Business context and reporting period
Frequency Electronics, Inc. (Nasdaq: FEIM) designs and manufactures precision time- and frequency-control products for satellite payloads, secure communications, and defense applications. This Form 10-K reports the fiscal year ended April 30, 2020; it does not provide separate fourth-quarter results. Fiscal 2020 revenue was primarily U.S. Government-related: 83% was from U.S. Government contracts or subcontracts, versus 87% in fiscal 2019.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $41.5 million | $49.5 million |
| Gross profit / margin | $5.7 million / 13.9% | $15.8 million / 31.9% |
| Operating loss | $10.9 million | $2.8 million |
| Net loss | $10.0 million | $2.5 million |
| Loss per share, basic and diluted | $1.10 | $0.28 |
| Cash used in operating activities | $1.4 million | $0.1 million |
Revenue fell 16%. Satellite revenue declined to $20.4 million from $22.8 million, and government non-space revenue declined to $16.9 million from $22.8 million; other commercial and industrial revenue increased to $4.1 million from $3.9 million. Management attributed lower gross profit to reduced sales and engineering cost overruns on development programs facing technical challenges. The fiscal 2020 loss included a $1.0 million reserve against a note receivable from the prior Gillam sale. The $1.7 million income tax benefit primarily reflected CARES Act net-operating-loss carrybacks.
At April 30, 2020, cash and cash equivalents were $3.8 million and marketable securities were $10.6 million. Working capital was $38.3 million, down from $46.9 million, and the current ratio was 3.9:1, versus 9.0:1. Investing activities used $3.4 million, including $1.5 million of capital expenditures. Financing cash flow included a $5.0 million Paycheck Protection Program (PPP) loan, which was repaid in full on May 6, 2020. The company reported $11.3 million of operating lease liabilities; available credit backed by securities was unused. Total liabilities were $37.0 million. The company paid no dividends.
Material changes, outlook, and risks
- FEI-NY revenue decreased 17% to $31.8 million; FEI-Zyfer revenue decreased 11% to $10.9 million. FEI-Zyfer moved from $1.7 million operating income to a $0.7 million operating loss.
- Contract loss provisions rose to $2.4 million from $0.1 million, primarily reflecting anticipated losses on certain programs. Backlog was approximately $36 million, compared with $37 million a year earlier; about 81% was expected to be filled in fiscal 2021. Backlog is subject to cancellation and other changes.
- The company recorded four consecutive fiscal years of operating losses and two years of operating cash outflows. Management said available cash, securities, and expected operating cash flows should cover normal needs for the 12 months after issuance, while cautioning that COVID-19 could accelerate cash use and require additional financing.
- COVID-19 had not caused a sustained facility shutdown as of the report, but supplier delays had negatively affected production. Management could not estimate the pandemic’s fiscal 2021 financial or liquidity effects and planned to monitor suppliers and consider alternatives.
- Four customers each represented over 10% of consolidated revenue in fiscal 2020; management warned that losing a major customer could materially harm the business. Government appropriations timing, fixed-price contract cost overruns, competition, and dependence on technical execution are additional risks.
- OFAC opened a civil investigation after the company voluntarily disclosed late payments involving Morion, a Russian supplier partly owned by a bank subject to U.S. sanctions. The company could not assess whether a liability was probable or estimate potential penalties; an adverse outcome could be material.
- Former Chief Scientist Martin Bloch brought employment, age-discrimination, deferred-compensation, and related arbitration claims. The company disputes the claims; it could not estimate the likelihood or potential loss.
- The company sold FEI-Asia in May 2019, following its classification as held for sale in fiscal 2019. Fiscal 2019 included an approximately $1 million loss associated with that sale.
Important facts for investors to verify
- Review the full financial statements and contract disclosures for the causes, expected duration, and cost-to-complete exposure of development-program losses and the $2.4 million contract-loss provision.
- Track quarterly revenue, gross margins, operating cash use, working capital, and conversion of the $36 million backlog into funded orders and sales.
- Confirm the PPP loan repayment and monitor liquidity needs, including lease payments and any future borrowing or equity financing.
- Monitor COVID-19 supply-chain and production effects, major-customer concentration, and the progress and outcome of the OFAC investigation and Bloch proceedings.
- The filing reports effective management disclosure controls and internal control over financial reporting; the independent auditor did not provide an internal-control attestation.