Frequency Electronics, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended April 30, 2014; comparable period is fiscal 2013. Although the request metadata says “2013 Q4,” this filing reports full-year results, not a standalone quarter. Amounts below are in U.S. dollars.
Business context
Frequency Electronics designs and manufactures precision time and frequency products for satellite payloads, U.S. Government and defense applications, GPS-based systems, and commercial network infrastructure. Its reportable segments are FEI-NY (including FEI-Elcom and FEI-Asia), Gillam-FEI, and FEI-Zyfer. Satellite programs are the largest business area.
Financial results and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $71.55 million | $68.93 million |
| Gross margin | $24.75 million; 34.6% | $25.11 million; 36.4% |
| Operating profit | $4.87 million; 6.8% of revenue | $4.68 million; 6.8% of revenue |
| Net income | $4.04 million; $0.47 basic EPS, $0.46 diluted | $3.69 million; $0.44 basic EPS, $0.43 diluted |
| Operating cash flow | $3.64 million | $2.83 million |
| Capital expenditures | $5.41 million | $2.25 million |
| Cash and short-term marketable securities | $23.73 million | $21.73 million |
| Working capital / current ratio | $78.2 million / 9.1 | Current ratio 8.7 |
| Credit-facility borrowings | $10.1 million | $6.0 million reported as long-term credit obligations |
Total assets were $119.46 million and stockholders’ equity was $88.35 million at April 30, 2014. Net cash increased by $4.24 million during FY2014. Management said liquidity was adequate to meet operating and investment needs through at least April 30, 2015.
Material changes versus FY2013
- Revenue rose 4%. FEI-NY revenue increased 6% to $55.77 million, while Gillam-FEI fell 15% to $10.00 million and FEI-Zyfer fell 24% to $7.99 million.
- Satellite revenue increased approximately 25% and represented about 60% of consolidated revenue. Non-space U.S. Government/defense revenue declined approximately 25%; network infrastructure and other commercial revenue declined approximately 10%.
- Gross margin dollars fell $0.36 million and the margin rate decreased 1.8 percentage points, reflecting higher engineering and production costs, capacity investment, product mix, approximately $0.5 million of inventory write-downs, and lower FEI-Zyfer sales.
- Operating profit edged up 4% as lower selling and administrative expense partly offset lower gross margin and higher R&D. FEI-NY generated all segment operating profit; Gillam-FEI and FEI-Zyfer reported operating losses.
- Net income benefited from a $736,000 gain on manufacturing equipment sold to Morion and higher investment gains. The effective tax rate rose to 35.9% from 27.5%, principally due to lower U.S. tax credits and foreign subsidiary losses without a tax benefit.
- Cash from operations improved, but inventory increased to $41.23 million from $37.52 million. Capital expenditures more than doubled year over year.
Outlook, risks and unusual items
- Management expected FY2015 revenue growth based on backlog and potential new orders, led by satellite payloads. Non-space government, network infrastructure, and other commercial revenue were expected to remain approximately in FY2014’s range.
- Management expected FY2015 gross margin to remain below its 40% target based on the current backlog mix, while forecasting higher operating profit on expected revenue growth and favorable mix. It targeted $3–$4 million of capital equipment spending and $5–$6 million of internal R&D.
- Backlog was approximately $48 million at year-end, down from $51 million; about 70% was expected to be filled in FY2015. Approximately $3.5 million was under cost-plus-fee contracts not yet fully funded. Backlog may be canceled or changed and is not a guarantee of future revenue or profit.
- Customer concentration is significant: two FEI-NY customers accounted for $29.4 million, or 53% of FEI-NY sales, and each exceeded 10% of consolidated revenue. The filing says losing a major customer could materially harm the business.
- About 54% of FY2014 sales were under U.S. Government contracts or subcontracts for government end-use, down from 62%. Sequestration and budget uncertainty could delay or reduce orders. Fixed-price contracts expose the company to cost overruns; government contracts may also be terminated for convenience.
- Other risks include contract cost-estimate and inventory valuation judgments, foreign currency exposure, competition, and dependence on timely satellite programs. FY2014 included the Morion license/equipment transaction; additional revenue under that agreement depends on further performance and regulatory relief for certain sales.
- The company had a five-year, $25 million JPMorgan revolving facility maturing June 2018, secured by company assets and subject to financial covenants. It reported compliance with applicable Tranche A covenants at year-end. No dividends were declared or paid in FY2014.
Most important facts for investors to verify
- Whether satellite backlog converts to funded orders and revenue on schedule, and how much of the $48 million backlog is ultimately realized.
- Whether gross margins recover from 34.6%, given FY2015 guidance below the 40% target and continued cost, mix, and capacity pressures.
- Inventory quality and recoverability, especially the $41.23 million balance and the assumptions behind contract completion estimates and write-downs.
- Customer concentration, U.S. Government budget exposure, and the timing or cancellation risk of key programs.
- How much future earnings depend on nonrecurring Morion transaction gains, investment income, and tax credits; confirm the reported operating performance excluding unusual items.
- Debt usage, facility covenant headroom, and cash needs for planned capital spending, R&D, and potential acquisitions.
The independent auditor gave an unqualified opinion on the consolidated financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation.