Frequency Electronics, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2016, the three months ended July 31, 2015. Comparative period is the three months ended July 31, 2014. Amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Revenue | $16.68 | $19.74 | Down 16% |
| Gross profit / margin | $5.77 / 34.6% | $5.67 / 28.7% | Profit up 2%; margin +5.9 points |
| Operating profit / margin | $0.94 / 5.6% | $0.93 / 4.7% | Up 1% |
| Net income | $0.89 | $0.72 | Up 24% |
| Diluted EPS | $0.10 | $0.08 | Up $0.02 |
| Operating cash flow | $(1.83) | $(5.64) | Cash use decreased |
| Capital expenditures | $0.61 | $1.15 | Down |
Revenue declined primarily because satellite programs were completed and FEI-Asia had less third-party contract-manufacturing revenue. Gross margin improved on favorable contract and product mix and a vendor reimbursement related to a defective part; management said the reimbursement improved the consolidated gross-margin rate by approximately 2 percentage points. Operating profit was broadly flat despite lower revenue. Net income also benefited from approximately $0.4 million of life-insurance proceeds recognized as other income. The effective tax rate was 44.0%, versus 45.1%.
Liquidity, debt and balance sheet
- At July 31, 2015, cash and cash equivalents were $5.92 million and marketable securities were $10.36 million. Working capital was $76.6 million and the current ratio was 10.8 to 1.
- Total assets were $119.1 million; total liabilities were $25.6 million. Outstanding long-term debt was $6.0 million, unchanged from April 30, 2015.
- The credit facility permits borrowings up to $25 million, subject to tranche limits and borrowing conditions; the $6 million outstanding was under Tranche A. The company met its required debt and interest-coverage covenants at quarter-end. Facility maturity is June 5, 2018.
- Operating cash use reflected increases in receivables, unbilled contract assets and inventory, together with lower accounts payable and accrued liabilities. Management expected to collect a high percentage of unbilled receivables and generate positive operating cash flow for the remainder of fiscal 2016.
Segments and material period changes
| Segment | Revenue | Operating profit (loss) |
|---|---|---|
| FEI-NY | $13.49 million, down 22% | $1.09 million, versus $2.08 million |
| Gillam-FEI | $1.41 million, down 6% | $(0.22) million, versus $(0.58) million |
| FEI-Zyfer | $2.10 million, up 88% | $0.12 million, versus $(0.51) million |
Satellite programs accounted for more than 55% of consolidated revenue and remained the largest business area. Non-space U.S. Government/Department of Defense revenue more than doubled year over year and represented approximately 20% of revenue. Network infrastructure and other industrial revenue declined approximately 30%, mainly because of lower third-party contract-manufacturing activity at FEI-Asia. The company recognized $9.3 million of percentage-of-completion contract revenue, compared with $12.9 million in the prior-year quarter.
Outlook, risks and unusual items
- Management expected fiscal 2016 revenue to be comparable to fiscal 2015, based on current backlog and anticipated project awards. Satellite payloads were expected to remain dominant; management also anticipated growth in non-space U.S. Government/DoD business, particularly at FEI-Zyfer.
- Backlog was approximately $27 million at July 31, down from $37 million at April 30; about 75% was expected to be realized within 12 months. Approximately $3.5 million was under cost-plus-fee contracts for which the company had not received full funding.
- Management planned $3 million to $4 million of fiscal 2016 capital spending and internal R&D spending below 10% of revenue. It stated liquidity was adequate to meet operating and investment needs through at least September 14, 2016.
- Key exposures include dependence on satellite business, contract awards and customer funding; competition and technology changes; third-party suppliers and costs; and estimates used for long-term contract revenue, costs to complete and inventory valuation. The company cautioned that interim results are not necessarily indicative of full-year results.
- Marketable securities had $0.36 million of gross unrealized losses at quarter-end. Management did not consider the losses other-than-temporary and stated it could hold the securities for potential recovery or maturity.
- A Morion agreement includes a further $1 million license payment contingent on State Department approval of removal of certain provisions. The filing says the department approved the technology transfer; the remaining payment condition is described as pending.
Important facts for investors to verify
- Whether satellite program completions and the reduced FEI-Asia contract-manufacturing activity continue to pressure revenue, and whether DoD growth offsets those declines.
- Backlog conversion, including timing and funding of the approximately $3.5 million in partially funded cost-plus-fee contracts.
- Collection of unbilled contract assets and inventory management, given negative operating cash flow in the quarter.
- How much of the gross-margin improvement is recurring versus attributable to the vendor reimbursement and favorable quarterly mix.
- Timing and collectability of the contingent $1 million Morion license payment, and the company’s ability to meet planned capital and development spending while maintaining liquidity.