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

Greetings, and welcome to the Frequency Electronics Fourth Quarter and Fiscal Year-end 2021 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Any statements made by the company during this conference call regarding the future constitute forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements inherently involve uncertainties that could cause actual results to differ 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, Stanton Sloane, President and CEO.

Thank you. Good afternoon, everyone. Thank you for joining us on the call today. Let me begin by saying I'm very pleased with FEI's improving financial performance in fiscal year 2021. Revenue increased by approximately 31% compared to fiscal year 2020 and 53% compared to Q4 of fiscal year 2020. Gross margin for the fiscal year increased to 31%. And while we work diligently to keep improving that, the trend is very encouraging. Comparing Q4 fiscal year '21 to Q4 fiscal year '20, revenue increased by $5.4 million. Operating income was positive. And net income was significantly improved at $1.4 million. Again, that is an encouraging trend. Net income for the full fiscal year was also substantially improved. And we generated over $12 million of cash from operations, ending the year with approximately $20 million of cash and marketable securities. We also ended the year debt-free and with approximately a $40 million backlog of funded contract work. SG&A costs increased last year due to legal and other administrative cost increases. Absent these unusual expenses, bottom line performance would have been higher. The fact that we achieved these improvements in a very difficult year attest to the growing strength of the company. The COVID-19 pandemic was a particular challenge last fiscal year due to supply chain issues and delays in customers processing of the anticipated contract awards, particularly in our Zyfer operations. Sadly, we did lose one employee to COVID. Except for that extremely unfortunate event, it was a very good year. Now let me turn the call over to Steve and have him take us through financial details. Steve?

Thank you, Stan, and good afternoon. For the fiscal year ended April 30, 2021, consolidated revenue was $54.3 million, up 31% compared to $41.5 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 $27 million compared to $20.4 million for the same period of the prior fiscal year and accounted for approximately 50% of consolidated revenues compared to 49% for the prior fiscal year. Revenue on satellite payload contracts are recognized primarily under the percentage of completion method and recorded only in the FEI-New York segment. Revenue from non-space U.S. government and DOD customers, which are recorded in both the FEI-New York and FEI-Zyfer segments, were $27.8 million compared to $16.9 million in the same period of the prior fiscal year and accounted for approximately 46% of consolidated revenue compared to 41% for the prior fiscal year. Other commercial and industrial revenues were $2.5 million compared to $4.2 million in the prior fiscal year. Intersegment revenues are eliminated in consolidation. For the fiscal year ended April 30, 2021, gross profit and gross profit percentage increased significantly as compared to the prior fiscal year. The increase in gross profit and gross profit percentage was due to completion of several programs identified in prior periods that incurred higher engineering costs in their development phase and have since been completed or are near completion. For the fiscal year ended April 30, 2021 and 2020, selling and administrative expenses were approximately 24% and 28%, respectively, of consolidated revenues. The increase in SG&A expense was mainly due to an increase in professional fees relating to litigation, deferred compensation and insurance expenses. R&D expense for the fiscal year ending April 30, 2021 and 2020 decreased to $4.7 million from $5.1 million, a decrease of $0.4 million and were 9% and 12% of consolidated revenue. The company's R&D expense decreased year-over-year as previous R&D efforts have ended and turned into production. However, the company plans to continue to invest in R&D to keep its products at the state of the art. For the fiscal year ended April 30, 2021, the company recorded an operating loss of $1 million compared to $10.9 million in the prior year. The decrease in operating loss in the fiscal year ended April 30, 2021, reflects improvement in revenue, gross profit and gross profit percentage. Other income consists primarily of investments derived from the company's holdings of marketable securities. For the fiscal year ended April 30, 2021, investment income includes $105,000 dividend from Morion compared to $250,000 dividend from Morion in the same period in fiscal '20. Included in other income for the fiscal year ended April 30, '21, was the collection of a $1 million note relating to the sale of Gillam in April of 2018. This yields pretax income of approximately $476,000 compared to a pretax loss of approximately $11.8 million in the prior year. For the fiscal year ending April 30, 2021, the company recorded a tax benefit of $204,000 compared to $1.7 million for the prior year. Consolidated net income for the fiscal year ending April 30, '21 was $680,000 or $0.07 per diluted share compared to a consolidated net loss of $10.3 million or $1.10 per share in the previous fiscal year. Our fully funded backlog at the end of April 2021 was approximately $40 million, up approximately $5 million from the previous year-end April 30, 2020. The company's balance sheet continues to reflect a strong working capital position of approximately $57 million at April 30, 2021, and a current ratio of approximately 6:1. Additionally, the company is debt free. The company believes that its liquidity is accurate to meet operating and investing needs for the next 12 months and the foreseeable future. I'll turn the call back to Stan, and we look forward to your questions shortly.

Thanks, Steve. Before we take questions, please be advised that we will not discuss details of any pending litigation or matters related to it. Now let me turn the call over to the operator, who will explain how to submit your questions. Operator?

[Operator Instructions] Our first question is from Brett Reiss with Janney Montgomery Scott.

Congrats on the quarter. Very, very encouraging. Just 1 or 2 questions. If we have a quarter where you do, let's say, $18 million to $20 million in revenues with the same mix of businesses this last quarter. What do you think the gross margin would be in that kind of quarter?

Well, I would hope it would be as good or better. We obviously keep striving to raise the gross margins. So we'll continue to do that. It's driven by a lot of things, product mix, timing, a variety of other variables.

Right. I'm just trying to get a sense of what kind of operating leverage we have as revenues hopefully continue to move up?

Well, I think we've said before, the business is very sensitive to revenue. So the best predictor, I think, here is the revenue trend. That's what I would look at.

Our next question is from Sam Rebotsky with SER Asset Management.

You folks have done wonderful, unbelievable, Stan since you've been a board. And tell me, is it possible to expect at this point in time the shareholders that get stock will stop selling and hold on to the stock as you clearly have -- expect to improve earnings.

Well, hard for me to predict people's behavior. I can tell you I'm not selling anything. So I think -- I believe that people will -- that their confidence in the business will increase as we continue to improve. And I would hope they'll continue to hold and buy more. That would be my expectation.

Well, that's wonderful. That would be my expectation. And as far as -- I know we talk about a number that's unfunded. Do you have a number of sales backlog that's unfunded or funded that you could sort of share with us at this time?

So as we've said many times, we don't -- we only report the backlog that's funded, but the unfunded part is substantial. It's probably in the order of -- probably in the $40 million range.

Unfunded $40 million and funded is the $40 million, too. Okay.

Correct. Yes.

And is it possible you will start telling your story as it's improved to the Wall Street people. Of course, the numbers are really wonderful and it's clear it's something to talk to about from -- so everybody would know what you're doing.

Yes. The answer is yes. I've been hesitant until I felt like we had things on the right track, and I think we are. So I'm ready to get out and start talking to folks.

Our next question is from Michael Eisner, a private investor.

Great job. Did you hire more people this quarter and going forward?

Yes. We've hired roughly 25 people since January. I mean, let's say, this quarter, last quarter, you're talking about Q4. So...

Yes. And going forward?

Yes. We're -- we've added about 25 folks. We're -- I think we have openings for another 10 or so. So we're adding folks. Yes.

So you could find people?

We've had reasonably good luck finding folks in this environment, of course, very difficult. We seem to be holding our own. Our turnover rates are very low here, average tenure of the workforce is pretty high. So at the moment, it's -- we're doing okay.

How is your -- the supply chain now?

Still some issues in the supply chain related to COVID, there's sort of a lag effect in some parts of the supply chain as they catch up. A lot of folks had people out, had delays in their raw materials and other things. We're -- it's fairly isolated. We have -- it's not a widespread problem. But we are having some lingering effects. We're working through those. We have alternate sources of supply for a lot of things. So at the moment, we're holding our own.

And this is affecting everyone now in the supply chain problem.

Yes.

Your backlog, I think, was about the same last quarter, but your revenue went up much higher. Is that going to -- what was that? How did that happen? What was the -- just the timing of when you recognize revenue?

Yes. The 606 accounting, of course, we record the revenue as we complete the work which is disconnected from when the billings are. So you see variation in the timing as a result of that.

Yes. You guys are always lumpy. Do you see revenue increasing?

That's our objective. Backlog is increasing. So that's the best indicator right there.

And the bids outstanding?

Yes. That goes up and down as things get awarded or not. We're doing pretty good on win rates. I think last year, our win rate was about 40%. That's -- I would say that's pretty good. So yes, things look promising.

No, I think it was like $600 million, the bids outstanding.

Yes, that -- it's probably a little lower than that right now just because a lot of stuff got awarded or we didn't win it. But I don't know what the number is offhand. It's probably between $400 million and $500 million.

And we have one more -- we have another question from Brett Reiss with Janney Montgomery Scott.

Because things really look like they're turning around and you're building cash, is it too soon or premature for the board to at least consider instituting some sort of share buyback authorization?

So I'll just say that we're mindful of deploying capital and looking at all the options. And the Board obviously watches that, and we'll decide what to do with it at some point, but we want to make sure we employ it effectively.

[Operator Instructions] We have another question from Michael Eisner, a private investor.

So I'm going to hit you with some of the questions. Lockheed launched GPS III, I think it was launch #5 and the launch...

Yes, Space 5.

What was that?

Space Vehicle 5.

Again, they're going to launch 6, 7 and 8. Now are we involved in that or we're involved in GPS IIIF, which I think starts at launch #11, if I were to remember.

You're correct. We're not on the III program around IIIF.

So we won't -- I mean, they're working on it now, but our stuff won't be launched until #11.

Well, it's a little more complicated. We have 2 products that will potentially be on the GPS IIIF satellites. The exact satellite, the first satellite that those products will go on to is a little uncertain at the moment schedule-wise. There is a potential that we'll be putting one of those product development version of that product actually on a GPS III launch, that's in discussion. But at the moment, that's not a hard contractual requirement.

And final question. Elcom, it's been a long contract. The advanced electronic warfare. How is that going?

You're talking about the advanced -- let me say, advanced offboard electronic warfare, AOEW.

Yes.

Yes. The products are in the final development stage. There -- they've tested very well. At the moment, we're awaiting a production order, which is dependent on not on us, but on Lockheed Martin and the government to get through the milestone and authorized production. So that's where that stands.

So you haven't booked any revenue on this yet?

We booked revenue on AOEW, but not on the production options. We don't have that yet.

Just on they gave you money to R&D.

Yes, the development and the initial testing and qualification.

All right. If things get busy, you can outsource?

Yes. We outsourced quite a bit. Things that aren't core to the business, circuit board assembly, that sort of stuff and machine shop mechanical parts. So we do a fair amount of that.

Ladies and gentlemen, we have reached the question-and-answer session. And I would like to turn the call back to Stan Sloane for closing remarks.

I'd just say, thank you, everybody. It was a good year, and we look forward to talking to you again at the next call. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you very much for your participation, and have a great day.