Frequency Electronics, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended April 30, 2021, compared with fiscal 2020. Although the request metadata says “2020 Q4,” this filing reports full-year FY2021 results, not a standalone quarter.
Business context
Frequency Electronics designs and manufactures precision time and frequency products for satellite payloads, U.S. Government and defense applications, secure communications, and electronic warfare. Its reportable segments are FEI-NY and FEI-Zyfer. About 91% of FY2021 sales were under U.S. Government contracts or subcontracts for government end-use; foreign sales were about 3%.
Financial results and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $54.254 million | $41.507 million |
| Gross profit / margin | $16.921 million / 31.2% | $5.748 million / 13.9% |
| Operating income (loss) | $(0.958) million | $(10.922) million |
| Net income (loss) | $0.680 million | $(10.026) million |
| Diluted EPS | $0.07 | $(1.10) |
| Cash from (used in) operations | $12.157 million | $(1.407) million |
- Revenue rose 30.7%. Satellite revenue increased 32% to $26.980 million; government non-space revenue rose to $24.775 million; other commercial and industrial revenue fell to $2.499 million from $4.146 million.
- Management attributed the much stronger gross margin primarily to completion or near-completion of programs that had incurred elevated engineering costs during development. FEI-NY reported an operating loss of $1.067 million; FEI-Zyfer reported operating income of $0.655 million.
- Cash, cash equivalents and marketable securities totaled $20.120 million at year-end. Working capital was $40.6 million and the current ratio was 6.0, versus $37.5 million and 3.7 a year earlier.
- Total assets were $86.016 million and stockholders’ equity was $55.409 million. The company had no current debt at year-end after repaying its $4.965 million PPP loan in May 2020. Operating lease liabilities totaled $10.081 million; deferred compensation liabilities were $14.017 million.
- Backlog was approximately $40 million, up from $36 million; about 81% was expected to be filled in FY2022. No FY2022 revenue or earnings guidance was provided.
Changes, outlook and key considerations
- The turnaround in operating performance reflected substantially higher revenue and gross profit. FY2021 net income also included $1.103 million of other income, including collection of a $1 million note receivable related to the sale of Gilliam; FY2020 included a provision on that note.
- The FY2021 income tax benefit was $0.204 million, compared with $1.742 million in FY2020, when the CARES Act contributed to the benefit. The company maintained a full valuation allowance against its U.S. net deferred tax assets.
- Management said cash and marketable securities plus operating cash flows should cover normal operating needs for the next 12 months. It expects to continue investing in product development; FY2022 R&D allocation will depend on market conditions and opportunities.
- COVID-19 caused employee absences, supplier delivery delays and higher procurement costs, and delayed some anticipated customer orders. Management said the full future effect on results, liquidity and operations could not be estimated.
- Customer concentration is material: Northrop Grumman and Lockheed Martin each exceeded 10% of FY2021 consolidated revenue. Government appropriations, customer priorities, fixed-price contract cost overruns, supply disruptions and competition can affect results. Most revenue is recognized over time using cost-to-cost estimates; the auditor identified this as a critical audit matter.
- Former Chief Scientist Martin Bloch’s employment-related litigation and deferred-compensation arbitrations remained unresolved. The company said it could not determine the likelihood or possible loss. Separately, OFAC completed its review of the company’s disclosure concerning delayed Morion receivable collections and issued a cautionary letter instead of imposing a civil monetary penalty or other enforcement action.
- The company reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation. The financial statements received an unqualified audit opinion.
Most important facts for investors to verify
- Whether FY2022 backlog converts to revenue on schedule and at sustainable gross margins, given the company’s cost-to-cost estimates and fixed-price contract exposure.
- Whether the FY2021 cash generation and return to profitability continue, and how working capital, inventory and contract billings evolve.
- Revenue exposure to major customers and U.S. Government funding or program delays, as well as continued COVID-related supplier and workforce impacts.
- Developments and any potential financial exposure from the Bloch litigation and arbitrations; the filing provides no clear estimate of possible loss.
- Availability and realizability of tax attributes, including the full valuation allowance on U.S. deferred tax assets and the $10.0 million federal capital-loss carryforward that expires in FY2023.