Frequency Electronics - Q3 2023
March 9, 2023
Transcript
Operator (participant)
Greetings, welcome to the Frequency Electronics Q3 Fiscal 2023 earnings release conference call. At this time, all participants are in a listen-only mode. There will be an opportunity to ask questions on today's call after the presentation. Please press star 1 on your telephone keypad at any time to enter the Q&A queue. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. Any statement 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 release 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 turn the floor over to your host, Thomas McClelland, President and Chief Executive Officer.
Thomas McClelland (President and CEO)
Thank you. With the Q3 results we began to see the impact of the cost-cutting efforts and management reorganization, which has taken place over the last seven months. Revenue and gross margin have increased substantially quarter-over-quarter, and the company is reporting an operating profit for the third quarter, not only for the consolidated company but also for each segment individually. Many factors contributed to this but I think importantly, we initiated an effort to recognize and promote talent within our existing workforce. To this end, and with encouragement from our board of directors, we have established a broad-based equity incentive program that rewards individuals who meet key performance metrics and aligns employee performance with both customer satisfaction and shareholder interests. We see a market of improvement in the overall morale of our workforce and have a sense that everyone is pulling together to achieve a common goal.
FEI's backlog remains strong at quarter end, 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. At this time, we anticipate the imminent award of several significant contracts. Although we still are experiencing supply chain issues and the effects of inflation, we do see a definite easing of these problems. Continued vigilance is required to navigate the changing economic and geopolitical environment. We are nonetheless confident that we are progressing in a positive direction and look forward to more improvement in results. The company is committed to moving towards sustained profitability and cash generation going forward.
I appreciate the board of directors' support in naming me permanent President and CEO, and I believe the board has taken meaningful steps to enhance the company's value for its shareholders, customers, and employees, and that our best days are ahead. We have truly unique technical and manufacturing capabilities which are particularly well suited to the needs of the U.S. government and our other customers in the years ahead. At this point, I would like to turn things over to our CFO, Steven Bernstein, who will fill you in on some details.
Steven Bernstein (CFO, Secretary, and Treasurer)
Thank you, Tom, and good afternoon. Before I go through the financial results, it's important to mention that even though we are not presenting FY 2023 Q2, the company has made significant improvements from FY 2023 Q2 compared to FY 2023 Q3. Sales increased $1.6 million or 18.6%. Gross margin went from 3.9% to 32.6%. A nd operating profit loss went from a loss of $2.28 million to income of $325,000. These are substantial improvements, and we continue to strive to make changes to keep this trend continuing. For the three months ended January 31, 2023, consolidated revenue was $10.6 million compared to $12.2 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 approximately $5 million or 47% compared to $7.5 million or 62% in the same period of the prior fiscal year. Revenue on satellite payload contracts are recognized primarily under the percentage of completion method and are recorded only in the FEI-NY segment. Revenues from non-space U.S. government and DoD customers, which are recorded in both the FEI-NY and FEI-Zyfer segments, were $5 million compared to $4.3 million in the same period of the prior fiscal year and accounted for approximately 47% of consolidated revenue compared to 35% for the prior fiscal year. Other commercial and industrial revenue were approximately $650,000 compared to approximately $400,000 in the prior fiscal year.
The decrease in revenue for the 3 months ending January 31, 2023 was mainly due to the timing of the various production phases for products in the satellite market. For the 3 months ending January 31, 2023, gross margin and gross margin rate increased as compared to the same period in fiscal year 2022. The increase in gross margin and gross margin rate was due to higher engineering costs associated with programs in the development phase in the prior year period versus the production phase during the current year period. For the 3 months ending January 31, 2023 and 2022, SG&A expenses were approximately 22% and 23% respectively of consolidated revenues. The decrease in SG&A expense for the 3 months ending January 31, 2023 as compared to prior year period, was largely due to decrease in payroll and associated costs related to the previously announced workforce reduction.
The company continues to monitor expenses, looking for additional cost-effective reductions going forward. R&D expense for the 3 months ending January 31, 2023, decreased to approximately $780,000 from $1.1 million for the 3 months ending January 31, 2022, a decrease of approximately $345,000, and were approximately 7% and 9% respectively of consolidated revenue. R&D decreased for the 3 months ending January 31, 2023, are related to resolution of fiscal year 2022 technical challenges to projects that are now in production phase. The company plans to continue to invest in R&D in the future to keep its products at the state of the art.
For the 3 months ending January 31, 2023, the company recorded operating income of approximately $325,000, compared to an operating loss of approximately $720,000 in the prior year. Operating income increased due to a combination of increase in sales over the 3 months ending October 31, 2022, increased gross margin and effects of the changes management has instituted. Other income consists primarily on investment activity derived from the company's holding of marketable securities. During the 3 months ending January 31, 2023, the company liquidated its holdings and as a result, there was a loss recognized. This yields a pre-tax loss of approximately $313,000 compared to an approximately $734,000 pre-tax loss for the prior fiscal year.
It is important to mention, as a result of the liquidation of the company's holdings in marketable securities and the associated loss, the pre-tax loss would have been pre-tax income. For the three months ending January 31st, 2023, the company reported a tax provision of $3,000 compared to $1,000 for the same period of the prior fiscal year. Consolidated net loss for the three months ending January 31st, 2023, was approximately $316,000 with $0.03 per share, compared to an approximate $735,000 net loss or $0.08 per share in the previous fiscal year. Our fully funded backlog at the end of January 2023 was approximately $54 million compared to $40 million for the previous fiscal year ending April 30, 2022.
This is the second consecutive quarter in which backlog is greater than $50 million, levels the company hasn't seen in years. Some of this will turn into revenue and thus come out of backlog this year, we expect additional significant contracts 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 $20 million at January 31st, 2023 and a current ratio of approximately 1.7 to 1. The company's debt-free. The company believes that its liquidity is adequate to meet its operating investing needs for the next 12 months and in the foreseeable future. I will turn the call back to Tom. We look forward to your questions.
Thomas McClelland (President and CEO)
Okay. At, at this point, we can open things up to Q&A.
Operator (participant)
Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, please press star 1 on your phone if you have a question at this time. One moment while we pull for questions. Once again, ladies and gentlemen, please press star 1 on your phone at this time if you wish to ask a question. We did have a question come from Michael Eisner. Michael is a Private Investor. Michael, your line is live.
Michael Eisner (Private Investor)
Hi. Great, great job there.
Steven Bernstein (CFO, Secretary, and Treasurer)
Yeah, hi, Michael.
Michael Eisner (Private Investor)
What was that? I'm sorry.
Steven Bernstein (CFO, Secretary, and Treasurer)
Hi.
Revenue increased a nice amount. A couple questions. Even after the dividend, am I correct that you still gain, like, $3 million in cash after paying out, like, $10 million?
The actual cash went up about $1 million. We don't have any marketable securities anymore.
It's up all right. It did go up $1 million.
Thomas McClelland (President and CEO)
Yes, a little over $1 million.
Michael Eisner (Private Investor)
Which is nice. All right.
Thomas McClelland (President and CEO)
Yes.
Michael Eisner (Private Investor)
Last time you, GPS IIIF, I think you completed the qualifications on delivered the engineering, and I think they were testing it.
Thomas McClelland (President and CEO)
Yeah, that's almost correct. We completed the qualification, and we delivered a second unit, which has been installed in an experimental slot on one of the satellites that is slated to be launched in the near future. We don't know the exact schedule, but it's probably within the next 2 years, certainly, maybe a lot sooner than that. That is on target, and we are currently in the process of finishing what's called the life test unit, which eventually will go under long-term testing at Naval Research Laboratory.
Michael Eisner (Private Investor)
Okay. Was that one of your satellites? I think the GPS III, you were able to get one of your clocks on it.
Thomas McClelland (President and CEO)
No.
Michael Eisner (Private Investor)
Not the three yet. I thought...
Thomas McClelland (President and CEO)
Well, oh, you are actually right. It's not GPS IIIF.
Michael Eisner (Private Investor)
It's 3.
Thomas McClelland (President and CEO)
The one that I just talked about is one of the GPS III satellites, which is slated to be launched, sometime in the relatively near future.
Michael Eisner (Private Investor)
Yeah. All right. That, that is that was good 'cause you didn't think you were gonna get on that.
Thomas McClelland (President and CEO)
Yeah.
Michael Eisner (Private Investor)
All right. Are companies, you mentioned that some of these big companies are buying more parts up front, so if something goes wrong, they have the parts. Are they still doing that?
Thomas McClelland (President and CEO)
Well, I think that is a general strategy. We are still doing that to some extent, but, we do see that whole the, you know supply chain situation improving at this point. And so we are trying to be just as efficient as we can in terms of managing our inventory of, parts.
Michael Eisner (Private Investor)
All right. Are there any more overruns or anything like that?
Thomas McClelland (President and CEO)
No, nothing, you know there is no new programs where we have any significant concerns, regarding overruns.
Michael Eisner (Private Investor)
All right. You kept your backlog about even from last quarter. Your book-to-bill ratio, I think Steve mentioned it, was it 1.7 to 1?
Thomas McClelland (President and CEO)
Yes. It's now for the year, 1.51.
Michael Eisner (Private Investor)
One point five to one?
Thomas McClelland (President and CEO)
Yes.
Michael Eisner (Private Investor)
For the year?
Thomas McClelland (President and CEO)
For the year.
Michael Eisner (Private Investor)
You mean for the first 9 months?
Thomas McClelland (President and CEO)
Yes, that's correct.
Michael Eisner (Private Investor)
All right. I think last time you gave that number, you were 2.8 for 1. Was that for the quarter, or was that for the-?
Thomas McClelland (President and CEO)
That was just that one quarter, yes.
Michael Eisner (Private Investor)
All right. Do you know what it was for the, for the year at that time?
Thomas McClelland (President and CEO)
I don't have last quarter's number in front of me, no. I can get it to you.
Michael Eisner (Private Investor)
Yeah. you're happy with the 1.5:1?
Thomas McClelland (President and CEO)
Yes.
Michael Eisner (Private Investor)
All right. several significant contracts you mentioned in the coming quarters, you feel comfortable they're gonna have to come to you and buy them?
Thomas McClelland (President and CEO)
Yes, we do. We have seen in several cases things have moved out from what we anticipated last quarter. But we, believe me, we are monitoring this pretty closely, and we see no indication that any of these things won't happen. They move out a little. It's a pretty common thing in this business, but they are not going away. You know, there are some significant new things unanticipated even a quarter ago that we do anticipate coming in, some of them actually within, potentially within the next couple of weeks.
Michael Eisner (Private Investor)
When you say pushed out, you mean pushed to the right?
Thomas McClelland (President and CEO)
Pushed to the right. Yeah.
Michael Eisner (Private Investor)
Yeah, that was the term, always used.
Thomas McClelland (President and CEO)
Yeah.
Michael Eisner (Private Investor)
All right. You should keep your backlog up then.
Thomas McClelland (President and CEO)
Yes.
Michael Eisner (Private Investor)
To continue.
Thomas McClelland (President and CEO)
Yes.
Michael Eisner (Private Investor)
These. Can you comment which? Are they government? Can you comment what type of contracts? Are they classified?
Thomas McClelland (President and CEO)
So most of our contracts aren't directly with the government. In fact, I don't think we anticipate any directly with the government, but in general, the government, the U.S. government is the ultimate end customer. I think the things we are talking about, you know, over the next year or so are mostly fit into that category.
Michael Eisner (Private Investor)
Yeah, 'cause everyone, you may get stuff from Loral or some place like that.
Thomas McClelland (President and CEO)
Yes.
Michael Eisner (Private Investor)
These are all necessary contracts, is where I'm getting.
Thomas McClelland (President and CEO)
Yeah. I think you can say that.
Michael Eisner (Private Investor)
All right. I know if you can't comment on something, just say, you know, "We can't comment." All right. Thank you. Great job. Your revenues went up nicely.
Thomas McClelland (President and CEO)
Okay. Thank you, Mike.
Michael Eisner (Private Investor)
You're welcome.
Operator (participant)
Thank you. There were no other questions in queue at this time. I would now like to hand the call back over to Thomas McClelland for some closing remarks.
Thomas McClelland (President and CEO)
Okay. I think, I'd just like to thank everybody that has participated in this call. I'd like, make it clear that, if there anybody has any remaining questions, please feel free to contact us at Frequency Electronics, by telephone at any time. We welcome your calls. Thank you for participating and have a nice afternoon.
Operator (participant)
Thank you. This concludes today's conference. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.