Frequency Electronics Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 13, 2023

There are 7 speakers on the call.

Operator

And welcome to the Frequency Electronics Fiscal Year End 2023 Earnings Release Conference Call. At this time, all participants are in a listen only mode. 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 Actual results to differ materially from the forward looking statements.

Operator

Factors 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 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 McClelland, President and Chief Executive Officer.

Speaker 1

Thank you, and welcome, everyone. Today, it's almost exactly 1 year Since I inherited the role of CEO and President of Frequency Electronics, and I find myself reflecting What has transpired during the last year, it's certainly been a challenge Overall, it has been a very positive experience, and I look forward to a continuation of that experience over the next couple of years. There will be more challenges, but I feel confident that the company is on a solid path Continued success and growth. I'd like to start with some non financial observations, which I think are ultimately very important For the financial health of the company. Over the past year, we've made a number of changes Designed to make the company stronger in the long run.

Speaker 1

In early September of last year, we had a major layoff restructuring at our Long Island facility and before the end of calendar year 2022, we relocated The ZYPHER manufacturing capability, which had been moved to Long Island back to their original location in California Alongside their engineering team, these moves were understandably traumatic and also costly in the short run. The layoff was costly in terms of workforce morale and the ZYFIR move was costly in dollars and cents. But both of these moves have made us stronger and are now showing positive benefits. Simultaneously, while all of this was going on, we've made a conscientious effort to harness our strength in science and engineering And in fact, to bolster it in such a way that we can remain competitive well into the future. Over the last year, we've begun to work collaboratively with several of our major customers to develop new approaches, old problems, which have the potential to improve performance and lower cost in the physician navigation and timing arena.

Speaker 1

Similarly, we've reinvigorated our internal R and D program to target quantum technology Our Ziffer division has made a dramatic comeback. In fiscal year 2022, Cipher suffered an operating loss of over $2,000,000 whereas in fiscal year 2023, Which ended April 30, Cipher had still had a small overall operating loss of about $160,000 But much more importantly, in the second half of the year, Zipher made an operating profit of just over $1,000,000 This, in spite of the costs associated with the cross country move of manufacturing. John Johan, Xipher's President, and his team deserve a lot of credit for making this happen much faster than was originally anticipated. Furthermore, ZEIFER has been awarded several major contracts during fiscal Year 2023, which will significantly contribute to the bottom line during fiscal year 2024 and beyond, And several new contracts are expected in the near future. Meanwhile, in New York, FPI has regrouped, is smaller after the layoffs, but is coming back strong.

Speaker 1

Some costly engineering development efforts are finally coming to completion successfully, new contracts are in and proceeding profitably, And several large satellite program contracts are anticipated over the next 6 months. Importantly, after enduring some pretty traumatic changes over the last year, I believe our workforce morale There is a spirit of success in the air, and I feel we're all working together, not only in New York, but the entire company To do what's necessary to make things happen, I believe the whole at FEI is greater than the sum of the parts, And that's a powerful force. So okay for the financial portrait. In the Q4 of fiscal 2023, we continued to see the results of the cost cutting efforts and management reorganization, which has taken place over the last year. Revenue and gross margin have increased substantially for the 6 month period ended April 30, 2023 compared to the 6 month period ended October 31, 2023, as well as in comparison to the same period in fiscal year 2022.

Speaker 1

And the company is reporting an operating profit for the second half of the fiscal year. FEI's backlog at year end is at a decade high and several historically large satellite programs are anticipated during the next 6 months, substantiating our confidence in the growth of our primary markets. Both commercial and government satellite Businesses continue to show signs of sustained double digit growth going forward. Continued vigilance is required to navigate the challenging economic and geopolitical environment, But we're nonetheless confident that we are progressing in a positive direction, and we look forward to continuing improvement The company is committed to moving towards sustained profitability and cash generation going forward. Further, we remain debt free with a very strong balance sheet to fund future growth opportunities.

Speaker 1

Thank you. And I'd like to turn things over now to Steve Bernstein, our Chief Financial Officer.

Speaker 2

Thank you, Tom, and good afternoon. Turning to the financial results, it is important to mention that I will be comparing Q4 Fiscal 'twenty three versus Q4 fiscal 'twenty two results. Our press release has the full fiscal year results and some of the key metrics. I would also like to mention the improvement in results for the second half of the fiscal twenty twenty three compared to the first half of fiscal twenty twenty three. Revenue increased from $17,200,000 during the first half of fiscal twenty twenty three to $23,600,000 during the second half of fiscal twenty twenty three.

Speaker 2

Gross profit percentage went from 2% in the first half of fiscal twenty twenty three to 31.8% in the second half of fiscal twenty twenty three And operating income loss went from an operating loss of $5,400,000 in the first half of fiscal twenty twenty three to an operating income of $717,000 in the second half of fiscal twenty twenty three. Additionally, this is the 2nd quarter in a row that the company has Operating income is evident by the vast improvement in our results from comparing the second half of fiscal 'twenty three to the first half of fiscal 'twenty three That the company is heading in the right direction and the changes that have been previously announced are contributing to this improvement. For the 3 months ended April 30, 23, consolidated revenue was $13,000,000 compared to $10,200,000 Satellite programs was approximately $5,100,000 or 39 percent of consolidated revenue compared to $5,200,000 51% of consolidated revenue in the same period of the prior fiscal year. Revenue on satellite payload Tracks are recognized primarily under the percentage of completion method and are recorded only in the FEI New York segment. Revenues from non space U.

Speaker 2

S. Government and DoD customers, which are recorded in both the FEI New York and FEI XIPRA segments were $7,300,000 compared to $4,700,000 in the same period of the prior fiscal year and accounted approximately for 56% consolidated revenue compared to 46% for the prior fiscal year. Other commercial and industrial revenue was approximately $563,000 Compared to approximately $249,000 in the prior fiscal year. The increase in revenue for the 3 months ending April 30, 23 was mainly due to Increase in revenue at FPI ZIFER. For the 3 months ended April 30, 'twenty three, gross margin went down and gross margin rate increased as Compared to the same period of fiscal year 2022, the company is encouraged by the fact that the gross profit percentage for the 3rd Q4 of fiscal year 2023 were both over 30% and the company anticipates this trend will continue in fiscal 2024.

Speaker 2

For the 3 months ended April 30, 2023, 2022, SG and A expenses were approximately 23% 20%, respectively, of Consolidated revenues. The increase in SG and A expense for the 3 months ending April 30, 'twenty three as Compared to prior year, it was largely due to reversals in fiscal 2022. Full year SG and A expenses decreased over $2,000,000 The company continues to monitor expenses looking for additional cost effective ways going forward. R and D expense for the 3 months ending April 30, 'twenty three decreased to approximately $658,000 from 1,100,000 For the 3 months ending April 30, 'twenty two, a decrease of approximately $450,000 and was approximately 6% and 11%, respectively, of Consolidated revenue. R and D decreased for the 3 months ending April 30, 23 due to decline Dedicated R and D resources are working on 2 externally funded developmental programs, which would not show up in R and D.

Speaker 2

The company plans to continue to invest in R and D in the future to keep its products at the state of the art. For the 3 months ending April 30, 23, the company recorded operating income of approximately $390,000 Compared to an operating loss of approximately $5,900,000 in the prior year. Operating income increased due to a combination of an increase in sales over the 3 months ending April 30, 'twenty two, increased gross margin and effects of changes management has instituted. For Q4 fiscal 'twenty three, other income consisted primarily of interest expense and miscellaneous income Since all marketable securities were sold this year, during the 3 months ending April 30, 22, the company took a $795,000 impairment charge related to the company's investment in Morion. This yields a pretax income of approximately $313,000 For the 3 months ending April 30, 23, the company recorded a tax provision of $68,000 compared to a $3,000 tax benefit For the same period of the prior fiscal year.

Speaker 2

Consolidated net income for the 3 months ending April 30, 23 was approximately $246,000 or $0.03 per share compared to an approximately $6,800,000 loss or $0.74 per share for the same period of the previous fiscal year. Our fully Funded backlog at the end of April 23 was approximately $56,000,000 compared to $40,000,000 for the previous fiscal year ended April 30, 22. In addition, this is the 3rd consecutive quarter in which backlog is greater than $50,000,000 levels 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 a strong working capital position of approximately $21,000,000 At April 30, 23, at a current ratio of approximately 1.8:one.

Speaker 2

Additionally, the company is debt free. The company believes that its liquidity is adequate to meet its operating 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.

Speaker 1

Thanks, Steve. And at this point in time, we will turn Over to accept questions from the audience.

Operator

Thank you. At this time, we will be conducting a question and answer Okay. And our first question comes from Brett Reiss with Janney Montgomery. Please proceed with your question.

Speaker 3

Hi, Tom. Hi, Stephen. First, applaud it and congratulations on the progress. So nice to see that.

Speaker 2

Thank you.

Speaker 3

Now that we're Crossed over to profitability, you mentioned funding being able to self fund growth opportunities. Could you give us Some more color on what you have in mind?

Speaker 1

Well, We plan to significantly increase our R and D funding over the next couple of years. In fact, we've budgeted for that in fiscal year 2024. But of course, we're also working pretty aggressively to get internal external funding for development efforts. And we're actually seeing that there's a lot of stuff out there that's relevant to our areas of expertise in technology. And we're vigorously pursuing those development efforts.

Speaker 3

Great, Great. This growth in revenues that you anticipate in the coming quarters, is there Anything that can derail that, if we go into a recession, does that become a headwind Or those revenues come in irrespective of what the macro economy does?

Speaker 1

Yes. Of course, there are always things out there that can derail But I think things look very, very positive at this point in time. Our revenue estimates are based on the work that we already have contracts that we already have And also things that we are very, very confident of getting in the very near future. And I think we are We're working very carefully to pursue those programs In such a way that we can execute them profitably. And so I think because of all of that, we're really quite confident that we'll see Significant revenue growth and also profitability.

Speaker 3

Right. Is there a book to bill number, Steve?

Speaker 2

I don't have it with me. I can get it to you. I started to print it. It was somewhere in the neighborhood, I believe, of 1.5 to 1, maybe a little bit higher, but I will get you the exact number when we get off the call. I'll email it to you.

Speaker 3

Right. If that's what it is, it's consistent with what it was last quarter.

Speaker 2

Pretty close, yes.

Speaker 3

I'm going to drop back in queue. And once again, thank you for the progress.

Speaker 1

Thank you.

Operator

The next question is from Robert Smith with the Center For Performance Investing. Please proceed.

Speaker 4

Hi, good afternoon. Thanks for taking my questions and thanks for the progress. Tom, how much of the backlog Do you feel it is deliverable in fiscal 2024?

Speaker 1

Oh, I It's tough to estimate to give an exact But I think 75% is a reasonable

Speaker 4

And in prior calls, you said you were going to mount a distinct effort To tap the small satellite area, could you kind of give me some color as to the progress you're making?

Speaker 1

Okay. Sure. I think we are working closely With some of the major contractors, the prime contractors on satellite systems, And I think the most important part at this point in time is Really trying to home in on exactly how things are going to pan out in the future. I think There have been moves to the people have launched, especially there have been experimental satellites launched by universities and Thanks. That our satellites, the size of soccer ball and things like that, but we feel pretty strongly that That's not really where things are going to end up.

Speaker 1

We feel that there's a sweet spot that's A little bit bigger than that, a little bit more costly than that. And we are really trying to home in On the this is what we perceive as a sweet spot between low cost and very high performance. So we're targeting our internal R and D and also efforts that we're making in collaboration with Some of the prime contractors to really be able to achieve improved Performance over what we can achieve today, but doing it in a smaller package at a lower cost. Exactly where that ends up in specific dollars and cents and specific numbers of kilograms remains to be seen. But that in a general sense is where we're headed.

Speaker 4

Yes. And when do you think we see some actual product

Speaker 1

That's a little bit hard to estimate. I think there are some things that currently are scheduled in 2025 kind of timeframe, Calendar year 2025, perhaps 2026. I think That's probably what we're looking at.

Speaker 4

Yes. And I think you shared with us that you felt that there was a considerable addressable market there. Could you all give me some average kind of

Speaker 1

That's a little bit tough to The satellite business is definitely growing And the trend is toward the systems that involve a very large number Low Earth Orbit Satellites. So I think It just it remains to be seen exactly how big that market becomes.

Speaker 4

But you're certainly kind of it's not redirecting. I mean, you understand what the potential is and you're going to go for

Speaker 1

Can you repeat that? I'm sorry, I didn't quite catch it.

Speaker 4

Yes, I assume that You understand fully what the potential is and you're going to go for it.

Speaker 1

Oh, yes. Yes.

Speaker 4

Okay. All right. Thanks. Well,

Speaker 1

there are Two aspects to that. One is what the potential is, but I think the other very important thing That's the direction the satellite business is going. And if we don't pursue it, The satellite business starts to disappear. So Yes,

Speaker 4

I understand. Well, the recognition is powerful. Okay, and I wish you well. Thanks so much. Thank

Operator

The next question comes from Michael Eisner, Private Investor. Michael, please proceed.

Speaker 5

Hi. Great job. 22% increase in revenue from previous quarter. You feel can you continue that growth?

Speaker 1

Well, I don't Want to talk about specific numbers, but we feel very confident that we'll have continued growth.

Speaker 5

Okay. How is the any part delays or inflation causing any problems?

Speaker 1

Well, we're continually dealing with problems that's really a part of the business. But I think things are in that regard, things are easing up. We're seeing less difficulty than we were 3 months ago or 6 months ago. I think more and more, we certainly encounter Much longer lead times on parts than what historically we're used to, But more and more we see that we're given initially lead times of 6 months or even a year, But then we actually receive delivery of parts in 2 or 3 months. And so that's very encouraging, but we still have to deal with Long lead times and the challenges associated with that.

Speaker 5

Okay. So the part the way it's getting less. This has been going on for a couple of years now. So as always, it keeps on going to slightly less. If I hear you right, is XIFA all in New York now?

Speaker 1

No, no. Sorry for the confusion. ZYPHR, a year ago, ZYPHR was split And the manufacturing was being done here in New York. The engineering was out at There are facility in Orange County, California, and we've made a decision To move the manufacturing back where it was originally to the California facility. So that took place over the last during the fiscal the last fiscal year.

Speaker 1

And that we The move to do the manufacturing here in New York, we feel was a mistake and it was To have the manufacturing separate from the engineering was problematic. And so we made the decision to move things back and obviously to move both ways. We ended up back where things started, but incurred a lot of cost in the process. So it was costly, but I think The results at this point speak for themselves. I think we're pretty happy that we did things and It happened a lot faster than we originally expected.

Speaker 5

All right. So that's back in California completely?

Speaker 1

Yes.

Speaker 5

All right. You said the R and D, some of it's going Hey, I saw your R and D went down and you started talking about that it will probably go up in the next couple of years. Is that We can is Frequency going to be paying that or external payers?

Speaker 1

Well, we We're aggressively pursuing any development efforts that we can get funded externally. That's the thing that makes the most sense for us As a small company, but we also anticipate that internally funded R and D It's going to increase over the next couple of years.

Speaker 5

With revenue, so it will be the percentage will Equal out?

Speaker 1

Yes. As revenue goes up,

Speaker 5

R and D will go up Or the opposite. Yes. They kind of work not maybe not exact timing, but they kind of in sync. And I'm sorry?

Speaker 1

Yes. I think that's a reasonable assumption.

Speaker 5

Okay. And how many employees do you have at this point?

Speaker 1

Roughly I think we have roughly 180 employees overall. Yes, overall. Overall. Yes.

Speaker 5

And final question, last quarter you talked about GPS 3 and 3F, I think there were 2 units that they would I think one they were testing and one was the life test With the National Research Laboratories, how is that coming along?

Speaker 1

So The testing was supposed to take place at the Naval Research Laboratory. That's still going to take place, but the government funding to support that testing Isn't going to be available, at least that's what we're told, until roughly the end of this calendar year. So we have agreed to we've agreed that we're going to Keep the unit here at FEI and do some testing in vacuum Simulating the space environment from now until the end of the year. Yes, just to be able to get additional data on the performance of that unit.

Speaker 5

And those I'm sorry, one thing. All the satellite programs you talked about, are we going to see that all at once in the backlog Or just the pieces like we usually do.

Speaker 1

Well, it's impossible to predict that exactly. There are several major programs that we anticipate in the very near future. It's conceivable that those could arrive almost simultaneously, but it's also Very conceivable that they could be stretched out a bit. It is one of the Frustrations, but the realities of this business that these things They tend to stretch out in time more than we would like.

Speaker 5

Yes. It's basically out of your

Operator

Okay. Thank you. Next question comes from Greg Rother with Adirondack Funds. Please proceed.

Speaker 6

Hi. Thank you for taking my call. I'm new to the frequency electronic story. So I'm just curious about the backlog growth is very impressive. And I'm curious as to, was that a function of The primes getting back into their good graces or was there a function of Is this one big order from a prime or what have you?

Speaker 6

Any color you could offer On the backlog would be helpful. Thank you.

Speaker 1

Yes. I think that's a combination of things. It's I would say it is distinctly not really a question Of getting back into the good graces of the primes, I think it is I think fundamentally, What this is about is a growth in the market and to a large extent is a growth in the space Market. And that's something that, of course, there will be ups and downs, but that's a trend that we have Every reason to believe is going to continue well into the future. I think Part of that backlog is a significant part of it is non space things.

Speaker 1

And I think our we've seen a substantial Backlog increase at Zipher and there are Several programs there that are very, very encouraging, and A lot of follow on to those programs. We have some development programs there, and there's a lot of potential for follow on afterwards. So I think we're really pretty positive at this point in time. Of Of course, we don't have a perfect crystal ball, but it does in no way looks like a one off blip At this point, we anticipate this to persist into the future.

Speaker 6

That was very helpful. Thank you and good luck.

Operator

Okay. The next question comes from Robert Smith a follow-up from Robert Smith with the Center For Performance Investing. Please proceed.

Speaker 4

Hi, Tom. So you've helmed the company for about a year and I was wondering what the Principal learnings you've taken in this time frame and how is your optimism still Present has it increased or how are you looking at the future?

Speaker 1

Well, Okay. Yes, I've been here for about a year. It's a new experience for me, frankly, But I have to say, I'm it's on a day to day basis, it's pretty challenging, Sometimes pretty frustrating, but I think overall, I'm enjoying it. And I think I'm very optimistic About the future at this point, I will say that I'm not a newcomer to Frequency Electronics. I have been here for most of my career, Close to 40 years at this point in time, but it's really 1 year as CEO.

Speaker 4

Yes. I well understand that you have a great knowledge of the company, and I'm counting on that to I mean that's and I was wondering in this 1 year since you've been at the helm, I mean, is there any particular Insights that you've gained as from the vantage point of being a leader?

Speaker 1

Well, I think there are a lot of insights. I don't think there's one Major thing that I can point my finger at, but I think there are a lot of little things. I think primarily it's attention to detail That I think is the important thing at this point. It's a lot of hard work and paying attention to the details. I think we're working hard to when we look at new business, we want to make sure That we can take it on and pursue it profitably.

Speaker 1

We As opposed to just seeking new business. But yes, other than that, I think it's The devil is in the details.

Speaker 4

Do you feel that you have the people in place that provide adequate support to you?

Speaker 1

Well, that's a really good question. I think we do, but we're looking at potentially some very significant growth And we are looking at this over the last year, we had some significant cutbacks. But at this point in time, We're looking at potentially growing our workforce. We're going to be very cautious in doing that. At the same time, I think what is most important, We have a number of people with many years of expertise, And we're looking to train a new generation of people And also to get new talent in science and engineering That have an expertise in some of some new approaches to old technologies.

Speaker 1

And I think that's really important for keeping Frequency Electronics viable as a technology company Well into the future.

Speaker 4

So that would come with new hires?

Speaker 1

Well, it's partly with new hires, Yes. And that's partly with training people that we already have on the workforce.

Speaker 4

Thank you. Wish you good luck. Thank you.

Operator

We have no further questions in queue.

Speaker 1

Okay. With that, I think we can end the call. I'd like to Thank you all for participating in this call, and I look forward to our next call after the Q1. Thank you.

Operator

Thank you.

Speaker 4

Thank you.

Operator

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

Powered by Quartr
Earnings Conference Call
Frequency Electronics Q4 2023
00:00 / 00:00