Frequency Electronics, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2020, the three months ended July 31, 2019. The company develops precision time and frequency-control products and systems for satellite, government, secure-communications, and commercial markets. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $12.554 | $11.011 |
| Gross profit / margin | $3.953 / 31.5% | $4.274 / 38.8% |
| Operating income (loss) | $(0.780) | $0.085 |
| Net income (loss) | $(0.591) | $0.031 |
| Basic and diluted EPS | $(0.07) | $0.00 |
| Operating cash flow | $0.153 | $(3.561) |
- Revenue grew 14.0%. FEI-Zyfer revenue increased 44.5% to $3.701 million; FEI-NY revenue increased 5.1% to $9.010 million.
- Gross margin fell by 7.3 percentage points. Management attributed the decline primarily to higher engineering costs on several new, technologically advanced programs. R&D expense rose 38.3% to $2.280 million, while selling and administrative expense decreased 3.4% to $2.453 million.
- Non-space U.S. Government/Department of Defense revenue increased about $2.0 million and represented approximately 54% of revenue, versus 43% a year earlier. Satellite revenue declined about $1.6 million and represented 31%, versus 50%; management cited product mix and contract-award timing. Other commercial and industrial revenue rose to $1.915 million from $0.696 million.
- Investment and other income supported results: investment income was $0.177 million, including a $0.125 million Morion dividend; other income included a $0.050 million fixed-asset sale gain. The tax provision was $0.020 million despite the pretax loss, including interest accrual for unrecognized tax benefits; the company maintained a full valuation allowance against deferred tax assets.
- Cash and marketable securities totaled $11.255 million at July 31, 2019, versus $11.882 million at April 30. Working capital was $44.9 million, the current ratio was 8.5:1, and cash declined $1.444 million during the quarter. Investing activities used $1.597 million, including $0.912 million for property and other assets. There was no financing cash flow.
- Total assets were $95.164 million and stockholders’ equity was $62.836 million. The filing reports no borrowings on its available variable-rate credit facility. Adoption of lease accounting added $12.076 million of lease liabilities ($1.883 million current and $10.193 million long term); these are lease obligations, not reported borrowings.
Outlook, risks, and notable items
- Management expects to maintain a high level of internally funded R&D for secure communications, command and control, next-generation satellite payloads, and other defense and commercial opportunities. It expects internally generated cash to fund these efforts and believes liquidity is adequate through at least September 17, 2020. No numerical earnings or revenue guidance is provided.
- Funded backlog was approximately $35 million, down from $37 million at April 30, 2019; about 85% was expected to be realized within 12 months. Backlog can change due to cancellations, contract changes, funding, and other factors and is not necessarily indicative of future revenue or profit.
- The company recorded approximately $0.314 million of anticipated contract losses in the quarter. Revenue and margins depend on estimates of costs to complete long-term contracts, while inventory valuation also relies on management estimates.
- Disclosed risks include market acceptance, competition and technology changes, product pricing and raw-material costs, dependence on vendors, contract terms, manufacturing and transportation costs, and capital availability. International contracts may involve non-U.S.-dollar currencies. Morion, a 4.6%-owned Russian supplier, operates as a subsidiary of Gazprombank, which is subject to U.S. restrictions on new financing; the company also buys products from Morion.
- The company adopted lease accounting effective May 1, 2019. Management reported effective disclosure controls as of July 31, 2019 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether engineering costs and R&D investment on new programs weigh further on gross margin and operating results.
- Whether the shift in revenue mix, including lower satellite revenue and higher non-space government revenue, continues, and whether contract timing affects reported results.
- Backlog funding, conversion, cancellations, and actual realization of the stated 85% expected within 12 months.
- Operating cash conversion and receivables collection, given management’s attribution of cash-flow pressure to higher accounts receivable.
- Contract-loss estimates, inventory reserves, lease obligations, and the continuing full valuation allowance on deferred tax assets.
- Exposure related to the Morion investment and supplier relationship, including any effects of restrictions involving Gazprombank.