Frequency Electronics, Inc. (FEIM) Q3 2023 Earnings Call Transcript

Frequency Electronics, Inc. (NASDAQ:FEIM) Q3 2023 Earnings Conference Call March 9, 2023 4:30 PM ET

Company Participants

Thomas McClelland - President and Chief Executive Officer

Steven Bernstein - Chief Financial Officer

Operator

Greetings, and welcome to the Frequency Electronics Q3 Fiscal '23 Earnings Release Conference Call. [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 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 turn the floor over to your host, Thomas McClelland, President and Chief Executive Officer.

Thomas McClelland

Thank you. With the Q3 results, we began to see the impact of the cost-cutting efforts and management reorganization, which has taken place over the last 7 months. Revenue and gross margin have increased substantially quarter-over-quarter, and the company is reporting an operating profit for the third quarter not only for the consolidated company, but also for each segment individually.

Many factors contributed to this. But I think importantly, we initiated an effort to recognize and promote talent within our existing workforce.

To this end and with encouragement from our Board of Directors, we have established a broad-based equity incentive program that rewards individuals who meet key performance metrics and aligns employee performance with both customer satisfaction and shareholder interest.

We see a market improvement in the overall morale of our workforce and have a sense that everyone is pulling together to achieve a common goal. FEI's backlog remains strong at quarter end, substantiating our confidence in the growth of our primary markets. Both commercial and government satellite businesses continue to show signs of sustained double-digit growth, going forward.

At this time, we anticipate the imminent award of several significant contracts. Although we still are experiencing supply chain issues and the effects of inflation, we do see a definite easing of these problems.

Continued vigilance is required to navigate the changing economic and geopolitical environment, but we're nonetheless confident that we're progressing in a positive direction and look forward to more improvement in results. The company is committed to moving towards sustained profitability and cash generation, going forward.

I appreciate the Board of Directors support in naming me permanent President and CEO, and I believe the Board has taken meaningful steps to enhance the company's value for its shareholders, customers and employees and that our best days are ahead.

We have truly unique technical and manufacturing capabilities, which are particularly well suited to the needs of the U.S. government and our other customers in the years ahead.

At this point, I'd like to turn things over to our CFO, Steve Bernstein, who will fill you in on some details.

Steven Bernstein

Thank you, Tom, and good afternoon. Before I go through the financial results, it's important to mention that even though we are not presenting FY '23 Q2, the company has made significant improvements from FY '23 Q2 compared to FY '23 Q3.

Sales increased $1.6 million or 18.6%. Gross margin went from 3.9% to 32.6%, and operating profit loss went from a loss of $2.28 million to income of $325,000. These are substantial improvements, and we continue to strive to make changes to keep this trend continuing.

The 3 months ended January 31, '23 consolidated revenue was $10.6 million compared to $12.2 million for the same period of the prior fiscal year. The components of revenue are as follows: Revenue of commercial and U.S. government satellite programs was approximately $5 million or 47% compared to $7.5 million or 62% in the same period of the prior fiscal year.

Revenue 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 $5 million compared to $4.3 million in the same period of the prior fiscal year and accounted for approximately 47% of consolidated revenue compared to 35% for the prior fiscal year.

Other commercial and industrial revenue were approximately $650,000 compared to approximately $400,000 in the prior fiscal year. The decrease in revenue for the 3 months ended January 31, '23 was mainly due to the timing of the various production phases for products in the satellite market.

For the 3 months ended January 31, '23, gross margin and gross margin rate increased as compared to the same period in fiscal year '22. The increase in gross margin and gross margin rate was due to higher engineering costs associated with programs in the development phase in the prior-year period versus the production phase during the current-year period.

For the 3 months ended January 31, '23 and '22, SG&A expenses were approximately 22% and 23%, respectively, of consolidated revenues.

The decrease in SG&A expense for the 3 months ending January 31, '23 as compared to prior-year period was largely due to a decrease in payroll and associated costs related to the previously announced workforce reduction. The company continues to monitor expenses looking for additional cost-effective reductions, going forward.

R&D expense for the 3 months ended January 31, '23, decreased to approximately $780,000 from $1.1 million for the 3 months ending January 31, '22, a decrease of approximately $345,000, and were approximately 7% and 9%, respectively, of consolidated revenue.

R&D decreased for the 3 months ending January 31, '23 are related to resolution of fiscal year '22 technical challenges to projects that are now 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 3 months ending January 31, '23, the company recorded operating income of approximately $325,000 compared to an operating loss of approximately $720,000 in the prior year. Operating income increased due to a combination of increase in sales over the 3 months ending October 31, '22, increased gross margin and effects of the changes management has instituted.

Other income consists primarily investment activity derived from the company's holdings of marketable securities. During the 3 months ending January 31, '23, the company liquidated its holdings and as a result, there was a loss recognized. This yields a pretax loss of approximately $313,000 compared to an approximately $734,000 pretax loss for the prior fiscal year.

It is important to mention, as a result of the liquidation of the company's holdings and marketable securities and the associated loss, the pretax loss would have been pretax income.

For the 3 months ending January 31, '23, the company recorded a tax provision of $3,000 compared to $1,000 for the same period of the prior fiscal year. Consolidated net loss for the 3 months ending January 31, '23, was approximately $316,000 or $0.03 per share compared to an approximately $735,000 net loss or $0.08 per share in the previous fiscal year.

Our fully-funded backlog at the end of January '23, was approximately $54 million compared to $40 million for the previous fiscal year ending April 30, '22. In addition, this is the second consecutive quarter in which backlog is greater than [$15 million], levels the company hasn't seen in years.

While some of this will turn into revenue and thus come out of backlog this year, we expect additional significant contract awards to be added to backlog in the coming quarters.

The company's balance sheet continues to reflect the strong working capital position of approximately $20 million at January 31, '23 and a current ratio of approximately 1.7:1. Additionally, the company's debt-free.

The company believes that its liquidity is adequate to meet its operating 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.

Thomas McClelland

Okay? At this point, we can open things up to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] We did have a question come from [Michael Eisner], Michael is a private investor.

Unidentified Analyst

Great job there. Revenue increased a nice amount. A couple of questions. Even after the dividend, am I correct that you still gain like $3 million in cash after paying out like $10 million?

Steven Bernstein

The actual cash went up about $1 million, but we don't have any marketable securities anymore.

Unidentified Analyst

So it's up. All right. But it did go up $1 million?

Steven Bernstein

Yes, a little over $1 million.

Unidentified Analyst

Which is nice. All right.

Steven Bernstein

Yes.

Unidentified Analyst

Last time, you -- GPS IIIF, I think you completed the qualifications on -- delivered the engineering, and they would -- I think they were testing it?

Thomas McClelland

Yes, that's almost correct. We completed the qualification. And we delivered a second unit, which has been installed in an experimental slot on one of the satellites that is slated to be launched in the near future. We don't know the exact schedule, but probably within the next 2 years, certainly maybe a lot sooner than that.

So that's on target, and we are currently in the process of finishing what's called the live test unit, which eventually will go under long-term testing at Naval Research Laboratory.

Unidentified Analyst

Okay. Was that -- one of your satellites, I think the GPS III, you were able to get one of your clocks on it? Not the IIIF, I thought...

Thomas McClelland

You're actually right. It's not GPS IIIF. The one that I just talked about is one of the GPS III satellites, which is slated to be launched sometime in the relatively near future.

Unidentified Analyst

Yes. All right. So that was good because you didn't think you're going to get on that.

Thomas McClelland

Yes.

Unidentified Analyst

All right. Are they -- are companies -- you mentioned that some of these big companies are buying more parts upfront. So if something goes wrong, they have the parts. Are they still doing that?

Thomas McClelland

Well, I think that's a general strategy. We're still doing that to some extent. But we do see that holds the supply chain situation improving at this point. And so we're trying to be just as efficient as we can in terms of managing our inventory of parts.

Unidentified Analyst

All right. Are there any more overruns or anything like that?

Thomas McClelland

No, nothing. There's no new programs where we have any significant concerns regarding overruns.

Unidentified Analyst

All right. And you kept your backlog about even from last quarter. And your book-to-bill ratio, I think Steve mentioned it, was it 1.7:1?

Steven Bernstein

Yes. It's now, for the year, 1.5:1.

Unidentified Analyst

1.5:1?

Steven Bernstein

Yes.

Unidentified Analyst

For the year?

Steven Bernstein

For the year.

Unidentified Analyst

You mean the -- for the first 9 months?

Steven Bernstein

Yes, that's correct.

Unidentified Analyst

All right. I think last time you gave that number, you were 2.8:1. Was that for the quarter or was that for the year?

Steven Bernstein

That was just that one quarter, yes.

Unidentified Analyst

All right. But do you know what it was for the year at that time?

Steven Bernstein

I don't have last quarter's number in front of me. No, but I can get it to you.

Unidentified Analyst

Yes. But you're happy with the 1.5:1?

Steven Bernstein

Yes.

Unidentified Analyst

All right. And several significant contracts you mentioned in the coming quarters, do you feel comfortable that they're going to have to come to you and buy them?

Thomas McClelland

Yes, we do. We have seen in several cases, things have moved out from what we anticipated last quarter, but we -- believe me, we're monitoring this pretty closely, and we see no indication that any of these things won't happen.

They move out a little. It's a pretty common thing in this business, but they're not going away. And there are some significant new things unanticipated even a quarter ago that we do anticipate coming in. Some of them actually within -- potentially within the next couple of weeks.

Unidentified Analyst

When you say pushed out, you've been pushed to the right just...

Thomas McClelland

Pushed to the right.

Unidentified Analyst

Yes. And that was a time I always used -- all right. So you should keep your backlog up then to continue?

Thomas McClelland

Yes.

Unidentified Analyst

Are these -- can you comment which -- are they government? Are they -- what type of -- can you comment what type of contracts? Are they classified?

Thomas McClelland

So most of our contracts aren't directly with the government. In fact, I don't think we anticipate any directly with the government. But in general, the government -- the U.S. government is the ultimate end customer. And I think the things we've -- we're talking about over the next year or so are mostly fit into that category.

Unidentified Analyst

Yes, because everyone -- you may get stuff from all around or some place like that. These are all necessary contracts is where I'm getting.

Thomas McClelland

Yes, I think you can say that.

Unidentified Analyst

All right. I don't know -- if you can't comment on something, just say, we can't comment. All right. Thank you. Great job. Your revenues went up nicely.

Operator

Thank you. And there are no other questions in queue at this time. I would now like to hand the call back over to Thomas McClelland for some closing remarks.

Thomas McClelland

Okay. I think I'd just like to thank everybody that has participated in this call. And I'd like to make it clear that if there -- anybody has any remaining questions, please feel free to contact us, Frequency Electronics, by telephone at any time. We welcome your calls. Thank you for participating, and have a nice afternoon.

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.