Frequency Electronics, Inc. — Form 10-Q Summary
Business context and period: The filing covers the fiscal third quarter and nine months ended January 31, 2018 (fiscal year ends April 30). The company makes precision time-and-frequency products and systems for satellite, telecommunications, and government markets. The results below are for continuing operations unless noted; Belgian subsidiary Gillam is classified as discontinued operations.
Financial performance
| Metric | Three months ended Jan. 31, 2018 | Nine months ended Jan. 31, 2018 |
|---|---|---|
| Revenue | $10.572 million, down 7.1% year over year | $31.932 million, down 7.2% |
| Gross profit (loss); margin | $(2.852) million; (27.0)% | $3.872 million; 12.1% |
| Operating loss | $(7.309) million | $(8.995) million |
| Net income (loss), including discontinued operations | $(10.396) million; $(1.18) per diluted share | $(11.263) million; $(1.27) per diluted share |
| Cash from operating activities | Not provided separately for the quarter | $4.010 million consolidated; $2.793 million from continuing operations |
- For the nine months, investment income was $1.236 million, including approximately $1.0 million of realized gains on securities. Interest expense was $61,000.
- At January 31, cash and cash equivalents were $6.984 million and marketable securities were $6.240 million. Working capital was $53.9 million and the current ratio was 7.1:1.
- Total liabilities were $25.690 million, including $13.546 million of deferred compensation. The company reported no credit-facility borrowings; its prior bank facility had been terminated. It said credit availability based on securities holdings was available, with no borrowings.
Changes versus prior comparable periods
- Nine-month revenue declined $2.479 million. FEI-NY revenue fell 18.4% to $22.184 million, while FEI-Zyfer revenue rose 30.7% to $12.378 million.
- Nine-month gross margin fell from 31.4% to 12.1%; third-quarter gross margin shifted from 28.7% to negative 27.0%. The company attributed deterioration primarily to a $5.0 million inventory write-down, lower revenue, increased repair costs, and under-absorbed manufacturing overhead.
- Third-quarter net results swung from income of $338,000 to a loss of $10.396 million. Nine-month net loss increased from $1.392 million to $11.263 million.
- Nine-month operating cash flow rose from $2.552 million to $4.010 million, including discontinued operations. Cash and cash equivalents from continuing operations increased to $6.984 million from $2.560 million at the prior-year period end.
Outlook, risks, and notable items
- The $5.0 million inventory write-down reflected anticipated restrictions by U.S. and European space agencies on older space-qualified materials and expected declining use of other legacy parts.
- The Tax Cuts and Jobs Act prompted a provisional, non-cash $4.8 million tax expense in the quarter from remeasuring U.S. deferred tax assets at the lower federal rate. The filing also reports a $6.8 million valuation allowance on deferred tax assets. Tax accounting remained subject to the measurement-period guidance.
- Management expected fiscal 2018 satellite-payload revenue to be lower than fiscal 2017, but anticipated significantly higher satellite-related bookings and subsequent revenue in the coming fiscal year. It also expected non-space revenue to increase, based on bids and submitted proposals. These are expectations, not quantified revenue guidance.
- Funded backlog was approximately $16 million at January 31, versus $28 million at April 30, 2017; about 80% was expected to be realized within 12 months. Approximately $7.6 million was under cost-plus-fee contracts that management described as firm commitments but not yet fully funded.
- Management believed liquidity would meet operating and investment needs through at least March 19, 2019. It expected internally generated cash to fund development efforts and said a Gillam sale could have a positive cash effect when completed.
- Gillam’s sale remained pending: the original foreign counterparties had not performed, and the company was negotiating with a potential foreign buyer, aiming to complete a transaction before April 30, 2018. Gillam generated a nine-month loss of $697,000 and had $8.477 million of current assets and $2.121 million of current liabilities at January 31.
- Key stated risks include changes in customer demand and acceptance, competition and technology shifts, contract cost estimates, inventory valuation and obsolescence, vendor dependence, capital availability, and foreign-exchange movements. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the inventory write-down and legacy-parts exposure lead to further charges or affect future production and margins.
- Whether satellite bookings recover as management expects, and whether backlog converts to funded orders and revenue on schedule.
- Whether the Gillam sale closes, on what terms, and with what effect on cash and reported results.
- The final tax effects of the Tax Act and any material transition adjustment from adoption of the new revenue standard, which the filing said could result in a material initial retained-earnings adjustment if required.
- The sustainability of operating cash flow and liquidity given the continuing operating losses and declining backlog.