Frequency Electronics, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended January 31, 2022, compared with the same periods ended January 31, 2021. The filing is dated March 15, 2022. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Business context and results
The company develops and manufactures precision time and frequency control products and systems for satellite, government and commercial markets. Its reportable segments are FEI-NY and FEI-Zyfer. Most revenue is recognized over time using the cost-to-cost percentage-of-completion method.
| Metric | Three months ended Jan. 31, 2022 | Prior-year quarter | Nine months ended Jan. 31, 2022 | Prior-year period |
|---|---|---|---|---|
| Revenue | $12.245 million | $11.672 million | $38.136 million | $38.612 million |
| Gross margin | $3.240 million; 26.5% | $2.804 million; 24.0% | $11.392 million; 29.9% | $12.214 million; 31.6% |
| Operating loss | $0.721 million | $0.939 million | $2.106 million | $1.057 million |
| Net loss | $0.735 million | $0.800 million | $1.813 million | $0.733 million |
| Loss per share, basic and diluted | $0.08 | $0.09 | $0.20 | $0.08 |
Quarterly revenue increased 4.9%, while nine-month revenue declined 1.2%. FEI-NY revenue rose 15.3% in the quarter and 3.3% over nine months; FEI-Zyfer revenue fell 37.2% and 25.3%, respectively. Satellite revenue was $7.525 million for the quarter and $20.868 million for nine months. Nine-month operating loss widened as lower revenue and gross margin outweighed lower selling and administrative expenses.
Cash flow, liquidity and obligations
- Operating cash flow was $3.970 million for the nine months, down from $9.333 million. Investing activities used $1.641 million, principally including $1.534 million for fixed and other assets; financing cash flow was zero.
- Cash and cash equivalents were $12.136 million and marketable securities were $10.107 million at January 31, 2022, totaling $22.243 million. Working capital was approximately $40.0 million and the current ratio was 4.8:1.
- Total assets were $81.216 million; stockholders’ equity was $53.847 million. The company reported no financing cash flow in the current nine-month period and disclosed an available UBS credit facility, but the filing does not provide a clear amount drawn or available at January 31, 2022. The PPP loan had been repaid in May 2020.
- Operating lease liabilities totaled $9.447 million, including $1.739 million current. Funded backlog was approximately $42 million, up from $40 million at April 30, 2021; about 82% was expected to be realized within twelve months.
Material changes, outlook and risks
- Quarterly gross margin improved year over year, which management attributed partly to differences in engineering costs between development- and production-phase programs. Nine-month gross margin declined amid difficult development work and supply-chain-related costs, including unavailable or defective parts that prompted redesigns and re-procurement.
- Management reported COVID-19-related employee absenteeism, vendor delays and customer administrative delays in anticipated new contracts. It said the full future effects on operations, liquidity and results could not be estimated.
- The company settled litigation with former Chief Scientist Martin B. Bloch for $6 million, paid in September 2021. It had accrued $6 million by July 31, 2021; the settlement resulted in a net expense of $650,000, recorded in selling and administrative expense in the quarter ended July 31, 2021.
- Research and development spending was $3.861 million for nine months, up 11.4%, supporting development of atomic clocks and low-noise oscillators. Management said it planned to continue R&D investment and expected internally generated cash to fund these efforts.
- No specific revenue or earnings guidance was provided. Management stated that liquidity was adequate to meet operating and investment needs through at least March 17, 2023.
- The company holds a 4.6% investment in Russian supplier Morion, carried at approximately $800,000, and purchased $215,000 of product from Morion during the nine months. The filing describes sanctions applicable to Morion’s parent, Gazprombank, including restrictions on certain transactions and new extensions of credit; it does not quantify any resulting financial impact.
- Other disclosed risks include continued pandemic effects, supply availability and quality, contract cost-estimation risk, customer concentration and acceptance, competition, technology changes, litigation outcomes and broader economic conditions. Management maintained a full valuation allowance against deferred tax assets.
Important facts for investors to verify
- Whether FEI-Zyfer revenue and performance recover, and whether the $42 million funded backlog converts to revenue as expected.
- Whether supply-chain delays, redesigns and higher costs continue to weigh on gross margin and contract profitability.
- Cash conversion and working-capital trends, including the shift from a net contract asset at April 30, 2021 to a $3.115 million net contract liability at January 31, 2022.
- The status and practical impact of sanctions-related restrictions on the Morion relationship and the company’s access to alternate suppliers.
- Future cash requirements for R&D, capital investment, leases and any acquisitions; the filing provides no clear current drawn balance for the UBS facility.