Frequency Electronics, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the three months ended July 31, 2016. Financial amounts below are in millions, except per-share data and percentages. Comparisons are with the three months ended July 31, 2015 unless noted.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Revenue | $12.708 | $16.680 |
| Gross profit / margin | $4.114 / 32.4% | $5.773 / 34.6% |
| Operating income (loss) | $(0.796) | $0.941 |
| Net income (loss) | $(0.706) | $0.891 |
| Diluted earnings (loss) per share | $(0.08) | $0.10 |
| Cash from operations | $(0.571) | $(1.825) |
- Revenue declined 24%. FEI-NY revenue fell 26% to $9.982 million and Gillam-FEI declined 17% to $1.168 million; FEI-Zyfer grew 12% to $2.346 million.
- Gross profit fell 29%, reflecting lower sales, product mix that included more low-margin contract work, and unabsorbed overhead, particularly in FEI-NY. SG&A decreased 10% to $3.326 million, but R&D increased 38% to $1.584 million.
- Other income was $0.050 million, versus $0.650 million a year earlier. The prior-year period included about $0.400 million of life-insurance proceeds and approximately $0.137 million of realized investment gains.
- The company recorded an income tax benefit of $0.040 million, compared with a $0.700 million provision. Management estimated a 32% fiscal 2017 effective tax rate, excluding discrete items; tax benefits are not recognized on losses at certain non-U.S. operations.
Liquidity, cash flow and debt
- At July 31, 2016, cash and cash equivalents were $4.016 million and marketable securities were $11.581 million, totaling $15.597 million. Combined cash and securities were $17.193 million at April 30, 2016.
- Working capital was $75.6 million and the current ratio was 9.3 to 1. Total assets were $120.511 million.
- Operating cash use improved to $0.571 million from $1.825 million. Investing activities used $1.087 million, primarily for property and equipment; cash declined by $2.066 million during the quarter, including the effect of exchange-rate changes.
- Long-term debt was $6.0 million, unchanged from April 30, 2016. It was outstanding under the company’s $25 million credit facility; the company reported compliance with its borrowing covenants. The facility matures June 5, 2018.
- Management said liquidity was adequate to meet operating and investment needs through at least September 14, 2017.
Outlook, commentary and risks
- Management expected full-year fiscal 2017 revenue to be comparable with fiscal 2016, based on current backlog and delayed awards on sole-sourced projects. It expected non-space U.S. Government and defense revenue to increase, particularly at FEI-Zyfer.
- Funded backlog was approximately $36 million at July 31, up from $32 million at April 30; about 75% was expected to be realized within 12 months. It included $9.7 million under cost-plus-fee contracts for which full funding had not been received.
- Satellite payload business represented approximately 60% of backlog and remained the dominant business. Management cited delays in U.S. Government satellite awards as a key reason for the quarter’s revenue decline.
- Fiscal 2017 capital equipment spending was expected to be $2.5–$3.5 million. The company also planned substantial investment in product development; quarterly R&D was above its 10%-of-sales target, and management said it was unlikely to meet that target for the year.
- Key risks include timing of government awards and funding, acceptance and competitiveness of products, technology changes, vendor dependence, costs, and estimates of contract completion and inventory realizability. Changes in contract cost estimates can affect reported revenue and profit. Management stated that marketable securities with unrealized losses were not considered other-than-temporarily impaired.
- No material changes to internal control over financial reporting were reported, and management concluded disclosure controls were effective as of July 31, 2016.
Important facts for investors to verify
- Whether delayed satellite-program awards and expected government funding convert into authorized, funded work and support the full-year revenue outlook.
- Backlog composition, especially the $9.7 million of cost-plus-fee commitments not fully funded, and the timing of expected conversion to revenue and cash.
- Whether lower sales, low-margin contract mix and higher R&D continue to pressure gross and operating margins.
- Inventory increased to $42.582 million; review its composition, expected use, and any changes in contract or inventory estimates.
- Available borrowing capacity and covenant headroom under the secured credit facility, alongside planned capital spending and cash needs.