Frequency Electronics, Inc. — Form 10-Q Summary
Reporting period: Three months ended July 31, 2022, the first quarter of fiscal 2023 (not calendar 2022 Q1). Financial statements are unaudited; amounts below are in U.S. dollars unless indicated.
Financial performance and position
| Metric | Q1 FY2023 | Comparable period | Change |
|---|---|---|---|
| Revenue | $8.204 million | $12.955 million | Down 36.7% |
| Gross profit (loss); margin | $(5,000); (0.1)% | $4.062 million; 31.4% | Margin fell 31.5 percentage points |
| Operating loss | $(3.107) million | $(1.687) million | Loss increased $1.420 million |
| Net loss; diluted loss per share | $(3.117) million; $(0.33) | $(1.575) million; $(0.17) | Loss per share worsened |
| Operating cash flow | $(3.574) million | $(0.828) million | Cash use increased |
- Revenue fell in both segments: FEI-NY was $6.854 million, down 32.6%; FEI-Zyfer was $1.732 million, down 44.8%. Satellite revenue declined to $3.476 million from $6.741 million.
- Cash and cash equivalents were $7.246 million at July 31, 2022; marketable securities were $10.221 million. Combined, these totaled $17.467 million, down from $21.525 million at April 30, 2022.
- Working capital was approximately $30.9 million and the current ratio was 2.3:1, compared with $34.2 million and 2.5:1 at fiscal year-end.
- No credit-facility borrowings were outstanding. Operating lease liabilities totaled $8.742 million; these are lease obligations, not reported funded debt.
- Stockholders’ equity was $43.682 million, down from $46.688 million at April 30, 2022. Total assets were $82.833 million.
Drivers of change and material items
- Management attributed the revenue decline to delayed contract awards, program milestones and funding limitations, which it believes are temporary timing issues. Lower sales also reduced absorption of costs.
- Gross margin was pressured by higher engineering costs on technically challenging development programs and supply-chain-related costs. The company recorded approximately $1.2 million of anticipated contract losses in the quarter, versus $16,000 in the prior-year quarter.
- Selling and administrative expense declined 54.7% to $1.992 million, primarily due to lower professional fees and one-time reductions in stock-option and deferred-compensation expense. The prior-year quarter included a $650,000 net expense related to the Martin B. Bloch settlement.
- R&D expense decreased 18.1% to $1.110 million, but rose to 14% of revenue from 10% because of lower sales. Management said it plans to continue investing in R&D.
- Contract assets were $11.750 million and contract liabilities were $12.837 million, for a net contract liability of $1.087 million. Most recorded amounts are expected to be billed, collected or recognized within 12 months.
Liquidity, outlook and risks
- Management believes liquidity is adequate for operating and investment needs through at least September 14, 2023, and the foreseeable future. It expects internally generated cash to fund planned R&D efforts.
- Funded backlog was approximately $40 million, unchanged from April 30, 2022; about 81% was expected to be realized over the next 12 months. Backlog may change and is not necessarily indicative of future revenue or profit.
- Management expects revenue to increase as delayed awards and milestones progress, but the filing provides no quantified revenue, earnings or margin guidance.
- The company reported COVID-related absenteeism, delayed contract awards and vendor parts delays. It said operations had returned to essentially normal by July 31, while noting continuing uncertainty and potential effects on schedules, costs and contract performance.
- Other identified risks include geopolitical conflict, inflation and energy or commodity costs, reliance on suppliers and workforce, customer funding and contract timing. The company stated that some cost increases may not be recoverable or covered by insurance.
- The company’s 4.6% investment in Russian company Morion was fully impaired in fiscal 2022; sanctions and the Russia-Ukraine conflict leave future dealings uncertain. No Morion product purchases or dividends were reported in this quarter.
- The company maintained a full valuation allowance against deferred tax assets. The estimated annual effective tax rate for fiscal 2023 was 0%.
Important facts for investors to verify
- Whether delayed contract awards, milestone approvals and customer funding convert into revenue, and whether the reported $40 million backlog is maintained or changes.
- Whether gross margins recover as technical challenges, supply constraints and under-absorbed production costs ease; review contract-loss provisions and cost-to-complete estimates.
- Cash burn and working-capital trends, including collections of contract assets, customer advances reflected in contract liabilities, and the company’s ability to fund operations without borrowing.
- How COVID-related disruptions, vendor delivery performance, inflation and geopolitical risks affect production and costs.
- Potential effects of the Morion investment and sanctions, and any changes to the deferred-tax valuation allowance.