Frequency Electronics, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended October 31, 2022. Unaudited results; comparisons are with the corresponding 2021 periods. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Three months ended Oct. 31, 2022 | Three months ended Oct. 31, 2021 | Six months ended Oct. 31, 2022 | Six months ended Oct. 31, 2021 |
|---|---|---|---|---|
| Revenue | $8.949 | $12.936 | $17.153 | $25.890 |
| Gross profit / margin | $0.350 / 3.9% | $4.091 / 31.6% | $0.345 / 2.0% | $8.152 / 31.5% |
| Operating income (loss) | $(2.283) | $0.303 | $(5.390) | $(1.385) |
| Net income (loss) | $(2.314) | $0.497 | $(5.431) | $(1.078) |
| Diluted EPS | $(0.25) | $0.05 | $(0.58) | $(0.12) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(0.466) | $1.661 |
- Quarterly revenue fell 30.8%; six-month revenue fell 33.7%. Both segments declined: FEI-NY revenue was down 26.0% for the quarter and 29.3% year to date; FEI-Zyfer was down 41.0% and 43.1%, respectively.
- Management attributed lower revenue to delayed contract awards and milestones, funding limitations, technical challenges, and supply-chain delays. Gross margin also suffered from higher engineering costs on development programs and under-absorption of costs as sales declined. The company recorded contract-loss provisions of approximately $0.737 million for the quarter and $2.0 million for six months.
- For six months, selling and administrative expense decreased to $4.026 million from $6.805 million, and R&D expense decreased to $1.709 million from $2.732 million. Lower spending did not offset the revenue and gross-margin deterioration.
Balance sheet, liquidity, and funding
- At October 31, 2022, cash and cash equivalents were $10.120 million and marketable securities were $9.612 million, or $19.7 million combined. Working capital was approximately $28.4 million, down from $34.2 million at April 30; the current ratio declined to 2.1 from 2.5.
- Total assets were $83.076 million and stockholders’ equity was $40.939 million. The company reported no borrowings under its available UBS credit facility. Operating lease liabilities totaled $8.380 million; these are lease obligations, not reported bank borrowings.
- Six-month operating cash flow was a use of $0.466 million, versus $1.661 million provided in the prior-year period. Investing activities used $0.975 million, including $0.729 million of capital expenditures. Cash declined $1.441 million from fiscal-year-end to $10.120 million.
- Contract liabilities rose to $16.976 million from $11.098 million; contract assets were $9.473 million. The resulting net contract liability was $7.503 million, compared with $2.241 million at April 30.
- Funded backlog was approximately $56 million, versus $40 million at April 30, with about 82% expected to be realized within 12 months. Backlog is subject to cancellation, funding, and other changes and is not a forecast of revenue or profit.
Outlook, risks, and unusual items
- Management said it expects revenue to increase as contract timing and program issues improve, which it views as temporary; the filing provides no quantified revenue or earnings guidance. Management believes liquidity is adequate through at least December 20, 2023.
- COVID-19-related absenteeism, delayed customer contracts, and vendor material delays continued to affect operations. Management could not estimate potential adverse effects for the remainder of fiscal 2023. Inflation, energy and commodity costs, geopolitical conditions, workforce availability, and supply-chain disruptions are additional risks.
- After quarter-end, on December 20, 2022, the board declared a $1.00-per-share special cash dividend, expected to total approximately $9.3 million and payable January 27, 2023. Consider this cash commitment alongside the reported liquidity.
- The company fully impaired its 4.6% investment in Russian company Morion in fiscal 2022 because of Russia-Ukraine-related sanctions and uncertainty; the impairment was $0.796 million. Future transactions and dividend receipts from Morion are uncertain.
- The filing reports material weaknesses in internal control over financial reporting involving contract-asset and contract-liability presentation/calculation and the process for identifying and assessing errors. Disclosure controls were deemed ineffective. Management said it would strengthen controls, but could not assure remediation by April 30, 2023. It also said the fiscal 2022 Form 10-K financial statements were materially misstated and that it would file a Form 10-K/A. The revision note describes an identified error as immaterial; investors should verify the scope and impact of the revisions.
Key facts for investors to verify
- Whether delayed awards, milestones, funding, and technical issues convert into revenue and improved gross margins, and whether FEI-Zyfer’s decline reverses.
- Whether the $56 million funded backlog is realized on schedule and at profitable contract margins, particularly given the $2.0 million six-month contract-loss provision.
- Cash and working-capital needs after payment of the approximately $9.3 million special dividend, including the effect of rising contract liabilities.
- The amended fiscal 2022 filing’s scope, the financial-statement revisions, and progress and testing of controls remediation.
- Any further effects from COVID-19, supply constraints, inflation, or sanctions on operations, costs, and customer or supplier relationships.