Frequency Electronics, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended October 31, 2019. Dollar amounts below are in millions unless stated otherwise. The company designs and manufactures precision time and frequency products for satellite, telecommunications, government, and commercial applications, through its FEI-NY and FEI-Zyfer segments.
Financial performance
| Metric | Three months ended Oct. 31, 2019 | Six months ended Oct. 31, 2019 | Prior-year comparable |
|---|---|---|---|
| Revenue | $9.1 | $21.6 | $12.1 quarter; $23.2 six months |
| Gross profit (loss) / margin | $(1.2) / (13.0)% | $2.8 / 12.8% | $4.0 / 33.1% quarter; $8.3 / 35.8% six months |
| Operating loss | $(4.9) | $(5.7) | $(0.2) quarter; $(0.1) six months |
| Net loss | $(4.9) | $(5.5) | $0.1 net income quarter; $0.2 net income six months |
| Loss per share, basic and diluted | $(0.54) | $(0.61) | $0.01 quarter; $0.02 six months |
- Six-month operating cash flow was $0.2, compared with cash used of $1.1 in the prior-year period. Investing activities used $1.3; capital and other asset purchases were $1.3. Cash declined $1.1 to $2.6.
- At October 31, cash and marketable securities totaled approximately $11.0, compared with $11.9 at April 30. Working capital was $40.7, down from $46.9; the current ratio was 5.9:1.
- Total assets were $91.9 and stockholders’ equity was $58.2. The filing reports no credit-facility borrowings. Adoption of lease accounting added $11.7 of operating lease liabilities ($1.9 current; $9.8 long-term); these are lease obligations, not reported borrowings.
Changes versus the prior comparable period
- Six-month revenue fell 6.5%; quarterly revenue fell 25.2%. Management cited timing slippage of anticipated contract awards.
- Gross margin deteriorated substantially, including a negative quarterly gross margin. Management attributed the decline and higher operating losses chiefly to engineering costs on development programs facing unanticipated technical challenges involving customer-driven packaging and environmental requirements.
- Contract losses were approximately $1.9 for the six months and $1.6 for the quarter; no contract losses were reported in the prior-year comparable periods. A $2.1 loss-provision accrual was recorded at October 31.
- For six months, FEI-NY revenue declined 8.3% to $16.8, while FEI-Zyfer revenue rose 11.7% to $5.7. Satellite revenue fell to $9.4 from $11.3; government non-space revenue fell to $9.0 from $10.4; other commercial and industrial revenue increased to $3.2 from $1.4.
- Six-month SG&A decreased 8.5% to $4.7; R&D increased 14.6% to $3.7. R&D was 17% of revenue versus 14% a year earlier.
Outlook, risks, and notable items
- Funded backlog was approximately $40 at October 31, up from $37 at April 30; management expected about 81% to be realized within twelve months. The company cautions that backlog may change and does not assure future revenue or profit.
- Management expects to sustain a high level of internally funded R&D to pursue new opportunities, anticipates customer funding for part of that work, and believes internally generated cash will be adequate for R&D. It stated liquidity should meet operating and investment needs through at least December 17, 2020. No specific revenue or earnings guidance was provided.
- The company maintained a full valuation allowance against deferred tax assets; losses therefore did not generate a recognized tax benefit. Management estimated a 0% effective tax rate for fiscal 2020.
- Risks cited include contract award timing, product acceptance and competition, technological and product-price changes, raw-material and manufacturing costs, dependence on third-party vendors, contract terms, and capital availability. Revenue recognition, contract cost-to-complete estimates, taxes, and inventory valuation require significant estimates.
- The company holds a 4.6% cost-basis investment in Russian manufacturer Morion and purchases products from it. Morion operates as a subsidiary of Gazprombank, which became subject to U.S. restrictions on new financing after the company’s investment.
- Operating leases were recognized on the balance sheet following adoption of the new lease standard on May 1, 2019. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether delayed contract awards convert to funded work and support the reported backlog.
- Whether the development-program engineering challenges and contract losses are contained, and whether gross margins recover.
- Cash conversion and working-capital trends, including unbilled contract assets of $8.1 and inventory of $23.3.
- Execution of the R&D and growth plans, and the extent of customer funding for development activity.
- Potential effects of the full deferred-tax-asset valuation allowance and the Morion/Gazprombank relationship.