3/11/2021

speaker
Operator

Greetings and welcome to the Frequency Electronics third 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 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 release 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, Stanton Sloan, President and CEO.

speaker
Stanton Sloan

Thank you. Hello, everyone. Thank you for joining us today. I'd like to make a few comments about the quarter and the state of the business, and then we'll turn things over to Steve to take you through the financial details. Following that, we'll take some questions. Let me start by saying that I'm very pleased with the general direction of the business, and in particular, our significant success capturing new contracts for space systems. FEI's unique capability to deliver high performance and high reliability timing and frequency generation systems that can operate in this difficult environment is our core competency. U.S. government investments in new space programs are producing an increasing number of opportunities for FEI, resulting in a growing backlog and improving revenues that we're seeing in the New York operation. We did see some customer and supply chain COVID-related issues in our Elcom and Zyphus subsidiaries in Q3, which impacted their revenues and gross margins. We had a very solid quarter for new business at FEI New York, with backlog up by $5 million to date from the end of last fiscal year, and we have won several key opportunities, not to mention the $17 million contract award we announced on February 24th after the end of the quarter. Bookings in our New York operation through the end of Q3 were $53 million, one of the best year-to-date performance new business wins in company history. This amount is not fully funded, but it is on contract. Consistent with our past practices, we only report funded amounts in our backlog. Our performance on new business bodes well for increasing revenue going forward, and as we've said before, increasing revenue is a very good leading indicator for improving margins. We also generated significant cash of $9 million through Q3 and are debt free. Hiring is continuing as we ramp up to meet anticipated engineering and production commitments associated with these new contracts. Space represents a rapidly expanding opportunity for us, and ensuring we deploy shareholders' capital towards continually improving operational efficiency and advancing our product technologies will continue to remain a focus for us. We will also continue to monitor and address the COVID situation And I want to thank our employees for their extraordinary efforts in maintaining FEI's customer commitments over this past year. With that, let me turn it over to Steve, and we'll go through some financial details, and then we'll take your questions. Steve?

speaker
Steve

Thank you, Stan, and good afternoon. For the nine months ended January 31, 2021, consolidated revenue was $38.6 million, up 24% compared to $31.3 million for the same period of the prior period. The components of revenue are as follows. Revenue from commercial and U.S. government satellite programs was $20.1 million compared to $14.7 million for the same period of the prior fiscal year and accounted for approximately 52% of consolidated revenue compared to 47% for the same period of the prior fiscal year. Revenue on satellite payload contracts are recognized primarily under the percentage of completion method and are recorded only in the New York segment. Revenues from non-SPACE, U.S. government, and DoD customers, which are recorded in both the FEI New York and FEI Zephyr segments, were $16.3 million compared to $12.7 million in the same period of the prior fiscal year and accounted for approximately 42% of consolidated revenue compared to 41% for the prior fiscal year. Other commercial and industrial revenues were $2.2 million compared to $3.9 million in the prior fiscal year. Intersegment revenues are eliminated in consolidation. For the nine-month period ending January 31, 2021, gross margin and gross margin rate increased significantly as compared to the same period in fiscal year 2020. The increase in gross margin and gross margin rate was due to several programs identified in prior periods that had higher engineering costs incurred that were in development phase that have since been completed or are near completion. For the nine months ending January 31st, 21 and 20, selling and administrative expenses were approximately 25% and 27% respectively of consolidated revenues. The increase in SG&A expense was mainly due to an increase in professional fees relating to litigation. R&D expense for the nine months ending January 31st, 21 and 20 decreased to $3.5 million from $4.8 million, a decrease of $1.3 million and were 9% and 15% 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 at the state of the art. For the nine months ended January 31st, 2021, the company recorded an operating loss of $1.1 million compared to $7.3 million in the prior year. Operating loss has made a significant improvement from the same period of the prior fiscal year and reflects improvement in revenues, gross margin and gross margin rate. Based upon our bookings and backlog, we are expecting this improving trend to continue. Other income consisted primarily investment income derived from the company's holdings of marketable securities. For the nine-month period ending January 31, 2021, investment income included a $105,000 dividend from Morion compared to a $250,000 dividend from Morion in the same period in fiscal 20. This yields pre-tax loss of approximately $695,000 compared to a pre-tax loss of approximately $7 million for the prior year. For the nine months ending January 31st, 2021, the company recorded a tax provision of $37,000 compared to $48,000 for the same period of fiscal 20. Consolidated net loss for the nine months ending January 31st, 2021 was $732,000 or $0.08 per diluted share compared to a consolidated net loss of $7.1 million or $0.78 per diluted share in the previous year. Our fully funded backlog at the end of January 2021 was approximately $41 million, up approximately $5 million from the previous year end, April 30, 2020. The company's balance sheet continues to reflect a strong working capital position of approximately $39 million at January 31, 2021, and a current ratio of approximately 6.6 to 1. Additionally, the company is debt-free. 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.

speaker
Stanton Sloan

Thank you, Steve. So we'll turn this over to the operator. We'll explain how to get your questions in, and we ask you to please limit it to one question. Thank you. Anastasia?

speaker
Operator

Thank you. 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 yourself from the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Once again, if you have a question, please press star one. The first question comes from Michael Eisner, a private investor. Please go ahead.

speaker
Michael Eisner

Hi. Elcom's revenue, that would be part of the New York area?

speaker
Stanton Sloan

That's correct. It's consolidated with New York.

speaker
Michael Eisner

All right. So how bad was the COVID in Zypha? Last quarter, he did like almost three and a half million in revenue.

speaker
Stanton Sloan

So yeah, we've had some employees. Uh, I think the, the way you think about COVID though, it's not just, uh, you know, about, uh, our employees, although we have had a few folks that, uh, that did have, uh, but, uh, it's causing some, uh, supply chain issues and also some delays from, uh, administrative delays in some of the customers in processing their contracts. So some of that slipped from what was anticipated in the quarter. It's unanticipated, of course, and people working remotely sometimes cause administrative slowdown. Is it going to be pushed into the fourth quarter? Well, it'll be pushed. They haven't lost anything. We have not lost any... any contracts. It's just things are slipping to the right schedules or being delayed.

speaker
Michael Eisner

So your revenue dropped for the quarter, but mostly it was because of the supply chain and Elcom.

speaker
Stanton Sloan

Because of delays.

speaker
Michael Eisner

Yeah, it will be. So that's why you had the lower revenue. All right. I guess I got one question. Thank you. Sure.

speaker
Operator

The next question comes from Sam Robotsky with SCR Asset Management. Please go ahead.

speaker
Sam Robotsky

Yeah, the backlog, which was 41 million, didn't think the 17 million contract. Is this a more profitable contract? And are we doing a lot more business? Will our backlog be further reduced? increase in the next quarter due to this $17 million?

speaker
Stanton Sloan

So we would anticipate that it will be. Of course, keep in mind that we only put into backlog what's funded. So we might win a large contract, and that might be for, let's say, for $17 million. But if it's only funded at a dollar, then we only put a dollar in the backlog. That's why I wanted to mention the performance on the new business side in my comments. So if you're trying to do the arithmetic, you can't really do it that way. But obviously, if you have a $17 million contract, we would expect, barring some unusual circumstance, that that would convert the backlog.

speaker
Sam Robotsky

Is this a new customer or is this? No, it's an existing customer. Okay.

speaker
Stanton Sloan

It's a customer that we've been doing business with for many years. Okay.

speaker
Sam Robotsky

Thank you.

speaker
Stanton Sloan

Sure.

speaker
Operator

Once again, if you have a question, please press star 1. The next question comes from Brett Reese with Jenny Montgomery Scott. Please go ahead.

speaker
Jenny Montgomery Scott

Hi, Stanton. Hi. The hiring you're looking to do, can you just kind of describe, is it engineers, is it salespeople, just the nature of the type of hiring?

speaker
Stanton Sloan

Right now, it's mostly engineering and manufacturing. I think we've added something like 20 people so far this year, and I have another 15 or 17 openings, so... It's mostly technical folks who are on the manufacturing floor or test technicians.

speaker
Jenny Montgomery Scott

Do you think the skill sets you're looking for, you'll have any trouble filling those positions?

speaker
Stanton Sloan

It's always challenging to get competent and experienced people, but we've done pretty good this year. Like I said, we've hired about 20. And, you know, on the manufacturing side, also keep in mind that we have the ability to outsource manufacturing. That's a little bit easier to do than the engineering side. So I expect we'll keep up with things. I don't think it's going to be a problem.

speaker
Jenny Montgomery Scott

Great. I'll drop back in queue. Thank you for answering my questions. Yep.

speaker
Operator

The next question comes from Michael Eisner, a private investor. Please go ahead.

speaker
Michael Eisner

Hi. The last about half dozen releases all pertain to oscillators. Is that part of GPS3F?

speaker
Stanton Sloan

Well, it's part of everything. I mean, that's our core business here is principally oscillators and related electronics.

speaker
Michael Eisner

Well, then how's GPS3F coming along?

speaker
Stanton Sloan

Doing really well. The quality unit is performing exceptionally well. And I got very good customer feedback the other day on it, so I think that's going swimmingly.

speaker
Michael Eisner

When do you think it will go into production?

speaker
Stanton Sloan

As soon as we get an order. Any idea? You saw the announcement for the two units. Those are actually evaluation units. I think when you say production, you mean fully flight qualified for the GPS3F satellites. So the first part of that is getting the units qualified. That was the nature of the announcement that we made a few weeks ago.

speaker
Michael Eisner

What date was that? You had a couple of them.

speaker
Stanton Sloan

I don't remember. It was the announcement for digital rubidium atomic clocks.

speaker
Michael Eisner

All right.

speaker
Stanton Sloan

Thank you.

speaker
Michael Eisner

Yeah.

speaker
Operator

The next question comes from Walter Sturm, a private investor. Please go ahead.

speaker
Walter Sturm

Yeah, hi. There are multiple SPACs acquiring space and satellite companies with multi-billion dollar valuations. They all seem to be involved with satellites, et cetera, internet from space, et cetera. Are you optimistic that some of those billions might eventually be headed your way?

speaker
Stanton Sloan

Well, sure. We compete in the commercial marketplace as well. And, you know, we periodically bid on those jobs. And I'm sure we'll win some of them. So, yeah.

speaker
spk03

All right. Thank you.

speaker
Operator

The next question comes from Brett Reese with Jenny Montgomery Scott. Please go ahead.

speaker
Jenny Montgomery Scott

Stanton, I know you can't comment on the merits of the lawsuit, but where do we stand? Has a trial date been set? When might we hope this thing, unless it's settled, comes to an end?

speaker
Stanton Sloan

very hard for me to speculate. It's in the courts and I really have no insight as to how long they're going to take, but we're hoping it's resolved soon.

speaker
Jenny Montgomery Scott

Okay. All right. Thank you.

speaker
spk03

Once again, if you have a question, please press star 1.

speaker
Operator

The next question comes from Walter Sturm, a private investor. Please go ahead.

speaker
Walter Sturm

Hi. Kathy Wood of ARC Investments intends to establish a space exploration fund. Do you think your company might be applicable to a fund like that?

speaker
Stanton Sloan

I'm not sure what you mean, applicable. Our products, if you're talking about space exploration, We produce a variety of products that are used by NASA, for example. We have products on the, going back to the Voyager spacecraft, which is still operating, has our oscillators on it. We have electronics on various NASA missions, including the Mars orbiter, space station, you know, you name it. So from that point of view, yeah, we'd be very applicable.

speaker
Walter Sturm

Okay, so maybe she'll... keep you in mind. Thank you. Sure.

speaker
Operator

The next question comes from Michael Eisner, a private investor. Please go ahead.

speaker
Michael Eisner

What's the, uh, bids outstanding?

speaker
Stanton Sloan

Uh, total, you're asking the total dollar of outstanding bids?

speaker
Michael Eisner

Yeah.

speaker
Stanton Sloan

Uh, I'm not quite sure today because I have to subtract, uh, some of these, uh, some of these awards. So I would expect it's probably not a lot different than what I told you last time. It's, you know, typical puts and takes to that.

speaker
Michael Eisner

One, I think 600 million or something.

speaker
Stanton Sloan

Yeah. I think it was around somewhere between six and six 50. If I remember the last call.

speaker
Michael Eisner

All right. Thank you.

speaker
Operator

The next question comes from Sam Robotsky with SCR Asset Management. Please go ahead.

speaker
Sam Robotsky

Yeah. You presented frequency at a conference recently. How did that go? Do we expect research? Do we expect to present at any other conference in the near future?

speaker
Stanton Sloan

Yeah, I think you're referring to Needham. So it went well. Are we anticipating further research? You know, we get various conversations. I'm not aware of anybody that's planning to pick up research on us right now, but we periodically get calls and discuss that with folks.

speaker
Sam Robotsky

Do we expect to hire an investor relations firm soon? So to tell our story, because the backlog seems to be improving.

speaker
Stanton Sloan

It not seems to, it is pretty significantly. Okay. So at the moment, Steve and I are the investor relations folks. So at least for the immediate future, we'll handle it.

speaker
Sam Robotsky

Okay. Great. Good luck.

speaker
Stanton Sloan

Thank you.

speaker
Operator

The next question comes from Joel Gursky, a private investor. Please go ahead.

speaker
Joel Gursky

Good afternoon, Stan and Steve. Congratulations on the quarter. One question came from Jane in Montgomery already, and it concerns the block suit. In your last quarterly conversation, Stan, you mentioned the numbers would have been better were it not for onerous legal fees. And Steve just mentioned that the professional fees are up. Can you please tell us now what our professional fees are as they relate to the block suit so that we can get an estimate as to how much more improved our corporation's bottom line will be when this suit is finally ended, whatever that time frame is, obviously.

speaker
Stanton Sloan

Yeah, we're not in a position to disclose that number, Joel.

speaker
Joel Gursky

The number as to how many dollars have been spent?

speaker
Stanton Sloan

Correct.

speaker
Joel Gursky

Can you tell us whether the insurance company has paid any percentage of the legal fees?

speaker
Stanton Sloan

Yes, they have.

speaker
Joel Gursky

They have. Can you tell us what percentage?

speaker
Stanton Sloan

No, we can't. Steve gave you the SG&A numbers. The legal expenses are in there, so...

speaker
Joel Gursky

All right. I don't know if they're identified as legal expenses, though, versus SG&A. Stan, stay healthy. Steve, you stay healthy also. Thank you.

speaker
Stanton Sloan

Thank you, Joe.

speaker
Operator

The next question comes from Walter Sturm, a private investor. Please go ahead.

speaker
Walter Sturm

Hi. Regarding atomic clocks that I don't really know that much about, are you at liberty to mention Your main competitor in that category?

speaker
Stanton Sloan

Well, depending on whether you're talking about in the U.S. or worldwide, there's a lot of people globally that produce Tomahawks in Europe, Russia, China, and then in the U.S. So it's a list of people.

speaker
Walter Sturm

In the United States?

speaker
Stanton Sloan

Yeah, Xellis produces atomic clocks, and, geez, I don't know, there's probably 20 or 15 or 20 other folks that produce atomic clocks. Now, that's a pretty broad category of stuff when you say atomic clocks generally. So it includes laboratory instruments, all sorts of things that would be classified as atomic clocks.

speaker
Walter Sturm

I see. But for satellites I'm referring to?

speaker
Stanton Sloan

Yeah.

speaker
Walter Sturm

In regard to satellites?

speaker
Stanton Sloan

Yeah, so we do.

speaker
Walter Sturm

There are many competitors in that arena?

speaker
Stanton Sloan

No, there's a few. It depends if you're talking about rubidium atomic clocks. There's two in the U.S., us and I think the other companies, Excellus.

speaker
Walter Sturm

Okay, and rubidium is the type used for satellites?

speaker
Stanton Sloan

various, we say atomic clocks, that would include mercury ion, rubidium, cesium, and there are variations of those things all flying in space. At the moment, most of what is being procured these days is rubidium. We talk about space atomic clocks. There are some mercury ion clocks that are associated with some of the NASA There's an experimental clock called the Deep Space Atomic Clock, which is Mercury Ion Clock, which was launched, I think, last year, which is NASA. So it just depends, you know, what particular application you're talking about.

speaker
Walter Sturm

Well, they're talking about satellites for Internet communication from space. Would that require rubidium atomic clocks?

speaker
Stanton Sloan

Depends on the satellite architecture, but not necessarily. Some of that can be done with a precision quartz oscillator.

speaker
Walter Sturm

I see. All right. Thank you very much.

speaker
Stanton Sloan

You bet.

speaker
Operator

Ladies and gentlemen, we have reached the end of the question and answer session. Now we'd like to turn the call back to Stanton Sloan for any closing remarks.

speaker
Stanton Sloan

Again, thank you, everybody, for joining the call today. We'll look forward to talking to you next quarter. Thank you. Goodbye.

speaker
Operator

This concludes tonight's conference. You may disconnect your lines at this time. Thank you for your

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This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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