Frequency Electronics, Inc. (FEIM) Q3 2020 Earnings Report, Transcript and Summary

Greetings and welcome to the Frequency Electronics Third Quarter Fiscal Year 2020 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 the conference call. It is now my pleasure to introduce your host, Stanton Sloane, President and CEO. Please proceed, sir.

Thank you, operator. Welcome, everyone. Thank you for joining us today. Let me start off with a few comments about operations. Third quarter financials were impacted principally by two issues. Firstly, by the termination of a problem program that has been the source of persistent technical and financial issues. Cleaning up this problem has been a focus for some months and I am glad to now put it behind us. That said, I have also instituted some best practices, which I have taken from my experience in a couple of well-run aerospace companies to ensure we avoid this sort of problem in the future. Revenue decreases, the second issue for the quarter, resulted in large part from slippages in U.S. government funding to prime contractors on space programs where we are a potential supplier of frequency generation or conversion systems. On several of these programs, the prime contractors have been awarded the contracts, but they either were not yet fully funded or there have been extended negotiations regarding the technical baselines, resulting in delays of sub-contract awards to us, which of course, impact the timing of our revenues. On some of these programs, FEI is in a very strong position as the supplier of choice and it’s simply a matter of timing. I would add that the total value of new business opportunities we are pursuing continues to grow and is currently around $660 million. That is the strongest leading indicator of future revenue and profit growth. We have invested significant resources in R&D and infrastructure to position the Company to win more than our fair share of these opportunities and deliver products, and I am confident that we will do both. Overall, I sense a renewed spirit at FEI and a growing optimism about the future. I can certainly assure you that’s how I feel. I should also comment on the coronavirus issue, which I know is on everyone’s mind these days. And to give you some comfort, we have taken appropriate precautions here, including canceling business travel, screening or restricting visitors, and arranging for employees who may have been exposed to work from home. We’re also in discussions with our supply chain to ensure there are no disruptions in the flow of parts and materials. Remember as well that we have not had any involvement with operations outside the U.S., like China or Belgium for more than a year. So, at the moment, we do not foresee any impact to our operations. Now, let me turn things over to Steve Bernstein to take us through financial details for the quarter, and I will come back with questions after that.

Thank you, Stan, and good afternoon. For the nine and three months ending January 31, 2020, consolidated revenue was $31.3 million and $9.6 million compared to $36.3 million and $13.2 million for the prior fiscal year. The components of revenue for the nine months period are as follows. Revenues from commercial and U.S. government satellite programs was $14.7 million compared to $17.3 million for the same period of the prior fiscal year, and accounted for approximately 47% of consolidated revenue compared to 48% for the same period of the prior fiscal year. Revenue on satellite payload contracts are recognized primarily under percentage of completion method and are recorded only in the FEI-New York segment. Revenues from non-space, U.S. government and DOD customers, which are recorded in both, the FEI-New York and FEI-Zyfer segments are $12.7 million compared to $17.1 million in the prior fiscal year and accounted for approximately 41% of consolidated revenue compared to 47% for the prior fiscal year. Other commercial industrial revenues were $3.9 million compared to $2 million in the prior fiscal year. Inter-segment revenues are eliminated in consolidation. Third quarter revenue was impacted by the conclusion of a program that has been the source of consistent technical and cost issues. Following a mutual agreement with the end customer, this program was terminated, incurring a reduction to revenue of approximately $725,000 during this quarter. For the nine and three months periods ending January 31, 2020, gross margin was $5.9 million and $3.1 million compared to $3.1 million and $4.1 million for the same periods of the previous fiscal year. Gross margin rate decreased to 18.9% and 30.3% as compared to 34.1% and 31.1% for the same periods in fiscal 2019. The gross margin and gross margin rate decreased as compared to the same periods in fiscal 2019, principally due to the program described above as well as charges detailed in the previous quarters. Despite the current quarter charge, the gross margin rates for the three months period ending January 31, 2020 remains relatively comparable to the gross margin rate for the three months period ending January 31, 2019. For the nine and three months period ending January 31, 2020, selling and general administrative expenses increased compared to the same period in fiscal 2019. For the nine months ending January 31, 2020 and 2019, SG&A expenses were approximately 26% and 22%, respectively of consolidated revenues. For the three months ended January 31, 2020 and 2019, SG&A expenses were approximately 35% and 20%, respectively of consolidated revenues. The large increase, both percentage and dollar amounts during the three months period ending January 31, 2020 was due to increases in depreciation, insurance expense, professional fees, and payroll-related expenses. 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. The R&D rate for the nine months ended January 31, 2020 was 15% of sales compared to 14% of sales, for the same period of the previous fiscal year. The R&D rate for the three months ended January 31, 2020 was 10% of sales as compared to 14% of sales for the same period of the previous fiscal year. For the nine and three months ended January 31, 2020, the Company recorded operating losses of $7.3 million and $1.6 million, compared to $540,000 and $394,000 for the prior fiscal year. Other income consists primarily of investment income derived from the Company’s holdings of marketable securities. For the nine-month period ending January 31, 2020, other income include a dividend of $250,000 from Morion, compared to $105,000 in the prior fiscal year. Other income expense in fiscal 2019 also included certain miscellaneous income and the proceeds of an insurance policy. This yields a pre-tax loss for the nine months and three months period ending January 31, 2020, of approximately $7 million and $1.6 million compared to a pretax loss of approximately $168,000 and $261,000 for the prior year. For the nine months ending January 31, 2020, the Company recorded a tax provision of $48,000 compared to $38,000 for the same period of fiscal 2018. For the nine months ended January 31, 2020, consolidated net loss was $7.1 million or $0.78 per diluted share, compared to $168,000, or $0.02 per diluted share for the same period of the previous fiscal year. For the three months ended January 31, 2020, consolidated net loss was $1.6 million or $0.17 per diluted share, compared to $321,000 or $0.04 per diluted share for the same period of the previous fiscal year. Our fully funded backlog at the end of January 2020 was approximately $36 million, down approximately $4 million from the previous quarter. However, subsequent to quarter-end, the Company received over $3.5 million additional funding on two existing programs. The Company’s balance sheet continues to reflect the strong working capital position of approximately $40 million at January 31, 2020, debt-free and at current ratio of over 6.1 to 1. The Company believes that its liquidity is adequate to meet operation and investing needs for the next 12 months and the foreseeable future. I will turn the call back to Stan, and we look forward to your questions later.

Thank you, Steve. We’re going to call for questions. We would ask that you please limit your questions to one, in the interest of trying to get to everybody. And then, if you have another question, get back in the queue. With that, let me turn it back to the operator for Q&A.

Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from Sam Rebotsky with SER Asset Management. Please proceed with your question.

Good afternoon, Stan and Steve. The revenue, the $725,000 and the additional professional fees, could you quantify the additional professional fees? And the $725,000, was that in addition to the $44 million that we charged in the previous quarter, and presumably we’re finished with any special charges in this current -- in the future quarters?

I’ll answer the easier one first. The professional fees was a couple of hundred thousand dollars. The $725,000 is part of accounting for -- based on 606 for the termination of a contract. So, it’s to basically to reverse what was on the books remaining at the point of termination.

But, is that related to the $4 million from the previous quarter? In other words, should have been $4.7 million and we have $4 million…

No, no, no. The programs that we took losses on this piece of the contract wasn’t in that $4 million.

Our next question comes from Michael Eisner, a private investor. Please proceed with your question.

Congratulations to Russell as Chairman of the Board. My question is, GPS IIIF, any update on that?

No. We are progressing through the qual program It’s going pretty well. In fact, I reviewed it today. And other than just Stony, [ph] it’s going well. There’s not much else to report.

[Operator Instructions] Our next question is a follow-up from Sam Rebotsky with SER. Please proceed with your question.

Your $660 million was about $160 million more. And relative to the $7.2 million, is the $7.2 million funded? And is there any chance of any sizable part of the $660 million coming into some place soon in the next three months, six months? What is the timing of this?

Well, I can tell you that the timing is very difficult to predict with precision for the reasons that I cited, in fact in the press release. So, we don’t control the government’s negotiation cycles and things like that. So, it’s a bit of a difficulty to predict that with precision. But, I’ll tell you that on two of those programs, we are -- believe in a single source position. So, when they’re awarded to the prime contractor or when they’re definitized, when the government negotiates them, then we would expect to get those contracts. The best I can tell you is that will play out over the next few months. That was, I think part of your question. The 7.2, those are funded. Those are the two contracts that we had in the press release is what I think you’re referring to.

Yes. So, if we had $36 million and another $7 million, is the backlog $43 million?

Well, yes, but then, you’ve got to take away from it sales. But yes, you’re -- that 7.2 was not included in the $36 million that I gave you.

Okay. Can I ask any more questions or should I get back in the queue?

Go ahead, Sam.

Okay. So, the key with this $660 million, do we see the government freeing up something and do we see the large companies, whether it’s Lockheed or it’s Northrop Grumman, or is there -- why do we need to know what they’re doing for them -- is it that they have to allocate it or is the government has to fund it? And as far as the next couple of months, do we expect something, say before the end of the year, which would be April, that we would see something going on that we know that could be profitable going forward.

Most of our work is as a second tier supplier to one of the big aerospace companies. That’s not a 100%, but the bulk of it is that way. So, for us to get revenue, couple things have to happen. One is, the government has to award the prime contracts to those large aerospace companies. The large aerospace companies have to negotiate and definitize their contracts with the government. So from the time the government announces the selection till the time the prime contractors are actually on a contract can be extended periods of time. It could be as short as a few weeks, it could be months. Then those -- the prime contractors have to negotiate with us that typically entails finalizing technical requirements, as well as cost. That can take also anywhere from a few weeks to a few months. So, we don’t control -- we control part of -- the second part of that, the part that we’re responsible for, but not the first part.

All right. Well, good luck. Hopefully that some of these contracts come into play, so you could be profitable. Of course, it appears you need close to $12 million to break even. And it would be nice if you could break even pretty soon and make some profits. Good luck.

I absolutely agree with you. Yes. Thank you.

Our next question comes from Richard Jones, a Private Investor. Please proceed with your question.

First, I’d like to congratulate management on getting to the point of $660 million of bids. It’s really a -- it’s a promising number. And I’d like to expand a little one on Stan’s question. A few years back, when management talked about the pot at the end of the rainbow, the vision was maybe $100 million in sales in a year, 50% gross margins, 20% for selling and administrative, 10% for R&D, leaving 20% for pretax. And it would seem to me that you’re -- you may be on the doorstep of numbers like that. What’s your response to that? And then, I know you don’t give guidance, but when do you think -- what quarter in the coming future would you think you’d report a significant profit?

So, first of all, let me -- because you covered a couple of things. On the $660 million, that -- what’s important about that number, I think, rather than whatever the immediate numbers is the trend. And I think if you’ve followed us for last few quarters, you’ve heard that number consistently increase. That’s the result of a couple of things. One is the increases in defense spending, but more so from a focused effort here to expand the types and numbers of new business opportunities we’re pursuing. And that’s not an easy thing to do. And it takes a lot of work. But, we’re starting to see the benefit of that and we see that number going up. So, I’m very encouraged by the 660. I want to turn that $660 million into $1 billion or $2 billion, if I can do so. In terms of trying to predict when we’re going to get there, I don’t want to do that because predictions always end up being wrong. But I think again, what I would say to you is you’re going to watch the trend. The trend is much more important. My objective is to focus on organic growth, and that’s both top line and bottom line growth. If we could grow the business on the 10% order, then your $100 million number is not far off. So, I’m working hard to do that. I don’t want to tell you that I’m going to do it by tomorrow. But, that’s my objective that. And the whole team here is pulling to take us there. So, standby.

Okay, okay. Good luck. My other question is what’s Martin Bloch’s role at the Company now?

Martin is a Director.

Okay. All right. Okay. Thank you.

You bet.

Our next question comes from Michael Eisner, a private investor. Please proceed with your question.

Are you guys able to comment on the value of the two sole-sourced contracts?

Which two contracts are you talking about?

You mentioned two sole -- you are waiting on two sole-sourced contracts, it would be for large defense company?

Yes. No, because they’re not definitized or negotiated yet. So, I don’t want to do that prematurely. But, as soon as that’s done, we obviously will make press releases on those.

It will take a couple of months I think you said.

If I could be more precise, I would, but that’s probably about what we’re talking about.

And any update on Elcom?

Elcom is doing well, they have some new EW products. And one of their big programs has to do with electronic warfare systems for the U.S. Navy. And that’s going pretty well. We’ve delivered the initial products and they’re going through evaluation. So, we’re -- at the moment, we’re waiting for what’s called a low rate initial production. And once that comes, then the follow-on would be full rate production. So, that’s a process that’s going to play out over the next year or two.

It will take a year or two for that?

Yes, to get through all of that. Yes.

Thank you. At this time, I would like to turn the call back to management for closing comments.

Great. Thank you. Again, thanks everybody for joining us. We look forward with increasing optimism to the future and we hope to share that. We’ll look forward to talking to you next quarter. Thank you.

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. And have a great day.