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

Good day, and welcome to the Frequency Electronics, Inc. 2021 Annual Meeting of Stockholders. I would now like to turn the conference over to Stanton Sloane, President and CEO Frequency Electronics. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen. I'm Stanton Sloane, President and Chief Executive Officer of Frequency Electronics, Inc., and I welcome you to the Frequency Electronics, Inc. 2021 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, Chief Financial Officer and Vice President of the company, will act as secretary of this meeting. Now I would like to introduce the company's directors, which includes myself, of course, Chairman of the Board, Russell Sarachek; Chairman of the Audit Committee, Jonathan Brolin; Chairman of the Compensation Committee, Richard Schwartz; and Chairman of the Nominating and Corporate Governance Committee, General Lance Lord. I would also like to recognize General Lord and thank him on behalf of our stockholders, our employees and our fellow citizens for his long and distinguished military service to the nation. Next, I'd like to introduce the officers of the company. In addition to myself and Steve Bernstein, we have with us Mr. Oleandro Mancini, Senior Vice President Business Development; Mr. Adrian Lalicata, Vice President of RF & 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, independent auditors for the company. Mrs. Sharon Best-Jhagroo of American Stock Transfer & Trust Company, transfer agent of 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, 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 will now ask our secretary to make the appropriate presentations at this time, Mr. Bernstein.

Thank you, Dr. Sloane. I hereby present the following items: A copy of the printed notice of the meeting dated August 30, 2021, stating the time, date and purpose of the 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 agent for the company. The list includes stockholders of record as of the close of business on August 13, 2021, the record date fixed by the Board of Directors for this meeting. The list shows that at the close of business on August 13, 2021, there were 9,226,267 shares of common stock of the company issued and 9,224,891 shares of common stock of the company outstanding. And the affidavit of Joan Vogel, an employee of Broadridge Financial Services, Inc., showing that on August 30, 2021, she caused to be mailed to the stockholders of record the 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 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 Election for this 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, any other proxies received and to check them against the list of stockholders as of August 13, 2021, 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 Election of the number of shares of common stock represented at this meeting in person or by proxy?

Yes. The company's Inspector of Elections, American Stock Transparent Trust Company has previously advised the company that a majority of the company's total issued and outstanding shares of common stock are represented 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 they're being represented at this meeting, a majority of the total issued and outstanding shares of common stock of the company as of August 13, 2021, 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. [Operator Instructions]. Questions relating to the company generally will be addressed later during the Q&A period. The first order of business is to elect directors to serve for one year or until their qualified successors are elected. 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 in regard to the director nominees? If there are no further questions, we will now vote on the election of the 5 director nominees. 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, 2022. 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, 2022? 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. The next order of business is to conduct a nonbinding advisory vote on executive compensation. In addition, 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, 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 2021 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. Mrs. Sharon Best-Jhagroo, please tabulate the votes on each of the proposals to 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 the 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 after this meeting. I will now provide a brief presentation on frequency electronics and review some current developments with the result as well as the results of operations and developments during the year. Okay. Are they up, Steve? Can everybody see them? Great. So many of you, of course, are pretty familiar with the company, but for the benefit of those who might be newer stockholders, I'll give you a little bit of background information on the company starting, of course, with the disclaimer up front here, so I would encourage you, please read that. Next chart. Frequency is a government and commercial company, and we do a lot of space and secure communications, Electronic Warfare, Position, Navigation and Timing systems. The clocks and frequency generation systems that we provide are really the heartbeats of the satellites and the other systems that they're -- that you would find them and they -- these systems require a precision timing or frequency source to be able to communicate. And so it's very critical piece of the systems. Precision timing, of course, is critical to network operations more generally. So that's our principal business is precision timing. We are really a unique national asset, one of the very few companies capable of producing high-precision quartz oscillators, starting with the raw materials. We actually build these oscillators starting with bars of raw quartz. Rubidium clocks, same thing. We produce those in-house from the raw materials and have some very unique capabilities here, particularly with respect to low g-sensitive oscillators. So these systems can be sensitive to vibration. So being -- having low sensitivity to vibration and g-force is very important for their performance. We are a world leader when it comes to these precision oscillators and timing systems. 2021 is our 60th year in operation. We have over 5,000 systems in space. Some of those have been in continuous operation for 44 years. I'll highlight one of those in a minute. Our systems have visited all the known planets, landed on the moon, aided in viewing the far reaches of the universe, Hubble system, helped to search for new planets on the Kepler Observatory, helped -- worked on the Apollo system, the Space Shuttle, the International Space Station. And Voyager is the system I was referring to, which is now 13 something billion miles from Earth and still going after 44 years. We've been working on these high-precision oscillators and low g-sensive systems for over 20 years. From an investor point of view, we have robust investments in R&D and continue to do that. And that's for new products and new markets, and I'll talk about one of those a little bit more here in a second. We continue to generate cash, very strong balance sheet, cash flows and working capital. We have very long history with all of our key customers, and that includes all of the large aerospace providers and reputation for technical excellence. We have a broad business base. In addition to those -- to the prime contractors, we do work directly for the government. And one highlight recently is that we've added a key new customer -- direct government customer, and that's the Office of Naval Research. So that's pretty exciting. In terms of manufacturing, I mentioned the ability to produce these key systems from -- directly from the raw materials. That's very important. That gives us the ability to control quality and schedule, which is critically important on these programs. If something happens to the clock or the frequency generation stuff, generally, the mission is lost. So it's a very, very critical program and confidence in our ability to deliver those things is a key element of our ongoing revenue stream. We have a market which is pretty robust. Space is, of course, getting a lot of attention and investment in the U.S. The recent formation of the space for us is indicative of that. Global geopolitics, I don't have to dwell on. So that's roughly half of our business and that's a pretty good opportunity. In terms of the customers, you'll see a lot of familiar logos on here. The Office of Naval Research, I want to just dwell in after one second. We did make an announcement recently regarding the award of that contract for the Pulsed Optically-Pumped Rubidium Atomic Frequency Standard, POPRAFS, a mouthful, but that's really key new technology. We've been working on that on R&D for some time. And we also had announced recently that we were proceeding with the product development based on that technology, which will be applicable for -- not only for the government but for commercial and other nongovernment space applications down the road. So that's a pretty exciting development. Revenue split, this will vary a little bit year-to-year, but generally consistent, roughly half the business is space related and the other half is mostly nongovernment is either commercial satellite payload or nongovernment or nonspace related. So about half and half is the typical mix here. Balance sheet is strong. Total assets about $86 million, net working capital of $41 million, roughly $20 million of cash and short-term investments and $55 million of stockholder equity. That, of course, is as of the end of fiscal year 2021. And something we're very proud of is the fact that our systems have been operating on the Voyager spacecraft. And as I said, about 13 billion miles from Earth now and still working. Curiously, the systems there were originally specified to operate for 7 years, has been running for 44. So I think that's pretty cool. Okay. I want to offer a couple of comments with respect to fiscal year '21 and the state of the company. '21 was a challenging year. Of course, the global pandemic was preeminent in that challenge. But despite that, financial trends improved. Revenues were up 31% compared to the prior fiscal year. Gross margins, net income also up, generated better than $12 million of cash, ended the year with a $40 million backlog. And at year-end, we were and to continue to be debt free. COVID pandemic was a particular challenge last fiscal year due to delays in obtaining parts and impacts to some of our traditional suppliers for their own COVID-related issues. We also saw delays in some contract awards resulting from slowdown in government and prime contractors, administrative processes in getting things awarded. They were experiencing some debts and tiers on them, COVID-related impacts and there are some downstream effects on timing of these awards also affected us. This particularly affected our Zyfer subsidiary. SG&A expenses were up last year as a result of unusual legal expenses and other costs, and that did impact bottom-line performance. As I reflect on the year as a whole, I'm pleased with the trends and our ability to weather the challenges we faced. Of course, we will continue to strive to improve. Looking to the future. In September, we were awarded a contract from the Office of Naval Research to develop a version of the POPRAFS, I won't go through the whole acronym again. And that technology, we think, is very critical to building future products. So very nice award and very encouraging that even though we were investing in this technology previously, the government decided to jump on board. So I see that as an endorsement for the technology. And of course, this and other technologies, which we continue to work on are the seeds for our future growth. So these are really exciting times for frequency electronics. I'm pleased to be a part of this remarkable organization.and have the privilege to work alongside the extraordinary team we have here. Okay. Let me turn the floor over to our Chairman, Russell Sarachek for a few comments. Russ?

Thanks, Stan. Welcome. It's been a major year of change at Frequency, not only battling through COVID and operating continuously as an essential business and a critical national asset for the U.S. and its allies but also for winning historic contract awards and furthering our position as a premier P&T and related electronics company for the most advanced space and terrestrial applications. We raised the standards and renewed a commitment to excellence in technology, customer focus, operations and importantly, corporate governance. We've improved our personnel. We've engaged with customers and are focused on improving our financial performance and our shareholder accountability and returns. Stan has discussed significant contract and award wins. FEI has reasserted itself as a leader in the future standards for timing in these -- with these historic wins. And we're clearly not done. As a side note, we have spent probably in the order of hundreds of millions of dollars directly and indirectly over the past decade and beyond on R&D. Our customers do know us as technology leaders and that has only increased this past year. Additionally, the past few years have highlighted the critical nature of the space market and no company is better suited to winning its space in FEI. Frequency's expertise in these most difficult environments is unparalleled and we're focused on keeping it so. intellectual property and expertise of FEI is powerful and growing. From a Board standpoint, I want to say that I am very privileged to be associated with these folks and know, over this past year and beyond, they have shown themselves to have 3 qualities that were in buffet value so greatly, integrity, number one, brains and hard work. And I have seen it up close their dedication, availability 24/7 in this very difficult past year and beyond that. The Board and its independent directors led by Jon Brolin, have consistently acted as the best of fiduciaries putting your interest ahead of their own. General Lords made it a priority to have best practices in place and focus the company on doing so and improving its processes and has a total focus on the mission. We all take our role as fiduciaries with the utmost of care and rigor. We plan to add to that expertise in this -- to that end. So in sum, Frequency is in an excellent position to grow and increase its value to customers, employees and shareholders. Stan?

Thank you. Thanks, everyone, for your kind attention. And now we'll be glad to answer any questions you may have. [Operator Instructions] While we wait for any questions, let me remind you that we will adhere to the rules of conduct and procedures for today's meeting that are posted on the meeting web portal. With that, let me take the first question.

What is the current backlog? As reported at the end of Q1, backlog was $37 million. Okay. We'll pause a moment for additional questions. Okay. There is no further business to come before this meeting. Thank you all for attending and your continued interest in Frequency Electronics. Meeting is now adjourned.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.