Frequency Electronics, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended April 30, 2019, compared with fiscal 2018 ended April 30, 2018. This is an annual filing, not a standalone 2018 Q4 report. The company designs and manufactures precision time- and frequency-control products for satellite payloads, U.S. Government and defense programs, secure communications, and electronic warfare.
Key financial results
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $49.5 million | $39.4 million |
| Gross profit / margin | $15.8 million / 31.9% | $5.2 million / 13.1% |
| Operating loss | $2.8 million | $12.4 million |
| Net loss | $2.5 million; $0.28 per share | $23.8 million; $2.69 per share |
| Operating cash flow, continuing operations | $(3.2) million | $3.3 million |
| Cash and cash equivalents at year-end | $3.7 million | $7.9 million |
| Marketable securities at year-end | $8.2 million | $6.1 million |
| Working capital / current ratio | $46.9 million / 9.0 | Current ratio 9.9 |
There was no reported funded debt outstanding; the company had an available credit arrangement secured by securities, with no borrowings. Total assets were $86.8 million and stockholders’ equity was $63.1 million at April 30, 2019. Capital expenditures were $2.8 million. The company said liquidity was adequate to meet operating and investment needs through at least July 26, 2020.
Material changes and drivers
- Revenue rose 26%, led by FEI-NY, whose revenue increased 41% to $38.1 million. FEI-Zyfer revenue fell 20% to $12.2 million.
- Satellite revenue increased to $22.8 million from $14.2 million; non-space Government revenue rose to $22.8 million from $17.6 million. Other commercial and industrial revenue declined to $3.9 million from $7.6 million.
- Gross margin improved substantially with higher revenue and lower repair costs, against relatively fixed overhead. FY2019 gross profit included a $1.1 million inventory-reserve charge; FY2018 included $5.6 million of inventory adjustments and about $3.0 million of unabsorbed manufacturing overhead and other costs tied to lower sales.
- Operating loss narrowed, but FY2019 included about $1.0 million related to the FEI-Asia sale and the $1.1 million inventory charge. SG&A increased 14% to $12.1 million, including the FEI-Asia-related charge; R&D expense declined 6% to $6.5 million.
- Net loss improved from FY2018, which included a $11.2 million tax provision after a full valuation allowance was established against U.S. net deferred tax assets, as well as losses from discontinued Gillam operations and its sale.
Outlook, risks and unusual items
- Backlog was approximately $37 million at April 30, 2019, versus $30 million a year earlier; about 80% was expected to be filled in FY2020. Backlog can change and is not a guarantee of future revenue or profit. The filing provides no specific earnings or revenue guidance.
- Management expects internally generated cash to support R&D, while FY2020 customer-funded R&D may decline due to changing U.S. Government funding priorities. Internal R&D spending will depend on market conditions and opportunities.
- FEI-Asia was classified as held for sale at year-end and sold on May 21, 2019 for $130,000, with a reported consolidated loss of approximately $1 million. Gillam had been sold in April 2018.
- Revenue-standard adoption changed the timing of recognition for certain Government production contracts from passage-of-title to percentage-of-completion accounting. FY2019 revenue included $45.3 million recognized over time under percentage-of-completion; reported FY2019 revenue was $2.7 million higher than it would have been without adoption, with a $0.5 million opening retained-earnings adjustment.
- Key risks include reliance on U.S. Government spending and a small number of major customers, contract delays tied to appropriations, fixed-price cost-overrun exposure, competition and technology changes, and estimates for contract costs, inventory values and taxes. The company reported a full valuation allowance against U.S. net deferred tax assets.
- The company reported no material legal proceedings, no end-use contracts terminated during FY2019, and no dividends or treasury-stock purchases during the year. The auditor issued an unqualified opinion on the financial statements; management said disclosure controls and internal control over financial reporting were effective. The auditor did not provide an ICFR attestation.
Important facts for investors to verify
- Reconcile the cash-flow figures: the MD&A says continuing-operations cash used was $0.6 million, while the consolidated cash-flow statement reports $3.175 million used. The statement separately reports $3.078 million provided by assets held for sale and $0.097 million net cash used overall.
- Assess how much of the revenue and margin improvement reflects underlying demand versus the new revenue-recognition method, program mix, and inventory-reserve changes.
- Track conversion and profitability of the $37 million backlog, including the expected FY2020 delivery schedule and funding or cancellation risks.
- Review customer concentration and U.S. Government funding exposure, and the effects of the FEI-Asia disposal and lower expected customer-funded R&D.
- Consider lease commitments: the company disclosed $13.6 million of future minimum operating lease payments and expected to recognize approximately $13.2 million of right-of-use assets and $13.4 million of lease liabilities upon adopting the lease standard in FY2020.