog will convert to revenue this year, we anticipate securing additional significant contract awards in the upcoming quarters. The company's balance sheet shows a solid working capital position of about $23 million as of July 31, 2023, with a current ratio of approximately 1.9 to 1. Additionally, the company is debt-free. The company believes it has sufficient liquidity to meet its operational and investment needs for the next 12 months and the foreseeable future. I will now turn the call back to Tom, and we look forward to your questions later.

Thanks, Steve. And I'd like to now open this up to questions.

Certainly. At this time we'll be conducting a question-and-answer session. Your first question is coming from Brett Reiss from Jenny Montgomery Scott. Please proceed with your question.

Hi, Tom. Hi, Steve. Another good quarter.

Hi, Brett.

Hi. Your statement that you expect additional contract awards, can you give us a feel for what you're seeing that gives you this confidence that we'll see these additional awards?

Yes. Let me talk to that. I think we have a lot of things, frankly, several that we thought would come in the first quarter but haven't. We are somewhat frustrated by delays in initiating some of these programs. But we see no indication that they're not going to happen. I think, primarily, it ends up being sort of slowness on the part of our federal government, primarily. But these are programs that are definitely going to happen. And we're just very positive. Unfortunately, I can't make any specific statements about specific programs. But yes, it looks quite good. And I think we're in a period of time where we're frankly, kind of inundated with new requests for proposals and so forth.

Why is there this briskness of new proposals? What is going on in your world that things are percolating if you can describe it to us laymen out here?

Well, I think fundamentally, there's a long-term growth in the space market. I think that's the real fundamental thing. And more specifically, I think there's just a fair amount of activity. I think, to some extent, the sort of global events, challenges in Ukraine and things have stimulated an interest in space and there are classified programs that have gotten sort of a kick because of concerns about availability of satellites and so forth and so on. So a number of things, but I think fundamentally it's long-term growth in space.

Great. One last one, the headwind you face with a tight labor market for advanced engineering talent. How much of a headwind is that? And is there maybe a way around it? Since things are going along so swimmingly, could you do a small bolt-on acquisition to not only get a good accretive business, but kill two birds with one stone and acquire some of this advanced engineering talent you need?

Yes. Well, we're pursuing several paths in parallel in this regard. Of course, we are trying to directly hire people. And that I think is important in the long run because we really want to sustain a really talented, capable workforce. But in the short run, we are investigating working with outside sources of engineering talent that we can utilize on our particular programs. And of course, for manufacturing activities, we're also looking at outsourcing some of that work. Yes, so I think that's the basic strategy. And yes, let me leave it at that.

Thank you. I'll drop back in queue. Thank you very much.

Okay, bye.

Thank you. Your next question is coming from Michael Eisner. Please proceed with your question.

Great job, Tom and Steve. Things are going well.

Hi, Mike. Thank you.

Just a follow-up on Greg's question. If you use temporary people for engineering, they wouldn't be on your books, so you wouldn't have to pay all the overhead like health insurance and all that?

Yes. That's correct.

So that could work out nicely. The Office of Naval Research, are you getting some grants from them?

We have several contracts, R&D contracts with the Office of Naval Research.

So they cover the expense and you keep the technology?

That's correct. All right.

All right. That's nice. And you mentioned something about patented low acceleration sensor technology, which offers a 100 times improvement in performance. Are we the only ones that make this?

We're not the only ones that make it, but I think it's a technology that we understand and execute better than anybody else. I think it's like most of our technology. It's very specialized and it's not so much a question of having patents, but it's a question of having the expertise to implement these technologies effectively.

The gross margins are at 39%. Do you believe that you will be able to maintain the gross profit level of 35% to 40% through 2024?

That's certainly the goal.

All right. And years ago, there was inventory write-downs because it wasn't accounted for properly. Is everything going good with that?

Well, in the space business, inventory is a challenge because in order to meet schedules, we need to have some significant inventory of parts and material. But that being said, I think it's something that we're actively monitoring. And I think we have things adequately under control.

All right. That goes back years. I was just wondering about that. And what's the current book-to-bill?

Good afternoon. This quarter was 0.67.

But that you can't really look at on one quarter period, can you?

You are right.

You should more like go back one complete year, I assume, correct?

Yes, right now, yes.

Were you going to say something? Did I cut you off? I'm sorry.

No.

I look forward to hearing about the upcoming contracts. If you secure any, will you be able to share that information, or is some of it confidential?

I think there might be some exceptions, but in general, we'll at least be able to release sort of generic ad hoc statements, and we'll do that.

Just like a dollar amount.

Yes. Yes, without identifying a specific customer or application.

That would be fine. I would just like to see here that something is going on. And one final question, how many people do you think you need at this time throughout the whole company?

Well, it's hard to put a number on that. And we don't want to get ahead of our skis, so to speak. But we're trying to fill some key positions and at least be out there looking with some potential candidates so that when we get some of these contracts that we're anticipating over the next couple of quarters, we can move out aggressively on them. And we've also initiated some work with some outside engineering sources. And to some extent, that's sort of on an experimental basis. But I think it's pretty important when we need to develop a good working relationship with some of these groups so that when we do get new contracts, we can get things moving quickly. I think that in terms of a specific number, I hesitate to really say anything in this regard. Workforce perhaps 10%, 15% increase, but we'll have to wait and see how things develop in that regard.

I was going to ask, if you received work from a certain company, would you be able to utilize some of their engineers? Is that what you're aiming for?

No. No, I don't think we have any thought that we would be able to do that kind of a thing. But there are some resources out there and some companies with sort of the engineering talent for hire, and we're working with several of those at this point in time.

All right. Great job. Really in the last year, you turned the company around. Thank you.

Okay, thanks.

Thank you. We have reached the end of the question-and-answer session. I will now turn the call over to Thomas McClelland, President and Chief Executive Officer for closing remarks.

Well, I'd just like to thank everybody participating in this call. And since there are no further questions, I think we'll end at this time. Once again, thanks, everybody, for participating.

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