Frequency Electronics, Inc. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended July 31, 2021; balance-sheet comparisons are with April 30, 2021. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted.
Business context
Frequency Electronics designs and manufactures precision time and frequency control products and related systems. Its two reportable segments are FEI-NY, serving satellite, telecommunications and other U.S. government markets, and FEI-Zyfer, serving secure communications and related GPS applications.
Financial performance and position
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Revenue | $12.955 million | $12.951 million |
| Gross margin | $4.062 million; 31.4% | $4.088 million; 31.6% |
| Operating loss | $1.687 million | $0.337 million |
| Net loss | $1.575 million; $0.17 per share | $0.262 million; $0.03 per share |
| Operating cash flow | $(0.828) million | $0.062 million |
- At July 31, cash and cash equivalents were $8.901 million and marketable securities were $9.964 million. Working capital was $40.1 million; the current ratio was 3.6, down from 6.0 at April 30.
- Total assets were $86.564 million and total liabilities were $32.452 million. No outstanding borrowings were reported; the company had available UBS credit tied to its securities holdings. Operating lease liabilities totaled $9.736 million.
- Investing cash outflow was $0.078 million, including $0.504 million of purchases of fixed and other assets. There was no financing cash flow in the quarter. The PPP loan had been repaid in May 2020.
Material changes versus the prior-year quarter
- Revenue was essentially unchanged. FEI-NY revenue rose 3.3% to $10.162 million, while FEI-Zyfer revenue declined 20.0% to $3.136 million. Satellite revenue was $6.741 million; government non-space revenue was $5.490 million.
- Gross margin was broadly stable, but SG&A increased 36.1% to $4.394 million and R&D rose 13.2% to $1.355 million. The larger operating loss reflected higher legal and professional fees, including costs associated with the Bloch dispute, as well as additional engineering costs and continuing COVID-related effects.
- Operating cash flow shifted from $0.062 million provided to $0.828 million used, mainly due to the increased net loss. Cash and cash equivalents decreased by $0.906 million during the quarter.
Outlook, risks and unusual items
- Management reported funded backlog of approximately $37 million at July 31, down from $40 million at April 30; approximately 82% was expected to be realized within 12 months. The company cautions that backlog may change and does not assure future revenue or profit.
- Management said liquidity should be adequate for operating and investment needs through at least September 14, 2022. It plans continued R&D investment and expects internally generated cash to fund those efforts; no specific revenue or earnings guidance was provided.
- COVID-19 caused employee absenteeism, customer order delays and supplier delivery disruptions that affected costs and production schedules. Management said operations had returned to normal as of July 30, 2021, but could not estimate the pandemic’s future effects.
- On August 25, 2021, the company agreed to settle litigation and arbitration with former Chief Scientist Martin Bloch for $6 million, payable by September 24, 2021. The $6 million was accrued at July 31; the settlement produced a net expense of $0.650 million in SG&A and is expected to end further legal expense related to the dispute.
- The company maintains a full valuation allowance against deferred tax assets. It also disclosed a 4.6% investment in privately held Russian company Morion, a subsidiary of Gazprombank, which is subject to U.S. sectoral sanctions; investors should review the filing’s discussion of the investment and related restrictions.
Important facts for investors to verify
- Whether the $6 million Bloch settlement was paid as scheduled and whether related legal costs decline as management anticipated.
- Whether backlog converts to revenue on the expected timetable, particularly given contract award delays and COVID-related risks.
- Whether operating costs, engineering expenses and cash use improve after the quarter’s loss and legal expenses.
- Current liquidity and credit-facility availability, including the impact of the settlement payment and the decline in the current ratio.
- Potential effects of supplier disruptions, contract cost estimates, inventory valuation and the Morion investment’s sanctions-related exposure.