Frequency Electronics, Inc.

Greetings and welcome to the Frequency Electronics Second Quarter Fiscal Year 2021 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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 insurgencies 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 our further details 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, Mr. Stanson Sloan, President and CEO. Sir, you may begin.

Thank you, Laura. Good afternoon, everyone. Thank you for joining us on our Q2 fiscal year 2021 call. Steve will walk us through financial details in a minute. Let me kick things off with a couple of highlights. We had what I consider to be a very good quarter. Revenue was up about a million dollars quarter to quarter, but also up significantly, about 25%, from the comparable periods of fiscal year 2020. We generated net income for the quarter of $329,000, also a significant improvement, and this despite extraordinary legal expenses. Backlog was up to $42 million, a $6 million increase from the end of fiscal year 2020, reflecting the robust set of new business opportunities we have mentioned on the last couple of calls. We generated about $2 million in cash, and we've hired about 18 people in order to meet increasing workloads. I'm pleased with the improvement in financial performance this quarter. I should make a few comments about the COVID-19 situation, as I know it's on everybody's mind. We've managed to maintain production and delivery schedules throughout the pandemic. While we've had some employees who were potentially exposed to COVID-19 through being in close proximity to someone who tested positive, We have had only three employees in our New York facility and two at our Zephyr facility actually test positive. In an abundance of caution, whenever any employee has been potentially exposed, they are excused from work and must quarantine pending negative test results. Of course, employees who actually test positive are required to follow the CDC guidelines regarding quarantine and subsequent return to work. As before, we have maintained production and delivery schedules through the second wave, but we remain vigilant to impacts. Now, let me have Steve take us through financial details. Steve?

Thank you, Stan, and good afternoon. With the six months ending October 31st in 2020, consolidated revenue was $26.9 million, up 25% compared to $21.6 million for the same period of the prior fiscal year. The components of revenue are as follows. Revenue from commercial and U.S. government satellite programs was $14.2 million compared to $9.4 million for the same period of the prior fiscal year and accounted for approximately 53% of consolidated revenue compared to 44% for the same period of the prior fiscal year. Revenues on satellite payload contracts are recognized primarily under the percentage of completion method and are recorded only in the FDI New York segment. Revenues from non-SPACE U.S. government and DOD customers, which are recorded in both the FDI New York and FDI Zephyr segments, were $10.9 million compared to $9 million in the same period of the prior fiscal year and accounted for approximately 40% of consolidated revenue compared to 42% for the prior fiscal year. Other commercial and industrial revenues were $1.9 million compared to $3.2 million in the prior fiscal year. Intersegment revenues are eliminated in consolidation. With the six-month period ending October 31, 2020, gross margin and gross margin rate increased significantly as compared to the same period in fiscal year 20. The increase in gross margin and gross margin rate was due to several programs identified in prior periods that had higher engineering costs incurred during the development phase and which are now completed or are near completion. For the six months ending October 31, 2020 and 19, selling and administrative expenses were approximately 27% and 22% respectively of consolidated revenue. The increase in SG&A expenses is mainly due to an increase in professional fees relating to litigation for which we expect insurance reimbursement for a portion of the legal fees and some additional insurance costs. R&D expense for the six-month ending October 31st, 2020 and 2019 decreased 2.2 million from 3.7 million, a decrease of 1.5 million and were 8% and 17% of consolidated revenue. The company's R&D expense decreased year over year as previous R&D efforts have ended and turned into production. However, the company plans to continue to invest in R&D to keep its products state-of-the-art. For the six months ending October 31, 2020, the company reported an operating loss of $119,000 compared to $5.7 million in the prior year. Operating loss has made a significant improvement from the same period of the prior fiscal year and reflects improvements in revenue, gross margin, and gross margin rate. Based upon our bookings and backlog, we are expecting the improving trend to continue. Other income consists primarily of investment income derived from the company's holdings of marketable securities. For the six-month period ending October 31, 2020, investment income includes a $105,000 dividend from Morion compared to $125,000 dividend from Morion in the same period in fiscal 20. This yields pre-tax income of approximately $93,000 compared to a pre-tax loss of approximately $5.5 million for the prior year. For the six months ending October 31, 2020, the company recorded a tax provision of $25,000 compared to $29,000 for the same period of fiscal 20. Consolidated net income for the six-month ending October 31, 2020, was $67,000, or $0.01 per diluted share, compared to a net loss of $5.5 million, or $0.61 per diluted share, in the previous year. Our fully funded backlog at the end of October 2020 was approximately $42 million, up approximately $6 million from the previous year end to April 30, 2020, The company's balance sheet continues to reflect a strong working capital position of approximately $40 million at October 31, 2020, and a current ratio of approximately 4.5 to 1. 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 Stan, and we look forward to your questions later.

Thank you, Steve. We'll be happy to take some questions. Let me turn this back over to Laura. We'll explain how to do that. Laura?

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, It may be necessary for you to pick up your handset before pressing the start key. One moment while we poll for questions. Our first question comes from the line of Brett Reese with Jannie Montgomery Scott. You may proceed with your question.

Hi, Stanton. Hi, Steve. Good quarter. Yeah, hi. The employment, you hired 18 people. Does that... satiate you now or you're looking to hire even more over and above that?

We will add additional people here going forward. So it's adequate for our current need, but we will be adding some more.

All right. Good. Now, you know, last call, I think in response to one of the questioners, You had a billings number, you know, that you've got bids outstanding, $600 million to $625 million. Is there a number, you know, this quarter that you can share with us?

I think you're referring to what I call the opportunity set. In other words, the sum total of everything that we're looking at. That's about $680 million at the moment. Keep in mind, however, that that fluctuates pretty regularly as things go in and out, but the current number is about 680.

Okay. One of these days, maybe offline, I can get a tutorial on oscillators. Sometimes the news releases talk about oven-controlled quality oscillators and Then master oscillators, I mean, are all oscillators created equal or are there some that are better with higher margins than others? If you could opine on that a little bit, I'd appreciate it.

Yeah, that's a good discussion to have offline. The answer is no, they're not all equal.

Okay. I'm going to drop back in queue. Good quarter. Thanks for taking my questions. You bet.

Our next question comes from the line of Michael Eisner. You may proceed with your question.

Great job. Uh, I think that's the first time you've been profitable in a while. Yeah. Uh, do you need more sales people?

Uh, we're okay at the moment. Uh, the, uh, the team we have is pretty seasoned and, uh, doing a really good job of keeping up with all the new business opportunities. Uh, you know, uh, for us, uh, we're, we're really not, uh, so much, uh, what I would call a sales organization. You know, we, we, the way we generate new businesses through, uh, generally through writing complicated technical proposals and, uh, that, that really has to be done here. It's a little different than having a, you know, what I think you're thinking of as a salesman out in the field. Uh, we, we do have, uh, representatives that, uh, that handle that part of the business, but, uh, But the team here is doing a pretty good job keeping up with everything. Win rates are good, and we're booking things. So I think we're doing good.

All the problem programs, are they completely over?

The few programs that we've been talking about the past couple of quarters are done.

Really? That's great to hear. So do you expect margins to increase now? No.

We always work hard to keep the margins increasing, the revenue increasing. Yep.

Well, do you expect them to increase at this point?

That's my job. I'm working on it.

All right. How bad were the legal expenses? Can you comment?

Well, Steve talked about the SG&A. That was up in about, I think, 1.6 of that was professional fees. That's not strictly legal, but that's the number, about 1.6.

That's something you should get back?

We anticipate receiving some of that back, yes.

All right. So you took the hit, but you may get some money back on that.

That's correct.

All right. Just two more questions. How's the advanced electronic warfare contract coming along?

Yeah, technically good. There's been some delays in the production contract through nothing to do with us. Just the prime contractor had some delays getting the system through their milestone C event with the government. So that's delayed things a bit. But technically very well, performing very well technically.

Any revenue from the past quarter from that?

Not significant, but yes.

A small amount. And revenue for GPS3F?

Yes.

Is some of that in there?

Yeah, there's revenue. We've been on that job now for probably a year and a half or so. That's progressing through qualifications. So, yes, there's some revenue in there. I think if you're asking about the production contract, that hasn't started yet.

That's what I was getting at. When do you expect that?

You know, probably in the next year or so we'll start to see, I hope we'll see the initial awards for that. And we are also bidding that particular clock for some other things. So I'm hoping we'll see some other awards, not just GPS 3F.

Yeah, and you just recently had another announcement the other day I guess that program's continuing well.

You're referring to the December 3rd announcement on the oscillator award?

Exactly. That's continuing from, I think, last year or a while ago.

Yeah, so it's options that were added to a prior contract, which you had talked about before. Keep in mind, that's after the quarter. That's not in the Q2 numbers.

Oh, yeah, I realize. How long is that program going to

That particular one is about two years.

All right. Really a great job. Changes everywhere. Margin's up. Revenue up. Thank you.

You bet. Thank you.

Our next question comes from the line of Sam Hrabowski with SER Asset Management. You may proceed with your question.

Yeah, good afternoon, Stanton and Steve. Wonderful job. Nobody's disappointed. So do you think we're ready to tell the story, or when do you think we're ready to share our performance with other investors?

I'm ready to tell the story. I think we've got a great story. Okay.

We'll be back. Okay. Now, one of the things, I'm not sure you're aware of this, it just was released earlier today. A company, Abracon, acquires Fox Electronics and a frequency control supplier headquartered in Fort Myers, Florida. do they compete with you? Do you compete with them? How large are they, and what kind of products do they have if they do compete with you?

I'm not familiar with the company. The name rings a bell, and the fact that they're in Fort Myers, because that sounds like a good place to be, but I don't know the details of it, and they're not a principal competitor for For the finished oscillators, as far as I know, at least I haven't run across them.

Since early 19th, Fox has focused on U.S. innovation for the frequency control market with a series of quick-turn crystal oscillators.

Well, a lot of people make crystal oscillators.

Okay.

As somebody said before, an oscillator can be many things.

Okay. Sounds good. Okay. Thank you.

Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Stanton-Slow for closing remarks.

Great. Thank you, Laura. Let me just finish by wishing everybody a happy, healthy holiday season and also I hope a great 2021. Thanks for joining us today, and we look forward to talking to you next quarter.

Mr. Stanton, there's actually one more question that just popped up.

Okay.

Our next question comes from the line of Michael Wasserman with Morris. You may proceed with your question.

Yeah, hi. Is it fair to say that given that we had a Republican president and a Republican-controlled Senate the past four years have been a bit disappointing for in terms of business generated for frequency that's government related and what might the new administration perhaps do that would make things better or worse for frequency specifically in your judgment?

My opinion is we've fared pretty well. We're winning a heck of a lot of new business, so I don't see that as a disappointment. As to the new administration, I suspect They'll be driven largely by global geopolitics and other things that influence defense budgets. Investment in space I think is likely to continue. It looks like they're going to continue to invest in the Navy. So what that translates into in terms of growth or not in the defense budgets obviously remains to be seen. But I think that's a much bigger driver for us than the politics.

All righty, thank you.

Laura, any further questions?

Yes, one more just popped in. Next question comes from the line of Richard Johns. You may proceed with your question.

Hi, nice to see the improvement. And in past years, management in giving a rough idea of what the income statement might look like going forward, management has talked about increasing SG&A being about 20% and R&D being roughly 10%. I know that you can't, you know, pin it down exactly, but are those good numbers to think about going forward?

Yeah, generally speaking, I think. You know, we had this period, obviously, we had some anomalies with professional fees, but, yeah, ballpark.

Okay. Okay. All right, and you mentioned that you're up for telling your story. Have you signed up with any specific brokers to present at conferences coming up?

We will be presenting at the Needham Conference in January.

Okay.

At the moment, that's the only one we've signed up for, but we'll be looking for some others.

Okay, okay, good. And you mentioned that your win rate is pretty good. In past calls... I believe you said that if you could win half of that 680 number, that that would be what you would be happy with and kind of expect. Is that an accurate idea going forward?

50% win rate is pretty good performance, in my opinion, and we're close to that now. fairly large contracts. So, you know, any one contract swings that number, you know, one month to the next. But that's a good ballpark target. You know, if we could do 50%, I'd say we're doing pretty good.

Okay. Okay. And my last question, you've talked in the past about the potential for solving problems related to spoofing and jamming. Could you... Give a few words about the current status of that and the prospects.

So for us, that all boils down to timing, to the precision of timing. Basically, that relates to ability to hold over. In other words, if you're receiving a GPS signal and that signal gets jammed or spoofed, you want to be able to maintain the time reference while you don't have that signal. So in order to do that, you need a very precise clock. And the more precise your clock is, the more time you have from when the signal gets jammed to when you can sync back up again, or in other words, you have longer holdover. So for us, everything is about better and better clocks. And, you know, our rubidium clocks today are very high performance. That's what's going on to GPS 3F. And we're working on some advanced technologies for the future that will improve the performance of those even more. So that's really what it's about for us.

Okay. And is the potential for the clocks and related equipment in that particular area, spoofing and jamming, do you still think it has a whole lot of potential?

Yeah, that problem is just increasing significantly. I mentioned earlier about the defense budgets and investment in space. The government is going to continue to invest to deal with that problem because adversaries are getting better and better at those counter timing, counter GPS sort of systems. I think that's a great place to be. I think that's going to be a good growth area for the future.

Okay. Okay. Great. And way to go in the quarter. Thank you. You bet.

There are no further questions at this time. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your evening.