Frequency Electronics, Inc. — Form 10-Q Summary
Business and reporting period: Frequency Electronics designs and manufactures precision time and frequency control products and GPS-based systems for satellite communications, government and defense, telecommunications, and other markets. This unaudited report covers the three months ended July 31, 2023—its fiscal 2024 first quarter—and compares results with the three months ended July 31, 2022. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q1 fiscal 2024 | Q1 fiscal 2023 |
|---|---|---|
| Revenue | $12.408 | $8.204 |
| Gross profit (margin) | $4.868 (39.2%) | $(0.005) ((0.1)%) |
| Operating income (loss) | $2.060 | $(3.107) |
| Net income (loss) | $2.042 | $(3.117) |
| Diluted EPS | $0.22 | $(0.33) |
| Cash used in operations | $2.801 | $3.574 |
| Capital expenditures | $0.187 | $0.465 |
Revenue increased 51.2%. FEI-NY revenue rose 38.5% to $9.490 million and FEI-Zyfer revenue rose 88.6% to $3.267 million, before intersegment eliminations. Growth was primarily in government non-space programs. Government non-space programs represented approximately 55% of revenue, satellite programs 39%, and other commercial and industrial revenue 5%.
Gross margin improvement reflected higher sales, progress on programs that had faced technical challenges, and one-time contractual and other adjustments that contributed approximately 8 percentage points to the gross margin rate. Contract-loss charges were approximately $0.139 million, compared with $1.2 million in the prior-year quarter. Selling and administrative expense increased 15.6% to $2.302 million, mainly due to payroll and related costs. R&D expense declined 54.4% to $0.506 million as employees shifted to production work; management said it plans to continue investing in R&D.
Financial position and liquidity
- Cash and cash equivalents were $9.061 million at July 31, 2023, down from $12.049 million at April 30, 2023. The quarter’s net decrease was $2.988 million.
- Working capital was approximately $23.4 million; the current ratio was 1.9 to 1. Operating cash use reflected changes in operating assets and liabilities, including increases in inventory, receivables, and contract assets.
- Total assets were $75.971 million and stockholders’ equity was $35.169 million at July 31, 2023. Inventory was $22.604 million; contract assets were $11.028 million and contract liabilities were $18.356 million.
- The company reported no credit-facility borrowings and no financing cash flows in the quarter. It had retired its UBS advisory credit arrangement as of April 30, 2023. Operating lease liabilities totaled $7.284 million.
- Funded backlog was approximately $52 million, down from $57 million at fiscal year-end; approximately 79% was expected to be realized over the next 12 months. The company cautions that backlog may change and is not necessarily indicative of future revenue or profit.
Management stated that liquidity should be adequate for short-term operating and investment needs through at least September 14, 2024, and for the foreseeable future thereafter. No specific earnings or revenue guidance was provided.
Outlook, risks, and notable items
- Management expects to continue R&D for space, guidance and targeting, and communications applications, with some R&D funding anticipated from customers. It expects internally generated cash to support these efforts and may consider acquisitions using internal or external funding.
- Vendor supply-chain delays and longer material lead times continued to affect production schedules and increase procurement costs. The company may seek alternative suppliers or redesign products using alternative parts.
- Revenue and contract profitability depend on estimates of costs to complete long-term contracts; changes in estimates can affect reported results. Inventory valuation also relies on estimates of future usage and demand.
- The company maintains a full valuation allowance against deferred tax assets. The estimated annual effective tax rate for fiscal 2024 was 0%, subject to estimates and changes in circumstances.
- The company’s 4.6% investment in Russian company Morion had previously been fully impaired; its future status remains uncertain in light of the Russia-Ukraine conflict and related sanctions. Management considers future transactions and dividend payments remote.
- Management reported disclosure controls were effective at a reasonable assurance level and no material changes in internal control over financial reporting. It reported no material updates to the risk factors in its latest Form 10-K.
Important facts for investors to verify
- How much of the 39.2% gross margin rate is repeatable, given the approximately 8-point benefit from one-time adjustments?
- Whether the higher revenue and operating profitability continue as programs progress, and whether R&D spending returns to higher levels.
- Whether backlog converts to revenue as expected, considering funding, cancellation, contract changes, and execution risks.
- Whether working-capital demands—particularly inventory, receivables, and contract assets—continue to consume cash despite reported earnings.
- Whether supply-chain delays, contract cost estimates, customer concentration, and other risks materially affect results.