UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period ended OctoberJuly 31, 2017
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from __________ to __________
Commission File No. 1-8061
FREQUENCY ELECTRONICS, INC.
(Exact name of Registrant as specified in its charter)
Delaware | 11-1986657 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
55 CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y. | 11553 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: 516-794-4500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an “emerging growth company”. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer ☐ (Do not check if a smaller reporting company) | Smaller Reporting Company ☒ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of Registrant’s Common Stock, par value $1.00 as of December 11, 2017September 12, 2018 – 8,729,682
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Part I. Financial Information: | Page No. |
3 | |
4 | |
5 | |
6-16 | |
17-23 | |
23 | |
23 | |
Part II. Other Information: | |
24 | |
25 | |
PART I. FINANCIAL INFORMATION
(In thousands except par value)
| October 31, | April 30, | |||||||
| 2017 | 2017 | |||||||
| (UNAUDITED) | ||||||||
| ASSETS: | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 11,015 | $ | 2,163 | ||||
| Marketable securities | 1,395 | 7,815 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $187 at October 31, 2017 and at April 30, 2017 | 7,071 | 10,986 | ||||||
| Costs and estimated earnings in excess of billings, net | 5,949 | 7,964 | ||||||
| Inventories, net | 31,210 | 29,051 | ||||||
| Prepaid income taxes | 3,478 | 2,606 | ||||||
| Prepaid expenses and other | 1,242 | 1,105 | ||||||
| Current assets of discontinued operations | 8,157 | 8,165 | ||||||
| Total current assets | 69,517 | 69,855 | ||||||
Property, plant and equipment, at cost, net of accumulated depreciation and amortization | 14,349 | 14,813 | ||||||
| Deferred income taxes | 11,794 | 11,902 | ||||||
| Goodwill and other intangible assets | 617 | 617 | ||||||
| Cash surrender value of life insurance and cash held in trust | 13,694 | 13,376 | ||||||
| Other assets | 2,169 | 2,187 | ||||||
| Non-current assets of discontinued operations | 562 | 569 | ||||||
| Total assets | $ | 112,702 | $ | 113,319 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY: | ||||||||
| Current liabilities: | ||||||||
| Accounts payable - trade | $ | 2,694 | $ | 2,437 | ||||
| Accrued liabilities | 2,907 | 3,425 | ||||||
| Current liabilities of discontinued operations | 1,978 | 2,249 | ||||||
| Total current liabilities | 7,579 | 8,111 | ||||||
| Deferred compensation | 13,453 | 13,252 | ||||||
| Deferred rent and other liabilities | 1,405 | 1,409 | ||||||
| Non-current liabilities of discontinued operations | 1,387 | 1,215 | ||||||
| Total liabilities | 23,824 | 23,987 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock - $1.00 par value authorized 600 shares, no shares issued | - | - | ||||||
Common stock - $1.00 par value; authorized 20,000 shares, 9,164 shares issued and 8,843 outstanding at October 31, 2017; 8,817 outstanding at April 30, 2017 | 9,164 | 9,164 | ||||||
| Additional paid-in capital | 56,139 | 55,767 | ||||||
| Retained earnings | 22,845 | 23,712 | ||||||
| 88,148 | 88,643 | |||||||
Common stock reacquired and held in treasury - at cost (321 shares at October 31, 2017 and 347 shares at April 30, 2017) | (1,472 | ) | (1,592 | ) | ||||
| Accumulated other comprehensive income | 2,202 | 2,281 | ||||||
| Total stockholders’ equity | 88,878 | 89,332 | ||||||
| Total liabilities and stockholders’ equity | $ | 112,702 | $ | 113,319 | ||||
July 31, | April 30, | |||||||
2018 | 2018 | |||||||
(UNAUDITED) | ||||||||
ASSETS: | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 2,621 | $ | 7,869 | ||||
Marketable securities | 7,178 | 6,149 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $175 at July 31, 2018 and $181 at April 30, 2018 | 6,487 | 4,268 | ||||||
Costs and estimated earnings in excess of billings, net | 6,732 | 5,094 | ||||||
Inventories, net | 26,341 | 26,186 | ||||||
Prepaid income taxes | 1,453 | 1,459 | ||||||
Prepaid expenses and other | 1,247 | 1,050 | ||||||
Total current assets | 52,059 | 52,075 | ||||||
Property, plant and equipment, at cost, net of accumulated depreciation and amortization | 14,041 | 14,127 | ||||||
Goodwill and other intangible assets | 617 | 617 | ||||||
Cash surrender value of life insurance and cash held in trust | 14,083 | 13,915 | ||||||
Other assets | 2,733 | 2,850 | ||||||
Total assets | $ | 83,533 | $ | 83,584 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY: | ||||||||
Current liabilities: | ||||||||
Accounts payable - trade | $ | 1,264 | $ | 1,841 | ||||
Accrued liabilities | 3,174 | 3,416 | ||||||
Total current liabilities | 4,438 | 5,257 | ||||||
Deferred compensation | 13,626 | 13,541 | ||||||
Deferred rent and other liabilities | 1,500 | 1,524 | ||||||
Total liabilities | 19,564 | 20,322 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock - $1.00 par value authorized 600 shares, no shares issued | - | - | ||||||
Common stock - $1.00 par value; authorized 20,000 shares, 9,164 shares issued, 8,881 shares outstanding at July 31, 2018; 8,867 shares outstanding at April 30, 2018 | 9,164 | 9,164 | ||||||
Additional paid-in capital | 56,610 | 56,439 | ||||||
Retained earnings (accumulated deficit) | 449 | (65 | ) | |||||
Common stock reacquired and held in treasury - at cost (283 shares at July 31, 2018 and 297 shares at April 30, 2018) | (1,295 | ) | (1,361 | ) | ||||
Accumulated other comprehensive income | (959 | ) | (915 | ) | ||||
Total stockholders’ equity | 63,969 | 63,262 | ||||||
Total liabilities and stockholders’ equity | $ | 83,533 | $ | 83,584 | ||||
See accompanying notes to condensed consolidated financial statements.
Three Months Ended OctoberJuly 31,
(In thousands except per share data)
(Unaudited)
| 2017 | 2016 | |||||||
Condensed Consolidated Statements of Income | ||||||||
| Revenues | $ | 21,360 | $ | 23,028 | ||||
| Cost of revenues | 14,636 | 15,474 | ||||||
| Gross margin | 6,724 | 7,554 | ||||||
| Selling and administrative expenses | 5,046 | 5,648 | ||||||
| Research and development expense | 3,364 | 3,496 | ||||||
| Operating loss | (1,686 | ) | (1,590 | ) | ||||
| Other income (expense): | ||||||||
| Investment income | 1,167 | 279 | ||||||
| Interest expense | (41 | ) | (67 | ) | ||||
| Other income, net | 3 | 1 | ||||||
| Loss before provision for income taxes | (557 | ) | (1,377 | ) | ||||
| Benefit for income taxes | (98 | ) | (204 | ) | ||||
| Net loss from continuing operations | (459 | ) | (1,173 | ) | ||||
| Loss from discontinued operations, net of tax | (408 | ) | (557 | ) | ||||
| Net loss | $ | (867 | ) | $ | (1,730 | ) | ||
| Net loss per common share: | ||||||||
| Basic loss from continued operations | $ | (0.05 | ) | $ | (0.14 | ) | ||
| Basic loss from discontinued operations | (0.05 | ) | (0.06 | ) | ||||
| Basic loss per share | (0.10 | ) | (0.20 | ) | ||||
| Diluted loss from continued operations | (0.05 | ) | (0.14 | ) | ||||
| Diluted loss from discontinued operations | (0.05 | ) | (0.06 | ) | ||||
| Diluted loss per share | $ | (0.10 | ) | $ | (0.20 | ) | ||
| Weighted average shares outstanding: | ||||||||
| Basic | 8,830 | 8,771 | ||||||
| Diluted | 8,830 | 8,771 | ||||||
Condensed Consolidated Statements of Comprehensive Loss | ||||||||
| Net loss | $ | (867 | ) | $ | (1,730 | ) | ||
| Other comprehensive loss: | ||||||||
| Foreign currency translation adjustment | 575 | 369 | ||||||
| Unrealized (loss) gain on marketable securities: | ||||||||
Change in market value of marketable securities before reclassification, net of tax of ($20) and ($61) | 37 | 118 | ||||||
Reclassification adjustment for realized gains included in net income, net of tax of $356 in 2017 | (691 | ) | - | |||||
| Total unrealized (loss) gain on marketable securities, net of tax | (654 | ) | 118 | |||||
| Total other comprehensive loss (income) | (79 | ) | 487 | |||||
| Comprehensive loss | $ | (946 | ) | $ | (1,243 | ) | ||
2018 | 2017 | |||||||
Condensed Consolidated Statements of Operations | ||||||||
Revenues | $ | 11,011 | $ | 12,023 | ||||
Cost of revenues | 6,737 | 7,502 | ||||||
Gross margin | 4,274 | 4,521 | ||||||
Selling and administrative expenses | 2,540 | 2,712 | ||||||
Research and development expense | 1,649 | 1,629 | ||||||
Operating income | 85 | 180 | ||||||
Other income (expense): | ||||||||
Investment income | 45 | 1,154 | ||||||
Interest expense | (18 | ) | (21 | ) | ||||
Other (expense) income, net | (74 | ) | 2 | |||||
Income before provision for income taxes | 38 | 1,315 | ||||||
Provision for income taxes | 7 | 485 | ||||||
Net income from continuing operations | 31 | 830 | ||||||
Loss from discontinued operations, net of tax | - | (216 | ) | |||||
Net income | $ | 31 | $ | 614 | ||||
Net income per common share: | ||||||||
Basic earnings from continued operations | $ | 0.00 | $ | 0.09 | ||||
Basic loss from discontinued operations | (0.02 | ) | ||||||
Basic earnings per share | $ | 0.00 | 0.07 | |||||
Diluted earnings from continued operations | $ | 0.00 | 0.09 | |||||
Diluted loss from discontinued operations | (0.02 | ) | ||||||
Diluted earnings per share | $ | 0.00 | $ | 0.07 | ||||
Weighted average shares outstanding: | ||||||||
Basic | 8,876 | 8,826 | ||||||
Diluted | 8,990 | 8,967 | ||||||
Condensed Consolidated Statements of Comprehensive (Loss) Income | ||||||||
Net income | $ | 31 | $ | 614 | ||||
Other comprehensive loss: | ||||||||
Foreign currency translation adjustment | (36 | ) | 315 | |||||
Unrealized loss on marketable securities: | ||||||||
Change in market value of marketable securities before reclassification, net of tax of ($19) in 2017 | (8 | ) | 34 | |||||
Reclassification adjustment for realized gains included in net income, net of tax of $355 in 2017 | - | (689 | ) | |||||
Total unrealized loss on marketable securities, net of tax | (8 | ) | (655 | ) | ||||
Total other comprehensive loss | (44 | ) | (340 | ) | ||||
Comprehensive (loss) income | $ | (13 | ) | $ | 274 | |||
See accompanying notes to condensed consolidated financial statements.
Three Months Ended OctoberJuly 31,
(In thousands except per share data)
(Unaudited)
| 2017 | 2016 | |||||||
Condensed Consolidated Statements of Income | ||||||||
| Revenues | $ | 9,337 | $ | 11,466 | ||||
| Cost of revenues | 7,134 | 7,737 | ||||||
| Gross margin | 2,203 | 3,729 | ||||||
| Selling and administrative expenses | 2,335 | 2,816 | ||||||
| Research and development expense | 1,734 | 2,095 | ||||||
| Operating loss | (1,866 | ) | (1,182 | ) | ||||
| Other expense: | ||||||||
| Investment income | 13 | 187 | ||||||
| Interest expense | (21 | ) | (26 | ) | ||||
| Other income, net | 1 | - | ||||||
| Loss before provision for income taxes | (1,873 | ) | (1,021 | ) | ||||
| Benefit for income taxes | (584 | ) | (164 | ) | ||||
| Net loss from continuing operations | (1,289 | ) | (857 | ) | ||||
| Loss from discontinued operations, net of tax | (192 | ) | (167 | ) | ||||
| Net loss | $ | (1,481 | ) | $ | (1,024 | ) | ||
| Net loss per common share: | ||||||||
| Basic loss from continued operations | $ | (0.15 | ) | $ | (0.10 | ) | ||
| Basic loss from discontinued operations | (0.02 | ) | (0.02 | ) | ||||
| Basic loss per share | (0.17 | ) | (0.12 | ) | ||||
| Diluted loss from continued operations | (0.15 | ) | (0.10 | ) | ||||
| Diluted loss from discontinued operations | (0.02 | ) | (0.02 | ) | ||||
| Diluted loss per share | $ | (0.17 | ) | $ | (0.12 | ) | ||
| Weighted average shares outstanding: | ||||||||
| Basic | 8,835 | 8,781 | ||||||
| Diluted | 8,835 | 8,781 | ||||||
Condensed Consolidated Statements of Comprehensive Loss | ||||||||
| Net loss | $ | (1,481 | ) | $ | (1,024 | ) | ||
| Other comprehensive income: | ||||||||
| Foreign currency translation adjustment | 260 | 984 | ||||||
| Unrealized (loss) gain on marketable securities: | ||||||||
Change in market value of marketable securities before reclassification, net of tax of ($2) and ($161) | 3 | (194 | ) | |||||
Reclassification adjustment for realized gains included in net income, net of tax of $1 in 2017 | (2 | ) | - | |||||
| Total unrealized (loss) gain on marketable securities, net of tax | 1 | (194 | ) | |||||
| Total other comprehensive income | 261 | 790 | ||||||
| Comprehensive loss | $ | (1,220 | ) | $ | (234 | ) | ||
2018 | 2017 | |||||||
Cash flows from operating activities: | ||||||||
Net income from continuing operations | $ | 31 | $ | 830 | ||||
Net loss from discontinued operations | - | (216 | ) | |||||
Net income | 31 | 614 | ||||||
Non-cash charges to earnings | 1,151 | 145 | ||||||
Net changes in operating assets and liabilities | (4,743 | ) | 1,759 | |||||
Cash (used in) provided by operating activities – continuing operations | (3,561 | ) | 2,518 | |||||
Cash provided by operating activities – discontinued operations | - | 641 | ||||||
Net cash (used in) provided by operating activities | (3,561 | ) | 3,159 | |||||
Cash flows from investing activities: | ||||||||
Proceeds on redemption of marketable securities | 595 | 6,273 | ||||||
Purchase of marketable securities | (1,636 | ) | ||||||
Purchase of fixed assets and other assets | (483 | ) | (450 | ) | ||||
Cash (used in) provided by investing activities – continuing operations | (1,524 | ) | 5,823 | |||||
Cash used in investing activities – discontinued operations | - | (9 | ) | |||||
Net cash (used in) provided by investing activities | (1,524 | ) | 5,814 | |||||
Cash flows from financing activities: | ||||||||
Tax benefit from exercise of stock-based compensation | - | 1 | ||||||
Net cash provided by financing activities | - | 1 | ||||||
Net (decrease) increase in cash and cash equivalents before effect of exchange rate changes | (5,085 | ) | 8,974 | |||||
Effect of exchange rate changes on cash and cash equivalents | (163 | ) | 316 | |||||
Net (decrease) increase in cash and cash equivalents | (5,248 | ) | 9,290 | |||||
Cash and cash equivalents at beginning of period | 7,869 | 2,738 | ||||||
Cash and cash equivalents at end of period | 2,621 | 12,028 | ||||||
Less cash and equivalents of discontinued operations at end of period | - | 1,118 | ||||||
Cash and cash equivalents of continuing operations at end of period | $ | 2,621 | $ | 10,910 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 18 | $ | 17 | ||||
Income Taxes | $ | - | $ | - | ||||
See accompanying notes to condensed consolidated financial statements.
| 2017 | 2016 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss from continuing operations | $ | (459 | ) | $ | (1,173 | ) | ||
| Net loss from discontinued operations | (408 | ) | (557 | ) | ||||
| Net loss | (867 | ) | (1,730 | ) | ||||
| Non-cash charges to earnings | 1,451 | 2,864 | ||||||
| Net changes in operating assets and liabilities | 1,631 | (4,340 | ) | |||||
| Cash provided by (used in) operating activities – continuing operations | 2,215 | (3,206 | ) | |||||
| Cash provided by operating activities – discontinued operations | 614 | 728 | ||||||
| Net cash provided by (used in) operating activities | 2,829 | (2,478 | ) | |||||
| Cash flows from investing activities: | ||||||||
| Proceeds on redemption of marketable securities | 6,477 | 1,000 | ||||||
| Purchase of fixed assets and other assets | (883 | ) | (2,413 | ) | ||||
| Cash provided by (used in) investing activities – continuing operations | 5,594 | (1,413 | ) | |||||
| Cash used in investing activities – discontinued operations | (28 | ) | (10 | ) | ||||
| Net cash provided by (used in) investing activities | 5,566 | (1,423 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Tax benefit from exercise of stock-based compensation | 1 | 25 | ||||||
| Cash provided by financing activities – continuing operations | 1 | 25 | ||||||
| Cash used in financing activities – discontinued operations | - | 280 | ||||||
| Net cash provided by financing activities | 1 | 305 | ||||||
| Net increase (decrease) in cash and cash equivalents before effect of exchange rate changes | 8,396 | (3,596 | ) | |||||
| Effect of exchange rate changes on cash and cash equivalents | 675 | 1,619 | ||||||
| Net increase (decrease) in cash and cash equivalents | 9,071 | (1,977 | ) | |||||
| Cash and cash equivalents at beginning of period | 2,738 | 6,082 | ||||||
| Cash and cash equivalents at end of period | 11,809 | 4,105 | ||||||
| Less cash and equivalents of discontinued operations at end of period | 794 | 344 | ||||||
| Cash and cash equivalents of continuing operations at end of period | $ | 11,015 | $ | 3,761 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 41 | $ | 76 | ||||
| Income Taxes | $ | 325 | $ | 335 | ||||
(Unaudited)
NOTE A – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management of Frequency Electronics, Inc. (“the Company”(the “Company”), the accompanying unaudited condensed consolidated interim financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly, in all material respects, the consolidated financial position of the Company as of OctoberJuly 31, 20172018 and the results of its operations and cash flows for the six and three months ended OctoberJuly 31, 20172018 and 2016.2017. The April 30, 20172018 condensed consolidated balance sheet was derived from audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended April 30, 2017,2018, filed on July 31, 2017,30, 2018, and the financial statements and notes thereto. The results of operations for such interim periods are not necessarily indicative of the operating results for the full fiscal year.
NOTE B – DISCONTINUED OPERATIONS
In December 2016, the Company entered into a contingent share purchase agreement with certain foreign counterpartiesparties with respect to a potential sale of Gillam-FEI (“Gillam”)s.a., the Company’s Belgian subsidiary.subsidiary (“Gillam”). However, these counterparties haveparties did not yet performedperform their obligations under that agreement. Because the counterparties have failed to perform their obligations under the share purchase agreement, and the Company has a right to terminate that share purchase agreement. The Company continuescontinued to negotiate with these counterpartiesother parties with respect to effectuate a closing of the transaction contemplated by the share purchase agreement, but the Company is also discussing a sale of the Gillam business with other potential buyers.sale. In April 2017, the Company decided to sell its Gillam business as soon as practicable, and began contacting potential buyers other than the counterparty to the stock purchase agreement. The Company believes that the divestment should be completed by the end of fiscal year 2018.practicable. Accordingly, the Company determined that the assets and liabilities of this reportable segment met the discontinued operations criteria as defined in Accounting Standards Codification 205-20-45 forU.S. GAAP in the yearquarter ended April 30, 2017,2017. On April 26, 2018, the Company sold Gillam to a European entity in a stock purchase agreement for $1.0 million in cash, which was received on April 27, 2018, and a note payable in three years for an additional $1.0 million. The loss recorded due to the sale of Gillam was approximately $359,000, which represented the carrying amount of the investment on FEI-NY’s books less the retained earnings and remaining Gillam equity value reduced by the cash received and the value of the note receivable. As such Gillam’s results have been classified as discontinued operations in the accompanying Consolidated Statements of Operations and Comprehensive Loss.
Summarized operating results for the Gillam discontinued operations, for the three and six months ended OctoberJuly 31, 2017 and 2016 respectively, arewere as follows:
| Six months | Three months | |||||||||||||||
| Periods ended October 31, | ||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| (UNAUDITED) | (UNAUDITED) | (UNAUDITED) | (UNAUDITED) | |||||||||||||
| (In thousands except par value) | ||||||||||||||||
| Revenues | $ | 1,955 | $ | 2,294 | $ | 943 | $ | 1,448 | ||||||||
| Cost of Revenues | 1,390 | 1,621 | 674 | 1,064 | ||||||||||||
| Gross Margin | 565 | 673 | 269 | 384 | ||||||||||||
| Selling and administrative expenses | 703 | 950 | 346 | 456 | ||||||||||||
| Research and development expenses | 268 | 277 | 118 | 94 | ||||||||||||
| Operating Loss | (406 | ) | (554 | ) | (195 | ) | (166 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Investment (loss) income | ||||||||||||||||
| Other income (expense), net | (3 | ) | (3 | ) | (2 | ) | (2 | ) | ||||||||
| Loss before provision for income taxes | (409 | ) | (557 | ) | (197 | ) | (168 | ) | ||||||||
| Benefit for income taxes | 1 | - | 5 | - | ||||||||||||
| Net Loss | $ | (408 | ) | $ | (557 | ) | $ | (192 | ) | $ | (168 | ) | ||||
July 31, | ||||
2017 | ||||
(UNAUDITED) | ||||
(In thousands except par value) | ||||
Revenues | $ | 1,012 | ||
Cost of revenues | 716 | |||
Gross Margin | 296 | |||
Selling and administrative expenses | 357 | |||
Research and development expenses | 150 | |||
Operating Loss | (211 | ) | ||
Other income (expense): | ||||
Other income (expense), net | (1 | ) | ||
Loss before provision for income taxes | (212 | ) | ||
Provision for income taxes | (4 | ) | ||
Net loss | $ | (216 | ) | |
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| October 31, | April 30, | |||||||
| 2017 | 2017 | |||||||
| Cash and cash equivalents | $ | 794 | $ | 575 | ||||
| Accounts receivable, net of allowance for doubtful accounts | 2,525 | 3,202 | ||||||
| Inventories, net | 4,633 | 3,980 | ||||||
| Prepaid expenses and other | 205 | 408 | ||||||
| Total current assets of discontinued operations | $ | 8,157 | $ | 8,165 | ||||
| Property, plant and equipment, at cost, net of accumulated depreciation and amortization | $ | 547 | $ | 555 | ||||
| Investments | 15 | 14 | ||||||
| Deferred taxes – non-current | - | - | ||||||
| Total non-current assets of discontinued operations | $ | 562 | $ | 569 | ||||
| Accounts payable – trade | $ | 1,004 | $ | 949 | ||||
| Accrued liabilities | 974 | 1,300 | ||||||
| Total current liabilities of discontinued operations | 1,978 | 2,249 | ||||||
| Deferred rent and other liabilities | 1,387 | 1,215 | ||||||
| Total non-current liabilities of discontinued operations | $ | 1,387 | $ | 1,215 | ||||
NOTE C – EARNINGS PER SHARE
Reconciliation of the weighted average shares outstanding for basic and diluted Earnings Per Share arewere as follows:
| Six months | Three months | |||||||||||||||
| Periods ended October 31, | ||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic | 8,830,486 | 8,771,494 | 8,834,945 | 8,780,633 | ||||||||||||
| Effect of dilutive securities | ** | ** | ** | ** | ||||||||||||
| Diluted | 8,830,486 | 8,771,494 | 8,834,945 | 8,780,633 | ||||||||||||
Three months ended July 31, | ||||||||
2018 | 2017 | |||||||
Weighted average shares outstanding: | ||||||||
Basic | 8,876,416 | 8,826,026 | ||||||
Effect of dilutive securities | 114,055 | 141,281 | ||||||
Diluted | 8,990,471 | 8,967,307 | ||||||
The computation of diluted earnings per share inEarnings Per Share for the other fiscal periodsthree months ending July 31, 2018 and 2017 excludes those options and stock appreciation rights (“SARS”) with an exercise price in excess of the average market price of the Company’s common shares during the periods presented. The inclusion of such options and SARS in the computation of earnings per share would have been antidilutive. The number of excluded options and SARS were:
| Six months | Three months | |||||||||||||||
| Periods ended October 31, | ||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Outstanding options and SARS excluded | ** | ** | ** | ** | ||||||||||||
Three months ended July 31, | ||||||||
2018 | 2017 | |||||||
Outstanding options and SARS excluded | 1,129,000 | 893,500 | ||||||
NOTE D – COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS, NET
At OctoberJuly 31, 20172018 and April 30, 2017,2018, costs and estimated earnings in excess of billings, net, consistconsisted of the following:
| October 31, 2017 | April 30, 2017 | |||||||
| (In thousands) | ||||||||
| Costs and estimated earnings in excess of billings | $ | 6,205 | $ | 8,890 | ||||
| Billings in excess of costs and estimated earnings | (256 | ) | (926 | ) | ||||
| Net asset | $ | 5,949 | $ | 7,964 | ||||
July 31, 2018 | April 30, 2018 | |||||||
(In thousands) | ||||||||
Costs and estimated earnings in excess of billings | $ | 8,042 | $ | 5,266 | ||||
Billings in excess of costs and estimated earnings | (1,310 | ) | (172 | ) | ||||
Net asset | $ | 6,732 | $ | 5,094 | ||||
Such amounts represent revenue recognized on long-term contracts that had not been billed at the balance sheet dates or represent a liability for amounts billed in excess of the revenue recognized. Amounts are billed to customers pursuant to contract terms, whereas the related revenue is recognized on the percentage of completion basis at the measurement date. In general,For the most part, the recorded amounts will be billed and collected or revenue recognized within twelve months of the balance sheet date. Revenue on these long-term contracts is accounted for on thea percentage of completion basis. During the six and three months ended OctoberJuly 31, 2018 and 2017, revenue recognized under percentage of completion contracts was approximately $10.9$9.3 million and $4.5 million, respectively. During the six and three months ended October 31, 2016, such revenue was approximately $12.4 million and $5.1$6.4 million, respectively. If contract losses are anticipated, costs and estimated earnings in excess of billings are reduced for the full amount of such losses when they are determinable.
NOTE E – TREASURY STOCK TRANSACTIONS
During the six and three months period ended OctoberJuly 31, 2017,2018, the Company made contributions of 25,27014,339 shares and 11,530 shares, respectively, of its common stock held in treasury to the Company’s profit sharing plan and trust under Section 401(k) of the Internal Revenue Code. Such contributions are in accordance with the Company’s discretionary match of employee voluntary contributions to this plan. During the six months ended October 31, 2017, the Company issued 844 shares from treasury upon the exercise
FREQUENCY ELECTRONICS, INC. and employees of the Company.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE F – INVENTORIES
Inventories, which are reported at the lower of cost or market, consistnet realizable value, consisted of the following:
| October 31, 2017 | April 30, 2017 | |||||||
| (In thousands) | ||||||||
| Raw Materials and Component Parts | $ | 18,552 | $ | 17,702 | ||||
| Work in Progress | 8,233 | 7,340 | ||||||
| Finished Goods | 4,425 | 4,009 | ||||||
| $ | 31,210 | $ | 29,051 | |||||
July 31, 2018 | April 30, 2018 | |||||||
(In thousands) | ||||||||
Raw Materials and Component Parts | $ | 15,108 | $ | 16,206 | ||||
Work in Progress | 8,540 | 8,216 | ||||||
Finished Goods | 2,693 | 1,764 | ||||||
| $ | 26,341 | $ | 26,186 | |||||
As of OctoberJuly 31, 20172018 and April 30, 2017,2018, approximately $30.2$25.5 million and $28.2$25.2 million, respectively, of total inventory iswas located in the United States and $1$0.9 million and $0.8$1.0 million, respectively, iswas located in China. The Company buys inventory in bulk quantities which may be used over significant time periods; due to its nature the inventory does not deteriorate.
NOTE G – SEGMENT INFORMATION
The Company operates under two reportable segments based on the geographic locations of its subsidiaries:
(1) | FEI-NY – operates out of New York and its operations consist principally of precision time and frequency control products used in three principal markets- communication satellites (both commercial and U.S. Government-funded); terrestrial cellular telephone or other ground-based telecommunication |
(2) | FEI-Zyfer – operates out of California and its products incorporate Global Positioning System (GPS) technologies into systems and subsystems for secure communications, both government and commercial, and other locator applications. This segment also provides sales and support for the Company’s wireline telecommunications family of products, including US5G, which are sold in the |
The Company’s Chief Executive Officermanagement measures segment performance based on total revenues and profits generated by each geographic location rather than on the specific types of products, customers or end-users. Consequently, the Company determined that the segments indicated above most appropriately reflect the way the Company’s management views the business.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The tables below present information about reported segments with reconciliation of segment amounts to consolidated amounts as reported in the statement of incomeoperations or the balance sheet for each of the periods (in thousands):
| Six months | Three months | |||||||||||||||
| Periods ended October 31, | ||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues: | ||||||||||||||||
| FEI-NY | $ | 15,740 | $ | 17,715 | $ | 6,579 | $ | 7,733 | ||||||||
| FEI-Zyfer | 7,865 | 6,596 | 3,593 | 4,249 | ||||||||||||
| less intersegment revenues | (2,245 | ) | (1,283 | ) | (835 | ) | (516 | ) | ||||||||
| Consolidated revenues | $ | 21,360 | $ | 23,028 | $ | 9,337 | $ | 11,466 | ||||||||
| Operating loss: | ||||||||||||||||
| FEI-NY | $ | (2,758 | ) | $ | (1,887 | ) | $ | (2,358 | ) | $ | (1,714 | ) | ||||
| FEI-Zyfer | 1,275 | 463 | 584 | 648 | ||||||||||||
| Corporate | (203 | ) | (166 | ) | (92 | ) | (116 | ) | ||||||||
| Consolidated operating loss | $ | (1,686 | ) | $ | (1,590 | ) | $ | (1,866 | ) | $ | (1,182 | ) | ||||
| October 31, 2017 | April 30, 2017 | |||||||
| Identifiable assets: | ||||||||
| FEI-NY (approximately $1.6 million in China) | $ | 62,242 | $ | 64,828 | ||||
| FEI-Zyfer | 10,663 | 10,427 | ||||||
| less intersegment balances | (12,797 | ) | (11,992 | ) | ||||
| Corporate | 52,594 | 50,056 | ||||||
| Consolidated identifiable assets | $ | 112,702 | $ | 113,319 | ||||
Three months ended July 31, | ||||||||
2018 | 2017 | |||||||
Revenues: | ||||||||
FEI-NY | $ | 8,577 | $ | 9,160 | ||||
FEI-Zyfer | 2,561 | 4,272 | ||||||
less intercompany revenues | (127 | ) | (1,409 | ) | ||||
Consolidated revenues | $ | 11,011 | $ | 12,023 | ||||
Operating profit: | ||||||||
FEI-NY | $ | (215 | ) | $ | (400 | ) | ||
FEI-Zyfer | 386 | 691 | ) | |||||
Corporate | (86 | ) | (111 | ) | ||||
Consolidated operating profit | $ | 85 | $ | 180 |
July 31, 2018 | April 30, 2018 | |||||||
Identifiable assets: | ||||||||
FEI-NY (approximately $1.5 and $1.7 million in China in fiscal years 2019 and 2018, respectively) | $ | 57,248 | $ | 55,181 | ||||
FEI-Zyfer | 8,562 | 8,168 | ||||||
less intersegment balances | (11,180 | ) | (11,888 | ) | ||||
Corporate | 28,903 | 32,123 | ||||||
Consolidated identifiable assets | $ | 83,533 | $ | 83,584 | ||||
NOTE H – INVESTMENT IN MORION, INC.
The Company has an investment in Morion, Inc., (“Morion”) a privately-held Russian company, which manufactures high precision quartz resonators and crystal oscillators. The Company’s investment consists of 4.6% of Morion’s outstanding shares, accordingly, the Company accounts for its investment in Morion on the cost basis. This investment is included in other assets in the accompanying balance sheets. During the sixthree months ended OctoberJuly 31, 20172018 and 2016,2017, the Company acquired product from Morion in the aggregate amount of approximately $170,000$68,000 and $204,000,$64,000, respectively, and the Company sold product and training services to Morion in the aggregate amount of approximately $2,000 and $182,000, and $10,000, respectively. (See discussion ofrespectively, included in revenues recognized under the license agreement in the paragraph below.) Duringstatement of operations as part of the three months ended OctoberFEI-NY segment. At July 31, 2017 and 2016, the Company acquired product from Morion in the aggregate amount of2018, approximately $106,000 and $123,000, respectively, and the Company did not have sales of product nor training services$4,000 was payable to Morion in same periods.Morion. At OctoberJuly 31, 20172018 there were neither amounts owed norwas no receivable related to Morion. During the sixthree months ended OctoberJuly 31, 2018, the Company did not receive a dividend from Morion. During the three months ended July 31, 2017, and 2016, the Company received a dividend from Morion in the amount of approximately $51,000 and $100,000, respectively.
Morion operates as a subsidiary of Gazprombank, a state-owned Russian bank. On October 22, 2012,July 16, 2014, after the Company entered into an agreement to license its rubidium oscillator production technology to Morion. The agreement required the Company to sell certain fully-depreciated production equipment previously owned by the Company and to provide training toCompany’s investment in Morion, employees to enable Morion to produce a minimum of 5,000 rubidium oscillators per year. Morion will pay the Company approximately $2.7 million for the license and the equipment plus 5% royalties on third party sales for a 5-year period following an initial production run. During the same 5-year period, the Company commits to purchase from Morion a minimum of approximately $400,000 worth of rubidium oscillators per year although Morion is not obligated to sell that amountGazprombank became subject to the Company. During the fiscal year ended April 30, 2016, sales to Morion included $375,000 for product and training services under this agreement. Per the amended agreement, the balance of $1 million for the transfer of the license will be due once the United StatesU. S. Department of State (“the State Department”) approves the removalTreasury’s prohibition against U. S. persons from providing it with new financing.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to $602,000 due to the U.S. Government easing of export regulations. Of this amount $392,500 was billed and paid during fiscal year 2016 and the balance of $210,000 was billed during fiscal year 2017 and was subsequently collected. During the six months ended October 31, 2017 and 2016, sales to Morion include $182,000 and $10,000, respectively, under this agreement.
(Unaudited)
NOTE I – FAIR VALUE OF FINANCIAL INSTRUMENTS
The cost, gross unrealized gains, gross unrealized losses, and fair market value of available-for-sale securities at OctoberJuly 31, 20172018 and April 30, 2017,2018, respectively, arewere as follows (in thousands):
| October 31, 2017 | ||||||||||||||||
| Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Market Value | |||||||||||||
| Fixed income securities | $ | 1,316 | $ | 79 | $ | - | $ | 1,395 | ||||||||
| Equity securities | - | - | - | - | ||||||||||||
| $ | 1,316 | $ | 79 | $ | - | $ | 1,395 | |||||||||
| April 30, 2017 | ||||||||||||||||
| Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Market Value | |||||||||||||
| Fixed income securities | $ | 1,516 | $ | 60 | $ | - | $ | 1,576 | ||||||||
| Equity securities | 5,230 | 1,248 | (239 | ) | 6,239 | |||||||||||
| $ | 6,746 | $ | 1,308 | $ | (239 | ) | $ | 7,815 | ||||||||
July 31, 2018 | ||||||||||||||||
Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Market Value | |||||||||||||
Fixed income securities | $ | 7,311 | $ | 11 | $ | (144 | ) | $ | 7,178 | |||||||
April 30, 2018 | ||||||||||||||||
Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Market Value | |||||||||||||
Fixed income securities | $ | 6,274 | $ | 10 | $ | (135 | ) | $ | 6,149 | |||||||
The following table presents the fair value and unrealized losses, aggregated by investment type and length of time that individual securities have been in a continuous unrealized loss position (in thousands):
| Less than 12 months | 12 Months or more | Total | ||||||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
October 31, 2017 | ||||||||||||||||||||||||
| Fixed Income Securities | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
| Equity Securities | - | - | - | - | - | - | ||||||||||||||||||
| $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||||
April 30, 2017 | ||||||||||||||||||||||||
| Fixed Income Securities | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
| Equity Securities | 219 | (9 | ) | 1,024 | (230 | ) | 1,243 | (239 | ) | |||||||||||||||
| $ | 219 | $ | (9 | ) | $ | 1,024 | $ | (230 | ) | $ | 1,243 | $ | (239 | ) | ||||||||||
Less than 12 months | 12 Months or more | Total | ||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
July 31, 2018 | ||||||||||||||||||||||||
Fixed Income Securities | $ | 6,054 | $ | (144 | ) | $ | - | $ | - | $ | 6,054 | $ | (144 | ) | ||||||||||
April 30, 2018 | ||||||||||||||||||||||||
Fixed Income Securities | $ | 5,334 | $ | (135 | ) | $ | - | $ | - | $ | 5,334 | $ | (135 | ) | ||||||||||
The Company regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. The Company does not believe that its investments in marketable securities with unrealized losses at OctoberJuly 31, 2017 are2018 were other-than-temporary due to market volatility of the security’s fair value, analysts’ expectations, and the Company’s ability to hold the securities for a period of time sufficient to allow for any anticipated recoveries in market value.
During the sixthree months ended OctoberJuly 31, 2018 the Company sold or redeemed available-for-sale securities in the amounts of $595,000, with no material losses. During the three months ended July 31, 2017, the Company sold or redeemed available-for-sale securities in the amounts of $6.5amount $6.3 million, realizing gains of approximately $1$1.0 million. During the six months ended October 31, 2016, the Company sold or redeemed available-for-sale securities in the amount $1.0M, realizing no gain or loss.
Maturities of fixed income securities classified as available-for-sale at OctoberJuly 31, 2017 are2018 were as follows at(at cost, (inin thousands):
Current | $ | 916 | ||
Due after one year through five years | 2,557 | |||
Due after five years through ten years | 3,838 | |||
| $ | 7,311 |
| Current | $ | - | ||
| Due after one year through five years | 98 | |||
| Due after five years through ten years | 1,217 | |||
| $ | 1,315 |
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The fair value accounting framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
Level 2 Inputs to the valuation methodology include:
- Quoted prices for similar assets or liabilities in active markets;
- Quoted prices for identical or similar assets or liabilities in inactive markets
- Inputs other than quoted prices that are observable for the asset or liability; and
- Inputs that are derived principally from or corroborated by observable market data by correlation or
other means.
Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. All of the Company’s investments in marketable securities are valued on a Level 1 basis.
NOTE J – RECENT ACCOUNTING PRONOUNCEMENTS
In January 2017, the Financial Accounting Standards Board (“the FASB”(the “FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Under ASU 2017-04 goodwill impairment will be tested by comparing the fair value of a reporting unit with its carrying amount, and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new guidance must be applied on a prospective basis and is effective for periods beginning after December 15, 2019, with early adoption permitted. The Company will not be adopting ASU 2017-04 early, and is in the process of determining the effect that ASU 2017-04 may have, however, the Company expects the new standard towill likely not have an immateriala material effect on its financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) which replaces the incurred loss impairment methodology in current generally accepted accounting priciples (“GAAP”)GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance is effective for fiscal years beginning after December 15, 2019. The Company is evaluating the effect, if any, the update will have on the financial statements when adopted in fiscal year 2021.
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842) (“ASU 2016-02”). The objective of the update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The standard requires a modified retrospective transition approach for existing leases. The amendments of ASU 2016-02 are effective for fiscal years beginning after December 31, 2018 and early adoption is permitted. While theThe Company does not intend to adopt this update early and is currently evaluatingre-evaluating the impact of this standard on its consolidated financial statements, due to the Company has minimal leases and expects thatnew lease amendment dated July 25, 2018, for the Company’s headquarters in New York, when adopted beginning in fiscal year 2019, the new standard will have an immaterial effect on the Company’s financials.2020.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Newly Adopted Accounting Standards
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09,, Revenue from Contracts with Customers (Topic 606). (“ASU 2014-09”), as amended, which establishes new guidance for revenue recognition. ASU 2014-09 eliminates most of the existing industry-specific revenue recognition guidance and significantly expands related disclosures. Additionally, it supersedes some cost guidance in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts, and creates a new Subtopic 340-40, Other Assets and Deferred Costs-Contracts with Customers. The required disclosuresCompany determines revenue recognition through the following steps: identification of the contract, or contracts, with the customer; identification of the performance obligations in the contract; determination of the transaction price; allocation of the transaction price to the performance obligations in the contract; and recognize revenue when, or as, the entity satisfies a performance obligation. The core principle of the guidance is that the Company will recognize revenue upon the transfer of the promised goods and services to its customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods and services. The new guidance requires significant additional judgement and estimation (as compared to the previous guidance) that may include, both quantitativebut is not limited to, identifying performance obligations and qualitative information aboutestimating the amount of variable consideration, if any, to include in the transaction price, and allocation of the transaction price to the performance obligations. The new standard allows for two methods of adoption, either by (i) retrospectively to each prior reporting period presented (“full retrospective method”) or (ii) retrospectively with the cumulative effect of initially applying the new guidance recognized at the date of initial application (“modified-retrospective method”). The Company adopted ASU 2014-09 in the first quarter of fiscal 2019 using the modified-retrospective method, which resulted in a cumulative effect increase of $484,000, including the adoption of ASC 340-40 as noted below, as of the date of adoption on May 1, 2018, to retained earnings. The adoption of ASU 2014-09 effected all new and open contracts as of the adoption date.
In connection with the adoption of Topic 606 on May 1, 2018, the Company also adopted the guidance in ASC 340-40, Other Assets and Deferred Costs - Contracts with Customers (“ASC 340-40”), with respect to capitalization and amortization of incremental costs of obtaining a contract. The new cost guidance requires the capitalization of all incremental costs incurred to obtain a contract with a customer that it would not have incurred if the contract had not been obtained, provided it expects to recover the costs. The Company expects that sales commissions as a result of obtaining customer contracts are recoverable, and therefore the Company defers and capitalizes them as contract costs. As a result of this new guidance, the Company capitalizes sales commissions for which the expected amortization period is greater than one year. The Company classifies the unamortized portion of deferred commissions as current or noncurrent assets based upon the timing of when the Company expects to recognize the expense. The current and uncertaintynoncurrent portion of deferred commissions are included in prepaid expenses and other current assets, respectively, in the Company’s Condensed Consolidated Balance Sheet. Adoption of ASC 340-40 resulted in a cumulative effect adjustment of $87,000 to total assets, $109,000 to total liabilities, and a $22,000 reduction to retained earnings, as of the date of adoption, on May 1, 2018.
The Company’s new accounting policies as a result of adopting ASU 2014-09 are discussed below.
Revenue Recognition
Revenue is recognized when a performance obligation is satisfied, which is when the expected goods or services are transferred to the customer, in an amount that reflects the consideration to which the Company expects to receive. A performance obligation is a distinct product or service that is transferred to the customer based on the contract. The transaction price is allocated to each performance obligation and is recognized as revenue upon satisfaction of that performance obligation. The company derives revenue from contracts with customers by units sold with specific specifications and frequencies that are used by a specific customer and contracts where the significant judgments used. Entities can retrospectively apply ASU 2014-09end user is the government. The Company’s contracts typically include multiple performance obligations which are satisfied either by shipped projects or use an alternative transitionthe completion of milestones as defined in the contract. The transaction price is allocated either (i) based on the sale price of each item shipped or (ii) as defined by the milestones stated in the contract.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Revenues under larger, long-term contracts which generally require billings based on achievement of milestones rather than delivery of product, are reported in operating results using the POC method. In July 2015, the FASB approved a one-year deferralOn fixed-price contracts, which are typical for commercial and U.S. Government satellite programs and other long-term U.S. Government projects, and which require initial design and development of the effective date of ASU 2014-09. ASU 2014-09product, revenue is effective for public companies for annual reporting periods beginning on or after December 15, 2017, and for the Company, must be adopted for its fiscal year 2019 beginning on May 1, 2018. The Company is currently evaluating the impact that ASU 2014-09 may have on its financial statements when the statement is adopted for its fiscal year 2019. It appears that there will be an effectrecognized on the way the Company recognizescost-to-cost method. Under this method, revenue and the associated disclosures, howeveris recorded based upon the workratio that incurred costs bear to total estimated contract costs with related cost of sales recorded as the costs are incurred. Each month management reviews estimated contract costs through a process of aggregating actual costs incurred and estimating additional costs to completion based upon the current available information and status of the contract. The effect of any change in the estimated gross margin rate for a contract is reflected in revenues in the period in which the change is known. Provisions for the full amount of anticipated losses on contracts are made in the period in which they become determinable.
On production-type orders, revenue is recorded as units are delivered with the related cost of sales recognized on each shipment based upon a percentage of estimated final program costs. Changes in job performance on long-term contracts and production-type orders may result in revisions to costs and income and are recognized in the period in which revisions are determined to be required. Provisions for anticipated losses on customer orders are made in the period in which they become determinable.
For customer orders in the Company’s FEI-Zyfer segment or smaller contracts or orders in the FEI-NY segment, sales of products and services to customers are reported in operating results based upon (i) shipment of the product or (ii) performance of the services pursuant to terms of the customer order. When payment is contingent upon customer acceptance of the installed system, revenue is deferred until such acceptance is received and installation completed.
In connection with the adoption of Topic 606, there were changes to the timing of the Company’s revenue recognition associated with the significant portion of our business that was not being accounted for as percentage of completion in prior years for contracts where the end customer was the U.S. Government. These production-type contracts under which revenue was previously recorded as Passage of Title (“POT”) are currently being recognized as Percentage of Completion (“POC”) following adoption of this ASU. As a result, the Company has done it expectswill begin recognizing revenue earlier under these contracts. The Company’s products generally carry a one-year warranty, but may vary based on the effectcontract terms.
Significant judgment is used in evaluating the financial information for certain contracts related to be immaterial.
Practical Expedients
The Company expenses sales commissions as sales and marketing expenses in the period they are incurred if the expected amortization period is one year or less.
The Company expenses costs, other than sales commissions, to obtain a contract in the period for which they are incurred as these amounts would have been incurred even if the contract had not been obtained.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Disaggregation of Revenue
Total revenue related to the adoption ASU 2014-09 and recognized over time as POC was approximately $9.3 million of the $11.0 million reported for the three months ended July 31, 2018. The amounts by segment are as follows:
July 31, 2018 | ||||||||||||
(In thousands) | ||||||||||||
POC Revenue | POT Revenue | Total Revenue | ||||||||||
FEI-NY | $ | 8,079 | $ | 498 | $ | 8,577 | ||||||
FEI-Zyfer | 1,175 | 1,386 | 2,561 | |||||||||
Intersegment | (7 | ) | (120 | ) | (127 | ) | ||||||
Revenue | $ | 9,247 | $ | 1,764 | $ | 11,011 | ||||||
The cumulative effect of changes made to the Condensed Consolidated May 1, 2018 Balance Sheet was as follows (in thousands):
Balance at April 30, 2018 | Adjustments | Balance at May 1, 2018 | |||||||||||
ASSETS | |||||||||||||
Costs and estimated earnings in excess of billings, net | $ | 5,094 | $ | 1,435 | (a) | $ | 6,529 | ||||||
Inventories, net | 26,186 | (929 | ) | (b) | 25,257 | ||||||||
Prepaid expenses and other | 1,050 | 77 | (c) | 1,127 | |||||||||
Total current assets | 52,075 | 583 | 52,658 | ||||||||||
Other assets | 2,850 | 10 | (d) | 2,860 | |||||||||
Total assets | 83,584 | 593 | 84,177 | ||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||
Accrued liabilities | $ | 3,416 | $ | 97 | (e) | $ | 3,513 | ||||||
Total current liabilities | 5,257 | 97 | 5,354 | ||||||||||
Deferred rent and other liabilities | 1,524 | 12 | (f) | 1,536 | |||||||||
Total liabilities | 20,322 | 109 | 20,431 | ||||||||||
(Accumulated deficit) Retained Earnings | (65 | ) | 484 | (g) | 419 | ||||||||
Total stockholders’ equity | 63,262 | 484 | 63,746 | ||||||||||
Total liabilities and stockholders’ equity | 83,584 | 593 | 84,177 | ||||||||||
Notes:
(a) Adjustment to unbilled accounts receivable for additional revenue recognized for which amounts have not been invoiced due to adoption of Topic 606
(b) Adjustment for additional allocated inventory costs related to additional revenue recognized due to adoption of Topic 606
(c) Adjustment for short-term capitalization of sales commissions, net of amortized amounts, due to adoption of ASC 340-40
(d) Adjustment for long-term capitalization of sales commissions, net of amortized amounts, due to adoption of ASC 340-40
(e) Adjustment to record short-term liability of sales commissions, net of amounts paid, due to adoption of ASC 340-40
(f) Adjustment to record long-term liability of sales commissions, net of amounts paid, due to adoption of ASC 340-40
(g) The cumulative effect of initially adopting Topic 606 and ASC 340-40 using the modified-retrospective method as an adjustment to the beginning balance of (Accumulated deficit) Retained earnings.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The impact of adopting the standard on the Company’s consolidated financial statements for the three months ended July 31, 2018 were as follows (in thousands):
Condensed Consolidated Balance Sheet
As Reported | Adjustments | Balances Without Adoption of ASU 2014-09 | |||||||||||
ASSETS | |||||||||||||
Costs and estimated earnings in excess of billings, net | $ | 6,732 | $ | 2,246 | (a) | $ | 4,486 | ||||||
Inventories, net | 26,341 | (1,155 | ) | (b) | 27,496 | ||||||||
Prepaid expenses and other | 1,247 | 62 | (c) | 1,185 | |||||||||
Total current assets | 52,059 | 1,153 | 50,906 | ||||||||||
Other assets | 2,733 | 2 | (d) | 2,731 | |||||||||
Total assets | 83,533 | 1,155 | 82,378 | ||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||
Accrued liabilities | $ | 3,174 | 84 | (e) | 3,090 | ||||||||
Total current liabilities | 4,438 | 84 | 4,354 | ||||||||||
Deferred rent and other liabilities | 1,500 | 12 | (f) | 1,488 | |||||||||
Total liabilities | 19,564 | 96 | 19,468 | ||||||||||
Retained Earnings (Accumulated deficit) | 449 | 1,059 | (g) | (610 | ) | ||||||||
Total stockholders’ equity | 63,969 | 1,059 | 62,910 | ||||||||||
Total liabilities and stockholders’ equity | 83,533 | 1,155 | 82,378 | ||||||||||
Notes:
(a) Cumulative adjustment to unbilled accounts receivable for additional revenue recognized for which amounts have not been invoiced due to adoption of Topic 606
(b) Cumulative adjustment for additional allocated inventory costs related to additional revenue recognized due to adoption of Topic 606
(c) Cumulative adjustment for short-term capitalization of sales commissions, net of amortized amounts, due to adoption of ASC 340-40
(d) Cumulative adjustment for long-term capitalization of sales commissions, net of amortized amounts, due to adoption of ASC 340-40
(e) Cumulative adjustment to record short-term liability of sales commissions, net of amounts paid, due to adoption of ASC 340-40
(f) Cumulative adjustment to record long-term liability of sales commissions, net of amounts paid, due to adoption of ASC 340-40
(g) The cumulative effect of initially adopting and adjustment for the three months ended July 31, 2018 for Topic 606 and ASC 340-40 using the modified-retrospective method as an adjustment to the balance of Retained earnings (Accumulated deficit).
Condensed Consolidated Statement of Operations
As Reported | Adjustments | Balances Without Adoption of ASU 2014-09 | |||||||||||
Revenues | $ | 11,011 | $ | 811 | $ | 10,200 | |||||||
Cost of revenues | 6,737 | 226 | 6,511 | ||||||||||
Gross profit | 4,274 | 585 | 3,689 | ||||||||||
Selling and administrative expenses | 2,540 | 10 | (a) | 2,530 | |||||||||
Operating profit (loss) | 85 | 575 | (490 | ) | |||||||||
Income (loss) before provision for income taxes | 38 | 575 | (537 | ) | |||||||||
Net income (loss) | 31 | 575 | (544 | ) | |||||||||
Note:
(a) Additional expense related the amortization of sales commissions due to the adoptions of ASC 340-40
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE K – CREDIT FACILITY
On January 30, 2017, the Company repaid the principal balance due on its credit facility, dated June 6, 2013, with JPMorgan Chase Bank, N.A. Subsequently, the Company voluntarily terminated this credit facility with JPMorgan Chase Bank, N.A to reduce the fees and expenses associated with maintaining that facility. The Company did not incur any early termination fees associated with its voluntary termination of this credit facility. If, in the future, the Company determines that it would be beneficial to have a credit facility in place, the Company believes that alternative facilities are available. As at Octoberof July 31, 2017,2018, the Company had available credit at variable terms based on its securities holdings under an advisory arrangement, under which no borrowings have been made.
NOTE L – VALUATION ALLOWANCE ON DEFERRED TAX ASSETS
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover deferred tax assets in the jurisdiction from which they arise, we consider all positive and negative evidence, including the reversal of deferred tax liabilities, projected future taxable income, tax planning strategies, and results of recent operations. The carrying valueBased on the weighting of all evidence, both positive and negative, most notably the Company’s netthree year cumulative loss, we established a full valuation allowance against our U.S. deferred tax assets assumes thatduring the Company will be able to generate sufficient future taxable income in certain jurisdictions, based on estimates and assumptions.quarter ended April 30, 2018. If these estimates and assumptions change in the future, the Company may be required to record an additional valuation allowances against its deferred tax assets resulting in additional income tax expense in the consolidated statement of operations, or conversely, to further reduceadjust its existing valuation allowance resulting in lesschanges to deferred income tax expense. The Company evaluates the realizabilitylikelihood of realizing its deferred tax assets quarterly.
On December 22, 2017, the legislation commonly known as the Tax Cuts and assessesJobs Act (the “TCJA” or the need“Tax Act”) was enacted into law. In response to the TCJA, the U.S. Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for additional valuation allowance quarterly.the tax effects of TCJA. The valuation allowancepurpose of approximately $6.4 millionSAB 118 was to address any uncertainty in applying ASC Topic 740, Income Taxes in the reporting period in which the TCJA was enacted. SAB 118 addresses situations where the accounting is incomplete for certain income tax effects of the TCJA upon issuance of a company’s financial statements for the reporting period which include the enactment date. SAB 118 allows for a provisional amount to be recorded if it is a reasonable estimate of the impact of the TCJA. Additionally, SAB 118 allows for a measurement period to finalize the impacts of the TCJA, not to extend beyond one year from the date of enactment.
The Company’s accounting for certain elements of the TCJA was incomplete as of OctoberApril 30, 2018, and remains incomplete as of July 31, 2017 is intended2018. However, the Company was able to providemake reasonable estimates of the effects and, therefore, recorded provisional estimates for uncertainty regardingthese items during the ultimate realization of U.S. state investment credits carryovers,three-month and foreign net operating losssix-month periods ended January 31, 2018 and tax credit carryovers.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995
:The statements in this quarterly report on Form 10-Q regarding future earnings and operations and other statements relating to the future constitute “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1933 or the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words “believe,” “may,” “will,” “could,” “should,” “would,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “objective,” “seek,” “strive,” “might,” “likely result,” “build,” “grow,” “plan,” “goal,” “expand,” “position,” or similar words, or the negatives of these words, or similar terminology, identify forward-looking statements. All statements by the Company that address activities, events or developments that the Company expects or anticipates will occur in the future, including all statements by the Company regarding its expected financial position, revenues, cash flows and other operating results, business position, legal proceedings or similar matters, are forward-looking statements. These statements are based on assumptions that the Company believes are reasonable, but are subject to a wide range of risks and uncertainties, and a number of factors could cause the Company’s actual results to differ materially from those expressed in the forward-looking statements referred to above. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company’s products in the marketplace, competitive factors, new products and technological changes, product prices and raw material costs, dependence upon third-party vendors, competitive developments, changes in manufacturing and transportation costs, changes in contractual terms, the availability of capital, and other risks detailed in the Company’s periodic report filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which relate only to events as of the date on which the statements are made and which reflect management’s analysis, judgments, belief, or expectation only as of such date. By making theseAny and all of the forward-looking statements contained in this Form 10-Q and any other public statement by the Company undertakes noor its management may turn out to be incorrect. The Company expressly disclaims any obligation to update these statements after the date suchor revise any forward-looking statement, was first made.
Critical Accounting Policies and Estimates
The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended April 30, 2017,2018, filed on July 31, 2017.30, 2018. The Company believes its most critical accounting policies to be the recognition of revenue and costs on production contracts, income taxes, and the valuation of inventory. Each of these areas requires the Company to make use of reasoned estimates including estimating the cost to complete a contract, the net realizable value of its inventory or the market value of its products. Changes in estimates can have a material impact on the Company’s financial position and results of operations.
Revenue Recognition
Revenue is recognized when a performance obligation is satisfied, when the expected goods or services are transferred to the customer, in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. A performance obligation is a distinct product or service that is transferred to the customers control based on the contract. The transaction price is allocated to each performance obligation and is recognized as revenue upon satisfaction of that performance obligation. The company derives revenue either as (i) units with specifications and frequencies that can be used by multiple customers (POT) or (ii) units with specific specifications and frequencies that are used by a specific customer or for government end use (POC).
In prior years a significant portion of our business that was not being accounted for as percentage of completion was from contracts where the end customer is the U.S. Government. These production-type contracts under which revenue was previously recorded as POT are currently being recognized as POC following adoption of ASU 2014-09 as noted in Footnote J. As a result, the Company will begin recognizing revenue earlier under these contracts.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Revenues under larger, long-term contracts which generally require billings based on achievement of milestones rather than delivery of product, are reported in operating results using the percentage of completionPOC method. On fixed-price contracts, which are typical for commercial and U.S. Government satellite programs and other long-term U.S. Government projects, and which require initial design and development of the product, revenue is recognized on the cost-to-cost method. Under this method, revenue is recorded based upon the ratio that incurred costs bear to total estimated contract costs with related cost of sales recorded as the costs are incurred. Each month management reviews estimated contract costs through a process of aggregating actual costs incurred and estimating additional costs to completion based upon the current available information and status of the contract. The effect of any change in the estimated gross margin percentagerate for a contract is reflected in revenues in the period in which the change is known. Provisions for the full amount of anticipated losses on contracts are made in the period in which they become determinable.
On production-type orders, revenue is recorded as units are delivered with the related cost of sales recognized on each shipment based upon a percentage of estimated final program costs.
For customer orders in the Company’s FEI-Zyfer segment or smaller contracts or orders in the FEI-NY segment, sales of products and services to customers are reported in operating results based upon (i) shipment of the product or (ii) performance of the services pursuant to terms of the customer order. When payment is contingent upon customer acceptance of the installed system, revenue is deferred until such acceptance is received and installation completed.
Costs and Expenses
Contract costs include all direct material, direct labor costs, manufacturing overhead and other direct costs related to contract performance. Selling, general and administrative costs are chargedexpensed as incurred, except as otherwise noted in Note J above in relation to expense as incurred.
Inventory
In accordance with industry practice, inventoried costs contain amounts relating to contracts and programs with long production cycles, a portion of which will not be realized within one year. Inventory write downswrite-downs are established for slow-moving or obsolete items and costs incurred on programs for which production-level orders cannot be determined as probable. Such write downswrite-downs are based upon management’s experience and expectations for future business. Any changes arising from revised expectations are reflected in cost of sales in the period the revision is made.
Marketable Securities
All of the Company’s investments in marketable securities are Level 1 securities which trade on public markets and have current prices that are readily available. In general, investments in fixed priceincome securities are only in the commercial paper of financially sound corporations or the bonds of U.S. Government agencies. Although the value of such investments may fluctuate significantly based on economic factors, the Company’s own financial strength enables it to wait for the securities to either recover their value or to mature such that any interim unrealized gains or losses are deemed to be temporary.
The table below sets forth for the respective periods of fiscal yearsthree months ended July 31, 2018 and 2017 (which end on April 30, 2018 and 2017, respectively) the percentage of consolidated revenues represented by certain items in the Company’s condensed consolidated statements of operations:
| Six months | Three months | |||||||||||||||
| Periods ended October 31, | ||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues | ||||||||||||||||
| FEI-NY | 73.7 | % | 76.9 | % | 70.5 | % | 67.4 | % | ||||||||
| FEI-Zyfer | 36.8 | 28.6 | 38.5 | 37.1 | ||||||||||||
| Less intersegment revenues | (10.5 | ) | (5.5 | ) | (9.0 | ) | (4.5 | ) | ||||||||
| 100.0 | 100.0 | 100.0 | 100.0 | |||||||||||||
| Cost of revenues | 68.5 | 67.2 | 76.4 | 67.5 | ||||||||||||
| Gross margin | 31.5 | 32.8 | 23.6 | 32.5 | ||||||||||||
| Selling and administrative expenses | 23.6 | 24.5 | 25.0 | 24.5 | ||||||||||||
| Research and development expenses | 15.8 | 15.2 | 18.6 | 18.3 | ||||||||||||
| Operating loss | (7.9 | ) | (6.9 | ) | (20.0 | ) | (10.3 | ) | ||||||||
| Other income(loss), net | 5.3 | 0.9 | (0.1 | ) | 1.4 | |||||||||||
| Provision for income taxes | (0.5 | ) | (0.9 | ) | (6.3 | ) | (1.4 | ) | ||||||||
| (Loss) from continued operations | (2.1 | ) | (5.1 | ) | (13.8 | ) | (7.5 | ) | ||||||||
| (Loss) from discontinued operations, net assets | (1.9 | ) | (2.4 | ) | (2.1 | ) | (1.5 | ) | ||||||||
| Net (loss) | (4.0 | )% | (7.5 | )% | (15.9 | )% | (9.0 | )% | ||||||||
Three months ended July 31, | ||||||||
2018 | 2017 | |||||||
Revenues | ||||||||
FEI-NY | 77.9 | % | 76.2 | % | ||||
FEI-Zyfer | 23.3 | 35.5 | ||||||
Less intersegment revenues | (1.2 | ) | (11.7 | ) | ||||
| 100.0 | 100.0 | |||||||
Cost of revenues | 61.2 | 62.4 | ||||||
Gross margin | 38.8 | 37.6 | ||||||
Selling and administrative expenses | 23.1 | 22.6 | ||||||
Research and development expenses | 15.0 | 13.5 | ||||||
Operating profit | 0.7 | 1.5 | ||||||
Other (expense) income, net | (0.4 | ) | 9.4 | |||||
Provision for income taxes | 0.1 | 4.0 | ||||||
Income from continuing operations | 0.2 | 6.9 | ||||||
Loss from discontinued operations, net of tax | - | (1.8 | ) | |||||
Net income | 0.2 | % | 5.1 | % | ||||
Revenues
| Six months | Three months | |||||||||||||||||||||||||||||||
| Periods ended October 31, | ||||||||||||||||||||||||||||||||
| Segment | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||||||||||
| FEI-NY | $ | 15,740 | $ | 17,715 | $ | (1,975 | ) | (11.2 | )% | $ | 6,579 | $ | 7,733 | $ | (1,154 | ) | (14.9 | )% | ||||||||||||||
| FEI-Zyfer | 7,865 | 6,596 | 1,269 | 19.2 | 3,593 | 4,249 | (656 | ) | (15.4 | ) | ||||||||||||||||||||||
| Intersegment revenues | (2,245 | ) | (1,283 | ) | (962 | ) | 75.0 | (835 | ) | (516 | ) | (319 | ) | 61.8 | ||||||||||||||||||
| $ | 21,360 | $ | 23,028 | $ | (1,668 | ) | (7.2 | )% | $ | 9,337 | $ | 11,466 | $ | (2,129 | ) | (18.6 | )% | |||||||||||||||
Three months ended July 31, (in thousands) | ||||||||||||||||
2018 | 2017 | Change | ||||||||||||||
FEI-NY | $ | 8,577 | $ | 9,160 | $ | (583 | ) | (6 | %) | |||||||
FEI-Zyfer | 2,561 | 4,272 | (1,711 | ) | (40 | %) | ||||||||||
Intersegment revenues | (127 | ) | (1,409 | ) | 1,282 | (91 | %) | |||||||||
| $ | 11,011 | $ | 12,023 | $ | (1,012 | ) | (8 | %) | ||||||||
For the sixthree months ended OctoberJuly 31, 2017,2018, revenues from commercial and U.S. Government satellite programs decreasedincreased approximately $1.6 million$335,000 over the same period of fiscal year 2017,2018, and accounted for approximately 42%50% of consolidated revenues compared to approximately 46% in43% during the same period of fiscal 2017.2018. Revenues on these contracts are recognized primarily under the percentage of completionPOC method. Revenues from the satellite market are recorded in the FEI-NY segment. Revenues from non-space U.S. Government/Department of Defense (“DOD”) customers, which are recorded in both the FEI-NY and FEI-Zyfer segments, increased approximately $230,000 over the same period of fiscal 2018, and accounted for approximately 43% of consolidated revenues compared to approximately 38% during the same period of fiscal 2018. Other commercial revenues for the three months ended July 31, 2018 decreased $1.3approximately $1.6 million over the same period of fiscal 2017,2018, and accounted for approximately 36%6% of consolidated revenues compared to approximately 39% in19% during the same period of fiscal 2017. Other commercial and industrial revenues in the fiscal year 2018 period accounted for approximately 22% of consolidated revenues compared to 15% in the prior year.2018. Intersegment revenues are eliminated in consolidation. Revenue amounts for the three months ended July 31, 2018 include the adoption of ASU 2014-09 as previously stated in Note J.
Based on current backlog, satellite payload revenue for fiscal year 2019 is expected to be higher when compared to fiscal year 2018, both in total revenue and as a percent of overall revenue. The Company received significant satellite related bookings in the past two quarters and expects increasing revenues to follow in the current fiscal year. For the foreseeable future satellite payloads will continue to be a major business area for the Company and represent a significant portion of the Company’s overall revenue.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Gross Margin
Three months ended July 31, | ||||||||||||||||
(in thousands) | ||||||||||||||||
2018 | 2017 | Change | ||||||||||||||
| $ | 4,274 | $ | 4,521 | $ | (247 | ) | (6 | %) | ||||||||
GM Rate | 38.8 | % | 37.6 | % | ||||||||||||
For the three month period ended July 31, 2018, the gross margin rate increased and the gross margin decreased as compared to the same period in fiscal year 2018. The gross margin decrease was primarily due to approximately $1.0 million in lower revenues compared to the same period of the prior fiscal year. The increase in gross margin rate was due to favorable product mix and effective cost management.
Selling and Administrative Expenses
Three months ended July 31, | ||||||||||||||
(in thousands) | ||||||||||||||
2018 | 2017 | Change | ||||||||||||
| $ | 2,540 | $ | 2,712 | $ | (172 | ) | (6 | %) | ||||||
For the three months ended OctoberJuly 31, 2017 revenues from commercial and U.S. Government satellite programs decreased approximately $444,000 over the same period of fiscal year 2017, and accounted for approximately 41% of consolidated revenues compared to approximately 37% in fiscal 2017. Revenues from non-space U.S. Government/DOD customers, which are recorded in both the FEI-NY and FEI-Zyfer segments, decreased $2.4 million over the same period of fiscal 2017, and accounted for approximately 34% of consolidated revenues compared to approximately 49% in fiscal 2017. Other commercial and industrial revenues for the three months ended October 31, 2017 accounted for approximately 26% of consolidated revenues compared to 14% in the prior year.
| Six months | Three months | |||||||||||||||||||||||||||||||
| Periods ended October 31, | ||||||||||||||||||||||||||||||||
| 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||||||||||
| $ | 6,724 | $ | 7,554 | $ | (830 | ) | (11 | )% | $ | 2,203 | $ | 3,729 | $ | (1,526 | ) | (41 | )% | |||||||||||||||
| GM Rate | 31.5 | % | 32.8 | % | 23.6 | % | 32.5 | % | ||||||||||||||||||||||||
| Six months | Three months | |||||||||||||||||||||||||||||
| Periods ended October 31, | ||||||||||||||||||||||||||||||
| 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||||||||
| $ | 5,046 | $ | 5,648 | $ | (602 | ) | (11 | )% | $ | 2,335 | $ | 2,816 | $ | (481 | ) | (17 | )% | |||||||||||||
Research and development expense
| Six months | Three months | |||||||||||||||||||||||||||||
| Periods ended October 31, | ||||||||||||||||||||||||||||||
| 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||||||||
| $ | 3,364 | $ | 3,496 | $ | (132 | ) | (4 | )% | $ | 1,734 | $ | 2,095 | $ | (361 | ) | (17 | )% | |||||||||||||
Three months ended July 31, | ||||||||||||||
(in thousands) | ||||||||||||||
2018 | 2017 | Change | ||||||||||||
| $ | 1,649 | $ | 1,629 | $ | 20 | 1 | % | |||||||
Research and development (“R&D”) expenditures represent investments intended to keep the Company’s products at the leading edge of time and frequency technology and enhance competitiveness for future competitiveness. Thecontracts. R&D ratespending for the six month period ending Octoberthree months ended July 31, 20172018 was 16% comparedcomparable to 15%that of sales for the same period of the previous fiscal year. The R&D rate for the three month period ending OctoberJuly 31, 20172018 was 19%15% compared to 18%14% of sales for the same period of the previous fiscal year. Even thoughFor the actual dollars spent onbalance of the fiscal year research and development activity will include a significantly higher level of customer funded R&D decreased the Company expects the level and activity related to R&D to continue through the current year and beyond to address new large opportunities in secure communications/command and control applications, next generation satellite payload product and additional DOD and commercial markets.
Operating (loss)
| Six months | Three months | |||||||||||||||||||||||||||||
| Periods ended October 31, | ||||||||||||||||||||||||||||||
| 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||||||||
| $ | (1,686 | ) | $ | (1,590 | ) | $ | (96 | ) | 6 | % | $ | (1,866 | ) | $ | (1,182 | ) | $ | (684 | ) | 58 | % | |||||||||
Three months ended July 31, | ||||||||||||||
(in thousands) | ||||||||||||||
2018 | 2017 | Change | ||||||||||||
| $ | 85 | $ | 180 | $ | (95 | ) | (53 | %) | ||||||
The Company had decreased revenue, gross margin, andachieved a lower operating income for the three months ended July 31, 2018 due to an increased gross margin rate, in the three months ending October 31, 2017 leading toexpense management and increased losses for both periods ending October 31, 2017 compared to the same periods of the preceding fiscal year.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Other income (expense)
| Six months | Three months | |||||||||||||||||||||||||||||||
| Periods ended October 31, | ||||||||||||||||||||||||||||||||
| 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||||||||||
| Investment income | $ | 1,167 | $ | 279 | $ | 888 | NM | % | $ | 13 | $ | 187 | $ | (174 | ) | (93 | )% | |||||||||||||||
| Interest expense | (41 | ) | (67 | ) | 26 | (39 | )% | (21 | ) | (26 | ) | 5 | (19 | )% | ||||||||||||||||||
| Other income (expense), net | 3 | 1 | 2 | NM | % | 1 | - | 1 | NM | % | ||||||||||||||||||||||
| $ | 1,129 | $ | 213 | $ | 916 | 430 | % | $ | (7 | ) | $ | 161 | $ | (168 | ) | NM | % | |||||||||||||||
Three months ended July 31, | ||||||||||||||||
| (in thousands) | ||||||||||||||||
2018 | 2017 | Change | ||||||||||||||
Investment income | $ | 45 | $ | 1,154 | $ | (1,109 | ) | NM | ||||||||
Interest expense | (18 | ) | (21 | ) | 3 | (14 | %) | |||||||||
Other income (expense), net | (74 | ) | 2 | (76 | ) | NM | ||||||||||
| $ | (47 | ) | $ | 1,135 | $ | (1,182 | ) | NM | ||||||||
Investment income is derived primarily from the Company’s holdings of marketable securities. Earnings on these securities may vary based on fluctuating interest rates, dividend payout levels, and the timing of purchases or sales of securities. For the three months ending OctoberJuly 31, 20172018 investment income was lower than in the same period of fiscal year 2017, mainly due to in the quarter ending July 31, 2017 the Company divested of all its holdings in equities securities in its investment account, which were converted to cash. The Company is in the process of evaluating its future cash management strategies. As a result, the Company recorded gains of approximately $1.0 million during the three months ended July 31, 2017 as compared to no gain or loss in the same period of fiscal year 2017.
Income tax (benefit)
| Six months | Three months | |||||||||||||||||||||||||||||||
| Periods ended October 31, | ||||||||||||||||||||||||||||||||
| 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||||||||||
| $ | (98 | ) | $ | (204 | ) | $ | 106 | (52 | )% | $ | (584 | ) | $ | (164 | ) | $ | (420 | ) | NM | % | ||||||||||||
| Effective tax rate on pre-tax book income: | ||||||||||||||||||||||||||||||||
| 17.6 | % | 14.8 | % | 31.2 | % | 16.1 | % | |||||||||||||||||||||||||
Three months ended July 31, | ||||||||||||||||
(in thousands) | ||||||||||||||||
2018 | 2017 | Change | ||||||||||||||
| $ | 7 | $ | 485 | $ | (478 | ) | NM | |||||||||
Effective tax rate on pre-tax book income: | ||||||||||||||||
| 23.0 | % | 36.9 | % | |||||||||||||
For the three months ended OctoberJuly 31, 2017 and 2016,2018, the effectiveCompany recorded an income tax rates were 31.2% and 16.1%, respectively.provision of $7,000, which includes a discrete income tax provision of $18,000. The current and prior year effectivecalculation of the overall income tax rates primarily reflectprovision for the impact of deductible permanent differences included in the computation of taxable income and state income taxes. The Company utilizes the availability of R&D credits and the Domestic Productions Activity deduction in the U.S. to lower its effective tax rate.
The impact would be recognized in the period in which the tax legislation is enacted. Consequently, our effective tax rate for the three and six months ended OctoberJuly 31, 2018 is an income tax provision of 23.0% compared to 36.9% in the comparable prior period. The effective rate for the three months ended July 31, 2018 differs from the U.S. statutory rate of 21% primarily due to the mix of domestic and foreign earnings, a discrete income tax provision related to the accrual of interest for unrecognized tax benefits, and domestic losses for which the Company is not recognizing an income tax benefit. Based on the weighting of all evidence, both positive and negative, most notably the three-year cumulative loss, we established a full valuation allowance against our U.S. deferred tax assets during the quarter ended April 30, 2018. If these estimates and assumptions change in the future, the Company may be required to adjust its existing valuation allowance resulting in changes to deferred income tax expense. The Company evaluates the likelihood of realizing its deferred tax assets quarterly.
On December 22, 2017, does notthe legislation commonly known as the Tax Cuts and Jobs Act (the “TCJA” or the “Tax Act”) was enacted into law. In response to the TCJA, the U.S. Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of TCJA. The purpose of SAB 118 was to address any uncertainty [or diversity of view] in applying ASC Topic 740, Income Taxes in the reporting period in which the TCJA was enacted. SAB 118 addresses situations where the accounting is incomplete for certain income tax effects of the TCJA upon issuance of a company’s financial statements for the reporting period which include the enactment date. SAB 118 allows for a provisional amount to be recorded if it is a reasonable estimate of the impact of any potential tax reform.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
The Company’s accounting for certain elements of the TCJA was incomplete as of the period ended April 30, 2018, and remains incomplete as of July 31, 2018. However, the Company was able to make reasonable estimates of the effects and, therefore, recorded provisional estimates for these items during the three-month and six-month periods ended January 31, 2018 and April 30, 2018. There were no changes to the estimates during the three months ended July 31, 2018.
Discontinued Operations
| Six months | Three months | |||||||||||||||||||||||||||||||
| Periods ended October 31, | ||||||||||||||||||||||||||||||||
| 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||||||||||
| Net Loss | $ | 408 | $ | 557 | $ | (149 | ) | (27 | )% | $ | 192 | $ | 167 | $ | 25 | 15 | % | |||||||||||||||
Three months ended July 31, | ||||||||||||||||
| (in thousands) | ||||||||||||||||
2018 | 2017 | Change | ||||||||||||||
Net Loss | $ | - | $ | (216 | ) | $ | 216 | (100 | %) | |||||||
The above table represents the net loss for the Gillam segment accounted for as discontinued operations as presented in Note B to the financial statements. ForOn April 26, 2018, the six months ended October 31, 2017, as comparedCompany sold Gillam to a European entity, in a stock purchase agreement, for $1.0 million in cash received on April 27, 2018, and a note payable in three years for an additional $1.0 million. The loss recorded due to the same periodssale of Gillam was approximately $359,000. The calculation of the loss was the carrying amount of the investment on FEI-NY’s books less the retained earnings and remaining equity amounts of Gillam reduced by the cash received and the value of the note receivable. As such Gillam’s results have been classified as discontinued operations in the accompanying Consolidated Statements of Operations and Comprehensive (Loss) Income for fiscal year 2017, sales increased approximately 36%. SG&A expenses and R&D expenses increased by approximately $247,000 and $174,000 respectively, compared to the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s balance sheet continues to reflect a strong working capital position of $61.9$47.6 million at OctoberJuly 31, 20172018 and $61.7$46.8 million at April 30, 2017.2018. Included in working capital at OctoberJuly 31, 20172018 and April 30 2017,2018, is $12.4$9.8 million and $10.0$14.0 million, respectively, consisting of cash, cash equivalents, and marketable securities.short-term investments. The Company’s current ratio at OctoberJuly 31, 2017 is 9.22018 was 11.7 to 1.
Cash used in operations for the three months ended July 31, 2018 was $3.6 million compared to $3.2 million provided by operations for the six months ended October 31, 2017 were $2.2 million compared to the use of cash from operating activities of $3.2 million in the comparable fiscal year 20172018 period. The increasedecrease in cash flow in the fiscal year 2019 period ended July 31, 2018 period resulted primarily from decreasean increase in accounts receivablereceivables, compared to the balances as of the end of the previous fiscal year.year 2018 period ended July 31, 2017. For the six-monththree month periods ended OctoberJuly 31, 20172018 and 2016,2017, the Company incurred approximately $1.5$1.2 million and $2.9 million,$145,000, respectively, of non-cash operating expenses including depreciation and amortization, inventory reserve adjustments, and accruals for employee benefit programs and gain on sale of marketable securities.
Net cash used in investing activities for the three months ended July 31, 2018, was $1.5 million compared to $5.8 million provided by investing activities for the six months ended October 31, 2017, was $5.6 million compared to $1.4 million used in the same period of fiscal year 2017. Sales and2018. During the fiscal year 2019 period, marketable securities were sold or redeemed in the amount of $595,000 compared to $6.3 million of such redemptions during the fiscal year 2018 period. For the fiscal year 2019 period, approximately $1.6 million of marketable securities totaled $6.5 millionwere purchased. There were no marketable securities purchased for the sixsame period in fiscal year 2018. In the three months ended OctoberJuly 31, 2017 compared to $1.0 million during the six months ended October 31, 2016. In the six months ended October 31, 20172018 and 2016,2017, the Company acquired property, plant and equipment in the amount of approximately $900,000$483,000 and $2.4 million,$450,000, respectively. The Company may continue to invest cash equivalents as dictated by its investment and acquisition strategies.
There was no cash provided by financing activities for the sixthree months ended OctoberJuly 31, 2017 and 2016 was2018 compared to $1,000 and $25,000 for each period, respectively, forprovided in the tax benefits arising from the exercise of stock-based awards.
The Company has been authorized by its Board of Directors to repurchase up to $5 million worth of shares of its common stock for treasury whenever appropriate opportunities arise but it has neither a formal repurchase plan nor commitments to purchase additional shares in the future. As of OctoberJuly 31, 2017,2018, the Company has repurchased approximately $4 million of its common stock out of the $5 million authorization. For the sixthree months ended OctoberJuly 31, 20172018 and 2016,2017, there were no repurchaserepurchases of shares.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
The Company will continue to expend resources to develop, improve and acquire products for space applications, guidance and targeting systems, and communication systems which management believes will result in future growth and profitability. During fiscal year 2017,2018, the Company secured partial customer funding for a portion of its R&D efforts. The customer funds received in connection therewith appear in revenues and are not included in R&D expenses. For fiscal year 2018,2019, the Company anticipates securinghas secured significant additional customer funding for a portion of its research and developmentR&D activities, and will allocate internal funds depending on market conditions and identification of new opportunities as in fiscal 2017.year 2018. The Company expects internally generated cash will be adequate to fund these development efforts. The Company may also pursue acquisitions to expand its range of products and may use internally generated cash and external funding in connection with such acquisitions.
As of OctoberJuly 31, 2017,2018, the Company’s consolidated funded backlog iswas approximately $21$37 million compared to $28$30 million at April 30, 2017,2018, the end of fiscal year 2017.2018. Approximately 80% of this backlog is expected to be realized in the next twelve months. Included in the backlog at OctoberJuly 31, 2017 is2018 was approximately $8.8$10.4 million under cost-plus-fee contracts which the Company believes represent firm commitments from its customers for which the Company has not received full funding to-date. The Company excludes from backlog any contracts or awards for which it has not received authorization to proceed and on fixed price contracts excludes any unfunded portion.associated funding. The Company expects these contracts to become fully funded over time and will add to its backlog at that time.
The Company believes that its liquidity is adequate to meet its operating and investment needs through at least December 15, 2018.
The Company’s international business is subject to changes in demand or pricing resulting from fluctuations in currency exchange rates primarily in the Euro to U.S. Dollar exchange rate and in the Chinese Renminbi to U.S. Dollar exchange rate.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements, other than operating leases, that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Not applicable.
Disclosure Controls and Procedures
. The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report.There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Changes in Internal Control Over Financial Reporting
. There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months endedPART II. OTHER INFORMATION
31.1 | |
31.2 | |
32 | |
101 | The following materials from the Frequency Electronics, Inc. Quarterly Report on Form 10-Q for the quarter ended |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FREQUENCY ELECTRONICS, INC.
(Registrant)
Date: December 15, 2017September 14, 2018 BY /s/ Steven L. Bernstein
Steven L. Bernstein
Chief Financial Officer
Signing on behalf of the registrant and as principal financial officer