Q2 2023 Frequency Electronics Inc Earnings Call
[music].
Okay.
Greetings and welcome to the frequency electronics second quarter fiscal 2023 earnings release Conference call. At this time, all participants are in a listen only mode.
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.
Statements inherently involve uncertainties that could cause actual results to differ materially from the forward looking statements.
<unk> 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.
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's now my pleasure to introduce your host Thomas.
President and Chief Executive Officer.
Hi, good.
Good afternoon, everyone.
Although the results for the second quarter are not wherever you would want them to be.
Significant indicators were on the road to recovery.
Quarter over quarter has increased.
Our backlog of approximately $56 million.
And it's higher than it has been at any time in the last eight years.
The book to Bill ratio was 2.8.
And additions.
The $4 4 million of new business already in the third quarter.
At the annual meeting we discussed the satellite industry moves to develop systems, which utilized a large number of low cost satellites.
Which are by design replace much more regularly every three to five years, rather than the 15 year lifetime.
Required of todays large satellites.
One of our key customers large government.
Prime contractor.
As communicated that they experienced 15% growth in satellite business over the past year.
We anticipate sustained growth attendant to 15% annually over the coming years.
And as a result is interested in engaging.
Development of enhanced technology appropriate for what they refer to as proliferated low Earth orbit satellite systems.
Often referred to as large systems of small satellites.
We're experiencing similar similar overtures other satellite prime contractors, all of which bodes well for our future aerospace business prospects.
All that being said, we still struggle with supply chain issues persistent inflation.
But in both cases signs of easing are beginning to appear.
Continued effort is required to navigate the changing economic and geopolitical environment, but we are confident we are progressing in a positive direction and look forward to a dramatic improvement in results.
The company is committed to moving towards sustained profitability and cash generation in the near future.
We remain debt free and our strong balance sheet allows us to pay the special dividend discussed in a separate press release today.
While still maintaining the ability to invest for future growth opportunities.
Okay.
I'd like to turn things over to the chief.
<unk> Financial Officer, Steve Bernstein.
Go ahead, Steve.
For you Tom and good afternoon.
Before I give you the financial report for the second quarter of fiscal 'twenty. Three I just wanted to give you a brief explanation relating to the delay in filing the 10-Q as well as the restated fiscal 'twenty to 10-K.
During the during their preference.
Ration of the current 10-Q for the period ending October 31, 22, we realized there was a formula error in the calculation that split contract assets and contract liabilities from a net presentation to a gross presentation.
The net number is correct. However, our formula didn't split the assets and liabilities of related contracts being calculated as one project for revenue purposes.
For example, if there were three related contracts that made up one complete project to where the contract asset of $1 5 million, each and one with a contract liability of $1 million. Our formula would have recorded a contract asset of $2 million instead of a contract asset of $3 million and a contract liability of one.
Million.
As we put together footnote C. In the 10-Q to show the effect of the Formula change going back in time. It was determined that it was an immaterial error and that it would be only footnoted to show the effect going back.
It was also determined that when the fiscal year Form 10-K for the period ended April 32002 was filed with their stated fiscal year 'twenty, one contract assets and contract liabilities shown gross as opposed to net as was shown in the fiscal year 'twenty. One annual report on Form 10-K, the footnote.
Was deficient in that it did not disclose to the reader that the fiscal year 'twenty, one contract assets and contract liabilities change from net to gross.
As a result, we had to amend the fiscal year 'twenty two annual report on Form 10-K to advise the public not to rely upon the financial statements as well as the controls on financial reporting.
It is a GAAP requirement to disclose the change that were made with regards to the fiscal year 'twenty. One presentation changes in the annual report on Form 10-K for the period ending April 32002.
But manage ment wanted to clarify the situation. Despite the emission to disclose the reader of the financial statements that the contract assets and contract liabilities would change from net to gross presentation management feels that the financial statements were accurate and could be relied upon other than the formulary mentioned above all.
The information a reader of the financial statements needed was in the financials and was completely accurate the only thing, causing this restatement and delay in filing was the correction of a footnote to make the reader aware that the contract assets and contract liabilities, which changed on the face of the FY 'twenty one balance sheet from net to gross.
However, it was shown growth in the supporting footnotes.
I should also mention that this change does not affect the P&L working capital or any other calculation that would have helped in Nevada in the financial statements as presented is because of these reasons that management of the company feels that the financials were accurate and could be relied upon.
I believe I have said enough about this subject. However, if you want more detail feel free to contact me after the call and now I will go into the financials for the second quarter of fiscal 2003.
For the six months ending October 31, 22, consolidated revenue was $17 2 million compared to $25 9 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 approximately $7 8 million or 46% compared to $13 3 million or 52% 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 New York segment.
Revenues from non space U S government and Dod customers, which are recorded in both the New York and <unk> segments were $8 million compared to $10 6 million in the same period of the prior fiscal year and accounted for approximately 47% consolidated revenue compared to 41% for <unk>.
The prior fiscal year.
Other commercial and industrial revenues were $1 4 million compared to $2 million in the prior fiscal year.
Consolidated revenues increased quarter over quarter by approximately 750000 or nine 1%.
Intersegment revenues are eliminated in consolidation.
For the six months ending October 31, 22, gross margin and gross margin rate decreased as compared to the same period in fiscal year 'twenty two.
The decrease in gross margin and gross margin rate was due to increased engineering cost on development phase programs experienced particularly complex technical challenges that have since been resolved.
Minor technical challenges that have been or will be resolved reasonably quickly and the negative.
Cost impacts of some programs due to supply chain delays gross margin was also affected by under absorption of costs due to decreases in sales during the six month period, ending October 31 22.
For the six months ending October 31, 'twenty, two and 'twenty, one SG&A expenses were approximately two 3% and 26% respectively. As consolidated revenue the decrease in SG&A expense for the six months ending October 31, 22 as compared to the prior year was largely due to decrease in professional fees.
As well as one time reductions that stock option expense related to forfeitures and deferred compensation expense. The company continues to monitor expenses looking for additional cost effective reductions going forward.
R&D expense for the six months ending October 31, 20, <unk> decreased to $1 7 million from $2 7 million for six months ending October 31, 21, a decrease of $1 million and was approximately 10% and 11% respectively of consolidated revenue.
The R&D decrease for the first half of the fiscal year 'twenty three are really it's a focus on projects currently in production phase the company plans to continue to invest in R&D in the future to keep its products at the state of the art.
For the six months ending October 31, 22, the company recorded an operating loss of $5 4 million compared to an operating loss of one 4 million in the prior year.
Operating losses resulted largely from decrease in revenue coupled with the additional cost margin previously regarding gross margin operating loss improved quarter over quarter by approximately 120000 or 26, 5%.
Other income consisted primarily investment income derived from the company's holdings of marketable securities earnings on these securities May based on fluctuating interest rates dividend payout levels and the timing of purchase sales redemptions or maturities of securities.
This yields a pretax loss of approximately $5 4 million compared to $1 1 million pre tax loss for the prior fiscal year.
For the six months ending October 31, 22, the company recorded a tax provision of <unk> hundred compared to 2300 for the same period of the prior fiscal year.
Consolidated net loss for the six months ending October 31, 22 was $5 4 million or <unk> 58 per share.
That's a $1 1 million net loss or <unk> 12 per share in the prior fiscal year.
Our fully funded backlog at the end of October 22 was approximately $56 million compared to approximately $40 million for the previous fiscal year ended April 32002.
The company's balance sheet continues to reflect a strong working capital position of approximately $28 million on October 31, 22, and a current ratio of approximately three 9% to one. Additionally.
Additionally, the company is debt free.
The company believes that its liquidity is adequate to meet the operating investing needs for the next 12 months in the foreseeable future I will turn the call back to Tom and we look forward to your questions soon.
We can.
Now take questions.
Thank you absolutely ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your Touchtone phone at this time pressing.
Pressing star to remove you from the queue should your question to be answered and lastly, while posing your question. Please pick up your handset if listening on speaker phone to provide optimum sound quality. Please hold while we poll for questions. Once again Thats star one if you have a question or comment.
Okay and the first question is coming from Brett Reiss.
Yes.
From Janney Montgomery Your line is live.
Hi, gentlemen, Tom Stephen can you hear me.
Yes, great great great.
First question is on the dollar a share special dividend.
Could you just give me a sense of.
How the board decided to do that.
Maybe looking on bolt in bolt on accretive acquisitions.
Sure.
Retaining the money for organic.
Growth.
Initiatives and I suppose.
Share buybacks the stock is already pretty illiquid.
Why that was rolled out could you could you give us some color on that.
Thank you.
Kind of hit the nail on the head with respect to share buyback I think.
The general conclusion.
Or was it.
This was an appropriate way to.
Sure.
Yes.
Secondly, provide the same benefit share buyback.
Sure.
But in a more effective fashion.
Okay.
It was very encouraging to see the backlog.
Move up so dramatically.
Tom could you give us some sense.
On the timing on working through the backlog or is it.
A certain percentage each quarter or is it more back end loaded could you give us some color on that.
Well that's it.
Yes.
Yes.
It's not like the backlog is rare.
Presented by.
One or two contracts, so I think it's hard to make.
A general statement in that regard.
<unk>.
Uh huh.
<unk>.
In general I think.
<unk>.
But.
Backlog.
It's confirmed two revenue period, roughly two years.
But they're going to be.
Some cases, whereas significantly longer than that somewhere else a little bit shorter.
Okay.
And what is the composition of the backlog is it mainly with your.
Expertise with the quartz clocks is at the atomic clocks or is it another area of your business that gave rise to this increase in the in the backlog.
Well I think there are really three things stairs courts oscillators.
<unk> Kloss and.
Microwave systems.
I actually don't have.
Quantitative breakout available at this time.
But those are those are the primary things.
It's reasonably well balanced between those three.
The areas.
Okay, and a couple of quarters ago.
The company was devoting a lot of R&D to reduce the size.
Wait.
We needs and costs.
Your.
Clock offerings have could.
Could you describe the progress he has been able to make in that area.
Well I think we've made considerable progress, but it's something that we we still work on.
In fact.
Sweet.
I just.
Noticed made note of the fact that.
We got.
A little over $4 million of new business in the third quarter and a significant chunk of that is.
Our contract which.
We will utilize.
<unk>.
The results of <unk>.
Some of that R&D to develop smaller.
Devices.
And so I think thats pretty encouraging.
So very much an ongoing effort.
We do see this is the direction of the industry at this point.
Moving to a smaller lower cost systems.
We have every intention of being a strong competitor.
Firemen.
Last question.
For me and I'll drop back in queue.
Is your employee head count where you wanted to be.
Based on what you see the.
The level of business over the next few quarters.
Going to be.
Yes, I think we're pretty close to where we need to be.
<unk>.
I.
Certainly don't anticipate any further reductions at this point in time.
Great I'll drop back. Thank you very much can taking all my questions I appreciate it.
Okay.
Okay next we have Richard Johns private Investor Richard Please proceed.
Hi, Thank you.
First thank you for the dividend.
And.
My first question has to do with your supply chain problems you've.
You've had this difficulty getting parts and that continued in the second quarter.
My question is can you can you see at the end of that can you see a getting back to normal in that regard at some point in the fourth.
Yes, yes, I think we can.
What can we what we continue to see.
We place orders and we get extremely long lead times.
<unk>.
Electronic parts.
Ordinarily would lead times of a couple of weeks, maybe a month.
We now are quoted to lead times of more than a year in some cases, we've had lead times of 80 weeks.
But what we're starting to see is it.
We get promise deliveries 80 weeks out in the future and then we actually receive the parts in.
10 weeks or 15 weeks.
And we've seen that in a number of cases.
And so I think.
Inc.
What what you start to see us as that.
People are being very conservative and making promises, but things are turning around and they are able to do much better than those original conservative estimates.
Thats really encouraging but nonetheless.
The plan based on our promises.
Our suppliers and so so and then we don't see these kind of improvements to deliveries in all cases, so it's kind of a mixed bag, but I think it is indicative of the direction that things are going.
Okay, that's great and.
The additional costs that come as a result of difficulty in getting parts or.
Sure.
Taking more time to engineered products.
Do you do you ever get.
Compensated for that that is in your ultimate.
Development or production.
Programs do your customers give you some wiggle room in that help you.
You pay for that.
Well.
That's something that we're actively pursuing at this point in time.
All of our customers.
In one particular case, we have gotten some some.
In that regard.
But.
In general that Hasnt happened, but I think that is something that we.
We are going to be pursuing.
For the next year or so because yeah.
We have suffered tremendously.
In this regard.
Okay.
You said on <unk>.
On one of the two calls that you that you lead time that.
You were hoping to get back to breakeven by the end of this fiscal year.
And I'm.
I'm wondering if you still think that's likely.
Alright.
I wouldn't say as quickly as it did.
This fiscal year will be breakeven, but I think the.
The last quarter and going forward after that we.
We do anticipate.
Being breakeven.
Perhaps a little bit better.
Okay. Okay, alright. Thank you good luck.
Thank you. Thank you.
Okay up next we have Robert Smith with center for performance investing Robert Please proceed.
Hi.
Afternoon, Thanks for taking my question.
<unk>.
Tom.
The presentation you made at the annual meeting is that on the website.
Yeah.
It should be if not we'll check but it should be there.
Okay. Thank you yeah, I'd be really interested in listening to it.
So.
What kind of the.
Time periods.
Or do you think you'd need to.
Make your own personal imprint on the leadership at the company I mean, you've been at the helm for relatively short while.
You have the.
Wealth of experience with the company.
Whom you're attempting to reposition the company into stronger growth markets. So I'm wondering.
How do you feel about this.
Well.
I think.
In some case.
Leaving an imprint already.
They're they're not very visible in the financial results at this point.
But.
There are a lot of things going on a lot of changes.
<unk>.
<unk>.
So so I think there's kind of a mixed answer there are some things that are evident already and there are some things that are going to take a couple of years.
Have.
We are pursuing.
New products and things.
Yeah.
There are things that.
Eric.
Got it.
Develop instantaneously.
There are some things we're working on that we think we're going to have some prototype products in 2025 timeframe 2026 timeframe.
No.
Yes.
Really a summary answer is.
It does.
In France happening happening continuously between.
The present and.
A couple of years out.
Yeah.
Yes.
The burgeoning.
Small satellite business.
It's really coming to the fore I assume.
You were asleep, but in the past he has certainly not been.
Uh huh.
Turning to <unk>.
Participate, though so I assume that this is a really important shift that youre youre trying to take the company the direction is correct.
Yes.
No.
It is in some sense.
But I will say, we don't we don't believe that the large satellites are going to completely disappear anytime soon and so granular or you don't.
Want to abandon that business.
Back.
There are signs of growth in that business also.
Looking to the near future.
Yes.
We do feel that the small satellite businesses.
Is where the future will go but I think the thing and I've said this before.
Yeah.
The question is what the what those small satellite really mean it.
There are.
Satellites the size of a basketball uneven smaller that have been launched recently.
There are people that call a satellite dish.
100 times bigger than that which are also considered small satellites.
So that's that's really the challenge for US is to find out where the sweet spot is and where things really ends up I think.
There are an awful lot of small satellites many of which are.
Get launched up into space and never operate.
Even for a minute or two.
In fact as part of the Artemis.
Launch there were some satellites are launched at the same time that never function properly.
So so.
There is evidence that you can't just.
Make things cheaper and cheaper and smaller and smaller and get away with it.
<unk> and space Theres radiation, there, so I'll kind of environmental things that need to be taken into account. So that's what we're really.
Trying to do it.
And just to make sure that.
We steer towards the sweet spots in the future and I think we have some pretty good ideas of where that will be.
It makes sense so looking at the revenue models.
I guess the minutes to what kind of volume you have to generate two to reach breakeven considering gross margins.
Oh.
Do you want to answer.
That one Steve.
We have a model we've I don't want to really forecast the future yet, but based on what we see what we have in house in our backlog and everything else. We believe based on product mix and everything else going like Tom said in the second.
First quarter, we should be heading in that direction there.
Yeah, we're heading in the direction, which you were okay. Thanks, so much and good luck going forward.
Alright, Thank you you too.
Once again, if there are any remaining questions or comments. Please press star one on your Touchtone phone next we have Michael Eisner private Investor Michael. Please proceed. Thank you.
The $56 million in backlog.
With some of that classified.
Wasn't many news releases recently.
About contracts.
We.
We don't have any classified contracts.
Alright Thats fine.
None of that is classified.
And then the you see.
Right now technically up to $60 million in backlog because that 4.4 came in after October 31st.
Yes.
Yes.
That's good how many employees do you have all of them.
We have about 180 employees.
Thank you.
Considering all of.
The.
California, California, and New Jersey also totaled 180.
180 between long island.
New Jersey and California.
Let's see went down a drop.
I think he did did you move more people to from California to New York.
Oh no.
No we did not.
Hi.
And.
Where are we with GPS three F.
We.
We have actually just completed.
Completed qual qualification testing.
Of an engineering model and in fact, we.
Uh huh.
We have also completed as part of that we needed to do a one.
140 days stability test and we have successfully completed a debt also.
To fly.
Fly.
One of the GPS <unk> GPS.
<unk>.
Satellites.
In our <unk>.
An extra slot on the satellite for.
Extra atomic clock in.
The clock will be flying in that slot.
Don't remember the exact schedule for that satellite at this point in time, but.
But we have heard that.
Everything is good and I believe that's a satellite is all bundled up and ready to go.
It's just a question of when it will actually launch.
That would be on GPS three not the GPS three F.
That's correct.
Correct.
Yes.
There is a goal.
On the program.
This is seen as an important step.
Everybody having confidence in our clock.
Primary clock on the satellites and so both sourcing effort.
We get this in service.
As early as possible.
The three you have to just like the longest biggest contract right.
Yeah that would take years.
Okay.
Yes.
Yes, it'll take a few years too.
I think there are 22 GPS III.
<unk> satellites.
But I don't believe all of them have been released at this point in time.
Plus the GPS.
Three there was like 10 right.
Yes, so it's a totally like 32.
Yeah, I mean, you're getting on the final one.
GPS III.
Yes.
And one more question.
I think you mentioned last quarter.
Some of the companies were buying more parts upfront.
Uh-huh something to that effect they are they continuing to do that.
Well we want.
I want to speak for other companies, but we're doing that.
So this way you won't be short part.
Yeah.
It is.
It's a challenge because we don't want to just build up a huge inventory.
Parts on the other hand.
It makes sense given the long lead times.
Two.
Judiciously buildup.
Build up some inventory of parts that we commonly use so we're definitely pursuing the yeah. I think <unk> commented like if if they didn't give you the right path, we would take a year to get the new part and it's something I think.
That's what you mentioned and I mentioned last time.
Patrick.
And there are the overruns over with you are in good shape there.
Uh huh.
We're oh.
Or definitely finishing up.
The development.
On a couple of programs.
We anticipate that.
Overruns.
Our ofer.
Nearly over on those.
So yeah.
Alright, I will assume you think everything is going good if you paid the dividend.
Well.
Were certainly pretty bullish about the future.
That's right.
I'm glad to hear that I think you said this is the.
Something that getting first time in eight years.
You had this kind of backlog.
Yes in the release.
So thank you for your time.
Youre welcome.
Okay. The next question is coming from Frank was Natzke private Investor Frank. Please proceed.
Hi, Thanks.
Follow up on the inventory question.
Well it was pretty good.
Okay.
The supply chain issues.
Other issues contributed to that.
What do you see as Europe , but it's still a very large number you know almost $20 million in inventories.
The trends are pretty poor.
On an ongoing basis.
Without any supply chain.
What do you think your inventory turns should be because you have a lot of cash obviously tied up in that.
Steve.
Got it.
We look and manage inventory the problem is sometimes we use it.
Later on as we get repeat programs.
So you can you have minimum buys and various other things that affect the growth of the inventory. So yes, it stays a little bit higher but the end result is a lot of it gets reuse on the next generation of things and things of that nature.
Okay. So you wouldn't see any any particular change in the inventory drain ratio.
Yeah.
Because of the length of the programs.
Probably not or not significant.
Okay could you could you update us a little bit on safer with what's happening out there as far as there are.
For business.
I think their outlook is is.
Quite good at this point.
We've.
Recently received.
A large contract.
And we have a couple more in the pipeline.
Look very promising so I think.
We've gone through a challenging period with cipher, but I think things look really pretty good right now.
Good.
In the past there have been some classified work out there hasn't been.
Classified work at site.
Exactly yeah.
Yeah, well I think the.
<unk> they they.
Manufacture.
Hardware that takes advantage.
That utilizes GPS receivers.
And so so there are GPS receivers that are able to.
<unk> utilized.
Encrypted messages military messages and so there's a there's some.
Classified activity that goes on related to that but it's.
It's not that the site.
He is working on.
Overall classified programs.
Okay and one final question.
I think the moves you've made since you've become interim.
Been very favorable.
Could you update us on what.
Bob.
The status is of a non interim.
Either you or someone else.
CEO .
CEO .
Well.
<unk>.
I don't know that Thats really for me to say.
I think that.
It's my understanding that the board is not actively looking for a.
A replacement for me.
But.
Okay.
I don't have any intentions of going anywhere or doing anything different at this point in time.
So.
Think that.
We have every intention of being here certainly for the next.
Uh huh.
These five years.
And what was it in the interim.
Designation rights.
Uh huh.
But yes, well, perhaps so we'll see.
Alright, Thank you very much have a good holiday.
So thank you.
Okay. The next question is coming from FERC call private Investor. Please proceed yes.
Thank you very much.
Okay.
Thanks for taking the call.
The question that I had really relates to how our board.
And the dividend that we're giving.
While I certainly appreciate it.
I have some questions as relating to how all borders performing.
And there's no one on this call seems to really be concerned.
Our backlog is 56 million up from $40 million.
Additionally, we shipped SKT $8 million over the six months.
All of the press releases that goes through the board approval and so on I haven't seen any telling.
Selling and industry and the public at large that the corporation is in fact, having increased bookings. We took this <unk> million dollar contract and that one and so on and so forth to promote our cooperation as it relates to our stock price and the value of our cooperation.
That's a board responsibility, which to me and maybe others they've certainly failed.
The next thing that concerns me and it only occurs.
Hour ago.
Please have a dollar a share dividend.
While I certainly appreciate it a corporation is losing tons of money and it includes board members that probably only 20 or 25% or control 20 or 25% of the company's stock.
Look at their rewards they are getting to a corporation that's lost half its value in the last couple of years I'm really upset.
The performance of and overseeing board.
That determines a temporary CEO and not a temporary CEO or whatever's going on and no. One on this call seems to be concerned that our board of directors and rewarding itself in certain instances, where the shareholders that they represent and the cooperation and you're just.
Giving up on losing money certainly perhaps for the next balance.
Balance of this fiscal year, and hopefully that will turn around next year and while I'm an extremely small shareholder.
I guess you can tell by my anger in my comments my my conversations debate that I'm more than upset over the performance of it.
Individuals that control and run the management so to speak of our business gentlemen, I only wish you a healthy healthy new year and next year fiscal and calendar should be better for all of US. Thank you for accepting my call.
Okay I have no comment at this time.
Okay. We have no further questions in queue I'd like to turn the floor back to Tom for any closing remarks.
Okay.
I'd just like to wish.
Wish everyone.
Very happy holidays, and good health.
And yes.
That's it.
<unk>.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day.
For your participation.
I don't know my census.
Engage.