Frequency Electronics, Inc.

Greetings, and welcome to the Frequency Electronics First Quarter 2024 Earnings Release Conference Call. At this time, all participants are on a listen-only mode. 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 acts 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 or 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, Thomas McLelland, President and Chief Executive Officer.

Good afternoon, everyone. I have a very positive message for shareholders today. From a financial point of view, we have very encouraging numbers to report. But even more importantly, there are a number of signs that we're on a sustainable path of growth and profitability. We have a lot of exciting new business, as well as several very exciting programs, which we anticipate in the near future. In fact, we're really transitioning from a challenging period of cost cutting and reorganization to a period of growth. then we see the very real potential for acceleration of that growth over the next year. We now begin to face a different and, frankly, more pleasant challenge of effectively managing this growth such that we maintain profitability and positive momentum over the long term. We've transitioned out of a period of workforce reduction and are now beginning to hire at all our facilities. And in fact, we face the particular challenge of a very tight labor market, especially in advanced engineering fields, which are very important for our future. But let me briefly highlight the financial results before Steve fills you in on the details. So revenue and gross margin have increased substantially compared to the first quarter of fiscal 2023. and the company is reporting an operating profit of $2.12 million compared to an operating loss of over $3 million in the same quarter of last year. Although the operating profit for the quarter is affected by several one-time items, even without these items, the company would have reported an operating profit of slightly over $1 million. The backlog of $51.8 million at the end of Q1 is close to the historic high at the end of fiscal 2023 and is up dramatically compared to $39.7 million at the end of Q1 last year. More importantly, bookings are expected to increase the backlog significantly over the next two quarters. So in summary, I believe our efforts have put us on a sustainable, positive trajectory of growth in our core business. The company remains committed to achieving sustained profitability and cash generation going forward. So at this time, I'd like to turn things over to Steve Bernstein, who will go through the financial details. Steve?

Thank you, Tom, and good afternoon. For the three months ended July 31, 2023, consolidated revenue was $12.4 million compared to $8.2 million for the same period of the prior fiscal year. The components of revenue were as follows. Revenue from partial and U.S. government satellite programs was approximately $5.1 million, or 39%, compared to $5.2 million, or 51%, in 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 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 Zephyr segments, were $6.9 million compared to $4.1 million in the same period of the prior fiscal year and accounted for approximately 55% of consolidated revenue compared to 50% for the prior fiscal year. Other commercial industrial revenues were approximately 672,000 compared to approximately 664,000 in the prior fiscal year. The increase in revenue for the three months ending July 31st, 23 was mainly due to government non-space programs. For the three months ending July 31st, 23, gross margin and gross margin rate increased compared to the same period in the prior fiscal year. The gross margin dollars increased as a direct result of the increase in revenue. The gross margin rate increased significantly due to two main factors. First, many of the technical challenges faced in early part of last fiscal year have been resolved, and as a result, the related programs are now moving forward. Second, during the three months ending July 31st, 23, there were one-time contractual and other adjustments that also benefited the gross margin rate by approximately 8 percent. For the three months ending April, July 23 and 22, SG&A expenses were approximately 19 percent and 24 percent respectively of consolidated revenues. The consolidated decrease in SG&A expense of 5% for the three months ending July 31, 23 as compared to prior year period was largely due to the increase in revenue. R&D expense for the three months ending July 31, 23 decreased to approximately $506,000 from $1.1 million for the three months ending July 31, 22, a decrease of approximately $604,000 and were approximately 4% and 14% respectively of consolidated revenue. R&D decrease to the three months ending July 31st, 23 were due to dedicated R&D resources working on production orders to meet scheduled deadlines. The company plans to continue to invest in R&D in the future and keep its products at the state of the art. For the three months ending July 31st, 23, the company recorded operating income of approximately $2.1 million compared to an operating loss of approximately $3.1 million in the prior year. Operating income increased due to combination of increase in revenue over the three months ended July 31st, 22, increased gross margin, and the effects of certain cost-cutting measures instituted by management beginning in fiscal year 23. Other income expense net is derived from various sources. The income can come from reclaiming of metal, refunds, interest on deferred trust assets, or the sale of fixed assets. Interest expense is related to the deferred compensation payments made to retired employees. This yields pre-tax income of approximately $2 million for the three months ended July 31st, 23 compared to an approximately 3.1 million pre-tax loss for the three months ended July 31st, 22. For the three months ended July 31st, 23, the company recorded a tax provision of $7,000 compared to a $1,000 provision for the same period in prior fiscal year. Consolidated net income for the three months ending July 31st, 23 was approximately 2 million or 22 cents per share compared to an approximate 3.1 million loss or negative 33 cents per share for the same period of the previous fiscal year. Our fully funded backlog at the end of July 23 was approximately $52 million compared to $56 million for the previous fiscal year end, April 30th, 23. In addition, this is the fourth consecutive quarter in which backlog is greater than $50 million levels, a level the company has not seen in over 10 years. While some of this will turn into revenue and thus come out of backlog this year, we expect additional significant contract awards to be added to backlog in the coming quarters. The company's balance sheet continues to reflect the strong working capital position of approximately 23 million at July 31st, 23, and a current ratio of approximately 1.9 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 Tom, and we look forward to your questions later.

Thanks, Steve. And I'd like to now open this up to questions.

Certainly. At this time, we'll be conducting a question and answer session. If you'd 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'd like to remove your question from the 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. Your first question is coming from Brett Rice from Jenny Montgomery Scott. Please proceed with your question.

Hi, Tom. Hi, Steve. Another good quarter. Thank you. Hi. Your statement that you expect additional contract awards, can you give us a feel for what you're seeing that gives you this confidence that we'll see these additional awards?

Yeah. Let me talk to that. I think we have a lot of things, frankly, several that we thought would come in in the first quarter but haven't. We are somewhat frustrated by delays in initiating some of these programs, but we see no indication that they're not going to happen. I think primarily It ends up being sort of a slowness on the part of our federal government primarily. But, you know, these are programs that are definitely going to happen. And, you know, we're just very positive. Unfortunately, I can't make any specific statements about specific programs. But yeah, it looks quite good. And I think we're in a period of time where we're frankly kind of inundated with new requests for proposals and so forth.

Why is there this briskness of... of, of new proposals? What, what, what, what is going on in your world that, that things are percolating? If you can, you know, describe it to, to us laymen out here.

Well, uh, I, I think, uh, fundamentally we, uh, you know, there's, uh, uh, a long-term growth in the space market. Uh, I think that, uh, you know, that's the real fundamental thing. Um, and, uh, you know, more specifically, I think, uh, there's just, uh, a fair amount of activity. I think to some extent, uh, the, uh, the sort of, uh, global events, uh, challenges with, uh, uh, in, in, uh, Ukraine and things have, uh, stimulated an interest in space and there are some classified programs that have gotten sort of a kick because of concerns about availability of satellites and so forth and so on. So a number of things, but I think fundamentally It's long-term growth in space.

Great. One last one. The headwind you face with a tight labor market for advanced engineering talent, how much of a headwind is that, and is there maybe a way around it? Since things are going along so swimmingly, could you do a small bolt-on acquisition to not only get a good accretive business, but kill two birds with one stone and acquire some of this advanced engineering talent you need?

Yeah, well, we're pursuing several paths in parallel in this regard. Of course, we are trying to directly hire people, and that's I think is important in the long run because we really want to sustain a really talented, capable workforce. But in the short run, we are investigating working with outside sources of engineering talent that we can utilize on particular programs. And, of course, for manufacturing activities, we're also looking at outsourcing some of that work. Yeah, so I think that's the basic strategy. And, yeah, let me leave it at that.

Thank you. I'll drop back in queue. Thank you very much. Okay.

Thank you. Once again, everyone, if you have any questions or comments, please press star then one on your phone. Your next question is coming from Michael Eisner. Please proceed with your question.

Great job, Tom and Steve. Things are going well. Just a follow-up on... Brett's question. If you use temporary people for engineering, they wouldn't be on your books, so you wouldn't have to pay all the overhead, like health insurance and all that?

Yeah, that's correct.

So that could work out nicely. Yeah, they're pros and cons. Yeah, because when you... you could need them in the future and you have to pay more. The Office of Naval Research, are you getting some grants from them?

We have several contracts, R&D contracts with the Office of Naval Research.

So, they're going to cover the expense and you keep the technology?

That's correct.

All right, that's nice. And you mentioned something about patented low acceleration sensing of technology, which offers 100 times improvement in performance. Are we the only ones that make this?

We're not the only ones that make it, but I think it's a technology that we understand and execute better than anybody else. I think it's like most of our technology. It's very specialized. And it's not so much a question of having patents, but it's a question of having the expertise to implement these technologies effectively.

All right. The gross margins, I think you were at 39%. Last quarter, you kind of mentioned that you were going to try to keep the 35% to 40%. gross profit level. Do you think you'll be able to do that through 24?

That's certainly their goal.

All right. And years ago, there was inventory write-downs because it wasn't accounted for properly. Is everything going good with that?

Well, in the space business industry, inventory is a challenge because, uh, uh, in order to meet schedules, we need to have significant, uh, inventory of, uh, parts and material. Um, but, uh, uh, that being said, I think, uh, yeah, it's something that, uh, we're actively monitoring and, uh, I think we have things adequately under control.

All right. That goes back years. I was just wondering about that. And what's the current book to bill?

This quarter is 0.67.

But you can't really look at one quarter period, can you? Correct. It should be more like go back one complete year. I assume, correct?

Yeah, but right now, yes.

Were you going to say something? Did I cut you off? I'm sorry.

No.

All right. I think I look forward to hearing about the upcoming contracts. Are you going to be able to, if you get something, will you be able to release... release that or some of its top secret?

I think there might be some exceptions, but in general, we'll at least be able to release sort of generic public statements, and we'll do that.

Just like a dollar amount?

Yeah. Yeah, without identifying a specific customer or application.

That would be fine. I would just like to hear that something's going on. One final question. How many people do you think you need at this time throughout the whole company?

Well, it's hard to put a number on that. We don't want to get ahead of our skis, so to speak. But we're We're trying to fill some key positions and at least be out there looking with some potential candidates so that when we get some of these contracts that we're anticipating over the next couple of quarters, we can move out aggressively on them. And we've also initiated some work with some outside engineering sources. And to some extent, that's sort of on an experimental basis. But I think it's pretty important when we need to develop a good working relationship with some of these groups so that when we do get new contracts in, we can at things moving quickly. I think that in terms of a specific number, I hesitate to really say anything in this regard. Workforce, perhaps a 10%, 15% increase, but we'll have to wait and see how things develop in that regard.

All right, I was gonna say, hypothetically, if you got work from the row, I'm just using picking that company, would you be able to use some of them? Their engineers? Is that what you're trying to do?

No, no, I don't think we have any thought that we would be able to do that kind of a thing. But there are some resources out there, some companies with sort of engineering talent for hire, and we're working with several of those at this point in time.

All right. Great job. Really, in the last year, you turned the company around. Thank you. Okay, thanks.

Thank you. We have reached the end of the question and answer session. I will now turn the call over to Thomas McLelland, President and Chief Executive Officer, for closing remarks.

Well, I'd just like to thank everybody participating in this call. And since there are no further questions, I think we'll end at this time. Once again, thanks everybody for participating.

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