Frequency Electronics, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended April 30, 2022; comparisons are with the year ended April 30, 2021. Although the request metadata refers to 2021 Q4, this filing reports the full fiscal year.
Business context
The company designs and manufactures precision time- and frequency-control products for satellites, U.S. government defense and secure communications, and commercial applications. It reports two segments, FEI-NY and FEI-Zyfer. Approximately 94% of FY2022 sales were under U.S. government contracts or subcontracts for government end-use.
Financial performance and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $48.3 million | $54.3 million |
| Gross profit / margin | $8.6 million / 17.8% | $16.9 million / 31.2% |
| Operating loss | $8.0 million | $1.0 million |
| Net income (loss) | ($8.7 million) | $0.7 million |
| Operating cash flow | $4.0 million | $12.2 million |
| Cash and cash equivalents | $11.6 million | $9.8 million |
| Marketable securities | $10.0 million | $10.3 million |
| Working capital / current ratio | $34.2 million / 2.5 | $40.6 million / 3.2 |
Capital expenditures were $1.9 million. No financing cash flow occurred in FY2022; the PPP loan had been repaid in FY2021. The company reported no borrowings under its available credit arrangement. Operating lease liabilities were $9.1 million at year-end. No dividends were paid.
Material changes versus FY2021
- Revenue declined 11.0%; FEI-NY revenue fell 2.9% and FEI-Zyfer revenue fell 43.4%. Management attributed much of the Zyfer decline to delayed bookings and manufacturing relocation, and said it expected some revenue to shift into FY2023.
- Gross margin fell 13.4 percentage points. Management cited lower revenue and factory absorption, delayed contract awards, supply-chain disruption, and higher engineering costs on development programs.
- Government non-space revenue decreased about $5.2 million, or 21%; satellite revenue decreased about $0.9 million, or 3%.
- Contract-loss provisions totaled approximately $4.2 million, versus $1.0 million in FY2021. A $4.2 million loss provision accrual was on the year-end balance sheet.
- Other expense included a $796,000 full impairment of the Morion investment amid Russia-Ukraine sanctions and uncertainty. The company also recorded a $110,000 loss on disposal of an asset.
- Accumulated deficit increased to $20.1 million. Total stockholders’ equity declined to $46.7 million from $55.4 million.
Outlook, risks and unusual items
- Backlog was approximately $40 million, unchanged from the prior year-end; about 83% was expected to be filled in FY2023. Management cautions that backlog may change and is not necessarily indicative of future revenue or profit.
- The company expects cash, marketable securities and operating cash flows to cover normal needs for the next 12 months. It planned to continue R&D investment, with FY2023 spending dependent on market conditions and opportunities; no specific earnings or revenue guidance was provided.
- Management cited continuing exposure to inflation, higher input costs, supply delays, labor availability, COVID-related disruption, and delays or cancellations tied to government funding and customer orders. Fixed-price contracts represented 89% of FY2022 sales, exposing results to cost overruns.
- Customer concentration is material: Northrop Grumman, Lockheed Martin and BAE Systems each represented more than 10% of FY2022 consolidated revenue. Loss of a major customer or program could materially affect results.
- The Morion investment was written down in full. Morion-related purchases, sales and dividends may not continue; the company said it was pursuing alternate sources for relevant materials. OFAC had closed its earlier review of delayed Morion receivables with a cautionary letter, without a civil penalty or other enforcement action.
- A $6 million settlement with Martin B. Bloch was completed in September 2021. On July 8, 2022, after fiscal year-end, CEO Stanton D. Sloane resigned and Thomas McClelland was appointed interim CEO.
- The independent auditor issued an unqualified opinion on the financial statements and identified percentage-of-completion revenue estimates, particularly costs to complete contracts, as a critical audit matter. The auditor did not attest to internal control over financial reporting.
Important facts for investors to verify
- Whether delayed FEI-Zyfer bookings and shifted revenue materialize in FY2023, and whether backlog converts as expected.
- Whether development-program cost estimates and contract-loss provisions prove adequate, and whether any cost recovery or equitable-adjustment claims are realized.
- Whether supplier constraints, inflation and workforce availability continue to pressure schedules, costs and margins.
- How much revenue and program exposure is concentrated among major contractors and U.S. government funding priorities.
- Whether the company maintains its stated liquidity outlook, given lower operating cash flow, working capital and current ratio versus FY2021.