Frequency Electronics, Inc. — FY2024 Form 10-K
Reporting period: Fiscal year ended April 30, 2024, compared with fiscal 2023. This is an annual filing, not a report for calendar 2023 Q4.
Business context
Frequency Electronics designs and manufactures precision time- and frequency-control products for satellite payloads, U.S. Government communications, C4ISR and electronic warfare applications. Its reportable segments are FEI-NY and FEI-Zyfer. The business is highly concentrated in government end-use: approximately 98% of FY2024 sales were under U.S. Government contracts or subcontracts. Four customers each represented more than 10% of consolidated revenue.
Financial performance and liquidity
| Metric | FY2024 | FY2023 |
|---|---|---|
| Revenue | $55.3 million | $40.8 million |
| Gross profit / margin | $18.6 million / 33.6% | $7.8 million / 19.2% |
| Operating income (loss) | $5.0 million | $(4.7) million |
| Net income (loss) | $5.6 million | $(5.5) million |
| Diluted earnings (loss) per share | $0.59 | $(0.59) |
| Cash provided by operating activities | $8.7 million | $1.2 million |
- Revenue increased 35.6%. FEI-NY revenue rose 24.6% to $40.3 million; FEI-Zyfer revenue rose 82.6% to $18.1 million, before intersegment eliminations.
- Government non-space revenue was $29.0 million versus $20.3 million; satellite revenue was $23.2 million versus $17.9 million. Management attributed most growth to non-space Government/DoD sales.
- Management linked the gross-margin improvement mainly to resolving technical issues on developmental programs, alongside higher revenue and cost controls. SG&A increased 8.7% in dollars but fell to 18% of revenue from 23%.
- At April 30, 2024, cash and cash equivalents were $18.3 million, with another $0.9 million of restricted cash. Working capital was $27.3 million and the current ratio was 1.9, versus $21.0 million and 1.8 a year earlier.
- The company reported no borrowings and no borrowing capacity under a credit facility. Current and long-term operating lease liabilities totaled $6.2 million; these are lease obligations, not reported borrowings.
- Inventory was $23.4 million, including $9.1 million of reserves. Contract liabilities were $21.6 million and contract assets were $10.5 million.
Changes, outlook and notable items
- Backlog rose to approximately $78 million from $57 million; about 70% was expected to be filled in FY2025. Backlog may change and is not a guarantee of revenue or profit.
- Management expects R&D investment in FY2025 to be in line with or potentially above historical levels, with the amount dependent on market conditions and opportunities. It expects internally generated cash to fund future R&D and believes cash and operating cash flows will meet normal-course liquidity needs in the short and long term.
- No quantified revenue or earnings guidance was provided. Management noted that inflation-related material and service costs may continue to affect expenses, including in FY2025.
- Fixed-price contracts accounted for 87% of FY2024 sales, exposing results to cost overruns. Three Government end-use contracts were terminated during the year. Government appropriations, customer concentration, technical execution, suppliers and skilled-staff retention are significant risks.
- The company recorded approximately $3.1 million of total contract losses in FY2024, versus $0.4 million in FY2023. A $0.9 million out-of-period adjustment reduced both cost of revenue and the loss-provision accrual; the company said it had no cash-flow or continuing earnings impact and was not material to affected periods.
- Management identified a material weakness in controls over calculating contract loss provisions, and concluded disclosure controls and internal control over financial reporting were ineffective at April 30, 2024. The company said it corrected related errors before issuance, implemented enhanced calculation and review controls, and aims to remediate by April 30, 2025. The auditor gave an unqualified opinion on the financial statements but did not attest to internal control effectiveness.
- A $1.00-per-share special dividend, approximately $9.4 million in total, was declared July 22, 2024, payable August 29, 2024. No dividend was paid in FY2024; the prior-year special dividend was also approximately $9.4 million.
- The company’s Morion investment was fully impaired in FY2022 and had a zero carrying value at April 30, 2024. The Russian company’s sanctions-related status remains uncertain; FY2024 purchases from Morion were approximately $89,000. The company reported no material pending legal proceedings as of July 23, 2024.
Important facts for investors to verify
- Whether the contract-loss-provision control weakness is fully remediated and whether future filings report any related adjustments.
- Whether the FY2024 margin recovery persists after the developmental programs with resolved technical issues are completed.
- Backlog conversion, funding status and program timing, particularly given Government budget dependence and contract termination rights.
- Exposure to the four large customers and the effect of fixed-price contract costs, inflation and constrained space-qualified suppliers.
- Cash and liquidity after payment of the approximately $9.4 million post-year-end special dividend.