Frequency Electronics, Inc. — Form 10-Q Summary
Business context and period. The filing covers the three months ended July 31, 2020, the first quarter of fiscal 2021, with comparison to the three months ended July 31, 2019. The company develops precision time and frequency products and systems for satellite, U.S. government and defense, telecommunications, and other commercial markets. Its reportable segments are FEI-NY and FEI-Zyfer. Financial statement amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Revenue | $12.951 | $12.554 |
| Gross profit / margin | $4.088 / 31.6% | $3.953 / 31.5% |
| Operating loss | $(0.337) | $(0.780) |
| Pre-tax loss | $(0.253) | $(0.571) |
| Net loss / diluted loss per share | $(0.262) / $(0.03) | $(0.591) / $(0.07) |
| Operating cash flow | $0.062 | $0.153 |
- Revenue mix: FEI-NY revenue was $9.839 million, up 9.2%; FEI-Zyfer revenue was $3.922 million, up 6.0%, before intersegment eliminations. Satellite revenue rose to $6.651 million from $3.895 million; non-space government revenue declined to $5.335 million from $6.744 million; other commercial and industrial revenue fell to $0.965 million from $1.915 million.
- Costs and margins: Gross margin increased modestly, which management attributed primarily to product mix. Selling and administrative expense rose 31.6% to $3.228 million, reflecting higher professional fees, including litigation costs for which the company expects partial insurance reimbursement, and higher insurance costs. R&D expense declined 47.5% to $1.197 million as prior development efforts moved into production; management said it plans to continue R&D investment.
- Cash flow and capital spending: Investing activities provided $0.514 million, including $0.725 million of security redemptions, while purchases of property and other assets were $0.211 million. Financing activities used $1.953 million: the company repaid its $4.965 million PPP loan and drew $3.012 million on its UBS line of credit. Cash declined $1.377 million to $2.431 million.
- Liquidity and debt: At July 31, cash and marketable securities totaled $12.442 million, versus $14.378 million at April 30, 2020. Working capital was $38.9 million and the current ratio was 4.6 to 1. Current debt was $3.012 million, borrowed under a securities-backed UBS facility; the PPP loan had been repaid in full. Operating lease liabilities totaled $10.994 million and are distinct from funded debt.
- Other balance-sheet data: Total assets were $88.944 million and stockholders’ equity was $54.335 million. Inventory was $21.683 million, net of $6.8 million in reserves. The company maintained a full valuation allowance against deferred tax assets.
Changes, outlook, and risks
- Revenue increased 3.2% year over year and operating loss narrowed by $0.443 million. Satellite revenue growth was partly offset by declines in non-space government and commercial/industrial sales. Gross margin rate was nearly flat.
- Management said margins may improve as higher engineering costs on certain programs subside. It also said improvement could continue if certain current bids become contract wins; these wins are not assured. The company expects internally generated cash to fund planned R&D and believes liquidity is adequate through at least September 14, 2021.
- Funded backlog was approximately $38 million at July 31, 2020, compared with $36 million at April 30, 2020; about 81% was expected to be realized over the next 12 months. Backlog may change and is not necessarily indicative of future revenue or profit.
- COVID-19: Manufacturing sites remained open, but vendor delivery delays had negatively affected production. Management could not estimate the pandemic’s fiscal 2021 impact and cautioned that it could adversely affect results, financial position, and liquidity.
- OFAC investigation: After voluntarily disclosing potentially late collections related to Russian investee Morion, the company was notified that OFAC was conducting a civil investigation. The company could not determine whether a liability was probable or estimate any potential penalties, sanctions, or remedial measures; an outcome could be material.
- Litigation and arbitration: Former Chief Scientist and director Martin Bloch’s employment, discrimination, and deferred-compensation claims and related proceedings were pending. The company disputes the claims; it could not assess the probability or possible loss.
- Other risks identified include dependence on government and other key customers, suppliers and workforce, competition, changing product and input costs, and uncertain litigation outcomes. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether satellite-program growth and the company’s anticipated contract wins translate into sustained revenue and improved margins.
- Whether COVID-related supplier delays, workforce effects, or customer disruptions materially affect production, liquidity, or results.
- Developments in the OFAC investigation, including any potential penalties or remedial requirements and related legal costs.
- Outcomes and potential costs of the Bloch litigation and deferred-compensation proceedings.
- Cash generation, use of the UBS credit facility, and conversion of funded backlog into billed and collected revenue.