Frequency Electronics, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended October 31, 2021; fiscal year ends April 30. Figures are in millions of dollars unless otherwise noted.
Business context and financial performance
The company supplies precision time and frequency products and systems through its FEI-NY and FEI-Zyfer segments, serving satellite, government/defense, telecommunications, and other commercial markets. Most contract revenue is recognized over time using a cost-to-cost method.
| Metric | Three months ended Oct. 31, 2021 | Three months ended Oct. 31, 2020 | Six months ended Oct. 31, 2021 | Six months ended Oct. 31, 2020 |
|---|---|---|---|---|
| Revenue | $12.936 | $13.990 | $25.890 | $26.940 |
| Gross margin | $4.091; 31.6% | $5.322; 38.0% | $8.152; 31.5% | $9.410; 34.9% |
| Operating income (loss) | $0.303 | $0.219 | $(1.385) | $(0.119) |
| Net income (loss) | $0.497 | $0.329 | $(1.078) | $0.067 |
| Diluted EPS | $0.05 | $0.04 | $(0.12) | $0.01 |
Six-month operating cash flow was $1.661, versus $1.980 a year earlier. Investing activities used $0.845, primarily reflecting $1.108 of purchases of property and equipment and other assets, partly offset by net securities redemptions. Cash increased $0.816 to $10.623 during the six months.
At October 31, cash and marketable securities totaled $20.578; working capital was $40.5 and the current ratio was 5.0:1. Total assets were $81.378 and total liabilities were $26.749. The company reported no outstanding borrowings; operating lease liabilities totaled $9.384. The UBS securities-backed credit facility was available, but the filing does not state its available borrowing amount.
Changes versus the prior comparable period
- Quarterly revenue fell 7.5%; six-month revenue fell 3.9%. Both segments declined in the first half: FEI-NY revenue decreased 2.2% and FEI-Zyfer decreased 21.4%.
- Gross margin rate declined 6.4 percentage points in the quarter and 3.4 points in the first half, reflecting engineering challenges on development programs and supply-chain-related cost increases.
- Quarterly operating income improved to $0.303, while first-half operating loss widened to $1.385. Quarterly SG&A fell 41.5%, mainly due to lower professional fees; first-half SG&A remained elevated in part due to litigation-related costs.
- R&D expense rose 40.7% in the quarter and 25.5% for six months, driven by work on atomic clocks and low-noise oscillators.
- Funded backlog was approximately $38 at October 31, down from $40 at April 30; approximately 82% was expected to be realized within 12 months.
Outlook, risks, contingencies, and unusual items
- Management gave no specific revenue or earnings guidance. It expects internally generated cash to fund planned R&D and believes liquidity is adequate through at least December 15, 2022 and the foreseeable future. It plans continued product development and may pursue acquisitions.
- Management cited COVID-19-related workforce absences, customer contract delays, and supplier disruption. Material shortages and quality issues caused redesigns, re-procurement, higher costs, and schedule pressure. The future pandemic impact cannot be estimated.
- On September 21, 2021, the company finalized a settlement of disputes with former Chief Scientist and director Martin B. Bloch and related parties, paying $6.0. The company had accrued $6.0 by July 31; the settlement resulted in $0.650 of net expense, recognized in first-quarter SG&A, and concluded the disputes.
- Other risks include contract cost-estimation uncertainty, inventory valuation, reliance on customers and third-party suppliers, competition, and changes in product prices and manufacturing or transportation costs. The company maintained a full valuation allowance against deferred tax assets.
- The company holds a 4.6% investment in Morion, a Russian manufacturer. Morion is a less-than-wholly-owned subsidiary of Gazprombank, which was designated under U.S. sectoral sanctions; the filing describes restrictions on certain transactions with designated entities and affiliates.
Important facts for investors to verify
- Whether supply-chain and development-program cost pressures ease, and how they affect gross margin and contract completion estimates.
- Whether the $38 funded backlog converts to revenue as expected, including the timing of the 82% anticipated within 12 months.
- Whether customer award delays and COVID-19 or supplier disruptions affect production, deliveries, or cash collection.
- The terms and remaining availability of the UBS credit facility, which are not quantified in the filing.
- Potential exposure or operational effects related to the Morion investment and applicable sanctions, and the realization of deferred tax assets subject to the full valuation allowance.