Q1 2021 Frequency Electronics Inc Earnings Call

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Greetings and welcome to the frequency electronics first quarter fiscal year 2021 earnings release Conference call.

At this time, all participants Arnie listen only mode. A brief question 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 material.

Lee from the forward looking statements.

Factors.

That would cause or contribute to such differences are included in the Companys press releases.

And our further detailed and accompanied 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. Stanton Sloane President and CEO.

Thank you.

Hello, everyone. Thank you for joining us today to discuss first quarter 21 results.

Steve will cover financial details with you in a minute. Let me first give you my perspectives on the quarter.

I'll start by stating that I'm pleased with the direction I am sitting in the business.

Our teams have been working hard both to pursue new business and work our way through some difficult technical challenges on previous programs.

We're starting to see the results from these efforts.

<unk> has a long history of providing products that go into space and then as the U.S. increases its focus there. If you I is well positioned to service that market.

Building work trucks that have to operate reliably and effectively in that environment is very difficult.

<unk> as the benefit of over 50 years of experience with our systems operating in space now does a knowledge base that we leveraged to ensure a better more reliable products.

That's an invaluable FDI asset and one which fosters customer confidence in us as is reflected by the increasing number of awards for precision time in frequency products for satellite applications.

I believe we will see continuing growth in this arena as space becomes an increasingly more important domain to the U.S. military that bodes very well for <unk>.

[noise] not wanting to slight our terrestrial market I'm also pleased with recent awards for precision oscillators that will go into various U.S. military airborne platforms, one of which we announced this afternoon.

We had FDI are proud that our electronics can be found in some of the most important tactical and strategic military asset to the United States and its allies.

As we complete a couple of the programs that have been nagging us I expected our overall financial performance will continue to improve.

We of course continue to focus on internal operational improvements and cost reductions.

One example is our continuing rollout of new ERP system that is helping us streamline our manufacturing and program management processes.

Well this quarter showed a net operating loss on a non-GAAP pro forma basis, taking into account extraordinary legal in insurance expenses and the accounting associated with the problem programs I mentioned above we would be profitable I.

I see that as a significant improvement.

Now, let me turn it over to Steve to take you through the financial details Steve.

Thank you Stan good afternoon.

But the three months ended July 31st 2020, consolidated revenue was 13 million up 3% compared to 12.6 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 6.7 million compared to 3.9 billion for the same period of the prior fiscal year and accounted for approximately 51% of consolidated revenues compared to 31% for the same period of the prior fiscal years.

Sure.

Revenues out of satellite payload contracts I recognize primarily under the percentage of completion method at a recorded only in the FDI New York segment.

Revenues from non space U.S. government and Deo de customers, which are recorded in both the FBI, New York and FDIC for segments with 5.3 million compared to 6.7 million in the same period of the prior fiscal year and accounted for approximately 41% of consolidated revenue compared to 54.

<unk> percent for the prior fiscal year.

Other commercial and industrial revenues were $1 million compared to 1.9 in the prior fiscal year intersegment revenues are eliminated in consolidation.

But the three month period, ending July 30, Onest 2020, the gross margin and gross margin rate both increased marginally over the same period in fiscal 2020. The increase is primarily due to product mix. They were higher engineering costs on several programs in both periods, but as these programs and completed we expect.

Target is to increase.

For the three months ended July 30, Onest, 2020, and 2019, selling and administrative costs were approximately 25% and 20% respectively of consolidated revenue. The increase is due to additional insurance costs and professional fees relating to litigation for which we expect to receive a partial reimbursement through the car.

He is insurance.

R&D expense for the three months ending July 30, Onest 2020, and 2019 decreased to 1.2 million from 2.3 million a decrease of 1.1 million and were 9% an 18% of consolidated revenue.

The decrease is due to previous R&D efforts that have ended and turned into production. However, the company plans to continue to invest in R&D.

The three months ended July 31, 2020, the company recorded an operating loss of 337000 compared to 780000 in the prior year the operating loss reflects.

Improved in revenue gross margin in gross margin rate.

Other income consist primarily investment income derived from the company's holdings, a marketable securities. The prior year investment income included a dividend received from Lorianne of $125000.

This yields a pre tax loss of approximately 253000 compared to a pre tax loss of approximately 570 for the previous year.

For the three months ending July 31, 2020, the company recorded a tax provision of $9000 compared to 19000 for the same period of fiscal 2020.

Consolidated net loss for the three months ending July 31, 2020 was 262000 or three cents per diluted share compared to 591000 or seven cents per diluted share in the previous year.

Our fully funded backlog at the end of July 2020 was approximately 38 million up approximately 2 million from the previous year end April 32020.

The company's balance sheet continues to reflect the strong working capital position of approximately 39 million at July 31, 2020, and a current ratio of approximately 4.6 to one.

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 stand and we look forward to your questions later.

Thank you Steve.

We'll take questions now and let me ask the operator to come back on and I'd tell you how to do that.

Operator.

Hello, Pachter are you there.

Mm.

Did we lose the Lillian no.

Are you ready to take questions I apologize about that yes. Go ahead. Please at this time is conducting a question answer session. If you'd like to ask a question. Please press star one on your telephone keypad confirmation total indicate your line is in the question Q a confirmation telling to indicate your line is in a question can you make prestart too if you like to remove your question from the Q for participants.

Using speaker equipment, and maybe necessary to pick up your handset before pressing the star keys, one moment, while we poll for questions.

Your first question comes from line of Sam Rebotsky with SCR asset management. Please proceed with your question, yes. Good afternoon, Stan <unk>, Steve <unk> annual report really looks good.

And the improvement this quarter is good.

No we're.

You generally mentioned the bids that you have outstanding and what is the bids in what is the non funded backlog.

I simply have.

We don't we don't.

Report non funded we only report what is funded which is what the backlog number that Steve gave us.

And what is the bids that we have.

The total number of bids outstanding.

Oh, let's see is probably.

Probably in the 600 625 range I haven't checked it this week, but it's around there.

Well that's wonderful.

Northrop Grumman and won a 13 billion contract for a missed so I know you did 10% to your business with Northrop like this past year and I think there's 13 billion could be 85 billion do participate in missile contracts and it does.

And just satellites.

Yes, so my comments about terrestrial market is the is the non satellite part. So the answer is yes can you provide various electronics, mostly small courts oscillators, all which are used in high vibration hygiene environments, but we do provide products in that market.

Okay, I I'll step out let somebody ask some questions and I'll come back. Thanks.

Thanks Sam.

Your next question comes from line of Brett Reece with Janney Montgomery Scott. Please proceed with your question.

I Stat and high Steve Hi.

The precision oscillate a contract you announced today.

It is that from the same customer from the August 12, 5 million dollar precision oscillated contract or is it different customer that's a different customer.

Okay, Oh are we going to see a you know other multiple precision oscillator, you know contracts from different customers is that a possibility.

Well, we also we have looked a lot of things up 10 inhibitor in the competitive process, but my answers I would expect to see that yes.

Okay, and the factor that would lead.

Your customer to go from.

On funded to funded backlog.

Based on what's going on in the World has had the.

[noise] propensity for them to go to funded from unfunded has it increased stayed about the same can you can you talk to that at all.

So let me let me start by trying to make sure that articulate <unk>. These terms because I know there tends to be some confusion.

When we get a contract.

And this is very typical of government contracts and check that.

I would hesitate to say, it's universal, but it's very Tom when you get a government contract.

That the government will award the contract and but they don't be fun, the entire or contract value. They fund it incrementally and sold here, there's a a limitation.

Of liability on the government support a better associated with the amount of the funding.

So you could have a valid contract for let's say $10. He could it be only funded at the two dollar level and for US what we do is we record the $2, which is funded in the backlog. So when Steve talks about backlog, that's how we account for that.

Now to further confuse things you can also have a contract with options. So in that case, Oh, let's say you have a again a 10 dollar contract.

Oh It includes another oh option for another $5 million lets say, so the total contract value might be $15 million.

But the 5 million dollar options are not exercised.

And then you have the funding limitation also so you're going to about 15 million dollar contract. It has 10 million dollar base contract. That's funded at 2 million a but also has an additional $5 billion worth options.

So that is that as the case on several of our programs, we have contracts, which are at a particular value, but the funding has been limited.

So what we report to you in publicly is the backlog. So when we say backlog that is completely funded.

Well most of our contracts are either if they're not directly with the government. There are two government prime contractors and the contractual slowdowns associated with those contracts or essentially the same as what the government does for the prime contractors.

So that's the way things work and Ah you asked about trends. So at the moment, we're seeing an increase in the number of contract awards, we reported probably five to take we got to maybe four or five brush at least since your last couple of months some of them significant.

So the trends for contract awards is increasing and the the funding has been flowing a pretty readily so at that moment, a all those contracts are adequately funded and oh as far as I can tell there will continue to do their oh at least to their base values, we would answer <unk> anticipate.

The options associated with those are largely get exercised at some point as well.

That answer your question, it dies and <unk> and tagging on to that to move in your hypotheticals.

10 million dollar base contract with 2 million dollar funding that other 8 million that you know we Wanna get funded if that's something that's totally.

How did your control and in that control of the customer.

Or is there something that you proactively can do to accelerate.

Albeit catalyst.

To truly being funded.

Well ultimately it's a it's controlled by the government, but we don't usually there's not a problem. If the government for example, initiate contract for satellite and they have you know a I don't know there a third of away through construction the satellite they're going to fund the completion of the satellite I means be very and.

Usually they didn't do that sometimes they do stretch the funding bill they'll stretched the schedule. So that the funding in any one fiscal year, you know spreads a little bit more that happens, but but by and large once these programs are underway they tend to get funded.

Right I mean, it dropped back thank you very much for taking my question sure.

Your next question comes from lineup, Michael Eisner <unk> private Investor. Please proceed with your question.

Hi, great quarter Huh.

Your August and September contracts.

Not not none of that isn't that backlog correct.

No that are correct.

I'm, sorry, what what they say August August instead of the one today.

Well so they can't be into backlog now just went up until July thereby artist. That's correct. We're only talking first quarter here, yes, yes. So those two that was a 5 million in August I think almost 3 million today.

Right that has nothing to do with this 37.9, a 38 million that I thought I reported correct, yeah and the way you wrote this it looks like you started did the increase in Uh huh.

Backlog in part of the first quarter <unk> 'cause it looks like revenue is going to go up.

The backlog is going to go up continue to go up the way you both the press release.

Well Uh huh so the the press releases for a contract was awarded not in the first core so numbers were reporting to you today or first quarter numbers, but clearly it other contract awards will go into backlog, but that's not a few one ah that's going to do the Q1 numbers Oh, no no what I'm, saying.

He is.

You wrote the press release and they see.

The contract stock off slowly.

Yes, it though so I expect what the way I took that you expect a backlog to go up higher.

So net worth yeah, we'll make.

Yeah, you're mixing up a couple of things Mike Let me explain to you know I think I think I call myself, because you could you actually.

Do the same revenue and backlog could go up and down Yes. My point was when you get a large contract award. The revenue is not a linear you. It takes yeah, a little bit of time to do the planning for the project before you see the uptick in the revenue that was the point I was trying to make.

Exactly.

If I'm not forget and I think you jumped up 30% in revenue from last quarter roughly.

Yes, yes yep.

That said lots of very large increase because I think you were doing like 10 million.

Because like for the last yeah.

[noise] roughly I think he did 21 million last year.

That's about right [noise].

Oh, Yeah problem programs are they over with.

Not a totally but a one of them we will we will deliver all the products in about 10 days that we will be behind us.

The other one we're in a and we have stuff in final test the deliveries run out through a through October, but I would anticipate that oh be finishing up in that timeframe.

And they're going to cost us money or well can.

Well [laughter] I am doing my best to avoid additional cost, but we have to get through the test.

All right and without those are extra expenses you were made money the score.

Yes that was my point in the the commentary in the press release.

A lot about sales people did you hire more salespeople.

Not in Q1, but we have added folks we and we've added employee.

Always generally since May I think we have probably an additional 14 or 15 people were writing in another million on 12 or 14 right now so.

So employments is a increasing.

So from last quarter, you added they will be like 20 people know 14 since probably around May may timeframe to another 14, you plan on I have additional openings was what I meant to say.

It's hard to find people.

We seem to be having pretty good luck staffing the key positions I actually and encouraged that we have not had more problems. So.

I don't know fats are related to covert situation or the economy or whatever but at the moment. We're we're able to find people we need.

Okay. Thank you.

Yep.

As a reminder, if you'd like to ask the question. Please press star one on your telephone keypad as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad, one moment, while we pull for more questions.

Your next question comes from line of Robert Smith with Center of performance investing. Please proceed with your question.

Thank you for taking my questions.

What are what percentage of your funded backlog do you expect to ship I mean, its current fiscal year.

[noise] [noise] one second.

When we actually have that number there.

[noise] somewhere between 70 and 80% of it we expect.

Thank you with an increasing backlog and.

No problem contracts that are going away, what kind of gross margin targeting huh.

Oh, no I think the business should run north of 35%.

Uh huh.

And.

What a run rate do you need to Oh have profitability.

Oh, that's little a little tricky to answer a depends on the product mix and other things, but I think at at the 35 and work with 35 or the business should be profitable.

Okay and or.

What the particularly ones the litigation about.

Oh, you referred to Martin Bloch litigation.

Oh is that what are the ones Okay got it.

The one that you had expense one.

Oh, yes, mostly associated with that litigation.

Alright, thanks, so much for taking my questions.

Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to management for closing remarks.

Great. Thank you everybody appreciate you joining us today, and we look forward to talking to your next quarter with that we will sign off every day.

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

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