Q3 2024 Frequency Electronics Inc Earnings Call

Participants

Thomas McClelland; President & CEO; Frequency Electronics, Inc.

Steven Bernstein; CFO; Frequency Electronics, Inc.

Brett Richard

Marcel Herbst; Analyst; Herbst Capital Management, LLC

Michael Eisner

Tim Hasara; Analyst; Sinnet Capital LLC

Frank Wocinski

Presentation

Operator

Greetings, and welcome to the Frequency Electronics Q3 fiscal 24 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 could 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

Good afternoon, everyone. We have a mixed story to tell this quarter on the one hand, we're experiencing continued revenue growth and all-time record backlog and continued growing demand for our products. On the other hand, we're reporting a loss for the quarter of $473,000 attributable to technical challenges, primarily on a single new development program. In order to remain competitive in the long run, it's necessary to take on programs requiring challenging new technology development and such temporary setbacks are an inevitable part of the equation. In this case, we are aggressively managing the program in question conservatively assessing its progress and are confident that the overruns are largely behind us and that overall, we will still generate a material operating profit for the fiscal year.
Furthermore, the knowledge base and lessons learned from such setbacks helped position us for improved performance on new business incorporating the new technologies this quarter highlights the importance of higher gross margins on new business. As we've discussed on previous earnings calls, we are fortunate that currently there is considerable demand for our products, which allows us to successfully achieve higher gross margins in some times to pass on opportunities in which this is not possible. We'll continue to approach our business with this strategy. We anticipate continued long-term growth in our primary end markets of space, navigation, secure communication and timing.
Our proven heritage technical expertise. And these disciplines allows us to continue to win new business as evidenced by the continued growth in backlog and new bookings, coupled with a disciplined management approach in which problems are identified early addressed aggressively and conservatively accounted for. I strongly believe the Company is on a trajectory of sustained growth, profitability and cash flow, albeit with some inevitable wiggles going forward.
I'll now turn things over to our CFO, Steve Bernstein, who will fill you in on the financial details.

Steven Bernstein

Thank you, Tom, and good afternoon. Before I get into the nine month financial results. I wanted to add a comment regarding the results for the three months ending January 31st, 2024. As Tom mentioned, during the third quarter of fiscal year '24, the Company had a temporary setback on one of our programs. As of today, the issue has been almost fully resolved with the majority of the related costs. Having been accounted for during the third quarter of fiscal year '24. We look forward to reporting more favorable results next quarter as the program continues.
Despite the setback, there was positive news from the quarter, fully funded backlog was approximately $67 million. Sales continue to increase. Our balance sheet remains strong, and we expect Covetrus cash flow going forward. For the nine months ending January 31st, '24, consolidated revenue was $39.7 million compared to $27.8 million for the same period of the prior fiscal year, the components of revenue are as follows. Revenue from commercial and U. government satellite programs was approximately $16.3 million or 41% compared to $12.8 million or 46% in the same period of the prior fiscal year.
Revenues on satellite payload contracts are recorded primarily under the percentage of completion method and are recorded only in the FDI New York segment. Revenues from non-space US government and DOD customers, which are recorded in both the FDI. New York and FEI-Zyfer segments were $21.1 million compared to $13 million in the same period of the prior fiscal year and accounted approximately for 53% of consolidated revenue compared to 47% for the prior fiscal year. Other Commercial and Industrial revenues were $2.3 million and $2 million for the nine months ending January 31st, '24 and '23, respectively.
The significant increase in revenue for the period was primarily related to increases in US government customer sales, both for space and commercial orders for the nine months ending January 31st, '24, gross margin and gross margin rate increased as compared to the same period in fiscal year '23. The gross margin dollars increase as a direct result of the increase in revenue, the gross margin rate increased significantly due to the fact that many of the technical challenges faced in the prior fiscal year have been resolved and as a result, the relating programs are now moving forward and running more efficiently.
Previous programs at sustained lower margins due to technical issues are near completion or have been completed for the nine months ending January 31st, '24 and '23, SG&A expenses were approximately 19% and 23%, respectively, of consolidated revenue as a percentage of consolidated revenue decreased 4% due to an increase in sales for the nine months ending January 31st, '24 as compared to the nine months ending January 31st, '23.
Similarly, the absolute increase in SG&A expenses for the nine months ending January 31st, '24 as compared to the prior year period was largely due to bid and proposal costs associated with the increased sales and increase in professional fees and payroll associated costs.
R&D expense for the nine months ending January 31st, '24 decreased to $2.3 million from $2.5 million for the nine months ending January 31st, '23, a decrease of $200,000 and were approximately 6% and 9%, respectively, of consolidated revenue. R&D decreased for the nine months ending January 31st, '24 was primarily due to a temporary shift of R&D staff. 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 nine months ending January 31st, '24, the Company recorded operating income of $2.5 million compared to an operating loss of $5.1 million in the prior year. Operating income increased due to combination of increased revenue, gross margin and the effects of certain cost cutting measures instituted by man management that begun in fiscal '23.
Other income can be derived from reclaiming of metals refunds, interest on deferred trust assets or the sale of fixed assets, interest expenses related to deferred compensation payments made to retired employees. This yields pretax income of approximately $3 million compared to a $5.7 million pretax loss for the prior fiscal year. For the nine months ending January 31st, '24, the Company recorded a tax provision of $19,000 compared to $6,000 for the same period of the prior fiscal year.
Consolidated net income for the nine months ended January 31st, '24, was $3 million or $0.32 per share compared to a $5.7 million net loss or negative $0.62 per share in the previous fiscal year. Our fully funded backlog at the end of January '24 was approximately $67 million compared to approximately $56 million for the previous fiscal year ended April 30, '23.
The Company's balance sheet continues to reflect strong working capital position of approximately $24 million at January 31st, '24, and a current ratio of approximately 1.9 to 1. Additionally, the Company is debt-free. The Company believes that its liquidity is adequate to meet its operating and investing needs for the next 12 months and the foreseeable future. I will pull back turn the call back to Tom and we look forward to your questions soon.

Thomas McClelland

Thanks, Steve. I think we have nothing more to say we can turn things over for questions at this time.

Question and Answer Session

Operator

(Operator Instructions) Brett Richard, Private Investor.

Brett Richard

I had a couple of Fridays there. Can you guys a couple of questions actually, can you guys talk about how much of the backlog increase for the quarter was related to the November contract first other business?

Thomas McClelland

Well, certainly a significant part of it, but it is it was not completely due to the November contracts we've had additional new business and we're continuing we get a lot of new business as we speak.

Brett Richard

So would you say outside of those contracts as business strengthen versus, say, Q2 or held steady? Or I guess any kind of color on that.

Thomas McClelland

I think it strengthened.

Brett Richard

I'm good here. So the second question was about the cost overruns. So first, first part that was were the cost overruns part of those contracts that were announced in November also if you can quantified --?

Thomas McClelland

No.

Brett Richard

Okay. That's helpful. And can you quantify the dollar impact of those?

Thomas McClelland

I don't know, Steve, do you want our data?

Steven Bernstein

It was approximately, give or take about $1.8 million effect on that particular program.

Brett Richard

Okay. That's pretty pretty substantial margin. So absent that, you're probably somewhere in the mid 30s or something like that?

Thomas McClelland

Yes.

Brett Richard

So one more question on that, too. So we were halfway through the quarter when you when we had the last conference call there were there was any sign of this. When did management become aware of these problems and where you were from the beginning? Or was there a gap here and realizing the issues. Can you talk about that a little bit?

Thomas McClelland

Yes, we can talk about that a little bit. I think these are issues that came up in the middle at the end of December, primarily and their day was a little bit of a snowball effect. And I think the point I'd really like to make about this is that we and I have a lot of experience dealing with this kind of technical problem. And one of the worst things we can do is trying to work provide a quick fix. And what we usually find when we when we do that sort of thing is that we pay for it in spades down the road. So we are we didn't approach things this way. We spent significantly more resources in dealing with this problem. And unfortunately, in the short run, it's a little bit more costly to do things that way. But I think that by doing that, we're able to contain the problem and we have a lot of confidence that we won't have additional problems down the road.
Okay.

Brett Richard

And is this a last call, you talked about targeting ultimately, you know, 50% margins within six months of the year. Does this change any of that?

Thomas McClelland

Well, no, it doesn't change any of that, but I would like to discuss that a little bit. You know, we certainly used the right words. We target a gross margin of 50%, and we're continuing to do that and I tried to talk a little bit about that a few minutes ago, but I think we do need to understand that. We know we're in a situation at this point in time where we have a growing market and our technology is sound and needed. And in many cases, there's very little competition under those conditions. We can attain a know potentially a 50% gross margin and sometimes even better, but we can't always do that. And when there are there's competition, then obviously it becomes more difficult to do that. And of course, as we have been talking about, there will always be technical challenges. And so and we will we certainly have to expect that there will be some wiggles in the gross margin as we deal with those kind of things.

Operator

Marcel Herbst, Herbst Capital.

Marcel Herbst

Hello, good afternoon and thank you for taking my question, which is about GPS satellites of. I understand that the Space System command has put a major focus on improving the current Medium Earth Orbit GPS constellation. And this would complement from what I understand all the GPS. three GPSVR. programs. I was wondering if you consider such GBS constellations an opportunity or a future growth driver in how far involved, et cetera?

Thomas McClelland

We certainly consider a future opportunity. And in fact, we have a lot of ongoing activity in this regard on I think what you're talking about is an effort, a Space Systems Command, which is responsible for GPS. two field, a new set of satellites, which would orbit and similar orbits, but would be designed a little bit differently than the current GPS satellites that current GPS satellites are designed.
The satellites that are being launched at this point in time are designed to have a lifetime in space of 15 years earlier, GPS satellites were only designed to have a lifetime of about 7.5 years, but some of those satellites are still working after 25 years. So the new approach that is being pushed at this point in time is satellites with a lifetime of three years in space. And and there's even an acceptance of the idea that not all of the satellites will even last for three years.
Of course, along with this, there's a desire to be able to launch those satellites much more rapidly than that is the satellites which have been launched to date and there's of course, along with that, the desire for those satellites be a lot less expensive. So we're actively participating. We have had conversations with the people from the Space Systems Command related to this. And we're actively pursuing some of the early attempts at prototype satellites and obviously the atomic clocks that go on them. So so yes, we're interested and we're actively involved, and we see it as potentially a very important part of our future.

Marcel Herbst

And that sounds really great. And can you quantify the opportunity for us in some way?

Thomas McClelland

It's pretty hard to do that at this point in time because, you know, we the weight where things are being advertised to us at this point is being put forward in phases. And also the initial phases are are pretty small in terms of quantities of things. So but I think over the next two years, we'll start to get a much better feeling about where all of this is going.

Operator

Michael Eisner, Frequency.

Michael Eisner

I think you said none of this was the three November project.

Thomas McClelland

That's correct. That's correct.

Michael Eisner

So although it is a loose, I'll go ahead and sign.

Thomas McClelland

Yes, the losses for the quarter have nothing to do with the contracts that were awarded in November.

Michael Eisner

So those are still on schedule.

Thomas McClelland

All those are still on schedule.

Michael Eisner

Great. And then you have the revenue part of those projects that you did for the quarter?

Thomas McClelland

Yes, yes. And the that will continue to be the case going forward. You know, the initial phase of these programs the revenue is relatively minimal, mostly through procuring parts. And that doesn't doesn't translate into significant revenue till we start doing something with those parts, but we're sort of shifting into high gear on a as one of those programs, in particular on U.S. Second one is not far behind. So we'll start to see a significant revenue due to those programs as we go forward.

Michael Eisner

In fourth quarter?

Thomas McClelland

Yes.

Michael Eisner

Is the Company in the project? I guess there was something new that get you had problems with that?
Our client obsession?

Thomas McClelland

Well, I don't think anybody is a prudent jumping up and down for Joy because of it. But I think we're working with our customer and I think we have things under control.

Michael Eisner

It is that was that a bigger part of the $67 million backlog or the new part with less $17 million?

Thomas McClelland

No, no, it wasn't any or so. The increase in backlog wasn't involved in that. There's a program that we've been working on for some time.

Michael Eisner

I'm not sure if you can comment where the big increase came from.

Thomas McClelland

I don't think it's appropriate to go into any details. You have to understand that our customers are. I don't like us to talk about that details of their programs.

Michael Eisner

I can appreciate the project and the problem is mostly we are resolved and the cost of mostly accounted for.

Thomas McClelland

Yes, the costs are definitely accounted for and the problems are resolved. That's correct.

Michael Eisner

So you'd be back on schedule and that but in this quarter before you should be okay?

Thomas McClelland

Yes.

Operator

Tim Hasara, Sinnet Capital.

Tim Hasara

Yes, just with respect to the three new contracts, how are they going to go into backlog here? Exactly. I assume the full amount hasn't put in there given the value of the three?

Thomas McClelland

Correct. So our backlog is fully funded. So as the programs get funded, that additional amounts will be added to backlog. And then the revenue obviously taken on the program subtracted from backlog.

Steven Bernstein

So these four programs, as we get them, were typically funded for a fraction of the total contract amount. And that fraction that we're funded for is what goes into backlog.

Operator

Frank Wocinski, Private Investor.

Frank Wocinski

Hi. Thanks for taking the call. I get a couple of things, but mainly all these conference calls and concentrate on the satellite business, which is justifiable. That's where a lot of the growth is. But so far, it seems to be coming along extremely well. In fact, it's over half your business for the nine months, I guess could you bring us up-to-date on what's going on there? How much of that, how much of that is a backlog business as opposed to a turns business.

Thomas McClelland

So it's a sum of some of each, I think a year that is a they turn things over a lot more rapidly than we do in the satellite business. I don't have any specific numbers off the top of my head. They are there. There are a couple of programs at Cipher which are longer term, but they have a tremendous amount of business, which is essentially off-the-shelf products on an as needed basis. I'm not sure that answers your question, but --

Frank Wocinski

The weather just to get a yes, I guess the question basically is how predictable is that vapor business? I mean, it's been growing very, very nicely over the last couple of years. And the and how predictable is it. And what kind of margins? I think when you're talking about 50% margins, you're talking corporate-wide or just in the satellite business wide?

Thomas McClelland

We're talking corporate-wide.

Frank Wocinski

So the margins right for it must be pretty good on a gross basis.

Thomas McClelland

They are. Yes.

Frank Wocinski

And is that and how predictable is that, you know, is that is that something that you can model out pretty well or because it's so much of a turns business, it's more variable.

Thomas McClelland

Well, it's potentially more variable, I think has been pretty predictable for the last couple of years. But yes, it is potentially more variable, obviously, in changing economic conditions and so forth.

Frank Wocinski

And is most of that business said at DOD or government related.

Operator

We have reached the end of the question-and-answer session, and I will now turn the call over to Thomas for closing remarks.

Thomas McClelland

All right. I'd just like to thank everybody for participating in this call, and we'll talk again and another quarter. Thank you very much.

Operator

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.