Frequency Electronics, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended April 30, 2013. Although the request identifies 2012 Q4, this filing is an annual report; it also discusses notable fourth-quarter FY2013 items. Financial amounts below are in U.S. dollars.
Business context
The company designs and manufactures precision time- and frequency-control products for satellite payloads, U.S. government and defense programs, telecommunications networks, and industrial uses. It reports three segments: FEI-NY (including FEI-Elcom and FEI-Asia), Gillam-FEI, and FEI-Zyfer. FEI acquired the remaining 74.88% of Elcom in February 2012, making it a wholly owned subsidiary.
Financial and operating performance
| Metric | FY2013 | FY2012 | Change or context |
|---|---|---|---|
| Revenue | $68.9 million | $63.6 million | Up 8% |
| Gross margin | $25.1 million; 36.4% | $24.6 million; 38.7% | Gross profit up 2%; margin down 2.3 percentage points |
| Operating profit | $4.7 million; 6.8% of revenue | $6.7 million; 10.5% | Down 30% |
| Income before taxes | $5.1 million | $6.8 million | Down about 25% |
| Income tax provision (benefit) | $1.4 million expense | $0.6 million benefit | FY2012 included a $3.1 million deferred-tax valuation-allowance release |
| Net income | $3.7 million; diluted EPS $0.43 | $7.4 million; diluted EPS $0.86 | Net income down 50% |
| Operating cash flow | $2.8 million | $2.1 million | Up from prior year |
FY2013 revenue growth was led by FEI-NY, up 18% to $52.6 million, including a full year of FEI-Elcom. Gillam-FEI revenue fell 8% to $11.8 million and FEI-Zyfer revenue fell 8% to $10.5 million. Satellite payloads contributed about half of consolidated revenue. Sales under U.S. government contracts or subcontracts were approximately 62% of revenue, versus 46% in FY2012.
At April 30, 2013, working capital was $71.7 million, including $21.7 million of cash, cash equivalents and short-term investments; the current ratio was 8.7, compared with 4.9 a year earlier. Cash and cash equivalents alone were $3.5 million, and marketable securities were $18.3 million. Total assets were $108.9 million and stockholders’ equity was $82.5 million.
Year-end credit obligations totaled $6.2 million: $0.2 million current and $6.0 million classified as noncurrent following the subsequent refinancing. On June 6, 2013, the company entered a five-year, $25 million JPMorgan facility and borrowed $7.2 million to repay the prior credit line. The new facility bears interest at LIBOR plus 0.75% or 1.75%, depending on tranche, and includes financial covenants and collateral provisions. Management expected FY2014 interest expense to rise.
Material changes and unusual items
- FY2013 operating profit was reduced by a $1.4 million Gillam-FEI write-down of costs for a French smart-grid product, after expected production orders were delayed until no earlier than FY2015. Total inventory write-downs were approximately $2.4 million, reducing the reported gross-margin rate by about 3.4 percentage points.
- FEI-NY generated all consolidated operating profit ($7.3 million); Gillam-FEI recorded a $1.6 million operating loss and FEI-Zyfer a $0.6 million operating loss. Reduced sales, higher costs and the Gillam-FEI write-down contributed to the segment losses.
- Research and development expense rose 48% to $5.7 million, or 8.3% of revenue, partly reflecting FEI-Elcom product development and new satellite, rubidium-clock and GPS products.
- FY2012 comparisons include acquisition-related items: a $0.7 million gain on remeasuring the prior Elcom investment, a $0.7 million equity loss and a $0.4 million impairment charge. FY2012 also benefited from the $3.1 million tax valuation-allowance reduction.
- The company paid a one-time $0.20-per-share cash dividend, totaling $1.7 million, in FY2013. It made no treasury-stock repurchases in FY2013 or FY2012.
Outlook, risks and contingencies
Management expected FY2014 revenue to grow, supported by backlog and prospective orders, with satellite payloads remaining the largest business area. It anticipated higher operating profit, gross margin approaching its 40% target, and other operating expenses broadly in line with targets. FY2014 internal R&D spending was targeted at $5.0–$6.0 million (and below 10% of revenue); capital spending was expected at $2.0–$3.0 million. Management said liquidity was adequate for operating and investment needs through at least April 30, 2014.
Backlog was approximately $51 million at April 30, 2013, down from $57 million a year earlier; about 70% was expected to be filled in FY2014. Backlog excludes some unauthorized or unfunded work, including approximately $3 million of unfunded fixed-price contract amounts, and is subject to cancellation, changes and other factors; it is not a guarantee of future revenue or profit.
- Federal sequestration and government budget constraints could delay or reduce defense orders. Fixed-price contracts expose the company to cost overruns; government contracts may also be terminated for convenience.
- Customer concentration is material: three FEI-NY customers represented $34.1 million, or 65% of that segment’s FY2013 sales, and each exceeded 10% of consolidated revenue. The filing states loss of a major customer could materially harm the business.
- Revenue recognition on long-term contracts depends on estimates of costs to complete; inventory valuation also relies on management estimates. Changes in estimates can materially affect reported results.
- Foreign currency movements affected Gillam-FEI results; foreign operations, competition, technology changes, supplier and market conditions, and acquisition integration are additional disclosed risks.
- The company reported no material pending legal proceedings beyond routine litigation. Management concluded disclosure controls and internal control over financial reporting were effective at year-end; the auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Whether the $51 million backlog converts as expected, including the timing and funding of excluded or unfunded awards.
- Progress on the French smart-grid program and any further inventory valuation adjustments or margin recovery.
- Customer concentration and the effect of U.S. government budget decisions and contract delays on orders and revenue.
- Borrowings, interest costs, collateral and compliance with the new facility’s financial covenants.
- Whether FY2014 revenue growth, improved operating profit, gross-margin recovery and planned R&D and capital spending were achieved.
- The sustainability of earnings after adjusting comparisons for the FY2012 tax valuation-allowance release and Elcom acquisition-related items.