Frequency Electronics, Inc. (FEIM)

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Frequency Electronics, Inc. (FEIM)

F3Q08 Earnings Call

March 10, 2008 1:00 pm ET

Executives

Martin B. Bloch - President, Chief Executive Officer and Director

Alan Miller - Treasurer and Chief Financial Officer

Analysts

Michael Amari - Americo Inc.

Robert Smith – Center for Performance Investing

Larry Lytton – Second Line Capital Management

David Starkey – Smith Barney

[Harden Madea] – Idea Group

[Robert Lippard]

Presentation

Operator

Welcome to the Frequency Electronics third quarter earnings release conference call. (Operator Instructions) I would like to turn the conference over to Martin B. Bloch, CEO and President, and Alan Miller, Chief Financial Officer.

Martin B. Bloch

Joe Franklin will not join us. He is traveling on business

Alan Miller

Under the Private Securities Litigation Reform Act of 1995, the statements in 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.

Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that could cause or contribute to such differences are enumerated in our press release, and by making these forward-looking statements, the company undertakes no obligation to update these statements for revisions or changes after the date of this release.

Martin B. Bloch

Alan, why don’t you at this time walk everybody through the financial performance for this quarter and the nine months, and then I’ll address the future of business and then we’ll turn over questions and answers.

Alan Miller

For the quarter ended January 31, 2008, the company recorded revenues of $17.1 million compared to $12.1 million in the year ago quarter. This is a 41% increase in year-over-year revenues which were led by a better than 50% increase in revenues from satellite payload programs. Quarterly revenues from telecommunication infrastructure and non-space US government programs were also up from year ago levels.

For the 9 months of fiscal 2008, total revenues are $50.1 million, an increase of 23% over the $40.8 million recorded over the same period in 2007. Cost of sales was $11.6 million compared to $8.3 million a year ago, yielding a gross margin of $5.5 million in the third quarter of this year compared to $3.8 million in the year ago period.

The gross margin rate for this third quarter was 32% compared to 31% in the year ago quarter, and the third quarter results of this year represent a continued sequential improvement from the 30% gross margin rate realized in the first half of fiscal 2008. As we indicated previously, higher engineering costs in certain satellite programs, some of which were completed this quarter, kept margins at this lower than targeted level. We expect to realize improved margins in the fourth quarter of this year and into fiscal 2009.

SG&A was $3.1 million compared to $2.9 million a year ago, and R&D was $1.5 million compared to $2.6 million a year ago. Both SG&A and R&D spending this year are in line with our targets of 20% and 10% of revenues respectively.

Our challenge is to continue to bring down the cost of production and to significantly improve our gross margin rates. This should result in continued improvement in our operating margins which in the third quarter were $805,000. This is $2.5 million better than the year ago period, and more than double the operating profit realized in the preceding quarter of this fiscal year.

Investments and other income were $586,000 in the fiscal third 2008 quarter which is comparable to the $650,000 realized a year ago. Net income for the third quarter of this fiscal year was $758,000 or $0.09 per diluted share. This is compared to a loss of $754,000 in the year ago quarter or $0.09 per diluted share.

Now, just a quick word again on our effective cash rate, for the year to date we are at 42%. As we’ve indicated in previous calls, the $3 million gain on our Morion investment that was recorded in the first quarter will offset some of our loss tax carry forwards, as well any losses that are generated by our foreign subsidiaries do not generate any current tax benefits.

Turning to the balance sheet, overall our cash and marketable securities stand at $15.7 million, which is about on par with where we began the year. You may recall that in the first quarter of this year, we reported negative cash from operations of $4.4 million. Had we collected in January of this year, the $1.3 million in cash that came in early February, we would be operating cash flow positive over the last two quarters of the current fiscal year.

As of January 31, our accounts receivables stand at $20 million, of which about $8.7 million is in un-billed receivables, which is typical of these large long-term contracts. We do anticipate that in addition to the $1.3 million that was collected in early February that we will be billing and collecting over $6 million during the fourth quarter of this fiscal year on these longer-term contracts as we complete certain milestone events.

Inventory is at $31.4 million which is about the same as where we began the fiscal year but down from the previous quarter. And finally a word on backlog, we stand at about $40 million of backlog which is slightly up from where we stood at the end of the second quarter of this fiscal year.

Read the rest of this transcript for free on seekingalpha.com