Frequency Electronics - Q4 2023
July 13, 2023
Transcript
Operator (participant)
Greetings, welcome to the Frequency Electronics Fiscal Year-End 2023 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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, Thomas McClelland, President and Chief Executive Officer.
Thomas McClelland (President and CEO)
Thank you, and welcome, everyone. Today, it's almost exactly one year since I inherited the role of CEO and President of Frequency Electronics, and I find myself reflecting on what has transpired during the last year. It's certainly been a challenge. Overall, it has been a very positive experience, and I look forward to a continuation of that experience over the next couple of years. There will be more challenges, but I feel confident that the company is on a solid path to continued success and growth. I'd like to start with some non-financial observations, which I think are ultimately very important for the financial health of the company. Over the past year, we've made a number of changes designed to make the company stronger in the long run.
In early September of last year, we had a major layoff and restructuring at our Long Island facility, and before the end of calendar year 2022, we relocated the Zyfer manufacturing capability, which had been moved to Long Island, back to their original location in California, alongside their engineering team. These moves were understandably traumatic and also costly in the short run. The layoff was costly in terms of workforce morale, and the Zyfer move was costly in dollars and cents. But both of these moves have made us stronger and are now showing positive benefits. Simultaneously, while all of this was going on, we've made a conscientious effort to harness our strength in science and engineering, and in fact, to bolster it in such a way that we can remain competitive well into the future.
Over the last year, we've begun to work collaboratively with several of our major customers to develop new approaches to old problems, which have the potential to improve performance and lower cost in the position, navigation, and timing arena. Similarly, we've reinvigorated our internal R&D program to target quantum technology and products which address the move to smaller, lower-cost satellite systems. Our Zyfer division has made a dramatic comeback. In fiscal year 2022, Zyfer suffered an operating loss of over $2 million, whereas in fiscal year 2023, which ended April 30th, Zyfer still had a small overall operating loss of about $160,000. Much more importantly, in the second half of the year, Zyfer made an operating profit of just over $1 million. This, in spite of the costs associated with the cross-country move of manufacturing.
John Jahan, Zyfer's president, and his team deserve a lot of credit for making this happen much faster than was originally anticipated. Furthermore, Zyfer has been awarded several major contracts during fiscal year 2023, which will significantly contribute to the bottom line during fiscal year 2024 and beyond, and several new contracts are expected in the near future. Meanwhile, in New York, FEI has regrouped, is smaller after the layoffs, but is coming back strong. Some costly engineering development efforts are finally coming to completion successfully. Some new contracts are in and proceeding profitably, and several large satellite program contracts are anticipated over the next six months. Importantly, after enduring some pretty traumatic changes over the last year, I believe our workforce morale is high.
There's a spirit of success in the air, and I feel we're all working together, not only in New York, but the entire company, to do what's necessary to make things happen. I believe the whole at FEI is greater than the sum of the parts, and that's a powerful force. Okay, for the financial portrait. In the fourth quarter of fiscal 2023, we continued to see the results of the cost-cutting efforts and management reorganization, which has taken place over the last year. Revenue and gross margin have increased substantially for the six-month period ended April 30th, 2023, compared to the six-month period ended October 31st, 2023, as well as in comparison to the same period in fiscal year 2022. The company is reporting an operating profit for the second half of the fiscal year.
FEI's backlog at year-end is at a decade high, and several historically large satellite programs are anticipated during the next six months, 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. Continued vigilance is required to navigate the challenging economic and geopolitical environment, but we're nonetheless confident that we are progressing in a positive direction, and we look forward to continued improvement in results. The company is committed to moving towards sustained profitability and cash generation going forward. Further, we remain debt-free with a very strong balance sheet to fund future growth opportunities. Thank you, and, I'd like to turn things over now to Steven Bernstein, our Chief Financial Officer.
Steven Bernstein (CFO)
Thank you, Tom, and good afternoon. Before I go to the financial results, it is important to mention that I will be comparing Q4 of fiscal 2023 versus Q4 fiscal 2022 results. Our press release has the full fiscal year results and some of the key metrics. I would also like to mention the improvement in results for the second half of the fiscal 2023 compared to the first half of fiscal 2023. Revenue increased from $17.2 million during the first half of fiscal 2023 to $23.6 million during the second half of fiscal 2023.
Gross profit percentage went from 2% in the first half of fiscal 23 to 31.8% in the second half of fiscal 23, and operating income loss went from an operating loss of $5.4 million in the first half of fiscal 23 to an operating income of $717,000 in the second half of fiscal 23. Additionally, this is the second quarter in a row that the company is operating income. It is evident by the vast improvement in our results from comparing the second half of fiscal 23 to the first half of fiscal 23, that the company is heading in the right direction, and the changes that have been previously announced are contributing to this improvement.
For the three months ended April 30th, 2023, consolidated revenue was $13 million, compared to $10.2 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 $5.1 million, or 39% of consolidated revenue, compared to $5.2 million, or 51% of consolidated revenue 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 New York segment.
Revenues from non-space US government and DoD customers, which are recorded in both the FEI New York and FEI-Zyfer segments, were $7.3 million, compared to $4.7 million in the same period of the prior fiscal year, and accounted approximately for 56% of consolidated revenue, compared to 46% for the prior fiscal year. Other commercial and industrial revenue was approximately $563,000, compared to approximately $249,000 in the prior fiscal year. The increase in revenue for the three months ending April 30th, 2023, was mainly due to the increase in revenue at FEI-Zyfer. For the three months ended April 30th, 2023, gross margin went down and gross margin rate increased as compared to the same period of fiscal year 2022.
The company is encouraged by the fact that the gross profit percentage for the third and fourth quarter of fiscal year 2023 were both over 30%, and the company anticipates this trend will continue in fiscal 2024. For the three months ended April 30th, 2023 and 2022, SG&A expenses were approximately 23% and 20%, respectively, of consolidated revenues. The increase in SG&A expense for the three months ending April 30th, 2023, as compared to prior year, was largely due to reversals in fiscal 2022. Full year SG&A expenses decreased over $2 million. The company continues to monitor expenses, looking for additional cost-effective ways going forward.
R&D expense for the three months ending April 30th, 2023, decreased to approximately $658,000 from $1.1 million for the three months ending April 30th, 2022, a decrease of approximately $450,000, and was approximately 6% and 11%, respectively, of consolidated revenue. R&D decreased for the three months, ending April 30th, 2023, due to dedicated R&D resources are working on two externally funded developmental programs, which would not show up in R&D. 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 three months ending April 30th, 2023, the company recorded operating income of approximately $390,000, compared to an operating loss of approximately $5.9 million in the prior year.
Operating income increased due to a combination of an increase in sales over the three months ending April 30th, 2022, increased gross margin, and effects of changes management has instituted. For Q4 fiscal 2023, other income consisted primarily of interest expense and miscellaneous income, since all marketable securities were sold this year. During the three months ending April 30th, 2022, the company took a $795,000 impairment charge related to the company's investment in Morion. This yields a pretax income of approximately $313,000, compared to an approximately $6.8 million pretax loss for the three months ending April 30th, 2022. For the three months ending April 30th, 2023, the company recorded a tax provision of $68,000, compared to a $3,000 tax benefit for the same period of the prior fiscal year.
Consolidated net income for the three months ending April 30th, 2023, was approximately $246,000, or $0.03 per share, compared to an approximately $6.8 million loss, or $0.74 per share, for the same period of the previous fiscal year. Our fully funded backlog at the end of April 2023 was approximately $56 million, compared to $40 million for the previous fiscal year ended April 30th, 2022. In addition, this is the third consecutive quarter in which backlog is greater than $50 million, levels the company has not seen in over 10 years. While some of this will turn into revenue and thus come out of backlog this year, we expect additional significant contract 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 $21 million at April 30th, 2023, at a current ratio of approximately 1.8 to one. Additionally, the company is debt-free. The company believes that its liquidity is adequate to meet its operating investing needs for the next 12 months and the foreseeable future. I will turn the call back to Tom. We look forward to your questions later.
Thomas McClelland (President and CEO)
Thanks, Steve. At this point in time, we will turn over to accept questions from the audience.
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 one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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. One moment, please, while we pull for questions. Once again, that's star one if you have a question or a comment. Okay, and our first question comes from Brett Rice with Janney Montgomery. Please proceed with your question.
Brett Rice (Analyst)
Hi, Tom. Hi, Steven. First, applauded and, you know, congratulations on the progress. Nice to see that.
Steven Bernstein (CFO)
Thank you.
Brett Rice (Analyst)
You know, now that we're, you know, crossed over to profitability, you mentioned, you know, funding, being able to self-fund growth opportunities. Could you give us some more color on, you know, what you have in mind?
Thomas McClelland (President and CEO)
Well, we plan to significantly increase our R&D funding over the next couple of years. In fact, we've budgeted for that in fiscal year 2024. Of course, we're also working pretty aggressively to get external, excuse me, external funding for development efforts. We're actually seeing that there's a lot of stuff out there that's relevant to our areas of expertise in technology. We're vigorously pursuing those development efforts.
Brett Rice (Analyst)
Great, great. This growth in revenues that you anticipate in the coming quarters, is there anything that can derail that? If we go into a recession, does that become a headwind, or, you know, those revenues come in, you know, irrespective of what the macro economy does?
Thomas McClelland (President and CEO)
Yeah, I, you know, of course, there are always things out there that can derail stuff. I think things look very, very positive at this point in time. The, you know, our revenue estimates are based on the work that we already have, contracts that we already have, and also things that we are very, very confident of getting in the, in the very near future. I think we are, we're working very carefully to pursue those programs in such a way that we can execute them profitably. I think because of all of that, we're really quite confident that we'll see significant revenue growth and also profitability.
Brett Rice (Analyst)
Right. Is there a book to bill number, Steve?
Steven Bernstein (CFO)
I don't have it with me. I can get it to you. I started and printed. It was somewhere in the neighborhood, I believe, of 1.5 to one, maybe a little bit higher, but I will get you the exact number, when we get off the call. I'll email it to you.
Brett Rice (Analyst)
Right. If that's what it is, it's consistent with what it was last quarter.
Steven Bernstein (CFO)
Pretty close, yes.
Brett Rice (Analyst)
I'm gonna drop back in queue, and once again, thank you, thank you for, the progress.
Steven Bernstein (CFO)
Thank you.
Operator (participant)
The next question is from Robert Smith with the Center for Performance Investing. Please proceed.
Robert Smith (Analyst)
Hi, good afternoon. Thanks for taking my questions, and thanks for the progress. Tom, how much of the backlog do you feel is deliverable in fiscal 2024?
Thomas McClelland (President and CEO)
Oh, I it's tough to estimate to give an exact number, but I think 75% is a reasonable estimate.
Robert Smith (Analyst)
Okay, thank you. On prior calls, you said you were gonna mount a distinct effort to tap the small satellite area. Could you kind of give me some color as to the progress you're making?
Thomas McClelland (President and CEO)
Okay, sure. I think, we are working closely with the some of the major contractors, the prime contractors on satellite systems. I think the most important part at this point in time is really trying to home in on exactly how things are gonna pan out in the future. I think there have been moves to, you know, the people have launched, especially there have been experimental satellites launched by universities and things that are the satellites, the size of a soccer ball and things like that. We feel pretty strongly that that's not really where things are gonna end up.
We feel that there's a sweet spot that's a little bit bigger than that, a little bit more costly than that, and we're really trying to home in on what we perceive as a sweet spot between low cost and a very high performance. We're targeting our internal R&D and also efforts that we're making in collaboration with some of the prime contractors, to really be able to achieve improved performance over what we can achieve today, but doing it in a smaller package at a lower cost. Exactly where that ends up in specific dollars and cents and specific numbers of kilograms, it remains to be seen, but that, in a general sense, is where we're headed.
Robert Smith (Analyst)
Yeah. When do you think we see some actual product, and revenue?
Thomas McClelland (President and CEO)
That's a little bit hard to estimate. I think there are some things that currently are scheduled in 2025 kinda timeframe, calendar year, 2025, perhaps 2026.
Robert Smith (Analyst)
Mm-hmm.
Thomas McClelland (President and CEO)
I think that's probably what we're looking at.
Robert Smith (Analyst)
Yeah. I think you shared with us that you felt that there was a considerable addressable market there. Could you at all, give me some, you know, average kind of, figure that I could work with or get my arms around?
Thomas McClelland (President and CEO)
That's a little bit tough to do. You know, it the satellite business is definitely growing, and the trend is toward, you know, the systems that involve a very large number of low Earth orbit satellites. You know, I think, it remains to be seen exactly how big that market becomes.
Robert Smith (Analyst)
Mm-hmm. You're certainly kind of, if not redirecting, I mean, you understand what the potential is, and you're gonna go for it, right?
Thomas McClelland (President and CEO)
Can you repeat that? I'm sorry, I didn't quite.
Robert Smith (Analyst)
Yeah-
Thomas McClelland (President and CEO)
catch it.
Robert Smith (Analyst)
I assume that you understand fully what the potential is, and you're gonna go for it.
Thomas McClelland (President and CEO)
Oh, yes. Yes.
Robert Smith (Analyst)
Okay.
Thomas McClelland (President and CEO)
It's-
Robert Smith (Analyst)
All right, thanks. Yeah. Sorry.
Thomas McClelland (President and CEO)
There are two aspects to that, you know, the one is what the potential is, but I think the other very important thing is that that's the direction the satellite business is going, and if we don't pursue it, we, you know, the satellite business starts to disappear, so.
Robert Smith (Analyst)
Yes, I understand. Well, the recognition is palpable. Okay, I wish you well. Thanks so much.
Thomas McClelland (President and CEO)
Thank you.
Operator (participant)
Once again, if you have a question or a comment, please press star one. The next question comes from Michael Eisner, private investor. Michael, please proceed.
Michael Eisner (Private Investor)
Hi. Great job, 22% increase in revenue from previous quarter.
Thomas McClelland (President and CEO)
Thank you.
Michael Eisner (Private Investor)
Can you continue that growth?
Thomas McClelland (President and CEO)
Well, I don't, wanna talk about specific numbers, but, we feel very confident that we'll have, continued growth.
Michael Eisner (Private Investor)
Okay. how is the... Any part delays or inflation causing, any problems?
Thomas McClelland (President and CEO)
We're continually dealing with problems. That's really a part of the business. I think things are in that regard, things are easing up. We're seeing less difficulty than we were three months ago or six months ago. I think more and more, we certainly encounter much longer lead times on parts than what historically we're used to. More and more, we see that we're given initially lead times of six months or even 1 year, we actually receive delivery of parts in two or three months. That's very encouraging. You know, we still have to deal with long lead times and the challenges associated with that.
Michael Eisner (Private Investor)
The part delay, it's getting less. This has been going on-
Thomas McClelland (President and CEO)
Yeah
Michael Eisner (Private Investor)
for a couple of years now. as long as
Thomas McClelland (President and CEO)
Yeah
Michael Eisner (Private Investor)
-it keeps on going to, you know, slightly less.
Thomas McClelland (President and CEO)
Yeah.
Michael Eisner (Private Investor)
Did I hear you right, is Zyfer all in New York now?
Thomas McClelland (President and CEO)
No, no. That. Sorry for the confusion. Zyfer, a year ago, Zyfer was split, their manufacturing was being done here in New York. The engineering was out at their facility in Orange County, California. We made a decision to move the manufacturing back where it was originally to the California facility. That took place over the last fiscal year. You know, that we, you know, the move to do the manufacturing here in New York, we feel was a mistake, and it was to have the manufacturing separate from the engineering was problematic. We made the decision to move things back.
Obviously, to move, both ways, we ended up back where things started, but incurred a lot of cost in the process. It was costly, but, I think the, the results at this point speak for themselves. I think we're pretty happy that, we did things, and, it, happened a lot faster than, we originally expected.
Michael Eisner (Private Investor)
All right. That's back in California completely?
Thomas McClelland (President and CEO)
Yes.
Michael Eisner (Private Investor)
All right. you know, you said the R&D, some of it's gonna be paid. I saw your R&D went down, you started talking about that it will probably go up in the next couple of years. Is Frequency gonna be paying that or external payers?
Thomas McClelland (President and CEO)
We, so, you know, we're aggressively pursuing any development efforts that we can get funded externally. That's the thing that makes the most sense for us as a small company. We also anticipate that internally funded R&D is going to increase over the next couple of years.
Michael Eisner (Private Investor)
With revenue, the percentage will equal out?
Thomas McClelland (President and CEO)
Yeah, I think.
Michael Eisner (Private Investor)
As revenue goes up, R&D will go up, or the opposite?
Thomas McClelland (President and CEO)
Yes.
Michael Eisner (Private Investor)
The kind of work. Not, maybe not exact timing, but they're kind of in sync.
Thomas McClelland (President and CEO)
That's it.
Michael Eisner (Private Investor)
I'm sorry?
Thomas McClelland (President and CEO)
Yes, I think that's a reasonable assumption.
Michael Eisner (Private Investor)
Okay. How many employees do you have at this point?
Thomas McClelland (President and CEO)
Uh, um-
Roughly.
I think we have roughly 180 employees overall.
Michael Eisner (Private Investor)
Yeah, overall.
Thomas McClelland (President and CEO)
Overall, yeah.
Michael Eisner (Private Investor)
Final question. Your last quarter, you talked about GPS III, III and IIIF. I think there were two units that they were I think one they were testing, and one was the life test with the Naval Research Laboratory. How is that coming along?
Thomas McClelland (President and CEO)
That was, the testing was supposed to take place at the Naval Research Laboratory. That's still gonna take place, but the government funding, the to support that testing isn't gonna be available. At least that's what we're told, until roughly the end of this calendar year. We have agreed to, we've agreed that we're going to keep the unit here at FEI and do some testing in vacuum, simulating the space environment, you know, from now until the end of the year.
Michael Eisner (Private Investor)
The calendar year.
Thomas McClelland (President and CEO)
Yeah, just to be able to get additional data on the performance of that unit.
Michael Eisner (Private Investor)
All right, those. Oh, I'm sorry, one thing. All the satellite programs you talked about, are we gonna see that all at once in the backlog, or just the pieces like we usually do?
Thomas McClelland (President and CEO)
Well, you know, it's impossible to predict that exactly. Where there are several major programs that we anticipate in the, in the very near future. It's conceivable that those could arrive almost simultaneously, but it's also very conceivable that they could be stretched out a bit. It is one of the frustrations, but the realities of this business, that these things, the, you know, they tend to stretch out in time more than we would like.
Michael Eisner (Private Investor)
It's out, basically out of your control. When you, when it comes in, it comes in.
Thomas McClelland (President and CEO)
Yep.
Michael Eisner (Private Investor)
Basically. Thank you for your time. I appreciate it. Great job!
Thomas McClelland (President and CEO)
Okay, thank you.
Operator (participant)
Next question comes from Greg Roeder with Adirondack Funds. Please proceed.
Greg Roeder (Portfolio Manager)
Hi, thank you for taking my call. I'm new to the Frequency Electronics story. I'm just curious about the backlog growth is very impressive, and I'm curious as to was that a function of the primes getting back into their good graces? Was there a function of, is one big order from a prime or what have you? Any color you could offer on the backlog would be helpful. Thank you.
Thomas McClelland (President and CEO)
Yeah. I think that's a combination of things. It's I would say it is distinctly not really a question of getting back into the good graces of the primes. I think it is. I think fundamentally, what this is about is a growth in the market, and to a large extent, it's a growth in the space market. That's something that of course, there will be ups and downs, but that's a trend that we have every reason to believe is gonna continue well into the future. I think part of that backlog is, it, you know, a significant part of it is non-space things.
our, we've seen a substantial backlog increase at Zyfer, and there are several programs there that are very, very encouraging, and we anticipate a lot of follow-on to those programs. We have some development programs there, and there's a lot of potential for follow-on afterwards. I think, you know, we're really pretty positive at this point in time. Of course, we don't have a perfect crystal ball, but it does in no way looks like a one-off blip at this point. We anticipate this to persist into the future.
Greg Roeder (Portfolio Manager)
That was very helpful. Thank you, and good luck.
Operator (participant)
Okay, the next question comes from Robert Smith. Oh, a follow-up from Robert Smith with the Center for Performance Investing. Please proceed.
Robert Smith (Analyst)
Hi, Tom. You've helmed the company for about a year, and I was wondering what the principal learnings you've taken in this time frame. Is your optimism still present? Has it increased, or how are you looking at the future?
Thomas McClelland (President and CEO)
Well, okay. Yeah, I been here for about a year. It's a new experience for me, frankly, but I have to say On a day-to-day basis, it's pretty challenging, sometimes pretty frustrating, but I think overall, I'm enjoying it, and I think I'm very optimistic about the future at this point. I will say that, you know, I'm not a newcomer to Frequency Electronics. I have been here for most of my career, close to 40 years, at this point in time. I, it's really one year as CEO.
Robert Smith (Analyst)
Yeah, I well understand that you have a great knowledge of the company, and I'm counting on that to take us forward. I mean, that's. I was wondering, in this one year since you've been at the helm, I mean, is there any particular insights that you've gained as from the vantage point of being a leader?
Thomas McClelland (President and CEO)
Well, I think there are a lot of insights. I don't think there's one major thing that I can point my finger at, but I think there are a lot of little things. I think primarily, it's attention to detail that I think is the important thing at this point. It's a lot of hard work and paying attention to the details. I think we're working hard. When we look at new business, we wanna make sure that we can take it on and pursue it profitably. You know, as opposed to just seeking new business. Yeah, other than that, I think it's the devil's in the details.
Robert Smith (Analyst)
Do you feel that you have the people in place that provide adequate support to you?
Thomas McClelland (President and CEO)
That's a really good question. I think we do, but we're looking at potentially some very significant growth, and we are looking at this. You know, over the last year, we had some significant cutbacks, but at this point in time, we're looking at potentially growing our workforce. We're gonna be very cautious in doing that. At the same time, I think what is most important, we have a number of people with many years of expertise, and we're looking to train a new generation of people and also to get new talent in science and engineering that have an expertise in some of some new approaches to old technologies.
I think that's really important for keeping Frequency Electronics viable as a technology company well into the future.
Robert Smith (Analyst)
That would come with new hires?
Thomas McClelland (President and CEO)
it's partly with new hires, yes, and it's partly with training people that we already have on the workforce.
Robert Smith (Analyst)
Yes. Thank you. Wish you good luck. Thank you.
Operator (participant)
We have no further questions in queue.
Thomas McClelland (President and CEO)
Okay. With that, I think, we can end the call. I'd like to thank, you all for participating in this call. I look forward to our next call after the first quarter. Thank you.
Operator (participant)
Thank you.
Thomas McClelland (President and CEO)
Thank-
Operator (participant)
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.