Frequency Electronics, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended October 31, 2016 (fiscal 2017). Financial amounts below are in U.S. dollars; millions are used unless otherwise noted.
Business context and results
The company develops and manufactures precision time and frequency control products and systems for satellite, government and defense, telecommunications, and industrial markets. It reports three segments: FEI-NY, Gillam-FEI, and FEI-Zyfer.
| Metric | Three months ended Oct. 31, 2016 | Three months ended Oct. 31, 2015 | Six months ended Oct. 31, 2016 | Six months ended Oct. 31, 2015 |
|---|---|---|---|---|
| Revenue | $12.914m | $16.003m | $25.622m | $32.684m |
| Gross profit / margin | $4.113m / 31.9% | $5.224m / 32.6% | $8.227m / 32.1% | $10.998m / 33.6% |
| Operating income (loss) | ($1.347m) | $0.048m | ($2.143m) | $0.989m |
| Net income (loss) | ($1.024m) | ($0.069m) | ($1.730m) | $0.822m |
| Basic and diluted EPS | ($0.12) | ($0.01) | ($0.20) | $0.09 |
| Cash from operations | Not separately presented by quarter | ($2.478m) | ($2.916m) |
Financial position and liquidity
- At October 31, cash and cash equivalents were $4.105m and marketable securities were $10.285m, down from a combined $17.193m at April 30, 2016.
- Working capital was $75.2m, versus $75.6m at April 30; the current ratio was 12.3 to 1. Total assets were $118.279m and stockholders’ equity was $92.739m.
- Debt totaled $6.280m at October 31: $6.0m long-term and $0.280m short-term. The short-term borrowing was by Gillam-FEI and was subsequently repaid. The $6.0m facility balance was under Tranche A.
- Six-month investing cash use was $1.423m, including $2.423m of fixed-asset and other-asset purchases. Cash and cash equivalents declined by $1.977m after a positive $1.619m foreign-exchange effect.
- Inventory was $41.770m; costs and estimated earnings in excess of billings, net, were $10.710m.
Changes versus the prior comparable periods
- Revenue declined 19% for the quarter and 22% for the six-month period. FEI-NY revenue fell 36% in the quarter and 31% year to date; FEI-Zyfer and Gillam-FEI revenue increased in both periods.
- Management attributed the largest revenue reduction to delayed satellite program awards, particularly U.S. Government programs. Satellite revenue represented about 41% of six-month consolidated revenue, compared with 58% a year earlier. Non-space U.S. Government/DoD revenue increased about $1.0m year over year.
- Gross margin rate declined 0.7 percentage point for the quarter and 1.5 points year to date, reflecting lower sales and a less favorable product mix. Operating expenses were pressured by higher R&D: six-month R&D increased 22% to $3.772m, while selling and administrative expense was $6.598m, down 5%.
- Six-month results also compare against $0.404m of other income in the prior year, primarily a life-insurance gain on the death of a former officer. The prior-year period also included a $0.137m gain on securities sales.
Outlook, risks, and unusual items
- Management anticipated that the revenue rate from U.S. Government satellite programs would increase during the balance of fiscal 2017, but cautioned that major satellite procurement timing is difficult to predict. Delays have been associated with satellite operators revising plans to incorporate new technology.
- Funded backlog was approximately $39m at October 31, up from $32m at April 30; about 75% was expected to be realized within 12 months. Backlog included approximately $8m under cost-plus-fee contracts described as firm commitments but not yet fully funded.
- The company expected fiscal 2017 capital-equipment spending of $3.0m–$3.5m and planned continued investment in product development and manufacturing efficiency. Management said internally generated cash would fund development and liquidity was adequate through at least December 15, 2017.
- The company failed to meet certain Tranche A credit-facility covenants for the period ended October 31. JPMorgan waived the defaults under a waiver and amendment executed December 15, 2016. The facility matures June 5, 2018 and is secured by specified company assets; the filing does not state the amended covenant terms.
- Anticipated contract losses for the six-month period were approximately $0.210m; management expected these non-material losses to be contained within the fiscal year. Revenue and contract profitability depend on estimates of costs to complete, and management identified contract revenue recognition and inventory valuation as critical estimates.
- Quarterly selling and administrative expense included one-time legal and proxy-filing costs; management did not anticipate similar charges in the remainder of the year. The estimated fiscal 2017 annual effective tax rate, excluding discrete items, was about 27%.
Important facts for investors to verify
- Whether delayed satellite awards convert to funded orders and support the anticipated second-half revenue recovery.
- Current covenant compliance, the terms and duration of the December 15 waiver and amendment, and available borrowing capacity under the facility.
- Backlog funding and conversion, especially the approximately $8m of cost-plus-fee commitments not fully funded at quarter-end.
- Cash generation, working-capital needs, and progress against the $3.0m–$3.5m fiscal-year capital-spending outlook.
- Changes in contract cost estimates, anticipated losses, inventory realizability, and the concentration of revenue in satellite and government programs.