Frequency Electronics Q4 2024 Earnings Call Transcript

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Provided by Quartr
July 22, 2024

There are 6 speakers on the call.

Operator

Greetings and welcome to the Frequency Electronics Year End Fiscal 20 24 Earnings Release Conference Call. At this time, all participants are in a listen only mode. 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. 5.

Operator

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.

Speaker 1

Good afternoon, everyone. We have a very positive story to tell regarding the fiscal year that ended April 30. Revenues have grown consistently throughout the year, and we expect that to continue in the near term going forward. The backlog of $78,000,000 is a historic high for the company, and we anticipate the backlog will remain strong based on a very healthy new business outlook. The company is reporting an operating profit for the year of $5,000,000 with operating loss in the Q3 being followed by profitable 4th quarter.

Speaker 1

We anticipate continued long term growth in our primary end markets space, navigation, secure communication and timing. Our proven heritage technical expertise in these disciplines allows us to continue to win new business while maintaining healthy gross margins. This puts us on a very solid footing going forward and gives us some breathing room to develop new technologies and products in these markets as they evolve over the next decade. As we've discussed in the past, there is a growing concern with the vulnerability of satellite assets and thus a move to lower cost, easily replaceable satellite hardware. The company continues to respond to new business opportunities in this arena.

Speaker 1

In some cases, these programs involve higher risk and potentially lower gross margins, but are essential for the long term strength of the company. Our very healthy backlog of traditional satellite programs incorporating our legacy technologies allows us to participate in these more risky programs while maintaining growth and profitability overall. I would like to add a few words about our other press release today. As you have hopefully seen, today, the Board of Directors authorized a $1 per share special dividend, and I encourage you to read that press release for the details regarding the record and payment dates coming up in August. This is the 2nd such dividend that the Board has authorized in approximately 1.5 years.

Speaker 1

I'm proud of the continued progress we have made on profitability and cash generation, which allows us to reward our shareholders in this fashion. While we're not committing to a certain cadence or amount of such dividends in the future, it's reasonable that should we continue to make progress, the Board will consider similar capital plans in the future.

Speaker 2

We're able

Speaker 1

to do this while maintaining a debt free balance sheet and continuing to invest in next generation programs, which we are winning and are poised to continue to win. As we've seen over just the past two quarters, the path to improved profitability is not always going to be perfectly linear, especially given some of the bleeding edge technology that we're working on. But as I said earlier, business is booming, and we believe it is prudent to return excess cash to shareholders so that future gains and profitability can accrue in a more pronounced manner to equity holders. I'll now turn things over to our CFO, Steve Bernstein, who will fill you in on the financial details.

Speaker 3

Thank you, Tom, and good afternoon. Before we jump into the details of the company's results for the fiscal year ended April 30, 24, I would like to remind everyone that as mentioned on previous calls, there will be times the company's results will fluctuate quarter over quarter and that a single quarter is not indicative of future results. As an example, sometimes the effect of changes taken in 1 quarter can reverse in another quarter as engineering problems are solved and revenue and profitability flow through. For an accurate view of the company's performance, it's important to review the entire year and other significant items. For the fiscal year ended April 30, 2024, consolidated revenue was $55,300,000 compared to $40,700,000 for the same period of the prior fiscal year.

Speaker 3

The components of revenue are as follows: Revenue from commercial and U. S. Government satellite programs was approximately $23,200,000 or 42% compared to $17,900,000 or 44 percent in the same period of the prior fiscal year. Revenues on satellite payload contracts are recognized primarily under the percentage of completion method and are recorded only in the FEI New York segment. Revenue from non space U.

Speaker 3

S. Government and DoD customers, which are recorded in both the FEINew York and FEI Cypress segments, were $29,000,000 compared to $20,300,000 in the same period of the prior fiscal year and accounted for approximately 52% of consolidated revenue compared to 50% for the prior fiscal year. Other commercial and industrial revenue was $3,100,000 $2,600,000 for the fiscal years ended April 30, 'twenty four and 'twenty three, respectively. The significant increase in revenue for the period was primarily related to increase in U. S.

Speaker 3

Government orders. For the fiscal year ended April 30, 'twenty four, gross margin and gross margin rate as compared to the same period in fiscal year 'twenty 3, The gross margin dollars increased as 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 related programs are now moving forward and running more efficiently. Previous programs that sustained lower margins due to technical issues are near completion or have been completed. For the fiscal year ending April 30, 'twenty four and 'twenty three, SG and A expenses were approximately 18% 23%, respectively, consolidated revenue.

Speaker 3

While total SG and A expenses increased in fiscal year 2024 as compared to the prior fiscal year, SG and A expenses decreased as a percentage of revenue in fiscal year 2024 due to an increased revenue as well as the company successfully monitoring costs given the current economic conditions. R and D expense for the fiscal year ended April 30, 'twenty four increased to $3,400,000 from $3,100,000 for the fiscal year ended April 30, 'twenty 3, an increase of $300,000 and were approximately 6 percent 8%, respectively, of consolidated revenue. The company's funded R and D amount was slightly higher in fiscal year 'twenty four as compared to the previous fiscal year, reflecting the company's commitment to maintaining its technical excellence. The company expects future R and D investment to be in line with or even potentially above historic commitments. For the fiscal year ending April 30, 'twenty four, the company recorded operating income of $5,000,000 compared to an operating loss of $4,700,000 in the prior fiscal year.

Speaker 3

The change from an operating loss to operating income year over year is attributable to the company's significant increase in revenue and margin during the fiscal year 'twenty four, along with the positive effects of cost cutting measures instituted by management. 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 the deferred compensation payments made to retired employees. This yields pretax income of approximately $5,500,000 compared to a $5,400,000 pretax loss for the prior fiscal year. For the fiscal year ended April 30, 'twenty four, the company recorded a tax benefit of $130,000 compared to a tax provision of $74,000 for the same period of the prior fiscal year. Consolidated net income for the fiscal year ended April 30, 'twenty four was $5,600,000 or $0.59 per share compared to a $5,500,000 net loss or negative $0.59 per share in the previous fiscal year.

Speaker 3

Our fully funded backlog at the end of April 24 was approximately $78,000,000 compared to approximately $56,000,000 for the previous fiscal year ended April 30, 23. The company's balance sheet continues to reflect strong working capital position of approximately $27,000,000 at April 30, 2024 and a current ratio of approximately 1.8:one. 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 turn the call back to Tom, and we look forward to your questions.

Speaker 1

Okay. Thank you, Steve. And we're now prepared to take questions.

Operator

Certainly. Your first question is coming from Brett Reiss from Janney Montgomery Scott. Your line is

Speaker 4

live.

Speaker 5

Gentlemen, can you hear me because I'm calling from home?

Speaker 1

Yes, we can hear you.

Speaker 5

Great, great. Congrats on a spectacular quarter to both of you and the team. The dollar special dividend, fantastic, and I'm not going to give it back. But you described that business is booming and there were so many secular tailwinds in the satellite business. How did you arrive at the dollar?

Speaker 5

Why not $0.50 and retain $0.50 to reinvest in the growth opportunities in the business? If you could give me your thoughts on that, I'd appreciate it.

Speaker 1

Yes. Well, I think that's primarily a Board decision. I think there are arguments an infinite number of arguments for different levels of dividend there. I think this is a one time dividend, and I think the feeling is that we can do that. We can afford that at this point in time.

Speaker 1

And we'll evaluate going forward whether there are additional dividends in the future. If some of the tailwinds that you talk about occur or become more pronounced, then we can always back off from that. But at this point in time, the feeling is that this is something that we can afford and yes.

Speaker 5

Great. One more if I may and then I'll drop back in queue because I'm sure there's a line. This tremendous momentum and business opportunity going forward, what keeps you up at night that could derail the continued taking advantage of the opportunity that lays before us?

Speaker 1

Well, so certainly plenty to keep me awake at night. I think a couple of things that stand out. And in my earlier words, I tried to hit on it. We do see changes in the satellite industry and exactly how best to deal with those changes and how best to position ourselves relative to those changes is something that we give an awful lot of thought to certainly. Customers, we see there's kind of a desire to have the best of all worlds.

Speaker 1

They want smaller, cheaper, faster satellite hardware and they don't want to invest anything in order to get there. So how exactly to be able to do that is certainly a challenge. And I think it's something that we're working on. The trick is to do that. On the one hand, we absolutely have to participate.

Speaker 1

On the other hand, we don't want to start giving things away for nothing and go back into a situation where we're potentially losing money on these programs. So this is certainly perhaps the biggest challenge that keeps us awake at nights at this point.

Speaker 5

Thank you for taking my questions. I appreciate it.

Operator

Thank you. Your next question is coming from Richard Johns. Your line is live.

Speaker 5

Good afternoon and thanks very much for the dollar and the great job you're doing. I just have one question. I'm wondering what the size of the tax loss carry forward is as of the end of April?

Speaker 3

I believe the NOLs were roughly in the low $20,000,000 range. They're not all 100%. Some will be used obviously this year and then it will be recalculated after we file our tax return.

Speaker 5

Okay. Thank you.

Operator

Thank you. Your next question is coming from George Marima from Pareto Adventures. Your line is live.

Speaker 4

Hey, good afternoon, Tom. Hi. Hi.

Speaker 2

Hey. Hi, Nick. So this quarter, your gross margin was about 40%. Your backlog increased substantially here. A couple of questions on this.

Speaker 2

So how do you see is there any revision to your gross margin outlook over the long term? Or as you look into fiscal 2025, how should we think about gross margin, the cadence of that? And then I want to talk a little bit about your about the seasonality of that.

Speaker 1

Okay. It's actually a really good question. I think and we've talked about it on the last few calls a little bit. I think I divide things into 2 categories. We have the traditional programs that we've dealt with, particularly in satellite industry.

Speaker 1

And I think there, we really can push to keep the gross margins high. As we've said previously, we target 50 percent gross margin on those kind of programs. But then we have what we were just discussing a little bit earlier, these new programs where there's tremendous pressure on costs. And of course, we have a concern that if we don't get involved in some of those programs, we may lose out in the long run. So in some cases, we have to take on some additional risk.

Speaker 1

And effectively, that means that the gross margins we can expect from those programs is a little bit lower. So I think that realistically, I think we can expect gross margins to stay where they are. We may be able to push them higher in some cases, but I think on an overall basis, I don't see them going a lot higher in the near future.

Speaker 2

Okay. And then in terms of backlog, is there it looks like there's generally some seasonality where you win the bigger contracts in the fall, which I imagine is somewhat tied to the government fiscal year. So I was a little surprised to see in the springtime here the backlog go up so dramatically. Is there any seasonality to this?

Speaker 1

Well, I don't really think so. Maybe there was a one time, but the government fiscal year is a little bit distorted at this point since the fiscal year starts on October 1, and last year, we didn't have a budget for 6 months after that. I think I don't think we're really too tightly correlated with the government fiscal year. I mean, there are some aspects of our business that definitely are. But I think most of our work is not direct government contracts, but subcontracts with the major prime contractors to the government.

Speaker 1

And so there's usually a lag between when they're under contract and when we get our contracts. I think that any appearance of a seasonality over the past year or so is more coincidental than anything else, frankly.

Speaker 2

Yes. Did you win any I mean, because your backlog last quarter was $67,000,000 now it's $78,000,000 and you booked you did $16,000,000 of revenue, let's call it, rounded off. So that's about $27,000,000 $28,000,000 net net positive. Were there any large contracts in that or a bunch of small ones? Or how

Speaker 4

does that what was the makeup of that?

Speaker 1

We've had I don't think there are any excessively large contracts during that time, but a number of, I guess, medium sized contracts is best way to put it.

Speaker 4

Okay. Thank you. I'll get back in the queue.

Operator

Thank you. Your next question is coming from Michael Eisner. Your line is live. Hey, great job.

Speaker 1

Thank you, Michael.

Speaker 4

When you said 40% gross margins, was that going forward for the year?

Speaker 1

Yes, I think so.

Speaker 4

Roughly, roughly.

Speaker 1

Yes.

Speaker 4

The contracts we received in November of last year, How will they come how is that coming along? Is that no problems?

Speaker 1

Well, I there's never a case where we have no problems. But I would say, everything is very positive at this point in time. If it was a no problem kind of contract, they wouldn't be coming to Frequency Electronics. But we don't have the kind of technical problems that caused difficulties in the past, not yet on these contracts. And yes, so I think things are looking pretty good in that respect.

Speaker 4

And is XIPERE back on schedule?

Speaker 1

XIPERE is back on schedule, yes. And we're that's a management effort to be pretty disciplined in that regard and

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Key Takeaways

  • The company reported a record backlog of $78 million and consolidated revenues of $55.3 million for fiscal 2024, up from $40.7 million a year earlier, resulting in a $5 million operating profit after a Q3 loss.
  • Gross margins improved significantly as prior technical challenges were resolved, while SG&A expenses fell to 18% of revenue; the company swung from a $4.7 million operating loss to a $5 million operating income year-over-year.
  • The Board authorized a $1 per share special dividend—the second in 18 months—highlighting strong cash generation and a debt-free balance sheet, yet preserving capital for future R&D and next-generation programs.
  • Management anticipates ongoing long-term growth across its core markets of space, navigation, secure communications, and timing, targeting ~50% gross margins on traditional satellite programs while monitoring costs.
  • To address industry shifts toward lower-cost, easily replaceable satellite hardware, the company is selectively engaging in higher-risk, lower-margin programs, leveraging its high-margin traditional backlog to sustain profitability and strategic positioning.
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Earnings Conference Call
Frequency Electronics Q4 2024
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