Frequency Electronics, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended January 31, 2012; fiscal year ends April 30. Financial statements are unaudited.
Financial performance
| Metric | Three months ended Jan. 31, 2012 | Prior year | Nine months ended Jan. 31, 2012 | Prior year |
|---|---|---|---|---|
| Revenue | $15.448 million | $12.635 million | $46.442 million | $37.287 million |
| Gross profit / margin | $6.215 million / 40.2% | $4.849 million / 38.4% | $18.472 million / 39.8% | $14.399 million / 38.6% |
| Operating profit | $1.943 million | $0.796 million | $5.501 million | $2.397 million |
| Net income | $1.074 million | $0.508 million | $3.194 million | $1.344 million |
| Diluted EPS | $0.13 | $0.06 | $0.37 | $0.16 |
Revenue increased 22% for the quarter and 25% year to date; net income rose 111% and 138%, respectively. Operating margins were 12.6% for the quarter and 11.9% year to date, compared with 6.3% and 6.4% a year earlier. The filing attributes higher revenue primarily to satellite payload programs in FEI-NY, which represented about half of consolidated revenue for the nine-month period, versus about 30% a year earlier.
By segment, nine-month revenue was $33.050 million at FEI-NY, $7.039 million at Gillam-FEI, and $8.588 million at FEI-Zyfer, before intersegment eliminations. FEI-NY operating income improved to $6.404 million; Gillam-FEI and FEI-Zyfer recorded operating losses of $0.244 million and $0.230 million, respectively.
Cash flow, liquidity and debt
- Operating cash flow was $1.276 million for the nine months, versus $2.024 million in the prior-year period. Management cited growth in inventory and unbilled contract costs as offsets to cash generated from operations.
- Investing activities used $3.862 million; financing activities provided $2.160 million, including $2.350 million of short-term credit proceeds. Cash declined $0.727 million to $4.548 million.
- At January 31, cash and marketable securities totaled approximately $22.6 million. Working capital was approximately $64 million and the current ratio was 8.2 to 1.
- Short-term credit obligations were $2.581 million, up from $0.275 million at April 30, 2011. Total liabilities were $19.771 million; stockholders’ equity was $74.356 million.
- Capital expenditures were approximately $1.1 million year to date. Management expected full-year fiscal 2012 capital equipment purchases below $2 million.
Outlook, risks and notable items
- Management expected higher revenue from U.S. Government and commercial satellite programs, continued growth in U.S. Government/DOD non-space programs and wireline telecommunications, and fiscal 2012 operating profit above fiscal 2011. It expected gross margin rates for the remaining year to meet or exceed the 40% target and operating margin potential above 10% at the then-current business level.
- Management expected positive operating cash flow for the remainder of fiscal 2012 and stated liquidity was adequate through at least January 31, 2013. It reported a $58 million backlog, about 60% expected to be realized within twelve months. Backlog excluded unauthorized work and unfunded portions of fixed-price contracts; more than $7 million of such unfunded work was not included.
- In February 2012, the company acquired the remaining Elcom Technologies shares for a total $5.1 million, including repayment of certain shareholder debt. Its existing $1.9 million gross notes receivable from Elcom were contributed to its investment. Estimated transaction costs were $250,000–$300,000. Elcom results were to be consolidated from the acquisition date.
- Before the acquisition, the company recorded a $350,000 impairment-related charge associated with Elcom: a $200,000 investment impairment and a $150,000 allowance against notes receivable. Elcom also generated a $451,000 equity-method loss year to date.
- Other unusual items included approximately $119,000 of expense for an employee stock award and $137,000 of gains on life insurance proceeds, partly offsetting other expense. Management anticipated additional acquisition-related professional fees in the fourth quarter.
- Key risks cited include product acceptance and competition, technological change, pricing and raw-material costs, third-party vendors, manufacturing and transportation costs, contract terms, and availability of capital. Results on long-term contracts rely on estimates of costs to complete and inventory realizability.
- Management concluded disclosure controls were not effective at January 31, 2012. Previously identified material weaknesses in internal control over financial reporting remained; remediation work was planned at Gillam-FEI and FEI-Zyfer. Management reported no material control changes during the nine-month period.
Most important facts for investors to verify
- Whether satellite-program revenue growth and the $58 million backlog convert to funded orders, billings, collections, and sustainable margins.
- Cash conversion and working-capital trends, particularly inventory growth and costs and estimated earnings in excess of billings, which rose to $7.433 million from $2.409 million.
- Financing and integration effects of the Elcom acquisition, including purchase-price allocation, transaction costs, and future operating results.
- Progress in remediating the disclosed material weaknesses and restoring effective disclosure controls.
- Whether management’s fiscal 2012 revenue, margin, profit, and cash-flow expectations were achieved; the filing provides no numerical full-year revenue or EPS guidance.