Frequency Electronics, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended January 31, 2016. Although the request identifies “2015 Q3,” this filing covers the company’s fiscal 2016 third quarter. Fiscal 2016 ends April 30, 2016. Financial statements are unaudited; amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended Jan. 31, 2016 | Year-ago quarter | Nine months ended Jan. 31, 2016 | Year-ago period |
|---|---|---|---|---|
| Revenue | $13.50 million | $18.38 million | $46.18 million | $57.36 million |
| Gross margin; gross margin rate | $4.73 million; 35.0% | $5.90 million; 32.1% | $15.72 million; 34.0% | $18.24 million; 31.8% |
| Operating profit; operating margin | $0.27 million; 2.1% | $1.00 million; 5.4% | $1.26 million; 2.7% | $3.72 million; 6.5% |
| Net income; diluted EPS | $0.28 million; $0.03 | $0.88 million; $0.10 | $1.10 million; $0.12 | $2.89 million; $0.33 |
| Cash provided by (used in) operations | Not separately stated | Not separately stated | $1.99 million | $(0.79) million |
Quarterly revenue declined 27% and net income declined 68% year over year. For the nine-month period, revenue fell 19%, operating profit fell 66%, and net income fell 62%. Gross-margin dollars decreased, but the gross-margin rate improved, which management attributed partly to product mix and a vendor reimbursement related to a defective part; the reimbursement improved the nine-month gross-margin rate by approximately one percentage point.
Balance sheet, liquidity and debt
- At January 31, 2016, cash and cash equivalents were $7.08 million and marketable securities were $10.70 million, totaling $17.78 million. Working capital was $76.5 million and the current ratio was 9.9 to 1.
- Total assets were $119.85 million; total liabilities were $26.64 million. Long-term debt was $6.0 million, unchanged from April 30, 2015. The $25 million credit facility matures June 5, 2018; the company reported compliance with its covenants and no fiscal 2016 borrowings or repayments through the period.
- Operating cash flow was positive $1.99 million, compared with cash used of $0.79 million a year earlier. Investing activities used $1.83 million, including $1.64 million for fixed and other assets. Cash declined $0.14 million after exchange-rate effects.
- Inventory increased to $40.73 million from $38.24 million at April 30, 2015. The company reported no material off-balance-sheet arrangements other than operating leases.
Business changes and management outlook
- FEI-NY revenue fell 23% for the nine months and 31% for the quarter; Gillam-FEI revenue fell 41% and 20%, respectively. FEI-Zyfer revenue rose 12% for the nine months but declined 15% in the quarter.
- Management attributed much of the revenue decline to delayed U.S. Government and Department of Defense authorizations and contract awards, reducing satellite payload revenue by more than $8 million for the nine-month period and more than $3 million for the quarter. Reduced third-party contract manufacturing and lower Gillam-FEI sales also weighed on commercial revenue.
- Management expected full-year fiscal 2016 revenue to be below the prior fiscal year, reflecting award delays. Funded backlog was approximately $22 million at January 31, 2016, versus $37 million at April 30, 2015; approximately 80% was expected to be realized within 12 months. About 55% of backlog was satellite payload work. Management expected non-space government revenue, particularly at FEI-Zyfer, to increase as funding arrived on certain programs.
- Management expected positive operating cash flow for the remainder of fiscal 2016 as receivables were billed and collected, planned approximately $2.0 million of capital-equipment spending for the full fiscal year, and targeted internal R&D spending below 10% of full-year revenue. It stated liquidity was adequate through at least March 16, 2017.
Risks, contingencies and unusual items
- Results depend on the timing of government awards and funding, including satellite programs; management cautioned that actual results may differ from forward-looking statements. Other cited risks include competition, technology and product changes, raw-material and manufacturing costs, third-party vendors, contract terms, capital availability, and foreign-currency movements.
- Revenue and contract costs rely on percentage-of-completion estimates, including estimated costs to complete; inventory valuation also requires estimates. Changes in these estimates could materially affect results.
- Nine-month other income included an approximately $0.4 million life-insurance gain following the death of a former officer. The nine-month effective tax rate was 44.9%, which management linked partly to losses at foreign subsidiaries for which no tax benefit was available. The quarter’s 6.6% effective rate reflected the cumulative effect of the reinstated U.S. R&D tax credit and was not representative of the full-year rate.
- Marketable securities had $0.915 million of gross unrealized losses at January 31, 2016. Management considered these losses temporary, citing its ability to hold the investments and anticipated recovery; all securities were valued using Level 1 inputs.
- The company had contractual commitments under a Morion technology-license arrangement, including a remaining $1 million license payment contingent on State Department approval of removal of certain agreement provisions. The filing states the technology transfer had been approved.
Important facts for investors to verify
- Whether delayed government authorizations and satellite contract awards resume, and how that affects revenue and funded backlog.
- Backlog conversion, especially the expected timing of the approximately 80% due to be realized within 12 months.
- Inventory levels, contract-cost estimates, and receivable collections as revenue declines.
- Cash generation and planned capital spending, alongside the $6 million outstanding credit-facility balance and covenant requirements.
- Whether the one-time insurance gain, vendor reimbursement, and tax-credit effects distort comparisons with future periods.