Frequency Electronics, Inc. (FEIM) Q3 2013 Earnings Report, Transcript and Summary

Greetings, and welcome to the Frequency Electronics Inc. Third Quarter 2013 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 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 the conference call. It's now my pleasure to introduce your host, General Joseph Franklin, Chairman of the Board for Frequency Electronics. Thank you, General Franklin, you may begin.

Thank you, very much, Kevin, and welcome, everyone. Thank you for joining us here for our third quarter conference call this afternoon. You have copies of our press release. I'm joined by Martin Bloch, of course, our Chief Executive Officer; and Alan Miller, our Chief Financial Officer, who will make the presentations. Let me just make a short introduction by telling you that, as I have noted, we continue to anticipate year-over-year growth here for what we're doing. Our Elcom acquisition is also improving as we had anticipated. It'll be a nice asset for us. We're making excellent progress in developing and expanding product line and have prototypes available for qualification later this year. We'll have a question and answer when this is finished, open to all folks who would like to call in and ask questions. I'll turn it over now for our financial presentation to Alan Miller.

Thank you, Joe, and good afternoon, everyone. For the third quarter, Frequency's fiscal 2013, we had revenues of $17.1 million compared to last year's $15.4 million or about 11% increase. Revenues from satellite payloads increased approximately 10% over the year-ago quarter and continued to account for about half of consolidated revenues. Revenues from U.S. government DoD non-space programs, which include sales by FEI-Elcom, are accounted for approximately 30% of consolidated revenues. Year to date, total revenues for U.S. Government/DOD end-use, both for space and non-space programs, account for 60% of Frequency's consolidated revenues. Network infrastructure revenues are recorded in FEI New York, FEI-Zyfer and Gillam-FEI were less than 20% of consolidated revenues. As we anticipated, FEI-Elcom's third quarter revenues increased by 25% over the preceding quarter. We expect fiscal 2013 consolidated revenues to continue to exceed the levels achieved in the prior fiscal year of 2012. This is based on our current fully funded backlog, over 3/4 of which represent satellite payload business, plus the potential for new orders. Higher revenues resulted in increased gross margin dollars of $6.8 million compared to last year's $6.2 million. The gross margin rate was 39.4% in the fiscal 2013 period compared to 40.2% last year. And this gross margin rate is impacted primarily by product mix with lower-than-target margins realized at our subsidiaries. For full fiscal year 2013, we expect to approach our target consolidated gross margin rate of 40%. SG&A for the third quarter was $3.9 million, compared to last year's $3.4 million. And this year, that represents 23% of revenues compared to 22% last year. While in [ph] fiscal 2013, we expect SG&A expenses to be -- remain about the same level or just over 20% of revenues. R&D spending in the quarter was $1.1 million as compared -- or about 7% of revenues as compared to $900,000 last year or 6% of fiscal 2012 revenues. For the full fiscal 2013, we anticipate that R&D spending will remain at less than 10% of consolidated revenues. Increased revenues in 2013 were partially offset by higher operating costs, such that third quarter operating profit was $1.8 million as compared to last year's $1.9 million. This result is 10.2% of revenues compared to last year's 12.6% of revenues. For the quarter, FEI-Elcom made a positive contribution to our operating profit as opposed to the $900,000 operating loss that they recorded in the first quarter of fiscal 2013. We anticipate that fiscal 2013's full year consolidated operating profit will exceed that of last year. Other income, which consist of investment income, offset by interest and other expenses, netted to income of $70,000 this year compared to net expenses of $369,000 a year ago. This yields pretax income of $1.8 million compared to $1.6 million last year. Now as for taxes, during Frequency's third quarter of this current fiscal year, tax legislation was passed, whereby, the company expects to realize additional tax credits, as well as taking advantage of previously suspended state tax net operating loss carryforwards. Consequently, the effective tax rate for the full year is now expected to be in the range of 25% to 28% of pretax profit. This now will depend -- the rate -- the actual rate will depend on the pretax income or loss at our foreign subsidiaries, which are nontaxable. Now to adjust for this lower rate, the third quarter tax provision is reduced to $300,000, thus, making the 9-month provision of $1.4 million at a 27% effective rate. Now as a reminder, Frequency's trailing 12 months operating results include the reversal of a tax valuation allowance, which skewed the tax provision and net income for the trailing 12-month period. We do not anticipate any similar recurrence with that magnitude in this current fiscal year. This results in net income for the quarter of $1.52 million or $0.18 per diluted share versus last year's $1.1 million or $0.13 per diluted share. For the quarter, we generated positive operating cash flow of $4.2 million, and year to date, we are positive of $3.2 million. Cash and marketable securities are at $21.6 million and offset by borrowings under our line of credit of $5 million. The interest rate on this line continues to be less in the yields in our investment portfolio. Year to date, bookings exceeded revenues, and our funded backlog at January 31 was $63 million, about the same as last quarter's but up from the $57 million at the end of last fiscal year. And about 70% of the backlog is realizable over the next 12 months, and as I indicated before, 3/4 of the backlog is for our long-term satellite programs. And finally, stockholders' equity at the end of January was at $82.4 million, up from $79.1 million at the end of last fiscal year. And this is after the December payment of our special cash dividend of $0.20 per share, which totaled approximately $1.7 million. I'll turn it over now to Martin, and we look forward to your questions later.

Good afternoon, everybody. When things are going well, my briefing is going to be very short. We see great opportunities on FEI products even during this very tight times because we have many solutions that follow the slogan on how to accomplish a lot more with less. That means updating existing platforms both on land, sea, air and in space rather than designing new platforms or new start. That gives the precision time and microwave sources that we built a great opportunity. Then the objective both for commercial and military space especially is to put more channels for existing platforms, which means a smaller, lower rate, less power modules, so you can put more hardware on the same platform. FEI has excelled in that type of technology, and that's where we are doing our major investments in the receiver, down converter for the -- with the same type of philosophy because that will give us a significant opportunity to capture, give more satellite, both commercial and military business. Our low g-sensitivity technology and ruggedized clocks are finding application of upgrading existing platforms. Our precision timing and holdover is getting a lot of attention right now to improve the security and to minimize a cyber attack on critical assets that we have worldwide. And that's another opportunity that we are pursuing on this. As Joe and Alan has indicated, we are looking forward to increase revenue and profitability for fiscal 2013 and beyond. I would like to open this to questions and answers, so go ahead.

[Operator Instructions]

Kevin, would please ask them to announce their name and organization so we know to whom -- who is speaking, and also to whom they address the question to, General Joe Franklin or Martin Bloch or Alan Miller.

Certainly, sir, absolutely. Our first question is coming from Jim McIlree from Dominick & Dominick.

And as the operator said, it's Jim McIlree with Dominick & Dominick. So my question, I guess, is for Alan, but anybody feel free to answer. In terms of revenue for the quarter, can you talk about the major programs that -- were there any programs that were over 10% in the quarter?

Close to. There's a couple of major programs that we're working on in the aggregate, a couple of military programs and the Iridium program is approaching it. But I haven't done the actual math on it to tell you that, that is the case. So in terms...

Basically, I -- we are asked by our customers not to associate dollars with programs, so that's why we're -- we're not trying to be invasive. We're just trying to honor the request of our customers. But I think quite a few programs came close to that.

Yes.

Okay. And then in terms of -- Alan, did you say what the bookings were for the quarter?

No, we didn't. But if you take the $17 million worth of revenue and $17 million of bookings, you end up with the same backlog quarter-to-quarter. So I guess they're about the same.

Okay, great. Well, that's answering it. So the bookings for the quarter, did those come from brand-new programs? Or were those additions to existing programs or a little bit of both? And can you characterize that $17 million of bookings for the quarter?

Yes. This is Martin Bloch. The answer is both. We've gotten existing pipeline programs and a few new ones that have entered into the arena during this period.

Okay. And one more and I'll get back in line. So when we look out for the next 12 months, are there any major programs that you expect to complete that would create a revenue hole that needs to be filled?

Not visibly at this time. We are in very good shape on this. Most of the programs that we have are fully funded. And when we talk about backlog, it's all funded backlog. It's not contract failure. As a matter of fact, we have a couple of contracts over there that are now not fully funded, and we expect them to be fully funded during this coming fiscal year.

But I'm talking more about finishing up a program. So it's -- I know that Iridium is not even close to being finished, but that might be something. So in 2015 or '17, when that's done, you have to worry about filling that hole. Are there any large ones in the next 12 months that you'll be done and so you have to worry about how to fill it?

Not that I see at this time.

Our next question is coming from Lawrence Goldstein from Santa Monica Partners.

I have a couple of questions. The first one is very picayunish and immaterial, but I'd like to ask it out of curiosity. How -- who writes your press releases? And I ask that because I've never seen a press release like yours where you tell us the percentage increase in the revenues and you don't say a percentage for the net earnings. And since your net earnings are up so much, it struck me particularly odd. Who writes them? And why don't you do that? [Technical Difficulty]

We are experiencing technical difficulties.

Excuse me, when I -- excuse me, I asked the question and it went dead silent. I heard nothing then.

Well, you see what an important question it was. This was Martin, yet it was so pronounced that I had to cut you off. Now can you ask the question again? And what is the objective of the question?

I said I'd like to ask a couple of questions. My first one is very picayunish and immaterial, but it's got the best of my curiosity, which is who writes -- who wrote the press release? And I ask that because it's interesting to me, I've never seen anything quite like it, where you tell us the revenues went up X percent and you don't say the profits went up Y percent, which, in this case, was quite significant. And I'm just curious why? Why not?

I will chastise the committee. Good comment. This is Martin Bloch. I'll make sure they never do it again.

No, I'm asking the question. Who wrote the press release? And why is it...

I'm telling you, it was written by committee.

Internal.

Written by a committee.

Internal committee, and I'll chastise them. They'll never do that again.

Okay. So was it purposeful or not purposeful?

No, no.

No, no, justly carelessness. My apologies.

Okay. Now a serious question. What 7 things do you worry most about with respect to the future? Actually, you made a very straightforward and assertive statement that the rest of the year and next year, you expect to be increasing very positive, I forgot your exact -- the language. But given that, you must have some concerns that you won't do as well as whatever it is you hope to do. And I'm wondering what are your biggest concerns? What are you biggest worries? What could go wrong?

This is Martin Bloch. Well, we identify all the risk factors on a day-to-day basis on all our programs and assign the corrective action tools to eliminate them. I can't see -- I can't visualize anything that will go wrong because we don't have all our irons in one part, and we're involved in such a multitude of programs. We are now supporting someplace around 14 satellite programs. So it isn't like one, if one goes away, it spells disaster to the Frequency. And at the same time, we are actively engaged in 2 areas. One is to submitting a lot of new proposals for oncoming, both military, commercial and DoD work. So this is one area. We're not sitting on our laurels because we have a good backlog, and we're doing great, and we are waiting for manna from heaven. This is one. And the second is we're investing a lot of our time and energies in the; next-generation products that will offer us much larger opportunities. So instead of worrying of what risk is we are mitigating the risk. We are examining them and taking corrective action. And by the way, this is a discipline that we are very good at because every space military program especially is, if you would be present to any design review, one of the things that we have to present is what it -- that's the exactly answer your question. What could go wrong? What are the risks? And what are you doing about to mitigating the risk and how do you to minimize it and eliminate them? And we apply the same to our day-to-day business and to our future. So in short and long, I, at this time, don't see any catastrophes that can happen.

Really. Well, that's mighty refreshing that you feel so strongly and delighted to hear it. So are you saying that we will go back in time to -- I forgot what year -- 2002, 2003, when -- what was the stock, $30?

2000, yes.

Well, I can only focus on the business and doing the best we can. On this, I don't propose to have any power of what the value of the stock is on the marketplace. I'm not God.

Well, it's interesting not to see -- maybe I missed it -- not to see any of the officers or directors buying the -- in securities in the last year or 2 in any material way, and so that's odd. I guess you're happy to let the rest of us profit but not you guys. Is that it?

I think that's only fair. We have a good chunk of the securities. Now we want everybody to share in our good fortune.

Our next question is coming from Michael Amari, a private investor.

Look, I'm very happy that you declared that $0.20 special dividend. But really, what differentiates Frequency from most of these small companies is your history of paying quarterly dividend. This way, you will have most funds that are interested in stocks that would dividend are able to buy the stock. Now in spite of the fact that you paid the dividend, I see your cash is still about above $21 million. I think having a couple cents a quarter will not hurt you guys and would help us very much in terms of having a company that is producing income in spite of the fact that it's growing beautifully, too. And I'm glad, finally, you're finding a niche that is really beautiful, and that is the satellite is working out very well for you.

Michael, just a correction, we have never paid quarterly dividend. We have paid biannual dividends.

Yes, that's correct. That's correct.

Okay. And I just want to tell you that every Board of Directors meeting, this is discussed. And at this time, we are looking for opportunities that are -- that will help our growth and profitability. And the decision was made that, that's a better use of cash than distributing to the stockholders. But we always keep dividends on top of our agenda, and we'll review it on every board meeting. And I promise you, it will be reviewed on our next board meeting, which is July 12.

Our next question is coming from Sam Rebotsky from SER Asset Management.

So look, this is a very good quarter with good earnings. And your objective, I think, was $25 million per satellite, I mean, that's the amount that you could get up to? And you're up to $10 million? Is that the right numbers?

Yes. Let me lead you through from the beginning. When FEI started in the space business, we were providing only the clock, which was about $0.5 million to $1 million per satellite. We then introduced, and very successfully, the microwave Frequency sources and synthesizers, which pulled us up to between $5 million and $10 million per satellite. And the next crunch, which we are after, is to complete our development and qualification of the Ku and Ka band receiver, down converters, which will give us an opportunity between $25 million and $40 million to $50 million per satellite. And we are working very hard to get it completed. And in this calendar year, with brass board in the next couple of months, and then introducing the product before the end of this calendar year to the industry. And that's our game. So with the same number of satellites that are now being planned, we'll have an opportunity to significantly increase our revenue.

And how many satellites are you working on now per year?

Well, at this time, depending on some of the development and experimental and lower and synchronous, I would say probably 5 would be called major synchronous orbit satellites; and probably another 10 low-orbit satellites; and maybe another 2 or 3 host payloads.

All right. This is good. So you have a good game plan internally to grow the numbers and the sales and presumably the profits. The profits, will they increase more proportionately the more you participate in the satellite?

No. Our profits will increase very significantly because being in a satellite business, you have a certain amount of fixed expenses. If you do $10 million, you need a $10 million support organization. And if you do $100 million, maybe you need an $11 million support organization. So our margins will significantly improve as we improve the volume.

That sounds good. Now Alan, we spoke that we're going to add to the fourth quarter some of the tax loss NOL but did not significantly as we did last year. What is the maximum we could add to the tax loss benefits?

Well, we have a couple of state tax NOLs. Well, we actually acquired one from Elcom, which is limited each year. But the one we -- I was referencing is the state of California. We have some NOLs that were incurred several years ago, and the state of California had suspended utilization of those. They just recently freed that up. So we'll probably absorb that whole. It was about $2 million NOL that we'll absorb in the state of California this year.

And what about federal, fully utilized ...

No, we don't have any federal NOLs other than the one we acquired from Elcom, and we're limited about, roughly, about $0.5 million a year. The tax rules are such that you can't take the full benefit in one fell swoop.

Okay. And the opportunities that we're looking at, what kind of size are they? And would we like to close them in the next quarter, 6 months? What kind of opportunities are we looking at?

Well, we have lots of outstanding proposals ranging from $0.5 million to $20 million per opportunity. And that's the one thing in our business which is very difficult to predict, on when they come to fruition. So we support our customers, and we are continuously adding to those opportunities.

Okay. It was a nice presentation...

Are you asking about acquisitions or about business?

Oh, the opportunities or acquisitions are up or just contracts?

Well, they're both. I answered you for contracts and, the opportunities for adding to our vertical line is in the same $10 million to the $20 million range.

Yes. Do we think it's realistic in the next year to close one of those or...

Definitely.

Okay, okay. Now your presentation at Needham was very good. And I'm not sure if everybody got a chance to listen to it. But in reference to people knowing about Frequency and getting a greater valuation for the stock. Do you have any plans to be a little more aggressive in telling your story, so people know who you are?

Yes.

Where do you expect to do this?

Well, Alan will -- formulating the plans and opportunities, and we'll let you know. Maybe it's a good idea to announce the areas that we'll participate in presenting.

Yes. We don't have anything on the agenda right yet, but...

Okay. We will let you guys know as soon as we formulate -- finish formulating our plans.

And 1 further thing, the $0.20 dividend, even though after the dividend was announced, the stock went down, but immediately and soon thereafter, they forgot about that it went down, and then they started going up again. So dividend didn't hurt the stock.

Thank you.

Very grateful for that.

[Operator Instructions] Our next question is coming from Frank Barresi from Ameriprise.

And anyone can answer this. But first off, on the -- right now you can do $5 million to $10 million per satellite. I was wondering what you're getting per satellite right now. I mean, what's the revenue, approximately, per satellite at the present time?

Right now, the major satellites, we are getting between $5 million and $10 million per satellite. And by adding the next series of equipment, which we have legacy and space on, so it's easy for us to enter, we opened the opportunity of increasing this from $25 million to around $50 million per satellite.

Okay. So you are getting the $5 million to $10 million now.

Absolutely. [indiscernible] for that type of value.

Okay, okay. And the product will be available by the end of the year. And so you think -- will this be like then a 1 to 2 year before you -- or any idea how long before you can start generating that additional revenue?

I would say, definitely, by fiscal '15 or sooner.

Fiscal '15. Okay.

Within a couple of weeks, we're in fiscal '14. So even if we're successful in booking a major program in fiscal '14, we are not going to be able to recognize much of this revenue until fiscal '15. We're right on target. And we have many opportunities. And our customers are encouraging us to complete this because their -- because of our legacy of 50 years in space with great reliability. We've had almost a flawless history of over 6,000 products in space.

And you will have, you think, much lower cost in this, the Ka band at all, than the competitors that are already there?

Yes. Most of our competitors, by the way, are our present customers. And that's an opportunity that presents itself to Frequency at this time because the time has come where, especially DoD, has changed from cost plus to fixed price contracts. So there's a lot of pressure on the major satellite integrators to really be cost effective. And our model is going to be significantly lower in cost, smaller in size, less power. And also, what is very, very important is less weight, because the name of the game is to put more channels on a same platform. The weight becomes very paramount. So sometimes, entering a little bit later allows you to really address all of the features that are important for success.

Okay, okay. Real good. And getting to the earnings opportunity then. I didn't quite catch what you said. You were saying that if you had so much revenue, you'd be a $100 million, where I think you said you need $11 million...

Okay. All right. I understand the confusion. Let me tell you. To be in the satellite business as I -- and I used -- I don't know if it's $10 million, $9 million or $11 million, but yes, the fixed cost, like having the quality control, all of the physics laboratory to support a satellite business, and that is almost fixed independent of volume. So if we spend, right now, $10 million on those fixed cost at $30 million of satellite, if we spend $100 million, this will increase very little. The only thing we would have to produce in the additional is the touch labor. So it's very profitable as you increase the volume.

But some of that fixed cost is in the gross margin?

Sure. In the cost of sales, the fixed cost is always part of the overhead. But what Martin's simply saying is that we certainly expect to see our gross margins increase as we get higher volume, because you cover more of that fixed cost more readily.

Okay. And then this opportunity to double or triple revenue will start to happen within, say, 1.5 years or something like that, begin to develop. But this coming year, you expect growth but not anything too -- in percentage terms, it doesn't look like it'll be anything too large or...

Yes. That's a good assessment. With our present backlog and programs that we have coming in, we expect that we'll have growth in revenue and profitability for this year and beyond. But significant is when the new products enter into the play.

Okay. All right. Then on -- another question on these net operating losses. When you say, like, $2 million dollars, the state of California, you mean there's $2 million of the net -- is that $2 million in tax savings or $2 million...

That was the amount of losses that we'll -- we'll probably absorb it all this year, if we have a $9 million, $10 million pretax number, it'll be $7 million in California. So whatever the tax rate is in California, we'll get the benefit of that. It's not a huge number because I think it's only, what, about 11%, 12% corporate rate or something of that nature.

Okay. And that was on -- did you say it was $7 million in California?

It was $2 million, is what we're been carrying forward.

Okay. $2 million in California at maybe 11% or something like that. All right.

Whatever tax rate is, corporate rate is in California. It all depends on the apportionment and there's complexity to it. It's not a huge number, but it's enough to take down the effective rate.

Okay. All right. And then are there acquisitions -- you're talking about these different acquisitions. Are there acquisitions where there's an immediate opportunity to generate additional revenue per satellite? Are...

Yes.

Okay. And so that would be something that could -- I don't know if it could move things forward sooner than fiscal '15, but...

Well, that's what our objective is. But until it's done, it's not done. Right?

Yes, right. It doesn't count until.

And I want to thank all the employees of Frequency that are helping -- making a great job.

Our next question is coming from David Starkey from Morgan Stanley.

Morgan Stanley is the new name. Just a quick -- couple of quick questions for you. I've been listening on the last few calls. I haven't asked any questions but I've been pleased with the progress you guys are making. And on these new products coming here, prototype in the fourth quarter, Ka, Ku band receiver, down converters, these are -- are these the main line that you expect to do this doubling of business plus in the satellites over the next couple of years? Is that the products? Or are there other products that are still to come after that?

Those are the main products because they have -- it's the low-hanging fruit. They have immediate application and satisfaction because the name of the game for both commercial and military satellite is to put a lot more channels per satellite that are not existing to increase revenue with minimum in new IR&D. So that's the market we are attacking first, and then they are going to be the main type of low-hanging fruit we're going to go after.

Okay. How can you get these products out the door without sort of stepping on the toes of some of your current customers? And how can you...

Well, that's a good question on this. But we have done this with the microwave generators. And this is initially, we would supply and they have Frequency standard to our major customers, and they would feel the wrap-around electronics. We convinced them that we can do it better performance and lower cost. And they had the incentives to get better performance. Now they have the challenge of getting better performance and significantly controlling their costs because of the fixed price contracts that most of them are forced to take. So yes, there's going to be some internal friction since we are taking it away from our customers. But I believe and I've discussed with many of them, it will be welcome because their overall responsibility of getting business is to use their expertise to win jobs, not necessarily to build hardware that they can buy from someplace else.

And you're not worried about patent infringements and things like that on some of these products? Are you able to engineer them differently? Or how...

We have no -- there's no patent infringement. It's a technology that FEI has and that has flown. And that's why we expect to have fairly fast entry. Somebody else would start for this product line, it would take them 5 to 7 years after they have developed the product to establish legacy in space. We have flown receivers very successfully and down converters. What we are now trying to do is just optimize them for the new application. So we have the legacy for entry.

So you're expecting prototypes actually this quarter, then, to be available, right?

We are expecting brass boards in the next 2 months.

Okay, great, great. So the qualification this year, is that this fiscal year or this year or...

Calendar year.

So it's the calendar year. Okay, so summing it up, over the next 6 months, you'll be -- or 9 months, you'll be getting them into some customers to evaluate.

That's correct.

Okay. Okay. And I guess that's about it. I just wanted to let you know, it looks like a pretty steady, solid pace. Your backlog, any change there since the end of the last quarter, remaining fairly stable?

That's pretty stable at this point.

Okay. So you're -- and so do you have a threshold of where you're announcing orders? You've had about $17 million in orders here last quarter. You didn't really announce more than that one quarter for one of your subsidiaries, that one order. Is there a particular size level of per order that you wait to, to be able to announce? Because again, you don't get a whole lot of news out there between the quarters. It'll be nice to have a little bit more flow from you guys more than every couple of months.

I think it's a good suggestion, and we'll take it under consideration. And I'll tell you, in many cases, it's the objection of our customers that are very sensitive about release of contracts. But we'll take your suggestion in good faith and see what we can do.

Our next question is coming from Michael Iser [ph] from -- a private investor.

One question. After the Ku and Ka band, what areas of growth do you see?

Well, that is a very, very large lump to swallow. And then, of course, the adding of this transponder, similar to what we have developed for Iridium, is going to be our next objective. Which is basically making a more complete sub payload for our customers.

All right. So this is, like, over the next 2 years, this is going to be the big area for you guys.

That's what our objective is, yes.

And that's where you see the most -- the quickest growth?

The quickest growth. Low-hanging fruit.

Our next question is a follow-up from Lawrence Goldstein from Santa Monica Partners.

Is the world radiological organization satellite launchings a good source of predicting -- anticipating satellite launchings? Or there must be something actually better. What is the best site to see the number of launchings predicted for the future?

I think space news occasionally put it, but I'll tell you, give me -- Alan, write down the telephone number, and I'll speak to Olie Mancini because he gets the report on a quarterly basis on what is the planned number of satellites over the next 10 years, and I'll give you the publication. So, Alan, write down name and telephone number.

Larry Goldstein.

Larry Goldstein. What's your number, Larry?

Give me your number, and I'll call you with it afterwards. I don't need the world to have it.

Okay. Okay. Call Alan Miller and he -- by that time, hopefully, we'll have the answer. Call him tomorrow.

I think that will be direct. Do you want my direct number?

Sure.

(516) 357-2407. Now the world knows.

Okay. Well, your number's -- anyway, a second question is, is there any of your business going to military, specifically military uses? I don't mean a satellite that has military use. But anything else?

Yes.

What percentage, or what amount of your business now and as you see it going forward, is military related? And do you see any of this vulnerable to what, obviously, are going to be cuts in military?

Well, on the contrary, not in our technology. And I'll explain why. We are providing technology to upgrade existing platforms. Yes, there's going to be significant reduction in new starts. We're not going to develop new platforms because they cost $20 billion to $40 billion to make a new platform. But we must, in order to be able to respond to upgrade our existing platforms -- and this is the business that we are attacking with our ruggedized low g-sensitivity clocks. And we see lots of opportunities in there instead of a decrease.

And by the way, do you have anything to do with atomic clocks and crystals used for them?

Of course. We are the...

So you -- I mean, you purchase all the crystals? You're not making any.

No, no, this is one of our greatest secret asset that we have. We want to make sure that we outsource whichever we can for economy, but there are 2 technologies that are key at Frequency from raw material to finish products. And that's we make the quartz crystal resonator from the raw rock to the finished product, and we make the atomic clocks from rubidium chloride all the way to the finished clocks that can be for satellites between $1 million and $5 million a pop.

Do you sell atomic clocks to others?

We sell it. We provided a lot of atomic clocks...

Or crystals? Yes?

We provide atomic clocks, like on one of our largest present program is the atomic clocks for the GPS 3 program.

And do you sell crystals to others?

No. We only make them available to our -- to very critical programs that run into problems. Otherwise, we only make crystals for our own use. For 2 reasons: one is we don't want to compete with ourselves; and the second is even more important, is most people on the outside don't know how to use them properly.

Our next question is a follow-up from Jim McIlree from Dominick & Dominick.

Alan, the inventories in the quarter were up. It looks like $2.5 million, a little bit shy of $2.5 million. And they've been growing for the past 12 months, as well, they're up $6 million over the last 12 months. Is there -- when is the peak in that inventory level? When do you expect those to start climbing?

I would suspect it's probably much -- the peak is probably right about now. By the way, the year-over-year comparison, of course, is without Elcom. [indiscernible] Elcom, we had about $2 million of that increase. But in terms of the near-term growth that we've experienced, we have a couple of major programs. Iridium is an example of that, that have been going through basically the design phase, and they're getting close to the production phase. And so the whole bill of materials has now been determined. And they've gone out and bought a lot of materials. But we can't put into the production pipeline just yet until we get the design fully approved and get ready to go on the production side. So we've been building up some parts inventory to respond to some of these major programs that are going into full production shortly.

Great. And that leads to my second question. Of the total revenue, approximately, how much is associated with design versus how much is associated with production?

I don't know that we really keep track of that, that carefully. This is all -- we look at it as a full program. So I don't have the answer at the tip of my tongue on that one.

Can you repeat the question? I'm sorry. This is Martin Bloch. I didn't understand it.

Sure. So programs go through different phases. There's the design phase and then there's the production phase. And so my question was, how much of the quarter's revenues came from that design-type activity versus production activity?

Alan is right. I don't think we keep good enough record to give you a precise answer.

[indiscernible] answer, no.

As there are no further questions, I'd like to turn the floor back over to management for any further or closing comments.

Thank you, all, very much. We appreciate you tuning in. And thanks to you also, Kevin, for a very nice job. As Martin has already said, we want to thank particularly our folks that do all the real hard work here at Frequency Electronics who are listening in on this. And we look forward to speaking to you, all, in July, when we'll have our year-end report for you. Thanks, again. Good luck to everybody.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.