Frequency Electronics(FEIM) - 2020 Q1 - Quarterly Report

Part I. Financial Information This section presents the Company's unaudited condensed consolidated financial statements and management's analysis Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Frequency Electronics, Inc. and its subsidiaries, including balance sheets, statements of operations and comprehensive loss, cash flows, and changes in stockholders' equity, along with detailed notes explaining accounting policies and specific financial line items Condensed Consolidated Balance Sheets This table details the Company's financial position, including assets, liabilities, and stockholders' equity | Metric | July 31, 2019 (in thousands) | April 30, 2019 (in thousands) | | :--------------------------- | :--------------------------- | :---------------------------- | | Total Current Assets | $51,537 | $52,699 | | Total Assets | $95,164 | $86,771 | | Total Current Liabilities | $6,544 | $5,837 | | Total Liabilities | $32,328 | $23,682 | | Total Stockholders' Equity | $62,836 | $63,089 | Condensed Consolidated Statements of Operations and Comprehensive Loss This table outlines the Company's revenues, expenses, and net loss or income over specified periods | Metric | Three Months Ended July 31, 2019 (in thousands) | Three Months Ended July 31, 2018 (in thousands) | | :----------------------------------- | :---------------------------------------------- | :---------------------------------------------- | | Revenues | $12,554 | $11,011 | | Gross Margin | $3,953 | $4,274 | | Operating (Loss) Income | $(780) | $85 | | Net (Loss) Income | $(591) | $31 | | Basic Net Loss Per Common Share | $(0.07) | $0.00 | | Diluted Net Loss Per Common Share | $(0.07) | $0.00 | | Comprehensive Loss | $(457) | $(13) | Condensed Consolidated Statements of Cash Flows This table details cash flows from operating, investing, and financing activities | Metric | Three Months Ended July 31, 2019 (in thousands) | Three Months Ended July 31, 2018 (in thousands) | | :----------------------------------------- | :---------------------------------------------- | :---------------------------------------------- | | Net Cash Provided by (Used in) Operating Activities | $153 | $(3,561) | | Net Cash Used in Investing Activities | $(1,597) | $(1,524) | | Net Cash Provided by Financing Activities | $0 | $0 | | Net Decrease in Cash and Cash Equivalents | $(1,444) | $(5,248) | | Cash and Cash Equivalents at End of Period | $2,239 | $2,621 | Condensed Consolidated Statements of Changes in Stockholders' Equity This table illustrates changes in the Company's stockholders' equity components | Metric | July 31, 2019 (in thousands) | April 30, 2019 (in thousands) | | :----------------------------------- | :--------------------------- | :---------------------------- | | Common Stock (Amount) | $9,164 | $9,164 | | Additional Paid-in Capital | $56,796 | $56,831 | | Accumulated Deficit | $(2,702) | $(2,111) | | Treasury Stock (at cost) | $(602) | $(841) | | Accumulated Other Comprehensive Income | $180 | $46 | | Total Stockholders' Equity | $62,836 | $63,089 | Notes to Condensed Consolidated Financial Statements These notes provide additional detail and context for the condensed consolidated financial statements, covering significant accounting policies, earnings per share calculations, contract revenue recognition, treasury stock activities, inventory valuation, lease accounting under ASU 2016-02, segment information, investment details, fair value measurements, and recent and newly adopted accounting pronouncements NOTE A – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Interim financial statements are unaudited, prepared under U.S. GAAP, and should be read with the annual report - The interim financial statements are unaudited and include normal recurring adjustments, prepared in accordance with U.S. GAAP, but with condensed disclosures. They should be read in conjunction with the Annual Report on Form 10-K for the year ended April 30, 2019[21] NOTE B – EARNINGS PER SHARE This note details basic and diluted earnings per share calculations, including dilutive securities | Metric | Three Months Ended July 31, 2019 | Three Months Ended July 31, 2018 | | :------------------------------- | :------------------------------- | :------------------------------- | | Basic Weighted Average Shares Outstanding | 9,001,324 | 8,876,416 | | Diluted Weighted Average Shares Outstanding | 9,001,324 | 8,990,471 | - For the three months ended July 31, 2019, dilutive securities (179,000 options) were excluded from diluted EPS calculation because their inclusion would be antidilutive due to the net loss for the period[22] NOTE C – COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS, NET This note explains revenue recognition for percentage of completion contracts and related net assets | Metric | July 31, 2019 (in thousands) | April 30, 2019 (in thousands) | | :----------------------------------------- | :--------------------------- | :---------------------------- | | Costs and Estimated Earnings in Excess of Billings | $9,464 | $8,278 | | Billings in Excess of Costs and Estimated Earnings | $(2,260) | $(1,608) | | Net Asset | $7,204 | $6,670 | - Revenue recognized under percentage of completion (POC) contracts was approximately $11.5 million for the three months ended July 31, 2019, compared to $9.3 million in the prior year. Contract losses of approximately $314,000 were recorded for the three months ended July 31, 2019[23] NOTE D – TREASURY STOCK TRANSACTIONS This note describes treasury stock activities, including contributions to employee plans - During the three months ended July 31, 2019, the Company contributed 10,906 shares of common stock held in treasury to its 401(k) profit-sharing plan, as part of its discretionary match[24] NOTE E – INVENTORIES This note provides a breakdown of inventory categories and associated valuation reserves | Inventory Category | July 31, 2019 (in thousands) | April 30, 2019 (in thousands) | | :-------------------------- | :--------------------------- | :---------------------------- | | Raw Materials and Component Parts | $15,364 | $11,600 | | Work in Progress | $6,445 | $8,896 | | Finished Goods | $1,392 | $2,860 | | Total Inventories, Net | $23,201 | $23,356 | - Inventories are reported net of reserves of $7.2 million at July 31, 2019, and $6.6 million at April 30, 2019. All inventory was located in the United States[27] NOTE F – RIGHT-OF-USE ASSETS AND LEASE LIABILITIES This note details the adoption of new lease accounting standards and recognition of ROU assets and liabilities - Effective May 1, 2019, the Company adopted ASU 2016-02, recognizing $12.1 million in lease liabilities and corresponding ROU assets for operating leases on the balance sheet[29][59] | Lease Metric | July 31, 2019 (in thousands) | | :--------------------------------- | :--------------------------- | | Operating Lease ROU Assets | $11,840 | | Current Operating Lease Liabilities | $1,883 | | Long-Term Operating Lease Liabilities | $10,193 | | Total Lease Liabilities | $12,076 | - Total operating lease expense for the three months ended July 31, 2019, was $504,000, primarily included in cost of revenues. The weighted-average remaining lease term was 8.9 years, with a weighted average discount rate of 6.16%[29][34] NOTE G – SEGMENT INFORMATION This note presents financial data for the Company's reportable segments, including revenues and operating profit - The Company operates in two reportable segments based on geographic location: FEI-NY (New York) and FEI-Zyfer (California)[35][37] | Segment Performance (Three Months Ended July 31) | 2019 (in thousands) | 2018 (in thousands) | | :----------------------------------------------- | :------------------ | :------------------ | | FEI-NY Revenues | $9,010 | $8,577 | | FEI-Zyfer Revenues | $3,701 | $2,561 | | Consolidated Revenues | $12,554 | $11,011 | | FEI-NY Operating Profit | $(1,232) | $(215) | | FEI-Zyfer Operating Profit | $517 | $386 | | Consolidated Operating (Loss) Profit | $(780) | $85 | | Revenue by Product Line (Three Months Ended July 31) | 2019 (in thousands) | 2018 (in thousands) | | :--------------------------------------------------- | :------------------ | :------------------ | | Satellite Revenue | $3,895 | $5,534 | | Government Non-Space Revenue | $6,744 | $4,781 | | Other Commercial & Industrial Revenue | $1,915 | $696 | | Consolidated Revenues | $12,554 | $11,011 | NOTE H – INVESTMENT IN MORION, INC. This note describes the investment in Morion, Inc., related transactions, and regulatory considerations - The Company holds a 4.6% cost-basis investment in Morion, Inc., a privately-held Russian company[45] | Transaction with Morion (Three Months Ended July 31) | 2019 (approx.) | 2018 (approx.) | | :--------------------------------------------------- | :------------- | :------------- | | Product acquired from Morion | $245,000 | $68,000 | | Product/training services sold to Morion | $47,000 | $2,000 | | Dividend received from Morion | $125,000 | N/A | - Morion's parent company, Gazprombank, became subject to U.S. Department of Treasury financing prohibitions in July 2014[46] NOTE I – FAIR VALUE OF FINANCIAL INSTRUMENTS This note outlines fair value measurement of financial instruments, primarily marketable securities | Fixed Income Securities | Cost (in thousands) | Gross Unrealized Gains (in thousands) | Gross Unrealized Losses (in thousands) | Fair Market Value (in thousands) | | :---------------------- | :------------------ | :------------------------------------ | :------------------------------------- | :------------------------------- | | July 31, 2019 | N/A | $182 | $(2) | $9,016 | | April 30, 2019 | N/A | $71 | $(24) | $8,199 | - All marketable securities are valued on a Level 1 basis within the fair value hierarchy, indicating unadjusted quoted prices in active markets. The Company does not believe unrealized losses at July 31, 2019, were other-than-temporary[47][54] - During the three months ended July 31, 2019, the Company sold or redeemed approximately $750,000 of available-for-sale securities, realizing gains of approximately $1,000[48] NOTE J – RECENT ACCOUNTING PRONOUNCEMENTS This note discusses the Company's evaluation and expected impact of recently issued accounting standards - The Company is evaluating ASU 2018-13 (Fair Value Measurement) and ASU 2016-13 (Credit Losses), both effective for fiscal years beginning after December 15, 2019 (fiscal year 2021), and expects to determine their effects[55][57] - The Company will not early adopt ASU 2017-04 (Goodwill Impairment), effective for periods beginning after December 15, 2019, and expects it to have an immaterial effect[56] Newly Adopted Accounting Standards This section details the adoption of ASU No. 2016-02 Leases (Topic 842) - In the first quarter of fiscal 2020, the Company adopted ASU No. 2016-02 Leases (Topic 842), recognizing $12.1 million in lease liabilities and corresponding ROU assets. A prospective application was elected, and prior periods remain under Topic 840[59] NOTE K – CREDIT FACILITY This note provides information on the Company's available credit facility and its current utilization - As of July 31, 2019, the Company had an available credit facility with variable terms based on securities holdings, but no borrowings had been made[60] NOTE L – VALUATION ALLOWANCE ON DEFERRED TAX ASSETS This note explains the valuation allowance against deferred tax assets due to realization uncertainty - The Company maintained a full valuation allowance against its deferred tax assets as of July 31, 2019, and April 30, 2019, due to the assessment that it is more likely than not that these assets will not be realized[62] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations, including critical accounting policies, revenue recognition, cost management, inventory valuation, marketable securities, and a detailed analysis of operating results, liquidity, and capital resources for the three months ended July 31, 2019, compared to the prior year Critical Accounting Policies and Estimates This section highlights the Company's most significant accounting policies and estimates - The most critical accounting policies are revenue and cost recognition on production contracts, income taxes, and inventory valuation, all requiring significant estimates[66] - Significant accounting policies remained unchanged during the three months ended July 31, 2019, except for those impacted by the newly adopted lease accounting standard[66] Revenue Recognition This section describes the Company's methods for recognizing revenue from contracts - Revenue is recognized when performance obligations are satisfied, transferring goods or services to the customer. This occurs either as units with general specifications (Passage of Title - POT) or units with specific customer/government specifications (Percentage of Completion - POC)[67] - For larger, long-term fixed-price contracts (e.g., satellite programs), revenue is recognized using the cost-to-cost method under POC, with estimated contract costs reviewed monthly[68] - For production-type orders, revenue is recorded upon unit delivery. For FEI-Zyfer and smaller FEI-NY contracts, sales are recognized upon product shipment or service performance, unless customer acceptance is required[71][72] Costs and Expenses This section details contract cost components and accounting for selling, general, and administrative expenses - Contract costs include direct material, labor, manufacturing overhead, and other direct performance-related costs. Selling, general, and administrative costs are expensed as incurred, except for sales commissions with amortization periods over one year[73] Inventory This section explains inventory valuation policies, including write-downs for obsolete items - Inventoried costs include amounts for long production cycle contracts. Write-downs are established for slow-moving, obsolete items, and costs on programs where production orders are not probable, based on management's experience and expectations[74] Marketable Securities This section describes marketable securities, their classification, and valuation methodology - All marketable securities are Level 1, trading on public markets with readily available prices. Investments are primarily in commercial paper of financially sound corporations or U.S. Government agency bonds/notes[75] - The Company believes its financial strength allows it to hold securities until recovery or maturity, deeming interim unrealized gains or losses as temporary[75] Results of Operations The Company experienced increased revenues but a net loss for the three months ended July 31, 2019, primarily due to lower gross margin percentage and higher research and development costs, despite improvements in operating activities cash flow Revenues This section provides an overview of revenues | Segment Revenues (Three Months Ended July 31) | 2019 (in thousands) | 2018 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------------------- | :------------------ | :------------------ | :-------------------- | :--------- | | FEI-NY | $9,010 | $8,577 | $433 | 5.1% | | FEI-Zyfer | $3,701 | $2,561 | $1,140 | 44.5% | | Intersegment revenues | $(157) | $(127) | $(30) | 23.6% | | Total Consolidated Revenues | $12,554 | $11,011 | $1,543 | 14.0% | - Revenues from non-space U.S. Government/DOD customers increased by $2.0 million, accounting for 54% of consolidated revenues (up from 43%). Satellite program revenues decreased by $1.6 million, representing 31% of consolidated revenues (down from 50%). Other commercial and industrial revenues increased to $1.9 million (15% of consolidated revenues) from $700,000 (7%)[78] Gross Margin This section provides an overview of gross margin | Metric (Three Months Ended July 31) | 2019 (in thousands) | 2018 (in thousands) | Change (in thousands) | Change (%) | | :---------------------------------- | :------------------ | :------------------ | :-------------------- | :--------- | | Gross Margin | $3,953 | $4,274 | $(321) | (7.5%) | | GM Rate | 31.5% | 38.8% | | | - The decrease in gross margin and GM Rate was primarily due to higher engineering costs incurred in several new programs involving state-of-the-art technology[80] Selling and Administrative Expenses This section provides an overview of selling and administrative expenses | Metric (Three Months Ended July 31) | 2019 (in thousands) | 2018 (in thousands) | Change (in thousands) | Change (%) | | :---------------------------------- | :------------------ | :------------------ | :-------------------- | :--------- | | Selling and Administrative Expenses | $2,453 | $2,540 | $(87) | (3.4%) | - SG&A expenses decreased by 3.4% and represented approximately 20% of consolidated revenues in 2019, down from 23% in 2018. No single account or expense type significantly contributed to the change[81] Research and Development Expense This section provides an overview of research and development expense | Metric (Three Months Ended July 31) | 2019 (in thousands) | 2018 (in thousands) | Change (in thousands) | Change (%) | | :---------------------------------- | :------------------ | :------------------ | :-------------------- | :--------- | | Research and Development Expense | $2,280 | $1,649 | $631 | 38.3% | - R&D expenditures increased by 38.3% and represented 18% of sales in 2019, up from 15% in 2018, reflecting investments in leading-edge time and frequency technology for future competitiveness and new opportunities[82][84] Operating (Loss) Income This section provides an overview of operating (loss) income | Metric (Three Months Ended July 31) | 2019 (in thousands) | 2018 (in thousands) | Change (in thousands) | | :---------------------------------- | :------------------ | :------------------ | :-------------------- | | Operating (Loss) Income | $(780) | $85 | $(865) | - The Company reported an operating loss of $780,000 in 2019, a significant decrease from an operating income of $85,000 in 2018, primarily due to lower gross margin percentage and increased R&D costs, despite improved revenues[85] Other Income (Expense) This section provides an overview of other income (expense) | Metric (Three Months Ended July 31) | 2019 (in thousands) | 2018 (in thousands) | Change (in thousands) | | :---------------------------------- | :------------------ | :------------------ | :-------------------- | | Investment Income | $177 | $45 | $132 | | Interest Expense | $(24) | $(18) | $(6) | | Other Income (Expense), Net | $56 | $(74) | $130 | | Total Other Income (Expense) | $209 | $(47) | $256 | - Investment income increased significantly, including a $125,000 dividend from Morion. Other income also included a $50,000 gain from the sale of a fixed asset[86] Income Tax Provision This section provides an overview of income tax provision | Metric (Three Months Ended July 31) | 2019 (in thousands) | 2018 (in thousands) | Change (in thousands) | | :---------------------------------- | :------------------ | :------------------ | :-------------------- | | Income Tax Provision | $20 | $7 | $13 | | Effective Tax Rate on Pre-tax Book Income | (3.5)% | 18.4% | | - The effective tax rate for Q1 FY2020 was (3.5)% on a pretax loss, differing from the U.S. statutory rate primarily due to a discrete income tax provision for unrecognized tax benefits and unbenefited domestic losses. The estimated annual effective tax rate for FY2020 is 0%[87][89] Liquidity and Capital Resources This section analyzes the Company's working capital, cash flows, and ability to meet financial obligations - The Company maintains a strong working capital position of $44.9 million at July 31, 2019, with a current ratio of 8.5 to 1. Cash, cash equivalents, and marketable securities totaled $11.3 million[92] - Cash provided by operating activities was $153,000 for the three months ended July 31, 2019, a significant improvement from $3.6 million cash used in the prior year, despite increased accounts receivable[93] - Net cash used in investing activities was $1.6 million, including $912,000 for property, plant, and equipment. The Company has repurchased $4 million of common stock out of a $5 million authorization, with no repurchases in the current quarter[94][96] - Consolidated funded backlog was approximately $35 million at July 31, 2019, with 85% expected to be realized in the next twelve months. The Company believes its liquidity is adequate for the foreseeable future[98][99] Off-Balance Sheet Arrangements This section discloses any material off-balance sheet arrangements other than operating leases - The Company has no material off-balance sheet arrangements other than operating leases[100] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there are no applicable quantitative and qualitative disclosures about market risk for the Company - Not applicable[103] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of July 31, 2019. There were no material changes in internal control over financial reporting during the period - The Company's disclosure controls and procedures were effective as of July 31, 2019, ensuring timely and accurate reporting[104] - No material changes in internal control over financial reporting occurred during the three months ended July 31, 2019[106] Part II. Other Information This section includes required exhibits and signatures for the Form 10-Q filing Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO under Sections 302 and 906 of the Sarbanes-Oxley Act, and XBRL formatted financial statements - Includes certifications by CEO and CFO (Rule 13a-14(a) or 15d-14(a) and 18 U.S.C. Section 1350) and XBRL formatted financial statements[109] Signatures This section contains the required signatures for the Form 10-Q, confirming its submission on behalf of Frequency Electronics, Inc - The report was signed by Steven L. Bernstein, Chief Financial Officer, Secretary, and Treasurer, on September 16, 2019[112]