Frequency Electronics, Inc. (FEIM) Earnings Call Transcript & Summary

Welcome to the 2020 Annual Meeting for Frequency Electronics, Inc. Our host for today's call is Stanton Sloane, President and CEO. I will now turn the call over to your host, Mr. Sloane. You may begin, sir.

Thank you. Good morning, ladies and gentlemen. I'm Stanton Sloane, President and Chief Executive Officer of Frequency Electronics, Inc. and welcome to the Frequency Electronics, Inc., 2020 Annual Stockholders Meeting. I will act as Chair for this meeting. At the direction of the company's Board of Directors, this year's annual stockholders' meeting, is being conducted virtually by means of remote communication for the safety of our employees, our directors and our stockholders due to the ongoing COVID-19 global pandemic. We will conduct the business portion of our meeting first and answer questions at the end of the meeting. Steven Bernstein, Vice President and Chief Financial Officer for the company, will act as secretary for this meeting. Now I'd like to introduce the company's directors who are present either in the room with us here or on remote connections. There's myself; Chairman of the Board, Russell Sarachek, Chairman of the Audit Committee, Jon Brolin; Chairman of the Compensation Committee, Richard Schwartz; and Chairman of the Nominating and Corporate Governance Committee, General Lance Lord. I'd also like to take a moment to recognize General Lord and thank him on behalf of our stockholders and our employees for his long and distinguished military service to this nation. Next, I'd like to introduce the officers of the company: Mr. Oleandro Mancini, Senior Vice President and Business Development; Mr. Adrian Lalicata, Vice President of RF and Microwave Engineering; Dr. Thomas McClelland, Senior Vice President and Chief Scientist; Mr. John Caulfield, Vice President of Manufacturing; and Mr. Steven Strang, President of FEI-Zyfer. Also present is Mr. Joseph Scheriff, and Ms. Jennifer Marino of BDO USA, LLP, the independent auditors for the company. Mrs. Sharon Best-Jhagroo of American Stock Transfer & Trust Company, transfer agent to the company, is also present and will serve as our inspector of elections for this meeting. A copy of the rules of conduct and procedures for this meeting is posted on the web portal. Your cooperation and following these rules will allow us to treat all stockholders fairly and ensure that we can conduct an orderly meeting. It is now 10:04 approximately, and I declare the voting polls to be open. Any stockholder who has not yet voted or wishes to change or revoke his or her vote may do so by clicking on the voting button on the web portal website and by following the instructions there. To vote, you need to log in as a stockholder by entering the 16-digit control number you received with your proxy materials. Stockholders who have sent in proxies or voted via telephone or Internet and do not wish to change or revoke their vote, do not need to take any further action. I now ask our secretary to make the appropriate presentations at this time. Mr. Bernstein?

Dr. Sloane, I hereby present the following items: a copy of the printed Notice of this Meeting dated August 28, 2020, stating the time, date and purpose of this meeting; a complete certified list of stockholders entitled to vote at this meeting. Such list has been provided by American Stock Transfer & Trust company, transfer agents for the company. The list includes stockholders of record as of the close of business on August 14, 2020, the record date fixed by the Board of Directors for this meeting. The list shows that at the close of business on August 14, 2020, there were 9,163,939 shares of common stock of the company issued and 9,159,850 shares of common stock of the company outstanding. Also the affidavit of Joanne Vogel, an employee of Broadridge Financial Services Inc., showing that on August 28, she caused to be mailed to the shareholders of record of Notice of this Meeting, a proxy statement, the company's annual report on Form 10-K and a proxy card.

Mr. Bernstein, I direct that you incorporate a copy of the Notice of Meeting, together with the affidavit of mailing of the notice and the proxy, the annual report and the proxy card as part of the minutes of this meeting. I have designated the representative of American Stock Transfer & Trust Company to serve as inspector of elections for the meeting. She has already taken her oath of office and executed and sworn to that oath in writing. I have instructed the inspector of election to examine the company proxies and any other proxies received and to check them against the list of stockholders as of August 14, 2020, the record date for this meeting. The first order of business will be to determine the presence of a quorum. Mr. Bernstein, have you received a report from the inspector of elections for the number of shares of common stock represented at this meeting in person or by proxy?

Yes, the company's inspector of elections from American Stock Transfer & Trust Company has previously advised the company that a majority of the company's total issued and outstanding shares of common stock are presented at the meeting today, either in person or by proxy. A report of the inspector of elections, to that effect, will be filed with the minutes of this meeting.

On the basis of the Secretary's report and their being represented at this meeting, the majority of the total issued and outstanding shares of common stock of the company as of August 14, 2020, the record date, I declare a quorum to be present. The meeting is therefore lawfully constituted and is now open for official business. We will now proceed to the items of business to be considered by the stockholders and set forth in the Notice of the Meeting. If you have a question about one of these proposals, you may submit the question in the field provided in the web portal. But remember that you must be logged in by entering the 16-digit control number you received with your proxy materials. Questions relating to the company more generally will be addressed later during the Q&A period. The first order of business is to elect directors to serve for 1 year or until their qualified successors are elected. The Secretary will present the nominations for Director.

The Director nominees standing for election are Mr. Jonathan Brolin; General Lance Lord; Mr. Russell Sarachek; Mr. Richard Schwartz; and Dr. Stanton Sloane, all of whom are incumbent directors, additional information about each director nominee is contained in the proxy material.

Are there any questions with regards to Director nominees? If there are no further questions, we will now vote on the election of the 5 Director nominees. [Voting]

The next order of business is the ratification of the appointment of BDO USA, LLP as independent auditors of the company for the fiscal year ending April 30, 2021. As previously noted, Mr. Joseph Scheriff and Ms. Jennifer Marino of BDO USA, LLP are with us today and available to respond to any appropriate questions you may have. Are there any questions in regards to the ratification of the appointment of BDO USA, LLP as the independent auditors of the company for the fiscal year ending April 30, 2021? If there are no further questions, we will now vote on the ratification of the appointment of BDO USA, LLP as the independent auditors of the company for the fiscal year ending April 30, 2021. [Voting]

Next order of business is to conduct a nonbinding advisory vote on executive compensation. In accordance with the requirements set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act, we are providing stockholders with the opportunity to vote on a nonbinding advisory resolution to approve the compensation of our named executive officers as described in our proxy statement. We will now vote on the following resolution. "Resolved that the company's stockholders approve on a nonbinding advisory basis, the compensation of the named executive officers, as described in the executive compensation section, the summary compensation tables, the related footnotes and the narrative discussion in the company's proxy statement for the 2020 annual meeting of stockholders". Are there any questions in regard to the nonbinding advisory vote on executive compensation? If there are no further questions, we will now vote on the nonbinding advisory vote on executive compensation. [Voting]

Mrs. Sharon Best-Jhagroo, please tabulate the votes on each of the proposals and submit your final report to the secretary. That concludes all items on the agenda for stockholder action at this meeting. The polls for voting on the proposals at this meeting are now closed, and the formal portion of the meeting is now adjourned. Based on preliminary voting results, I'm pleased to report that each of the proposals has been approved. We will file the final voting results on a Form 8-K within 4 business days following this meeting. I'll now provide a brief presentation on Frequency Electronics, review some current developments as a result of operations and developments during the past year. Start with the safe harbor statement. Please read and understand that. Okay. So just a little bit about the company. A lot of you, of course, have been shareholders for some time, so this may be repetitive. But for those of you who aren't, Frequency Electronics is a world leader in precision time and frequency technology. We do that both for space systems and nonspace applications. And we're one of the few companies in the world that really can produce the core technologies here from scratch, from the raw materials. So we do atomic clock starting with the rubidium metal and produce finished clocks. That's all done in-house. Same thing with quartz oscillators, which are a key component of the atomic clocks and also other frequency and time reference systems. And so that's a competitive advantage for the company because it gives us complete control of quality, product performance, production schedules. So we see that as being a real asset for the company. Our customer base is government and commercial customers, both in space and for nonspace applications. And we do not only the time and frequency reference systems, but we also do electronic warfare and position navigation and timing systems in our subsidiaries. The clocks and the systems that we provide tend to be the core or the heartbeats of the systems that they go into. So without the clocks and the frequency references, for example, the rest of the system doesn't work. So we're a key element of the systems into which our products get incorporated. Precise time also is critical these days, as you all read the news about GPS jamming and spoofing. One way to address those problems is through more precise timing. So we're becoming increasingly important to our customers in that regard. We are truly a unique national asset. 2020 is our 58th year in operations. We have over 5,000 systems in space. Some of these have been in continuous operation for 43 years. I'll talk about that one a little bit more in a minute. Our products have been to all of the sun's known planets. They've landed on the moon. They've aided in viewing the far reaches of the universe, Hubbell system, also on the Kepler Observatory. They're on the space stations, the shuttle; and the 43 years legacy is tied to Voyager, which is still out there in the far reaches of the universe and still operating. And we've been providing low g-sensitive clocks for a variety of defense customers for 20-plus years. From an investment point of view, we think that we invest a disproportionate amount of funding into R&D and to -- and that's both internal research and development, which we fund; and also R&D, which is funded through our customers. And that's how we keep our technology robust. We continue to generate cash. We have a good, solid balance sheet, strong cash and working capital positions. You will note that, earlier in the year, we had taken a PPP loan. That has now been completely repaid. We have a long track record with key customers, a reputation for technical excellence, a broad customer base, which includes government prime contractors as well as commercial and other U.S. government customers. And in the business we're in, because our systems are so critical to the success of the -- whatever they get incorporated into, whether it's a satellite or a tactical platform, that track record is critically important to our business. The in-house capabilities here, I mentioned already, also a competitive advantage. And we do the critical components in-house for both the quartz and atomic clock products which we produce. The market is robust. The defense spending is up. We're pretty bullish on our future. And that includes both in the space arena, which is getting increasing attention here in the U.S. from a military point of view as well as nonspace systems. Let's just look at our customer base. As you would expect, it's just about everybody that's in the defense or satellite business. And you'll see commercial customers on here as well as the U.S. government prime contractors and the U.S. government agencies directly. We do business with all of those folks. Fiscal year '20, the revenue -- and I'll comment that the revenue split here between space and nonspace will go back and forth a little bit depending on budget cycles and things like that. But about half the business is nonspace related. About half is -- the other half, of course, is space. The satellite payload revenue, these are fiscal year '20 numbers. And you can see a legend, about $20.4 million of the revenue was for satellite payloads; and about $17 million was government nonspace; other commercial and industrial, about $4.2 million. So roughly half and half space and nonspace. Balance sheet is strong, about $91 million in assets. And again, this is as of the end of the fiscal year, $38 million in net working capital, about $14 million in cash and short-term investments and $54 million in total stockholder equity. Finally, I would like to close with the Voyager story. We're just very proud that the company provided the oscillators that are on the Voyager system, and that's way out there now. I think this 13 billion mile number and 11 billion is actually a couple of months old, so actually farther away. So great legacy, a great history here. Very proud of that. Okay. Now let me turn the floor over to our Chairman, Mr. Russell Sarachek for a few comments. Russell?

Thanks, Stan. I'll be brief. First, I would like to remind folks that the past couple of years have been about rebuilding and strengthening the company. To that end, we have taken over that time some necessary and difficult steps including divesting noncore divisions, such as our European subsidiary, which, while advanced technology, was not core to our work here and was a significant financial drain. This has not affected our ability to work with European customers in any way, and we continue to do so out of our U.S. operations. We also divested our Chinese subsidiary, which was a commercial enterprise from a different era of the company's life and not core and another financial drain. We do have further efficiencies in scale in our current operations and are making improvements that are bearing fruit. We've also taken significant realignments with regard to our inventory and working capital over that time, very significant. We've brought online an ERP system. And importantly, we -- rather Stan has streamlined our process for proposals and task accountability. We've strengthened our personnel as well and very excited to have added many, many key people to the company. These were some difficult but vital decisions, and the Board has been resolute to work toward best practices and to continue to support the company strategically and on a capital allocation basis and to work toward meaningful results. I would also like to add a special word of acknowledgment to the Board of Directors and Stan, our Board member and our CEO, who has worked diligently and steadfastly to put the company on the path for success; additionally, General Lord, who understands so well our defense mission and has brought a resolve and a focus on our efforts to deliver results to customers while acting as the very best fiduciaries, using a true can-do real-time attitude. Rick Schwartz, another long -- a long-standing Board member and a father of GPS has committed to our task at hand as well through leadership and a focus on quality every day, every customer. Jon Brolin, our lead director, has guided us with his independent leadership and forthrightness in addressing issues head on and focusing on tangible results now and in the future. I bring these gentlemen up to assure all that they are literally and have been literally available 24/7 and have been called upon to bring the best forward in FEI in the short, medium and long term. FEI has great technology and talent. We have tremendous intellectual property. We've invested heavily in R&D directly and via our customers. We have a unique and unrivaled legacy in space and in many, many terrestrial applications. Triangulating time does save lives. We have proven solutions for DOD challenges and various government branches, including the armed forces and commercial customers are acknowledging FEI via awards. Many of these programs are significant size and scope and have long tails, and they're directly in FEI's wheelhouse. This is an exciting time to be a company focused on time. Our expertise in the most advanced electronics has never been more important, and we're seeing and we expect to continue to see and realize success going forward. Lastly, on behalf of the Board, I want to thank our employees for their dedication in these difficult past 6 or so months. Our obligation is to protect our employees and customers who were long deemed essential workers. FEI and its people are essential. They are now, and they always have been. Frequency protects the U.S. and its allies, and we're humbled by their dedication to the mission. We thank them and thank you. Thank you, Stan.

Thank you, Russ. Thank you for your kind attention. And now we will be glad to answer any questions you may have. Your question must be submitted in the field provided in the web portal, but remember that you must be logged in by entering the 16-digit control number you received with your proxy materials. While we wait for questions, let me remind you that we will adhere to the rules of conduct and procedure for today's meeting that are posted on the meeting web portal. With that, we'll start to take questions.

First question is please give us an update on the progress of the business. Generally speaking, progress is good. I think I commented on the earnings call about the number of new opportunities. That we have ahead of us, which is pretty exciting. We continue to work on operational efficiency, manufacturing improvement. Russell just mentioned the ERP system. That's a pretty big deal here in terms of automating and improving visibility into things like inventory control and project planning. So I feel pretty good about our progress. Still work to do as always. But I think, by and large, progress has been pretty significant, particularly in the last year or so. Okay. Second question is has management or directors considered taking the company private. As a matter of policy, we wouldn't answer that question on this call. And certainly, if there were anything like that, we would be obligated to update that at a future time. Other questions? We'll give 1 more minute for any additional questions. Nothing further, Steve?

No.

Okay. There's no further business to come before this meeting. I'd like to thank you all for attending and for your continued interest in Frequency Electronics. The meeting has now adjourned.

This now concludes the meeting. Thank you for joining, and have a pleasant day.