Frequency Electronics Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
March 14, 2024

There are 7 speakers on the call.

Operator

Greetings. Welcome to the Frequency Electronics Q3 Fiscal 24 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.

Operator

Such statements inherently involve uncertainties that could cause actual results to differ materially from the forward looking statements. Factors that would cause or contribute to such differences are included in the company's press 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 McClellan, President and Chief Executive Officer.

Speaker 1

Good afternoon, everyone. We have a mixed story to tell this quarter. On the one hand, we're experiencing continued revenue growth and all time record backlog and continued growing demand for our products. On the other hand, we're reporting a loss for the quarter of 473,000 dollars attributable to technical challenges primarily on a single new development program. In order to remain competitive in the long run, it's necessary to take on programs requiring challenging new technology development, and such temporary setbacks are an inevitable part of the equation.

Speaker 1

In this case, we are aggressively managing the program in question, conservatively assessing its progress and are confident that the overruns are largely behind us and that overall, we will still generate a material operating profit for the fiscal year. Furthermore, the knowledge base and lessons learned from such setbacks help position us for improved performance on new business incorporating the new technologies. This quarter highlights the importance of higher gross margins on new business as we've discussed on previous earnings calls. We're fortunate that currently there is considerable demand for our products, which allows us to successfully achieve higher gross margins and sometimes to pass on opportunities in which this is not possible. We'll continue to approach our business with this strategy.

Speaker 1

We anticipate continued long term growth in our primary end markets of space, navigation, secure communication and timing. Our proven heritage technical expertise in these disciplines allows us to continue to win new business as evidenced by the continued growth in backlog and new bookings, coupled with a disciplined management approach in which problems are identified early, addressed aggressively and conservatively accounted for, I strongly believe the company is on a trajectory of sustained growth, profitability and cash flow, albeit with some inevitable wiggles going forward. I'll now turn things over to our CFO, Steve Bernstein, who will fill you in on the financial details.

Speaker 2

Thank you, Tom, and good afternoon. Before I get into the 9 month financial results, I wanted to add a comment regarding the results for the 3 months ending January 31, 2024. As Tom mentioned, during the Q3 of fiscal year 'twenty four, the company had a temporary setback on one of our programs. As of today, the issue has been almost fully resolved with the majority of the related costs having been accounted for during the Q3 of fiscal year 'twenty four. We look forward to reporting more favorable results next quarter as the program continues.

Speaker 2

Despite the setback, there was positive news from the quarter. Fully funded backlog is approximately $67,000,000 Sales continue to increase. Our balance sheet remains strong, and we expect Covetous cash flow going forward. For the 9 months ending January 31, '24, consolidated revenue was $39,700,000 compared to $27,800,000 for the same period of the prior fiscal year. The components of revenue are as follows: revenue from commercial and U.

Speaker 2

S. Government satellite programs was approximately $16,300,000 or 41 percent compared to $12,800,000 or 46% in the same period of the prior fiscal year. Revenues on satellite payload contracts are recorded primarily under the percentage of completion method and are recorded only in the FEINew York segment. Revenues from non space U. S.

Speaker 2

Government and DoD customers, which are recorded in both the FBI New York and FBI ZIFR segments, were $21,100,000 compared to $13,000,000 in the same period of the prior fiscal year and accounted approximately for 53% of consolidated revenue compared to 47% for the prior fiscal year. Other commercial and industrial revenues were $2,300,000 $2,000,000 for the 9 months ending January 31, 2423, respectively. The significant increase in revenue for the period was primarily related to increases in U. S. Government customer sales, both for space and commercial orders.

Speaker 2

For the 9 months ending January 31, 'twenty four, gross margin and gross margin rate increased as compared to the same period in fiscal year 'twenty three. The gross margin dollars increased as a direct result of the increase in revenue. The gross margin rate increased significantly due to the fact that many of the technical challenges faced in the prior fiscal year have been resolved, and as a result, the relating programs are now moving forward and running more efficiently. Previous programs have sustained lower margins are near completion or have been completed. For the 9 months ending January 31, 2423, SG and A expenses were approximately 19% 23%, respectively, of consolidated revenue.

Speaker 2

The percentage of consolidated revenue decreased 4% due to an increase in sales for the 9 months ending January 31, 'twenty four, as compared to the 9 months ending January 31, 'twenty three. Similarly, the absolute increase in SG and A expenses for the 9 months ending January 31, 24, as compared to the prior year period was largely due to bid and proposal costs associated with increase in professional fees and payroll associated costs. R and D expense for the 9 months ending January 31, '24, decreased to $2,300,000 from $2,500,000 for the 9 months ending January 31, 'twenty 3, a decrease of $200,000 and were approximately 6% and 9%, respectively, of consolidated revenue. R and D decrease for the 9 months ending January 31, 'twenty four, was primarily due to a temporary shift of R and D staff. The company plans to continue to invest in R and D in the future to keep its products at the state of the art.

Speaker 2

For the 9 months ending January 31, 'twenty four, the company recorded operating income of $2,500,000 compared to an operating loss of $5,100,000 in the prior year. Operating income increased due to combination of increased revenue, gross margin and the effects of certain cost cutting measures instituted by management that begun in fiscal 'twenty three. Other income can be derived from reclaiming of metals, refunds, interest on deferred trust assets or the sale of fixed assets, interest expenses related to deferred compensation payments made to retired employees. This yields pretax income of approximately $3,000,000 compared to a $5,700,000 pretax loss for the prior fiscal year. For the 9 months ending January 31, 'twenty four, the company recorded a tax provision of $19,000 compared to $6,000 for the same period of the prior fiscal year.

Speaker 2

Consolidated net income for the 9 months ended January 31, 'twenty four was $3,000,000 or $0.32 per share compared to a $5,700,000 net loss or negative $0.62 per share in the previous fiscal year. Our fully funded backlog at the end of January 'twenty four was approximately $67,000,000 compared to approximately $56,000,000 for the previous fiscal year end April 30, 23. The company's balance sheet continues to reflect strong working capital position of approximately $24,000,000 at January 31, 'twenty four and a current ratio of approximately 1.9:one. 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.

Speaker 2

I will call back turn the call back to Tom, and we look forward to your questions soon.

Speaker 1

Thanks, Steve. I think we have nothing more to say. We can turn things over for questions at this time.

Operator

Certainly. At this time, we will be conducting a question and answer session. Your first question for today is from Brett Richard, a Private Investor. Brett, your line is live.

Speaker 3

Hey, I apologize. I had a couple of problems there. Can you guys a couple of questions actually. Can you guys talk about how much of the backlog increase for the quarter was related to the November contracts versus other business?

Speaker 1

Well, certainly a significant part of it, but it was not completely due to the November contracts. We've had additional new business and we're continuing to get a lot of new business as we speak.

Speaker 3

So would you say outside of those contracts, has business strengthened versus Q2 or held steady or I guess any kind of color on that?

Speaker 1

I think it strengthened.

Speaker 3

Okay. Good to hear. So second question was about the cost overruns. So first part of that was, were the cost overruns part of those contracts that were announced in November?

Speaker 1

Also can you

Speaker 3

quantify No. Okay. Okay. That's helpful. And can you quantify the dollar impact of those?

Speaker 1

I don't know. Steve, do you want to address that.

Speaker 2

It was approximately, give or take, about $1,800,000 effect on that particular program.

Speaker 3

Okay. All right. So that's pretty substantial effect on margins. So absent that, you were probably somewhere in the mid-30s, something like that?

Speaker 1

Yes.

Speaker 3

Okay. So one more question on that too. So we were halfway through the quarter. When we had the last conference call, there wasn't any sign of this. When did management become aware of these problems?

Speaker 3

And were you aware of it from the beginning? Or was there a gap here in realizing the issues? Can you talk about that a little bit?

Speaker 1

Yes, we can talk about that a little bit. I think these are issues that came up in the middle to the end of December primarily. And there was a little bit of a snowball effect. And I think the point I'd really like to make about this is that we I have a lot of experience dealing with this kind of technical problem. And one of the worst things we can do is try to provide a quick fix.

Speaker 1

And what we usually find when we do that sort of thing is that we pay for it in spades down the road. So we didn't approach things this way. We spent significantly more resources in dealing with this problem. And unfortunately, in the short run, it's a little bit more costly to do things that way. But I think that by doing that, we're able to contain the problem and we have a lot of confidence that we won't have additional problems down the road.

Speaker 3

Okay. And does this so last call you talked about targeting ultimately 50% margins within 6 months to a year. Does this change any of that?

Speaker 1

Well, no, it doesn't change any of that. But I would like to discuss that a little bit. We certainly you used the right words, we target gross margin of 50% and we're continuing to do that. I tried to talk a little bit about that a few minutes ago, but I think we do need to understand that we're in a situation at this point in time where we have a growing market and our technology is sound and needed. And in many cases, there's very little competition.

Speaker 1

Under those conditions, we can attain potentially 50% gross margin and sometimes even better. But we can't always do that. And when there are there's competition, then obviously, it becomes more difficult to do that. And of course, as we have been talking about, there will always be technical challenges. And so we certainly have to expect that there will be some wiggles in the gross margin as we deal with those kind of things.

Speaker 3

Got you. Okay. I appreciate the time guys. I'm going to jump back in queue. I might have one more here in a bit.

Speaker 3

Thanks.

Speaker 2

Thank you.

Operator

Your next question for today is from Marcel Hurst with Hurst Capital.

Speaker 4

Hello, good afternoon and thank you for taking my question, which is about GPS satellites. I understand that the Space System Command has put a major focus on improving the current medium Earth orbit GPS constellation. And this would complement from what I understand older GPS III and GPS IIIF programs. I was wondering if you consider such GPS constellations an opportunity or future growth driver and how far you involved, etcetera?

Speaker 1

Yes. We certainly consider it a future opportunity. And in fact, we have a lot of ongoing activity in this regard. I think what you're talking about is an effort, Space Systems Command, which is responsible for GPS to field a new set of satellites, which would orbit in similar orbits, but would be designed a little bit differently than the current GPS satellites. The current GPS satellites are designed the satellites that are being launched at this point in time are designed to have a lifetime in space of 15 years.

Speaker 1

Earlier GPS satellites were only designed to have a life time of about 7.5 years, but some of those satellites are still working after 25 years. So the new approach that is being pushed at this point in time is satellites with a lifetime of 3 years in space. And there's even an acceptance of the idea that not all of the satellites will even last for 3 years. Of course, along with this, there's a desire to be able to launch those satellites much more rapidly than these satellites which have been launched to date. And there's of course along with that the desire for those satellites to be a lot less expensive.

Speaker 1

So we're actively participating. We have had conversations with people from the Space Systems Command related to this, and we're actively pursuing some of the early attempts at prototype satellites and obviously the atomic clocks that go on them. So yes, we're interested and we're actively involved and we see it as potentially a very important part of our future.

Speaker 4

That sounds really great. Can you quantify the opportunity for us in some way?

Speaker 1

It's pretty hard to do that at this point in time because we the way things are being advertised to us at this point is being put forward in phases. And so the initial phases are pretty small in terms of quantities of things. So but I think over the next 2 years, we'll start to get a much better feeling about where all of this is going.

Operator

Your next question for today is from Michael Eisner with Frequency.

Speaker 5

Hi.

Speaker 1

Hi, Michael.

Speaker 5

All right. I think you said none of this was the 3 November projects. Is that correct?

Speaker 1

That's correct. That's correct.

Speaker 5

Are those go ahead. I'm sorry.

Speaker 1

Yes. The losses for the quarter have nothing to do with the contracts that were awarded in November.

Speaker 5

So those are still on schedule?

Speaker 1

Those are still on schedule, yes.

Speaker 5

All right, great. And is any of the revenue part of those projects that you did for the quarter?

Speaker 1

Yes. Yes. And that will continue to be the case going forward. The initial phase of these programs, the revenue is relatively minimal. We're mostly procuring parts and that doesn't translate into significant revenue until we start doing something with those parts.

Speaker 1

But we're sort of shifting into high gear on one of those programs in particular and a second one that is not far behind. So we'll start to see a significant revenue due to those programs as we go forward.

Speaker 5

In the 4th quarter?

Speaker 1

Yes.

Speaker 5

All right. Is the project, I guess, there was something new that you had problems with. Is the client upset?

Speaker 1

Well, I don't think anybody is jumping up and down for joy because of it. But I think we're working with our customer and I think we have things under control.

Speaker 5

All right. Is that was that a big part of the $67,000,000 backlog or the new part like the last $17,000,000

Speaker 1

No, no, it wasn't any. The increase in backlog wasn't involved in that. There's a program that has we've been working on for some time.

Speaker 5

I'm not sure if you could comment where the big increase came from.

Speaker 1

I don't think it's appropriate to go into any details. You have to understand that our customers don't like us to talk about details of their programs.

Speaker 5

And you said the project the problem is mostly resolved and the costs are mostly accounted for?

Speaker 1

Yes, the costs are definitely accounted for, and the problems are resolved. That's correct.

Speaker 5

So you'd be back on schedule, not scheduled, but in this quarter, 4th, you should be okay? Yes. Okay. Thank you.

Operator

Your next question is from Tim Hasara with Synit Capital.

Speaker 5

Yes. Just with respect to the

Speaker 1

3 new contracts, how are they going to go into backlog here I assume the full amount hasn't put in there given the value of the 3?

Speaker 2

Correct. So our backlog is fully funded. So as the programs get funded, that additional amount will be added to backlog and then the revenue obviously taken on the program subtracted from backlog.

Speaker 1

So these programs as we get them were typically funded for a fraction of the total contract amount. And that fraction that we're funded for is what goes into backlog.

Operator

Your next question for today is from Frank Wisniewski, a Private Investor.

Speaker 6

Hi, thanks for taking the call. I get a couple of things, but mainly, all these conference calls and concentrate on the satellite business, which is justifiable, that's where a lot of the growth is, but ZEIFR seems to be coming along extremely well. In fact, it's over half your business for the 9 months, I guess. Could you bring us up to date on what's going on there? How much of that is a backlog business as opposed to a turns business?

Speaker 1

It's some of each, I think, they turn things over a lot more rapidly than we do in the satellite business. I don't have any specific numbers off the top of my head. There are a couple of programs at Zipher, which are longer term, but they have to do a tremendous amount of business, which is essentially off the shelf products on an as needed basis. I'm not sure that answers your question, but Well,

Speaker 6

I guess the question basically is how predictable is that ZIFO business? I mean, it's been growing very, very nicely over the last couple of years. And how predictable is it? And what kind of margins? I think when you talk about 50% margins, are you talking corporate wide or just in the satellite business?

Speaker 1

Well, we're talking corporate wide.

Speaker 6

Okay. So the margins at Cipher must be pretty good on a gross basis too then?

Speaker 1

They are, yes.

Speaker 6

And is that and how predictable is that? Is that something that you can model out pretty well or because it's so much of a turns business, it's more variable?

Speaker 1

Well, it's potentially more variable. I think it's been pretty predictable for the last couple of years. But yes, it is potentially more variable obviously in changing economic conditions and so forth.

Speaker 6

And is most of that business DoD or government related?

Speaker 1

Yes.

Speaker 6

Okay. Thanks a lot.

Speaker 1

Yes. Thank you.

Operator

We have reached the end of the question and answer session. And I will now turn the call over to Thomas for closing remarks.

Speaker 1

All right. I'd just like to thank everybody for participating in this call, and we'll talk again in another quarter. Thank you very much.

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Earnings Conference Call
Frequency Electronics Q3 2024
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