Frequency Electronics, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended January 31, 2020; comparisons are to the corresponding periods ended January 31, 2019. The filing was signed March 16, 2020. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where shown.
Business context and operating results
The company designs and supplies precision time- and frequency-control products and systems. Its two reportable segments are FEI-NY, serving satellite, telecommunications and other government markets, and FEI-Zyfer, providing GPS-based timing and communications systems.
| Metric | Three months ended Jan. 31, 2020 | Three months ended Jan. 31, 2019 | Nine months ended Jan. 31, 2020 | Nine months ended Jan. 31, 2019 |
|---|---|---|---|---|
| Revenue | $9.63m | $13.19m | $31.27m | $36.35m |
| Gross profit / margin | $3.14m / 32.6% | $4.10m / 31.1% | $5.91m / 18.9% | $12.39m / 34.1% |
| Operating loss | $1.56m | $0.39m | $7.26m | $0.54m |
| Net loss | $1.55m | $0.32m | $7.05m | $0.17m |
| Loss per share, diluted | $0.17 | $0.04 | $0.78 | $0.02 |
For the nine months, FEI-NY revenue fell 14.4% to $24.0m and FEI-Zyfer revenue fell 3.0% to $8.5m. Satellite revenue was $14.7m versus $17.3m; government non-space revenue was $12.7m versus $17.1m; other commercial and industrial revenue rose to $3.9m from $2.0m.
Cash flow, liquidity and balance sheet
- Operating cash use was $0.76m for the nine months, compared with $1.29m in the prior-year period. Investing cash use was $2.65m; there was no financing cash flow. Cash declined by $3.41m to $0.27m.
- At January 31, 2020, cash and marketable securities totaled approximately $9.73m ($0.27m and $9.46m, respectively). Working capital was $39.7m and the current ratio was 6.0 to 1.
- Total assets were $90.2m; total liabilities were $33.3m and stockholders’ equity was $56.8m. The company reported $11.64m of operating lease liabilities following adoption of the lease standard. It had no borrowings under its available credit arrangement.
- Inventory was $23.5m, net of a $7.1m reserve. Accounts receivable was $4.1m. Net costs and estimated earnings in excess of billings were $8.0m.
Material changes, outlook and risks
- Nine-month revenue declined 14.0%; quarterly revenue declined 27.0%. Management attributed weakness in part to delays in U.S. Government funding to prime contractors and extended technical-baseline negotiations, which delayed subcontract awards and revenue timing.
- A problem program with recurring technical and cost issues was terminated by mutual agreement with the customer. The termination reduced revenue by approximately $0.725m in both the quarter and nine-month period; contract losses recognized were approximately $0.3m for the quarter and $2.4m for the nine months. The balance sheet included a $0.786m loss-provision accrual.
- Nine-month gross margin fell to 18.9%, principally due to the problem program. Selling and administrative expense increased 6.7% for the nine months and 36.2% for the quarter; management cited higher depreciation, insurance, professional fees and payroll-related expenses. The company expects to maintain a consistent level of internally funded R&D.
- Funded backlog was approximately $36m at January 31, 2020, versus $37m at April 30, 2019; about 81% was expected to be realized within twelve months. Management cautioned that backlog may change and is not necessarily indicative of future revenue or profits.
- The company stated that liquidity should be adequate through at least March 16, 2021. It provided no quantified revenue or earnings guidance. It expects to pursue product development and may consider acquisitions; internal cash and external funding could be used for acquisitions.
- A current director and former chief scientist sued the company and board members, alleging wrongful termination, age discrimination, reputational harm and breach of fiduciary duty. The company disputes the claims and intends to defend them; it said the potential liability or loss could not yet be determined.
- The company maintained a full valuation allowance against deferred tax assets. Management’s estimated full-year effective tax rate was 0%, with a discrete $48,000 tax provision recorded for the nine months.
Important facts for investors to verify
- Reconcile the third-quarter gross-margin rate: the statements show gross profit of $3.14m on $9.63m revenue, or 32.6%, while one MD&A gross-margin table lists 30.3%.
- Track whether delayed government-funded programs convert into awards and revenue, and whether the terminated problem program creates further costs or adjustments.
- Monitor backlog conversion, cash and marketable-securities levels, operating cash use, and the adequacy of liquidity as the company funds R&D and capital needs.
- Follow developments in the Bloch litigation; the filing states that potential loss could not be estimated at that stage.