Frequency Electronics, Inc. (FEIM) Q2 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to the Frequency Electronics Second Quarter Fiscal Year 2019 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [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. Thank you. You may begin.

Good afternoon, everybody. I have here with me Stan Sloane, who is Chief Executive Officer of Frequency Electronics; and Steve Bernstein, CFO. And we'll set it up that Steve will give the factual down run and after that I -- Martin Bloch and Stan Sloane will make some appropriate comments and then open the floor for questions-and-answers. When you do ask your question it would be very helpful if you address it to either me Martin Bloch, Stan Sloane or Steve Bernstein. Now without further ado, Steve, slowly welcome through the factual part about Frequency.

Thank you, Martin, and good afternoon. For the six months ended October 31, 2018, revenues from commercial and US Government satellite programs increased to $11.3 million compared to $9 million for the same period of fiscal 2018 and accounted for approximately 49% of consolidated revenues compared to approximately 42% during the same period of fiscal 2018. Revenues on these contracts are recognized primarily under the percentage of completion method and are recorded only in the FEI-New York segment. Revenues from non-space US Government/DoD customers which are recorded in both the FEI-New York and FEI-Zyfer segments were $10.4 million compared to $7.7 million in the same period of fiscal 2018 and accounted for approximately 45% of consolidated revenues compared to approximately 36% last year. Other commercial and industrial revenues declined to $1.4 million compared to $4.7 million in the prior fiscal year and accounted for approximately 6% of consolidated revenues compared to 22% for the same period in the prior year. Intersegment revenues are eliminated in consolidation. For the six months period ended October 31, 2018, the gross margin rate increased to 35.8% from 31.5% over the same period in fiscal 2018. The increase of both the gross margin and gross margin rate was due to increased revenues, lower repair costs and favorable product mix. For the six months ended October 31, 2018 and 2017, selling and administrative expenses were approximately 22% and 24% respectively of consolidated revenues. Increase in SG&A expenses during the six months ended October 31, 2018 primarily consisted of additional personnel-related expenses and professional fees partially offset by reductions in other SG&A accounts. Research and development expenditures represent investments intended to keep the company's products at the leading edge of time and Frequency technology and enhance future competitiveness. R&D expenses were $3.3 million and $3.4 million for the six months ended October 31, 2018 and 2017 respectively. The R&D rate for the six month period ending October 31, 2018 was 14% compared to 16% of sales for the same period of the previous fiscal year. Customer funded R&D development recorded in revenue is expected to add substantially to overall R&D activity in the full current fiscal year. The company increased revenue, gross margin and gross margin rate in the six months ending October 31, 2018 resulting in a reduced operating loss of a $146,000 as compared to a loss of $1.7 million for the same period of the preceding fiscal year. Investment income is derived primarily from the company's holdings of marketable securities. Other income for the six months ending October 31, 2018 was $277,000 compared to $1.1 million last year. Last year’s other income reflected gain of approximately $1 million when the company divested all its holdings in equity securities in its investment account. This yields a pre-tax income of approximately $131,000 compared to a pre-tax loss of approximately $557,000 for the same period last year. For the six months ending October 31, 2018 and 2017, the company recorded a tax benefit of $23,000 and $98,000 respectively. The 2018 tax benefit of $23,000 included nominal accruals for unrecognized tax benefits. Consolidated net income from continuing operations for the six months ending October 31, 2018 was a $153,000 or $0.02 per diluted share compared to a loss of $459,000 or $0.05 per diluted share for the same period of the prior year. Our fully funded backlog at the end of October 2018 was $38 million, up from $21 million at the end of October 2017. The company's balance sheet continues to reflect a strong working capital position of over $47 million at October 31, 2018 at a current ratio of over 12 to 1. 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 you Martin and we look forward to your questions later.

Hello, everybody, again. I just want to tell everybody that I'm very excited about FEI’s status at this time for the following very exciting developments. We had the largest amount of outstanding proposals in the history of the company. And what's more important is that they are uniquely related to our expertise in precision time and low noise and low G-sensitivity technology, and those proposals are for military space, commercial space and DoD programs under Zyfer. As you probably realize that in our technology, unless there’s a certain level of expertise and people, you've maintained no matter what level of business. The quality control, all our research laboratories, all our support testing facilities are pretty much the same if we do $10 million worth of business, or if we do $60 million worth of business. So this time we had a great opportunity to significantly increase our top-line and obviously that makes me very excited to look forward to increasing revenue and increasing profitability for this and for the coming future on this. But also -- and I'm sure Stan is going to emphasize that it’s very important in addition to the investment of FEI in IR&D for future products and that we have experienced enormous investments in customer IR&D in the development of the next generation product for precision timing for all of those critical requirements for both military, homeland security and all levels of endeavor that require secure communication obligation and command and control. Very exciting time and I'm happy to be part and participating in this opportunity that Frequency is seeing. I'd like to turn it over to Stan who has a hard job together we think and should shape for the future.

Thank you, Martin. Hello, everybody. Pleased with the progress this quarter and for the first half of the fiscal year. We continue to improve operating efficiency, aggressively manage cost, but that’s something we always need to do. More importantly, we’ve seen a tangible shift in our market opportunities these last few months. The amount of new business activity we're experiencing is unprecedented, and outstanding proposals are at its all time high. The amount of research and development going underway is also the highest ever that includes both customer funded R&D as well as our internally funded efforts. As a result of all of that activity, we've hired several technical and manufacturing personnel recently to support all the projects. This bodes extremely well for future growth. While we always try to improve operating efficiency as the opportunity for top-line growth that is the most exciting and we'll have the largest potential effect on bottom line performance. From my point of view, FEI's future has never been brighter. With that, I think we can take questions.

I would just like to add one more comment. In addition to the engineers and physicists that we have hired, we are in continuous search for adding additional expertise to assist us in the exciting development programs and I'm sure we're going to be successful. We have a very exciting next-generation timing and development, and that excites physicists and engineers to be part of that exciting new development. Please go ahead with your questions. Please address it to either me, Stan or Steve?

Great. Thank you. At this time we'll be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Sam Rebotsky from SER Asset Management. Please go ahead.

You seem to be doing the right thing. Could you sort of address the bids last quarter, I guess Stan spoke of 170 million, 180 million bids out there and you’ve indicated that it’s larger, so could you to quantify that number?

I can tell you that is significantly higher right now then that number. And what is more exciting is that the majority of our proposal is in an area where we have unique expertise if not the best expertise in the world.

Okay. And as far as you referred to the foreign subsidiary, which will ultimately have a positive effect, do you expect that to happen, is that to be sold? Is that to be eliminated by the fourth quarter, and what can we quantify, what kind of number that is or how that improve profitability or -- at this point?

Yes. We’re not in a position to give you specific numbers. We’re evaluating our options. I anticipate we’ll make a decision in the next couple of weeks and then the timeline for implementing would be relatively near-term.

Okay. I know this is a difficult thing. But I guess there’s going to be a satellite launch December 18th by Lockheed and they indicated that as far as the accuracy and up to 8 times improved anti-jamming capabilities, it sounds exciting and this Air Force-Lockheed comps, which is a potential $7.2 billion. Is there any thoughts about that or …?

Well I can tell you Sam that we’re actively participating in the next phase of that program. And the next program that $7.3 billion is a funded program for GPS III follow-on. What is it? 11 through -- 11 through 22 satellites and we are actively involved in that area and it’s very exciting to us.

It sounds exciting to me.

Me too of course.

They expect to launch December 18. So that sounds good.

Okay. Thank you, Sam. Have a happy holiday.

Our next question from Brett Reiss from Janney, Montgomery, Scott. Please go ahead.

When I’m looking at your website on career opportunities as we speak, and you’re looking to fill 12 or 13 different types of positions. You said you’ve hired a lot of people, because of the greater amount of business you anticipate. Are all of these openings still -- are you still looking for another senior physicist, another senior …?

Yes.

Okay. So you must think the pipeline looks pretty robust if you have you have needs for all the different categories, correct?

I’ll make it more positive. We have been funded by our customers for the advanced development of the next generation atomic clocks and we need those people now.

Okay. Is there a problem in finding enough of these qualified people for the criteria that, that you need for your business?

It's always -- we've been very fortunate over the existing Frequency, we’ve had longevity and we’ve had very fortunately a good team. So we are very selective and it's going to take effort but we'll find them, because it's a very attractive program and exciting for young and experienced physicists to be part of it. So I'm sure that, that we will be able to acquire them.

Right. With the existing resources and talent that you have in place, are there any constraints on being able to fill orders that you might get in the near to intermediate-term future?

No, I think we're in good shape on that area.

Thank you for answering my questions and happy holiday to the entire management team.

And to all the employees that make it all possible.

Yes, that's right. Okay.

Our next question is from Michael Eisner, a Private Investor. Please go ahead.

Hi. Anyone can answer this. How was Zyfer doing with the spoofing and jamming and all that stuff?

Zyfer is doing well. The number of opportunities there is exciting like everything else. So in summary, doing good.

Can you give the -- are you able to give a breakdown of the revenue on that?

Not at this time.

No.

Alright. Not at this time, Mike. And we are expanding the same technology not only for terrestrial but for mobile environments such as remote pilotless vehicles and airplanes. So they are very exciting in pursuing this type of opportunities which is a combination of FEI's unique low G-sensitivity precision time and their expertise and making sure that they can overcome the jamming and spoofing of GPS signal. So it’s a good marriage.

Alright. GPS III contract with Lockheed; that can last long time, correct?

Yes, it's a long time and it has also extended opportunities, as Stan called to my attention that we might be allowed to participate in the European expansion of the GPS system. So it's very exciting.

And one final question. How many people do you need by the rest of the fiscal year?

Probably about half a dozen. Half a dozen of the right people. It's not the quantity, it's very specific people to be able to execute on this advanced development. We're trying to build a clock that's 10 times better than we have supplied before. We have proven the theory, now we have to implement them both. It takes a skilled team to get it done.

Alright, and I think you’re about a quarter to a third of the way into that $37 million contract, by on the 25%. How’s that coming along, the technologies, is everything working on schedule?

Yes. Stan?

Technically, progress on that’s been pretty substantial. I am actually very pleased, I think we’re hitting all the milestones right on time. So that’s going pretty well.

Excellent, great job.

Thank you.

[Operator instructions]. As there are no further questions, I’d like to turn the floor back to management for any closing comments.

I am very glad we were so informative that we gave you all the information. If anything, if you have question, you can always call Steve, me or Stan at any time. At this time I would like to wish a happy holiday season to everybody and express my many thanks to the FEI team that is doing a great job to take us through the next plateau. Have a happy New Year and goodbye.

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