Frequency Electronics, Inc. (FEIM) Q4 2018 Earnings Report, Transcript and Summary

Greetings and welcome to the Frequency Electronics Year-End 2018 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 releases 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, Martin Bloch, Executive Chairman of the Board of Frequency Electronics. Please go ahead, sir.

Thank you. Welcome, everybody. I have with me Steve Bernstein and Stan Sloane. And I will first turn over the agenda to Steve Bernstein go give us the financial highlights for fiscal 2018. Steve? Please proceed.

Thank you, Martin. Good afternoon. In our 2018, 10-K and financial reports, the results of Gillam-FEI for fiscal years ending April 30, 2018 and 2017 are presented as discontinued operations. Unless otherwise stated, financial results discussed on this call refer to continuing operations. Fiscal 2018 revenues were $39.4 million compared to $50.4 million in the previous fiscal year, a decline of $11 million over the same period of fiscal 2017, which was largely due to the reduced revenue from commercial and U.S. government satellite programs. Revenues from the satellite market are recorded in the FEI New York segment, and represents approximately 36% of consolidated revenues compared to approximately 45% in fiscal 2017. Revenues from non-space U.S. government DoD customers, which are recorded in both the FEI New York and FEI-Zyfer segments, accounted for approximately 45% of consolidated revenues compared to approximately 38% in fiscal 2017. Other commercial and industrial revenues in the fiscal year 2018 period, accounted for approximately 19% of consolidated revenues compared to 17% in the prior year. For the year ended April 30, 2018, gross margin and gross margin rate, both decreased compared to the prior year. The lower gross profit and percentage is the result of lower revenues, increased repair charges, unabsorbed manufacturing overhead costs, and a $5.6 million of inventory adjustments. In the fiscal years ended April 30, 2018 and 2017, selling and administrative expenses decreased from $11.9 million to $10.6 million, and were approximately 27% and 24% respectively of consolidated revenues. The majority of the reduction occurred in corporate deferred comp expense, professional fees, and stock option expense. During fiscal 2018, the Company continued its accelerated research and development activity. As a percentage of consolidated revenue, R&D spending for the years ended April 30, 2018 and 2017 were approximately 18% and 14% respectively. These R&D efforts address large business opportunities in secure communication, command and control, and satellite systems that require advance technologies and capabilities going forward. The Company believes it enjoys a competitive edge and has a head start in the development of these technologies. The operating loss was approximately $12.4 million compared to $7.5 million last year, for the most part due to decline in revenues. Other income generally consists of investment income offset by interest and other expenses. Other income included a gain of approximately $1.1 million recognized in the first quarter of fiscal 2018, in which the Company divested its holdings in equity securities. Prior year other income included $577,000 of income from interest and dividends compared to $220,000 of interest in dividends from the current year. This yields a pretax loss of $11.2 million compared to a pretax loss of $7 million for the same period last year. The tax provision for income taxes, an expense of $11.2 million compared to a benefit of $2.1 million for the same period last year. The current year tax expense of $11.2 million is primarily related to the impact of the recent U.S. tax reform and the establishment of evaluation allowance against the U.S. deferred tax assets. There is no current tax liability for frequency to pay. The company reported a consolidated net loss from continuing operations for fiscal 2018 of $22.5 million or $2.54 per diluted share compared to a loss of $4.9 million or $0.56 per diluted share for fiscal 2017. The reported net loss from continuing operations was impacted substantially by non-cash and one-time charges totaling approximately $16.8 million. Loss from discontinued operations was 967,000 or $0.53 per diluted share compared to income of 103,000 or $0.01 per diluted share for fiscal 2017 net of taxes. Additionally, the company reported a loss on the sale of Gillam of approximately $360,000. Accordingly, the company reported a consolidated net loss for fiscal 2018 of $23.8 million or $2.69 per diluted share compared to a net loss of $4.8 million or $0.55 per diluted share for the prior year. Our fully funded backlog at the end of April 30, 2018 was $30 million compared to $16 million at the end of last quarter and $28 million at the end of fiscal 2017. The company anticipates a significant increase in bookings during the balance of the current and the ensuing fiscal year. For the fiscal year ended April 30, 2018 the company generated $3.3 million positive cash flow from operations. Frequency continues to maintain a very strong balance sheet with a working capital position of over $47 million. Cash position increased to $14 million at April 30, 2018 up from $10 million at the beginning of the fiscal year. 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 Martin and we look forward to your questions later.

Welcome back everybody. I'm sure most of you have read the press release for clarity. Stan Sloane was elected President and Chief Executive Officer as of May 1, 2018 and I migrated to Executive Chairman and Chief Scientist and I'm sure this is for the best future growth of the company. I’d like to turn this over now to Stan Sloane and then I'll make a few remarks and open the session to questions and answers. Stan, please proceed.

Thanks Martin. Fiscal year 2018 was pivotal for a FEI. We had to deal with lingering slowdown in satellite procurement resulting lower revenues as Steve talked about. We reduced inventory, sold one subsidiary, started the process of winding down and divesting another and consolidated manufacturing operations. While addressing these operating items, we also maintained a robust R&D program continuing our legacy of developing state-of-the-art technologies. We continue to deliver our contracts and meet customer expectations, effectively managed our finances resulting in a strong cash position and zero debt balance sheet. We also booked the largest contract in company history, one contract for several other key satellite programs and picked up initial development contracts for several non-space DoD programs that was small dollar value initially have the potential for significant follow-on production. The outlook for future business has never been brighter. I’m confident we’ll see these actions pay-off in terms of improving financial performance and future growth. With that I will turn it back over to Martin.

Okay. I’ll just make a few remarks which I think are appropriate. Frequency as well as their customers were hit by the perfect storm in years 2016, 2017 and 2018 and this is a total change in the concept of what the commercial satellite industry will look like from satellite that were designed to last 20 years and have very steady technology to the concept of having satellite last five to eight years in order to be able to insert new technology and to take advantage of the lower launch cost that has happened in the past couple of years. At the same time, the military satellites also dragged their feet in deciding in which direction and which programs to fund. All of this resulted in us being able to book a lot less and of course ship a lot less. However, we didn’t sit ideally during that time, we focused on reassessing what technologies require the most emphasis and we invested in technologies that has the greatest payback for the future. The first result of this investment is that development of the next generation atomic clocks for space and terrestrial and terrestrial applications which is in addition to being the largest single contract we have ever booked. It has also enormous potential on future revenues both for satellites and for the secure communication market. FEI's technology of basically having low noise assistance from DC to microwave enables us to address the satellites, as well as the DoD business which Stan Sloane is taking an active role in helping to pursue it with vengeance on this. Then secure time that we have developed is the most crucial part in the future to minimize jamming and spoofing that our adversaries can easily do and the immediate cure is precision time. If you have precision time, you can identify, if you're being spoofed or jammed and you also have the capability of holdover, so you can navigate for short periods of time and communicate for long periods of time during the stress levels. Earlier this year, we projected that we’re going to book $50 million worth of new contracts during calendar 2018. I'm happy to report that we exceeded that in the first six months of 2018 and we still have one of many more opportunities before the calendar 2018. With this emphasis, I am very confident that Frequency Electronics will be able to capture more programs and produce profitable growth both in revenue and in the bottom line. With this, I’d like to turn over the conference to questions and please address the question to either Steve, me or Stan Sloane. Thank you.

[Operator Instructions] Our first question today is coming from Steve Emerson from Emerson Investment Group. Your line is now live.

Yes I greatly appreciate any help you can give us in possible guidance range for this year's revenue and any other metrics the quarters have been all over the waterfront this last year. It looks like Q4 was $18 million versus $12 million Q4 2017. So, again any help you can give us ranges or any other metrics would be greatly appreciated?

Steve this is Martin. It’s been the traditional frequency of not to give - exact guidance, but I can give you the general view. We expect our revenue for fiscal 2019 to increase considerably above the revenue of 2018 and we expect the year to be profitable.

[Operator Instructions] Our next question today is coming from Sam Rebotsky from SER Asset Management. Your line is now live.

I'm not happy like I'm sure everybody else on the call is and let's see if you can make us happy as we go to the New Year. Now your backlog is it 50 million as April 30th, of course I believe it was 28 million as of 2017 and what is the backlog as of now and how much of this backlog do you expect to be in the next year the 50 million that you talk about?

I just want to tell you I want to differentiate our funded backlog at the end of 2017 - last three months. Well I think it’s simpler to explain our funded backlog is 30 million as of April 30 and there has been additional increases involved. Now let's don’t confuse that with the new bookings because we only put in backlog what is funded. So if we get for example a $20 million contract, but the initial funding is only $10 million, we only put in the backlog the $10 million. So I would say that that's our backlog and we expect the backlog in fiscal 2019 to increase because of the additional bookings on this. One other thing I want to bring to your attention, I'm sorry that the company had difficulty in revenue and losses but there is one fact that you have to realize that we didn't sit on our tuition and wait for heaven. We invested enormous amount of time in new products on this and protecting all the products to be able to capture this large contracts and what’s equally important is we did a great job in maintaining our cash and our cash is $4 million higher than a year ago. We had 10 million at the end of fiscal 2017 and we ended up with 14 million at the end of the 2018. So we invested in research to be able to capture new programs and we at the same time preserved the cash and the key technologies will begin into the future that I see the greatest opportunity and need is precision time and low G-sensitivity. Precision time for satellites and stationery positions and precision timing including low G-technology for all the mobile markets. I hope I made you a little bit happier.

Now let me just clarify. The last year the funded backlog was $28 million as of April 30, 2017. April 30, 2018 the funded backlog is $30 million. The $50 million as of July, what percentage of this $50 million is funded, is there any increase in the funded backlog and when do we expect funding as relative to these bookings and as far as revenue for the year that we expect to increase the ability to do $50 million revenue because the funded you talk about of $30 million I assume you expect to complete that in the current fiscal year. Do you expect to complete any other bookings in the current fiscal?

An affirmative yes, and I just want to tell you many of the programs especially DoD contract on this you get a contract for $37 million at this point and I think the initial funding was $8 million right.

Yes.

Because they incrementally increased the fund as we used it up. The same is applicable to most of the DoD satellite programs on this. You get the contract and you get the initial funding and add-on as you need. We have three such programs that are very significant that they incrementally add to the funding. So we expect to be able to do a significant increase over the 40 million in revenue we did in fiscal 2018 with a $30 million funded backlog plus the additional funding we expect to get.

Do we expect to - if they’ve funded $8 million or the $37 million by the time the way you’re operating do you expect to be to the $37 million by April 30, 2019 so this unfunded will become funded or what is a rational number for us to use. And the contracts you are bidding on, do you expect other increases that will go into revenue not all of it, but how much might go into revenue as what you put?

The answer to additional contract, the answer is absolutely yes. Now I don't know exactly, I don't have the contract in front and what the funding profile is, but and that contract there is enormous incentive of doing things as quickly as possible. So funding is not going to be an issue. The issue on that is to finish the development to achieve the results of better frequency, stability and precision. So the faster we move the faster we get funded on this program there is no issue in getting funding on it, it's asked to move the development as quickly as we can.

As far as the tax valuation allowance, last year it was $3,290,000 I assume with the disallowance of your tax laws. What is the valuation allowance as of April 30 now?

The valuation allowance is the full valuation approximately $11.2 million is the expense, the valuation allowance itself I think is a little higher about $12 million.

12 million okay, okay, right. So 12 million and let's see. Now it appears that you needed - do we - could we indicate it's July 25 we have another six days before July 31. What kind of sales or what kind of range are we talking about for the first quarter?

Sam you should know this after 50 years that we don't give guidance.

Is it going to be proportionally higher or lower relative to the quarters going forward?

I believe it’s going to be higher, but I did not - I want to be the first one that I did not examine the details.

Okay.

But we’re doing much better.

Okay.

But visualize the emphasis is the new product development and not only a significant incremental future increase in revenue.

I’m going to make one recommendation before I come out of the queue and come back in. During the past years the stock, I mean the office and directors other than Aiden Brook really have not bought any significant amount of stock. Your stock is trading at the low, I mean Privet basically has been selling their stock they got below 5% and I assume they have been selling. I really would like to see the office and the directories with the stock trading here to look - in their heart and their wallets and sort of commit some money to the stock and make believe that they're not just going to get directors fees but they really know that frequency is turning around and they’re ready to pony up some money?

Sam sounds a good recommendation I promise to carry it to each director.

[Operator Instructions] Our next question today is coming from [Michael Aisner], a Private Investor. Your line is now live.

Is Zyfer continuing its growth?

Zyfer is doing very well and they have their mission of taking the precision time that's made at FEI New York and integrating it into systems and installing those systems in secure communication site. And that's moving forward very, very well.

And one more question. You did 50, yes like 50 million in bookings in the first six months so new bookings in the first six months of calendar 2018 - can you even comment on year-end 2018 what you hope to be at in bookings.

2019 you mean.

No we’re in 2018 not fiscal calendar - because yes calendar?

We have quite a lot of new contracts in play and its going to be significant. It’s not going to be – the kind of scarcity that the previous year that we booked like 3 million on this, we have lots of contracts in the play it looks bright.

So you’re seeing some visibility finally after all these years?

Definitely.

All right and I think that's all I had.

Thank you, Michael.

Our next question is a follow-up from Sam Rebotsky. Your line is now live.

I’m back better than ever.

Okay good.

Now Asia you're talking about divesting as far as I could see China and South Korea they had about 2 million sales last year. What kind of assets and do we divest it or what is it depends on, what's the assets we’re carrying do we take a loss?

Yes whatever it is - we have no more need for the China facility we established it during the build out of the cellular telephony where both Motorola and Lucent at that time establishment manufacturing facility in Tianjin and they basically insisted that that we have a place rightly by them to supply in the timing modules. And just for historical and historical purposes, we supplied 150,000 rubidium clocks to the build out of the cellular telephony. Now there is no need for it and our plan is to divest it as soon as we can.

So do we take a gain or a loss, pardon?

It’s probably going to be a small loss.

Small loss, okay. And do we see the need or the ability to look at things which stand at the helm to guarantee better sales and profits to make an acquisition to what extent are we looking at things does it makes sense that we're seeing so we could have a plan that we could be profitable at least on a quarter-to-quarter basis. And we don't get stuck with any inventory and that we know what we're looking and building that we don't build anything we’re not going to need. So what's our possibility so we could be profitable and one other thing you’ve spoken of all the Cybersecurity, are we generating revenue from Cybersecurity and where does this revenue go for Cybersecurities, how does that go forward?

Well let me on - the secure communication. That’s a combination of the timing portion being built in New York and the wraparound electronics being built at FEI-Zyfer and installed into the field. That basically is one of the very important elements of the build-out of being able to do secure communication on this not to be dependent on GPS synchronization only. So that's moving very fast. I think the U.S. government is now realizing how crucial it is and how vulnerable we are and how fast we have to implement it. Maybe I have some inputs in Trump’s administration to tell him to really make decisions because the need is there and the technology to do the early part of the safeguarding is available. So we’ll look very promising in that area.

So have we generated revenue in Cybersecurity yet?

Yes.

Yes, okay. How many employees do we have currently and how do we have at the end of the - either employees at April 30 compared to January 31. By consolidating do we have less employees and do we have enough of what we need so that going forward we could then put everybody at work and be profitable?

Go ahead Stan.

So roughly little over 300, roughly 150 in New York. The consolidation did reduce some overhead related costs and that should be reflected going forward. We’re also right now in process of hiring because the - all the additional contract that we have requires additional people. So the total employment number is going to increase.

Look hopefully we can make people happy because, can Aiden Brook by any more stock or are they allowed to?

I think they're allowed to more.

All right, good.

I have to check the rules I'm not…

Check the rules and check if everybody you know we gave out some options it would be nice that people take their own money and buy the stock whenever they could buy. Because I think there is no more stuff that - everybody should know what you know. So it's all out in the public now.

Absolutely.

All right.

That’s what we can do Sam thank you.

Our next question today is coming from [Richard Deutsche] from National Securities. Your line is now live.

Thank you for taking my call [indiscernible] that your previous caller has made listening to this call almost unbearable and I think we need to allow precise comments and move on. Having said that the comment that I have as an intellectual property leader, what is your patent protection I haven’t been able to see any and how do you protect the value of your research and your new product development?

Stan?

So we have some patents which are active. We generally deal with trade secrets versus filing the patents. We've just found that to be more effective for us so you don’t see the number of patents in the portfolio so most are trade secret.

Okay. And…

By the way you can see that our ability to have won this next-generation development contract. This was a very stiff competition I think that they were like seven or eight major competitors and we were picked because of their basic technology that we have at Frequency on our best successes in the short period of time.

That’s very impressive, I was just wondering how you can keep the total of what looks like potentially a very valuable asset and trade secrets are only secret as long as you can control your employees easing a knowledge of that. But I understand your dealing with a large amount of security and I look forward to following your progress and certainly time and interest in your company. So thank you for taking my call.

Thank you very much. We’ll do our best not to disappoint you.

Our next question is a follow-up from [Michael Aisner]. Your line is now live.

Martin any timeframe on $37 million contract how long is this going to take I know it’s like a year and half out, two years out?

Well on this, I can tell you the Air Force is pushing every day to tighten the schedule, the original schedule I think what flight units available in three years, right. And we are doing our best to see what we can do to cut down significantly. There is a great urgency to get it done as quickly as possible.

Our next question is coming from Brett Reiss from Janney Montgomery Scott. Your line is now live.

My question is on margins, how were the margins on these new orders the new satellite type systems versus the margins you enjoyed in past years. And how does the margins on the satellite orders versus the Cybersecurity type of business you want to develop compare?

Go ahead Stan.

So generally margins are improving. If your question are we being squeezed on the margin in these competitive biz the answer is no. Most of the things we do are pretty unique technically and they enjoy reasonably good margins so I think that’s the way I would think about it.

Thank you. We reached end of our question-and-answer session. I like to turn the floor back over to management for any further or closing comments.

Thank you all for listening. We are signing up to do our best to really grow the company in both revenue and the bottom line. And Stan taking over, doing the hard work in the company will give me the opportunity to focus even more on pushing the time spot of Frequency Electronics and I'm looking forward to doing it. I want to thank you all and stockholders and we’ll do our best not to disappoint you in the future. Thank you. And have a good day.

Thank you. That does conclude today’s teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.