Frequency Electronics, Inc. (FEIM) Q2 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to the Frequency Electronics Second Quarter Fiscal Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. An interactive question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host, Mr. Joel Girsky, Chairman of the Board. Thank you. You may begin.

Good afternoon, everybody. This is Joel Girsky, Chairman of Frequency Electronics. Sitting alongside of me Martin Bloch, President and CEO of Frequency; and Steven Bernstein, our CFO. And at this particular point in time, I would like to turn this meeting over to Steven -- maybe to Martin and Martin can do some other introductions. Thank you.

Welcome everybody. As usual, Steve Bernstein is going to go through the financials highlights and then I will make some comments and observation on present and future, and then open the session to questions and answers. Steve, please proceed.

Thank you, Martin and Joel, and good afternoon, everybody. You should be receiving the press release shortly, it should have been issued. In Q2 of fiscal 2017, satellite revenues represented approximately 33% of consolidated revenues compared to approximately 58% of consolidated revenues in the same period of fiscal 2016. In dollar terms, it was down $5 million. As was the case in previous periods, this was primarily due not to cancellations but delays in contract awards, many of which are sole-sourced to Frequency Electronics. Revenues from non-space U.S. Government/DOD programs, including sales by FEI-Elcom and FEI-Zyfer rose to approximately 43% of consolidated revenues in Q2 of fiscal 2017 of approximately 5.6 million compared to approximately 28% of consolidated revenues in fiscal 2016. Revenues from network infrastructure and other commercial products that are reported in the FEI New York, Gillam-FEI and FEI-Zyfer segments were approximately 24% of consolidated revenues compared to approximately 14% in the prior year. Gross margin was $4.1 million compared $5.2 million last year, yielding a gross margin rate of 32% in Q2 of fiscal 2017 compared to 33% in the prior year. The decrease in gross margin percent results from higher cost product mix as well as a decrease in sales. SG&A expenses were $3.3 million as compared to prior year’s $3.2 million. Although the net dollar amount of SG&A remained comparable to the net dollar of SG&A of the prior year, the percent increase reflects the results of lower revenues. Absent onetime expenses relating to legal and proxy filing cost, SG&A would have been closer to our target percentage after giving effect of lower sales. Internal R&D spending in Q2 of fiscal 2017 increased to $2.2 million or 17% of revenues compared to last year’s $1.9 million or 12% of revenues. During period of lower customer shipments, the Company can and will allocate increased available engineering resources to necessary R&D projects. Operating loss was approximately $1.3 million compared to an operating profit of approximately $48,000 last year. Operating profits were impacted by decrease in revenue, as mentioned earlier. Other income, which generally consists of investment income offset by interest and other expenses, netted to income of $159,000 in Q2 of fiscal 2017 compared to a net income of $63,000 in the same period of fiscal 2016. The increase was due to a dividend received from Morion. This yields pre-tax loss of approximately $1.2 million compared to pre-tax income of $112,000 for the same period last year. The provision for income tax is a benefit of $164,000 compared to an expense of $180,000. The change in tax is due to a domestic operating loss. Net loss for Q2 of fiscal 2017 is approximately $1 million or $0.12 per diluted share compared to $69,000 loss or $0.01 per diluted share for Q2 of fiscal 2016. Our backlog at the end of the quarter was $39 million, up from $36 million last quarter and up from $32 million at year-end. During the second quarter, we used cash in operations in the amount of $2.5 million compared to $2.9 million in the same period last year. Frequency continues to maintain a very healthy balance sheet with a working capital position of over $75 million. I will turn the call back to Martin and we look forward to your questions later.

Thank you, Steve. Just some general comments as Steve has indicated, although we had losses for the six months, I see that operating profit for the year will be positive and we will not of course have this onetime expense of the proxy filing and legal costs which impacted the profitability, also the mix of products for the next six months, look very good. I want to comment on what has happened with the decrease of satellite business. As you probably know, our business depends a lot on what our customers get. And all of the plans for the satellites, they didn’t go away but they just shifted to the right because the service providers are revaluating their configuration of the satellite they want to launch in the future in order to provide the necessary service as they see coming on line. And we have seen and heard from our customers that they expect them to start releasing satellite programs at the end of calendar 2016, beginning early part of 2017 and of course that will benefit FEI. We have seen the beginning of it with this $7 million three contracts that regarding November. And we actually expect that the majority of those contracts to come in, in June of 2016, and they also moved to the right, but we’re happy to increase our backlog with those units. We have a couple of very exciting areas of business. Satellite is of course our bread and better, but we are also very heavily involved in secure communications technology, and this is basically to protect secure communications from jamming and scooping, which is so easily done with a GPS system, and we have had great success in developing hardware and starting to implement them in the field. We expect that that portion of the business will mature [ph] considerably over the next period of time and is probably the most exciting new business area that FEI has seen happening in a long time. We are very excited and we expect that joint technology of FEI New York and GPS technology of FEI-Zyfer in California will be able to benefit from it greatly. With respect to FEI-Elcom and as we see the potential of the programs coming to fruition in the next three to six months, we also want to emphasize that we have very successfully employed FEI-Elcom technology in space hardware. So, they are a good partner and we expect them to be profitable this year or close to breakeven. Steven, is that right?

We’re expecting those to be that way.

We have utilized the free engineering time very effectively in the improving of existing products and development of new products, both for satellite and secure communications. The new satellites will use the same platform, so they’ll need a lot more hardware, more channels in order to provide the bandwidth and the high definition video. So, there is a great emphasis on reducing hardware size, weight and power consumption since 40 transponders will have to go to 140 transponders. So, we have looked at all hardware and invested the necessary engineering effort to meet that new challenge and we are making great progress in that as well as developing the new precision timing sources that is required for the new challenging market of secure communications. I think, I’ve talked too long. I would like to turn this over to answers and questions. I would appreciate if you would address the question to either me or Steve Bernstein, so we can be effective in answering you.

[Operator Instructions]. Our first question is from Sam Rebotsky from SER Asset Management. Please go ahead.

Yes. Martin, I’m very disappointed with this loss?

So am I.

Okay. Now, the backlog, $39 million, that’s fully funded and that includes the $7 million, I assume.

No, it does not include the $7 million; this is the backlog fully funded as of October 31st.

So, we have an additional $7 million as of now. Is there any other backlog that we should add to this $39 million?

Well, whatever we book and we are allowed to release, we will notify you.

Okay. Now, the $7 million you indicated is supposed to be completed by the beginning of 2018. When do you start that 7 million and…

Yesterday.

What?

Yesterday.

Yesterday, okay. So, is it frontend loaded or backend loaded as far as the $7 million or equally?

About probably -- except for material, all the labor will be equally, but the material will be front loaded on this. A lot of the material that we need for those programs, since these are follow-on research programs that we have invested previously, will come from inventory. So, there will be frontloaded and work in process from our existing inventory but the labor will be uniform until the end of calendar 2017.

And also we say we’re going to be profitable for the current fiscal year, are we going to be…

Operating profit.

Not net profit?

I don’t know about net profit, I’m not a good accountant. I can tell you that operating profit will be positive.

Well, Steve, he is the expert.

Probably the same.

Yes. I would definitely go with what Martin says. And again, we will advise you, as the quarter, the next quarter happens.

So, at this point, you can’t say whether you’re going to be net profit. And what about, in other words, is it take the whole next six months or what about -- are you going to be profitable as of the third quarter of -- you lost $0.20 so far, do you think $0.20 or better by the second quarter, what’s the deal?

We plan to be profitable in the third quarter.

No, but do we make up the loss for the $0.20 by the second -- the third quarter?

I don’t think we can fine tune it that closely at this time, Sam. We will keep you guys informed.

Okay. Now, as far as the annual meeting, we discussed we’re looking at acquisitions, what’s been going on there, have we found anything?

As soon as we conclude with anything, you will be the first one to know.

No, I don’t want to be the first…

We’re looking at opportunities. And as soon as we conclude on anything, we will immediately notify all the stockholders including you.

Okay. Why do we need to shake out more contracts? Why do we need and what is the number that we expect to get eventually by the end of the six months that we can make profits on a regular basis?

Well, we expect -- normally, our book to ship ratio is about 1.1 to 1, and we expect to book the same thing in fiscal 2017.

But, what we are shipping is not profitable; you need more than 1 to 1 to get to be profitable?

Well, remember, you asked me, are we going to be profitable in the third quarter? The answer is yes. Are we going to be profitable for the year? The answer is yes. The exact booking is something that I wish would be the type of a profit because the contracts that we booked in November we expected in June.

Alright, yes.

They sure moved to the right.

Alright. I’m going to let somebody ask a question and hopefully you give them some good answers.

I’m going to give them truthful answers.

Truthful, okay. Thank you.

Thank you.

[Operator Instructions] And our next question comes from Michael Eisner, [ph] a private investor. Please go ahead.

You had two contracts since end of October just so everyone realizes; you had the one in November and the one in December. My question, what about Gillam right now, is any update on that?

We’re trying to solve the issues on Gillam and we might -- we have an opportunity to possibly divest Gillam since their product line is no more of interest to us.

So, between the Gillam and the proxy site, you could have broken even?

You got it.

So, how much of the proxy site cost you?

On the grounds that I might incriminate myself, I cannot answer that question exactly, but it was significant.

That was a lot of the losses? Alright. One more question. I am sorry, go ahead. Martin, were you going to say something?

I said it was a significant portion of the loss.

Alright. On the satellites, you got three small contracts; they could be add-ons to that. How big do you think those to go, are those going to be big contracts?

They can be significantly more than the present level of the contract. There are lots of -- these contracts have long legs.

So, could go on for years?

Go on for years and some of them we expect will break in the middle to the third quarter calendar year 2017, very exciting contracts.

Which is very soon?

Nine months -- seven to nine months from now.

Alright. Why was that -- it was three separate companies or three -- how is it broken up?

I can’t tell you that because it’s secure contract and we cannot give any of those details, Mike.

I understand. All right. Thank you.

Thank you, Mike. Welcome back.

[Operator Instructions] And our next question comes from Sam Rebotsky from SER Asset Management. Please go ahead.

So, Martin, I’m back. So, the Gillam will be sold or divested in the next quarter or the last quarter or…?

We expect to have something to report probably before the end of calendar 2016.

And what is the losses we experienced in Gillam?

Steve, what is it, about $0.5 million?

A little over $0.5 million for the six months.

For the six months, okay. And so, we don’t have to provide any additional cost to sell Gillam?

That’s correct.

Okay. All right. Hopefully, we get rid of it and become more profitable. Good luck.

That’s our goal and that’s our obligation.

Okay. Thank you.

Thank you.

Our next question is from Mike Eisner, a private investor. Please go ahead.

Just to follow up on Gillam, we’re not going to take a one-time hit?

Are you talking in cash or book?

Cash, both actually.

No. Cash will be definitely positive; on book, I don’t know; we’ll have to analyze it then. But the important thing is to get significant positive cash transaction; that’s our objective.

Excellent. Thank you.

Thank you. This does conclude the question-and-answer session. I would like to turn the floor back over to management for any closing comments.

Okay. Again, thank you all for listening in. We expect again to have an operating profit for fiscal 2017. I want to wish everybody a happy and healthy New Year. And my appreciation to all FEI’s employees that have worked very hard during this stressful time. Again, have a happy and healthy year.

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