Frequency Electronics, Inc. — Form 10-Q Summary
Reporting period: Fiscal 2021 second quarter and first six months ended October 31, 2020; comparisons are to the periods ended October 31, 2019. The company develops and manufactures precision time- and frequency-control products and systems through its FEI-NY and FEI-Zyfer segments.
Financial performance
| Metric | Three months ended Oct. 31 | Six months ended Oct. 31 |
|---|---|---|
| Revenue | $14.0 million, up 54.0% | $26.9 million, up 24.5% |
| Gross margin | $5.3 million; 38.0% rate, versus a $1.2 million loss and (13.0)% rate | $9.4 million; 34.9% rate, versus $2.8 million and 12.8% |
| Operating income (loss) | $219,000, versus a $4.9 million loss | $(119,000), versus a $5.7 million loss |
| Net income (loss) | $329,000, or $0.04 per diluted share, versus a $4.9 million loss, or $(0.54) per share | $67,000, or $0.01 per diluted share, versus a $5.5 million loss, or $(0.61) per share |
For the six-month period, operating cash flow was $2.0 million, compared with $180,000 a year earlier. Investing activities used $169,000 and financing activities used $2.0 million; cash declined by $154,000 to $3.7 million. At October 31, cash and marketable securities totaled $13.6 million. Working capital was $39.7 million and the current ratio was 4.5:1.
Total liabilities were $35.0 million, including $10.5 million of operating lease liabilities and a $3.0 million UBS line-of-credit balance. The company repaid its approximately $5.0 million PPP loan in May 2020. Stockholders’ equity was $54.7 million.
Changes and business drivers
- Both segments grew: six-month FEI-NY revenue rose 25% to $21.0 million and FEI-Zyfer rose 29% to $7.4 million. Satellite revenue increased to $14.2 million from $9.4 million; government non-space revenue increased to $10.9 million from $9.0 million. Other commercial and industrial revenue fell to $1.9 million from $3.2 million.
- Management attributed higher gross margin to completion or near-completion of programs that had incurred elevated engineering costs during development. R&D expense declined 42% for six months as prior development efforts moved into production; management said it plans to continue investing in R&D.
- Selling and administrative expense rose 55% for six months, primarily due to higher professional fees, including litigation costs for which the company expects partial insurance reimbursement, and additional insurance costs.
Outlook, risks and contingencies
- Management said bookings and backlog support an expectation that the improving operating trend will continue. Funded backlog was approximately $42 million at October 31, up from $36 million at April 30; approximately 79% was expected to be realized within 12 months. Backlog can change and is not a guarantee of future revenue or profit.
- The company said liquidity should be adequate for operating and investment needs through at least December 11, 2021. It provided no quantified revenue or earnings guidance. It plans continued product development and may pursue acquisitions.
- COVID-19 impacts remain uncertain, and management said it could not estimate fiscal 2021 effects. Facilities remained open, but vendor delays had affected production; workforce absences had not significantly affected production to date. Disruption to employees, customers, suppliers, or government operations could affect contract performance and increase costs.
- OFAC is conducting a civil investigation following the company’s voluntary disclosure concerning delayed payments from Morion, a Russian investee associated with a sanctioned entity. The company cannot determine whether a liability is probable or estimate potential penalties, which could be material.
- Former executive Martin Bloch’s litigation includes a surviving breach-of-contract claim; the company appealed the denial of summary judgment on that claim. Related deferred-compensation arbitrations and court proceedings are also ongoing. The company cannot determine potential losses.
Investor verification points
- Whether revenue growth and gross-margin improvement persist as contract timing and development-to-production transitions change.
- Backlog conversion, funding status, cancellations, and the concentration of revenue in satellite and government programs.
- COVID-related supplier delays, workforce effects, and any resulting contract costs or schedule changes.
- Developments in the OFAC investigation and Bloch litigation/arbitrations, including any estimate of potential exposure or insurance recovery.
- Use and availability of the UBS credit facility, cash and securities levels, and the company’s assumptions supporting its liquidity outlook.