Frequency Electronics, Inc. — Form 10-Q Summary
Business context and reporting period. The filing covers the fiscal third quarter and first nine months ended January 31, 2021; comparisons are with the periods ended January 31, 2020. Frequency Electronics develops and manufactures precision time- and frequency-control products for satellite, U.S. government and defense, telecommunications, and other commercial markets. Its reportable segments are FEI-NY and FEI-Zyfer. Unless indicated otherwise, financial amounts below are in millions.
Financial performance and position
| Metric | Three months ended Jan. 31, 2021 | Three months ended Jan. 31, 2020 | Nine months ended Jan. 31, 2021 | Nine months ended Jan. 31, 2020 |
|---|---|---|---|---|
| Revenue | $11.672 | $9.628 | $38.612 | $31.270 |
| Gross margin | $2.804 (24.0%) | $3.140 (32.6%) | $12.214 (31.6%) | $5.912 (18.9%) |
| Operating loss | $(0.939) | $(1.561) | $(1.057) | $(7.263) |
| Net loss | $(0.800) | $(1.546) | $(0.733) | $(7.046) |
| Basic and diluted loss per share | $(0.09) | $(0.17) | $(0.08) | $(0.78) |
- Cash flow: Nine-month operating cash flow was $9.333, versus cash used of $0.760 in the prior-year period. Investing activities used $0.921; financing activities used $4.965, principally for repayment of the PPP loan. Cash increased by $3.447 to $7.255.
- Liquidity and debt: At January 31, 2021, cash and cash equivalents were $7.255 and marketable securities were $10.480. Working capital was $39.3 and the current ratio was 6.6:1. Current debt was zero; the $4.965 PPP loan and a $3.0 UBS borrowing had both been repaid. Operating lease liabilities totaled $10.407.
- Balance sheet: Total assets were $84.535 and total liabilities were $30.574. Inventories were $20.974, net of reserves of $7.2. Funded backlog was approximately $41, compared with $36 at April 30, 2020.
Changes versus prior comparable periods
- Revenue rose 21.2% in the quarter and 23.5% for the nine-month period. FEI-NY revenue increased 30.1% and 26.5%, respectively; FEI-Zyfer revenue declined 11.0% in the quarter but rose 15.9% year to date.
- Quarterly gross margin fell 10.7% in dollars, and the margin rate declined to 24.0% from 32.6%, despite higher revenue. Management cited engineering cost increases, technical corrections during testing, COVID-related production and booking delays—particularly at Zyfer—and the holiday season.
- Nine-month gross margin improved substantially, with the rate rising to 31.6% from 18.9%. Management attributed the improvement to completion or near-completion of programs that had previously incurred elevated development engineering costs. Contract loss provisions were $0.876 for the nine months, versus $2.4 in the prior-year period.
- Nine-month operating loss narrowed to $1.057 from $7.263, reflecting improved revenue and gross margin and lower R&D expense. Quarterly SG&A declined to $2.454 from $3.619; nine-month SG&A increased to $9.805 from $8.362, mainly due to litigation-related professional fees, partly reimbursed by insurance.
- Satellite revenue increased year over year, while other commercial and industrial revenue declined. For the nine months, satellite and non-space U.S. government/defense revenue increased by approximately $5.3 and $3.6, respectively; other commercial and industrial revenue decreased to $2.2 from $3.9.
Outlook, risks, and unusual matters
- Management said it expects the improving operating trend to continue based on bookings and backlog, but provided no specific numerical earnings or revenue guidance. Approximately 80% of the $41 million funded backlog was expected to be realized within 12 months; management cautioned backlog is not necessarily indicative of future revenue or profit.
- The company said internally generated cash should support planned R&D and believes liquidity is adequate through at least March 12, 2022. It may pursue acquisitions and could use internal or external funding. The board’s share-repurchase authorization is $5 million; approximately $4 million had been used as of January 31, 2021, with no repurchases in the nine-month periods reported.
- COVID-19 caused employee absenteeism, facility cleaning interruptions, vendor delivery delays, production impacts, and customer delays in anticipated orders. As of March 15, 2021, the company reported 14 confirmed employee cases since the outbreak began, including one fatality. Management could not estimate the pandemic’s full financial or operational impact.
- A long-running dispute with former Chief Scientist and director Martin Bloch includes a surviving breach-of-contract claim and deferred-compensation arbitrations. Courts ordered the parties to proceed to arbitration; the company appealed relevant orders. The company said it could not determine the likelihood or potential loss from these matters.
- In February 2021, the company received an OFAC Cautionary Letter following its voluntary disclosure concerning late collections from Morion, a Russian investee connected to Gazprombank. OFAC closed its review without a civil monetary penalty or other enforcement action.
- The company maintained a full valuation allowance against deferred tax assets. Management identified contract cost estimates, revenue recognition, inventory valuation, and income taxes as critical accounting areas. Disclosure controls were assessed as effective at a reasonable assurance level.
Investor verification priorities
- Track whether COVID-related order delays, employee absences, and supplier constraints ease, and whether Zyfer revenue and quarterly gross margins recover.
- Assess backlog conversion, timing of contract awards, and the risk that contract cost estimates or technical issues affect margins and loss provisions.
- Reconcile operating cash generation with working-capital movements and monitor cash, securities, lease obligations, and any renewed borrowing.
- Follow the Bloch litigation and arbitration appeals for developments affecting potential liability, legal costs, or deferred-compensation obligations.
- Review the company’s reliance on government and satellite programs, the reduced contribution from other commercial and industrial sales, and the assumptions underlying its liquidity outlook.