Frequency Electronics, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2015, compared with fiscal 2014. The filing is an annual report, not a calendar-year 2014 fourth-quarter report.
Business context
The company designs and manufactures precision time- and frequency-control products for satellite payloads, U.S. government and defense systems, telecommunications networks, and industrial markets. Its three reportable segments are FEI-NY, Gillam-FEI, and FEI-Zyfer. Satellite programs generated more than 60% of consolidated revenue in fiscal 2015. U.S. government end-use sales represented approximately 47% of revenue, down from 54% in fiscal 2014.
Key financial metrics
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $76.6 million | $71.6 million | Up 7% |
| Gross profit / margin | $23.5 million / 30.8% | $24.8 million / 34.6% | Margin down 3.8 percentage points |
| Operating profit / margin | $3.7 million / 4.8% | $4.9 million / 6.8% | Operating profit down 25% |
| Net income | $2.8 million | $4.0 million | Down 30% |
| Diluted EPS | $0.32 | $0.46 | Down $0.14 |
| Operating cash flow | $1.9 million | $3.6 million | Down $1.8 million |
| Capital expenditures | $4.2 million | $5.4 million | Down $1.2 million |
Cash and cash equivalents were $7.2 million and marketable securities were $11.2 million at year-end, totaling $18.4 million. Working capital was $75.2 million and the current ratio was 10.0, versus 9.1 a year earlier. Long-term debt was $6.0 million, down from $10.1 million; the company reported compliance with its credit-facility covenants. Stockholders’ equity was $91.8 million. No dividends were declared or paid, and no shares were repurchased during the year.
Material changes and segment performance
- FEI-NY revenue increased 11% to $61.9 million; FEI-Zyfer revenue increased 15% to $9.2 million. Gillam-FEI revenue fell 20% to $8.0 million.
- FEI-NY operating profit declined to $4.8 million from $6.4 million. FEI-Zyfer returned to operating profit of $1.0 million from a $0.6 million loss. Gillam-FEI’s operating loss widened to $1.7 million from $0.5 million.
- Gross margin fell despite revenue growth, primarily because of product mix, higher contract costs, engineering and production-capacity costs, and inventory charges. Inventory write-downs at subsidiaries totaled approximately $0.8 million. On a satellite program with an aggregate contract value of about $27 million, process-installation costs increased expected costs by about $2 million; the fiscal-year gross-margin loss on the related contracts was $0.8 million.
- Operating cash flow declined partly because of higher accounts receivable and lower accrued expenses and other liabilities. Investing cash flow was positive $1.2 million, including net proceeds from marketable-security transactions, while financing activities used $3.9 million, largely reflecting debt repayments.
- Backlog declined to approximately $37 million from $48 million. About 75% was expected to be filled in fiscal 2016; approximately $2.9 million consisted of cost-plus-fee commitments not yet fully funded.
Outlook, risks, and other notable items
- Management expected fiscal 2016 revenue to be comparable to fiscal 2015, with government/defense revenue increasing and commercial revenue decreasing. It expected positive operating cash flow.
- Management anticipated internal R&D spending above fiscal 2015’s $5.7 million but below 10% of revenue, and fiscal 2016 capital expenditures of $3.0–$4.0 million. It stated that available cash and internally generated funds were adequate for planned investment and operating needs through at least April 30, 2016.
- Risks include dependence on major customers and concentrated satellite programs, possible U.S. defense-budget delays or reductions, fixed-price contract cost overruns, backlog cancellations or funding delays, competition, foreign-exchange movements, and the need to realize inventory and contract estimates. Three FEI-NY customers accounted for 53% of that segment’s sales in fiscal 2015; the filing says loss of a major customer could materially harm the business.
- Revenue and contract profitability depend on estimates of costs to complete; the company recorded approximately $0.4 million of anticipated contract losses at year-end, versus none in fiscal 2014. Inventory valuation is also identified as a critical accounting estimate.
- Investment income included $0.6 million of realized marketable-security gains. Fiscal 2014 included a $0.7 million gain on equipment sold to Morion, making the year-over-year comparison of other income less recurring.
- The company had no material pending legal proceedings beyond routine litigation. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements but did not attest to internal control.
Important facts for investors to verify
- Whether backlog converts to revenue as expected, including the funding status of the $2.9 million in cost-plus-fee commitments and the timing or cancellation risk of orders.
- Whether satellite-program production efficiencies improve margins after fiscal 2015’s cost overruns and capacity investments.
- Whether the Gillam-FEI operating loss and inventory-conversion costs improve, and whether FEI-Zyfer sustains its return to profitability.
- Customer concentration, government-budget exposure, and the effect of foreign-exchange changes on reported results.
- Cash conversion, receivable collections, inventory quality, and continued compliance with the $25 million credit facility and its covenants.
- The potential effect of the forthcoming revenue-recognition standard; the filing said the company was still assessing its impact.