Frequency Electronics, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended January 31, 2017. The three-month and nine-month comparisons are against the periods ended January 31, 2016. Amounts are in millions except per-share data.
Financial performance
| Metric | Three months ended Jan. 31, 2017 | Three months ended Jan. 31, 2016 | Nine months ended Jan. 31, 2017 | Nine months ended Jan. 31, 2016 |
|---|---|---|---|---|
| Revenue | $12.80 | $13.50 | $38.12 | $46.18 |
| Gross margin | $3.73; 29.1% | $4.73; 35.0% | $11.95; 31.4% | $15.72; 34.0% |
| Operating profit (loss) | $(0.95) | $0.27 | $(3.09) | $1.26 |
| Pre-tax income (loss) | $(0.85) | $0.30 | $(2.78) | $2.00 |
| Income tax benefit (provision) | $1.19 | $(0.02) | $1.39 | $(0.90) |
| Net income (loss) | $0.34 | $0.28 | $(1.39) | $1.10 |
| Diluted earnings (loss) per share | $0.04 | $0.03 | $(0.16) | $0.12 |
- Nine-month revenue fell 17%; third-quarter revenue fell 5%. Nine-month gross margin declined by 2.6 percentage points, while third-quarter gross margin declined by 5.9 points.
- Lower revenue and gross margin, together with higher R&D expense, drove the operating loss. Nine-month R&D expense rose 17% to $5.15 million; SG&A declined 2% to $9.89 million.
- Quarterly net income and the nine-month tax benefit reflect a tax election treating FEI-Asia as a disregarded entity for U.S. tax purposes. The reported tax benefits offset pre-tax losses; the filing reports effective tax rates of 139.8% for the quarter and 50% for the nine months.
Cash, liquidity and balance sheet
- At January 31, 2017, cash and cash equivalents were $3.11 million and marketable securities were $7.58 million, totaling $10.69 million, down from $17.19 million at April 30, 2016.
- Working capital was $69.3 million, compared with $75.6 million at April 30, 2016; the current ratio was 11.8 to 1. Total assets were $112.8 million and total liabilities were $19.7 million.
- The company repaid its $6 million JPMorgan credit-facility balance on January 30, 2017, then voluntarily terminated the facility to reduce fees. No early termination fee was incurred; the filing says alternative facilities could be available if needed. No long-term debt was reported at January 31.
- Nine-month operating cash flow was $2.55 million, versus $1.99 million in the prior-year period. Investing cash flow was positive $0.05 million, including $3.85 million of marketable-security redemptions and $3.80 million of capital and other asset purchases. Financing cash flow was negative $5.98 million, primarily reflecting debt repayment. Cash declined $2.97 million after exchange-rate effects.
Drivers, outlook and risks
- Management attributed the revenue decline mainly to delayed awards and schedules for commercial and U.S. Government satellite programs, including delays associated with customers’ adoption of new satellite technologies. Satellite-program revenue fell approximately $10.1 million year over year for the nine months.
- FEI-NY nine-month revenue declined 23% to $27.18 million and its operating loss was $2.43 million. FEI-Zyfer revenue increased 19% to $9.47 million, but operating profit declined to $0.44 million from $1.09 million. Gillam-FEI revenue rose 6% to $4.11 million, while its operating loss widened to $0.76 million.
- Management cited additional satellite-payload warranty costs and higher initial integration and non-recurring engineering costs for FEI-Zyfer products as gross-margin pressures. The prior-year nine-month period also included a vendor reimbursement that improved gross margin by about one percentage point.
- Management reported funded backlog of approximately $42 million at January 31, 2017, up from $32 million at April 30, 2016; approximately 71% was expected to be realized within twelve months. About $8 million consisted of cost-plus-fee contracts described as firm customer commitments but not fully funded to date.
- Management expected fiscal 2017 capital-equipment spending of $3.5–$4.0 million and said internally generated cash would be adequate for planned development efforts. It believed liquidity was adequate through the end of March 2018. The filing provides no specific revenue or earnings guidance.
- Key uncertainties include the timing of satellite and government contract awards and funding, customer acceptance and program schedules, estimates of long-term contract costs and inventory realizability, competition, product and technology changes, vendor dependence, and raw-material and manufacturing costs. The company recorded approximately $0.21 million of anticipated contract losses for the nine months and expected these non-material losses to be contained within the fiscal year.
- Management identified contract revenue/cost estimates and inventory valuation as critical accounting areas. It also reported disclosure controls were effective as of January 31, 2017 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether satellite-program awards and customer funding recover, and whether the $42 million backlog converts to revenue on the expected schedule.
- Whether gross margins improve as warranty costs and new-product integration expenses change, and whether R&D spending produces commercial returns.
- The sustainability and cash-tax effects of the FEI-Asia tax election and the unusually large reported tax benefits.
- Cash and investment levels after debt repayment and planned capital spending, and whether the company needs a replacement credit facility.
- Progress on the approximately $8 million of backlog not yet fully funded, and changes in contract-loss estimates, inventory valuation, or marketable-security impairment assessments.