Frequency Electronics, Inc. — Form 10-Q Summary
Business context and reporting period. This filing covers the fiscal second quarter and first six months ended October 31, 2015 (fiscal year ending April 30, 2016). The company supplies precision time- and frequency-control products and systems through three segments: FEI-NY, Gillam-FEI, and FEI-Zyfer. Amounts below are in millions of dollars except per-share data and percentages.
Financial performance
| Metric | Three months ended Oct. 31, 2015 | Prior year | Six months ended Oct. 31, 2015 | Prior year |
|---|---|---|---|---|
| Revenue | $16.0 | $19.2 | $32.7 | $39.0 |
| Gross profit / margin | $5.2 / 32.6% | $6.7 / 34.7% | $11.0 / 33.6% | $12.3 / 31.7% |
| Operating profit | $0.05 | $1.80 | $0.99 | $2.72 |
| Net income (loss) | $(0.07) | $1.29 | $0.82 | $2.01 |
| Diluted EPS | $(0.01) | $0.15 | $0.09 | $0.23 |
Cash flow and liquidity. Operating activities used $2.9 million in the first six months, compared with $2.5 million used in the prior-year period. Investing activities used $0.8 million; financing activities provided $0.01 million. Cash and equivalents declined $3.1 million to $4.1 million. Marketable securities were $10.2 million, bringing cash and securities to $14.3 million. Working capital was $76.8 million and the current ratio was 11.8:1.
Debt and balance sheet. Long-term debt was $6.0 million, unchanged from April 30, 2015. The company had a credit facility of up to $25 million, with borrowings outstanding under Tranche A; it reported compliance with required covenants at October 31. Total assets were $118.8 million and stockholders’ equity was $93.8 million.
Material changes versus the prior comparable periods
- Revenue declined 17% in the quarter and 16% for the six-month period. FEI-NY revenue fell 18% and 20%, respectively; Gillam-FEI fell 71% and 50%. FEI-Zyfer revenue increased 11% in the quarter and 31% year to date.
- Satellite payload revenue was down more than $5.5 million year to date, chiefly because of delayed new contract awards. Non-space U.S. Government/DOD revenue increased about $2.5 million year to date, supported by additional funding for a FEI-Zyfer secure-GPS communications program.
- Quarterly gross margin declined to 32.6% from 34.7%, reflecting lower volume and product mix. The six-month gross margin rate rose to 33.6% from 31.7%, partly helped by a vendor reimbursement for costs associated with a defective part.
- R&D expense rose 38% in the quarter and 17% year to date as the company accelerated product development. Operating profit fell sharply in both periods. The quarterly tax provision exceeded pretax income, in part because foreign-subsidiary losses generated no tax benefit, contributing to the quarterly net loss.
Outlook, commentary, and risks
- Management expected fiscal 2016 revenue to be lower than fiscal 2015, citing delayed awards on sole-source projects. Satellite payloads remained the dominant business and management’s stated best long-term growth opportunity. It expected non-space Government/DOD revenue, particularly at FEI-Zyfer, to increase with additional program funding.
- Funded backlog was approximately $23 million at October 31, down from $37 million at April 30; about 75% was expected to be realized within 12 months. Backlog includes $1.4 million in cost-plus-fee commitments not yet fully funded. Management noted that unfunded awards and fixed-price contract portions without authorization to proceed are excluded.
- The company expected positive operating cash flow for the rest of fiscal 2016 and stated liquidity was adequate through at least December 15, 2016. Planned fiscal-year capital equipment spending was $3.0–$3.5 million. Internal R&D spending was targeted below 10% of full-year revenue; management said internally generated cash and reserves were adequate to fund development.
- Key sensitivities include customer award and funding delays, contract cost-to-complete estimates and percentage-of-completion accounting, inventory valuation, product mix, vendor and manufacturing costs, and the ability to bill and collect unbilled receivables. Management cited $13.7 million of net costs and estimated earnings in excess of billings.
- Other notable items: the company recorded an approximately $0.4 million life-insurance gain in the first quarter. Marketable securities had $0.6 million of gross unrealized losses at October 31; management considered them temporary. The company said it had no material off-balance-sheet arrangements other than operating leases.
Important facts for investors to verify
- Whether delayed satellite awards convert into funded orders, and how backlog and revenue develop against management’s lower-revenue fiscal 2016 outlook.
- Whether the increase in U.S. Government/DOD work offsets continued weakness in satellite and commercial/network-infrastructure revenue.
- Whether unbilled contract assets and inventory convert to billings, collections, and positive operating cash flow as management expected.
- Whether segment profitability improves, given Gillam-FEI’s operating loss and the steep year-over-year decline in consolidated operating profit.
- Whether the $6.0 million credit-facility balance, covenant compliance, tax rate, and planned capital spending remain manageable.