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 1934
For the Quarterly Period ended July 31, 20182019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For 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.) |
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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
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock (par value $1.00 per share) | FEIM | NASDAQ Global Market |
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 “emergingemerging growth company”.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 | Smaller Reporting Company ☒ |
Emerging growth company ☐ |
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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 September 12, 201811, 2019 – 8,729,6829,040,969
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Part I. Financial Information: | Page No. |
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Condensed Consolidated Balance Sheets – July 31, | 3 |
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Notes to Condensed Consolidated Financial Statements (unaudited) |
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Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3 - Quantitative and Qualitative Disclosures About Market Risk |
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Part II. Other Information: |
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PART I. FINANCIAL INFORMATION
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands except par value)
July 31, | April 30, | July 31, | April 30, | |||||||||||||
2018 | 2018 | 2019 | 2019 | |||||||||||||
(UNAUDITED) | (UNAUDITED) | |||||||||||||||
ASSETS: | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 2,621 | $ | 7,869 | $ | 2,239 | $ | 3,683 | ||||||||
Marketable securities | 7,178 | 6,149 | 9,016 | 8,199 | ||||||||||||
Accounts receivable, net of allowance for doubtful accounts of $175 at July 31, 2018 and $181 at April 30, 2018 | 6,487 | 4,268 | ||||||||||||||
Accounts receivable, net of allowance for doubtful accounts of $182 at July 31, 2019 and $183 at April 30, 2019 | 7,328 | 6,362 | ||||||||||||||
Costs and estimated earnings in excess of billings, net | 6,732 | 5,094 | 7,204 | 6,670 | ||||||||||||
Inventories, net | 26,341 | 26,186 | 23,201 | 23,356 | ||||||||||||
Prepaid income taxes | 1,453 | 1,459 | 326 | 499 | ||||||||||||
Prepaid expenses and other | 1,247 | 1,050 | 2,223 | 2,583 | ||||||||||||
Current assets held for sale | - | 1,347 | ||||||||||||||
Total current assets | 52,059 | 52,075 | 51,537 | 52,699 | ||||||||||||
Property, plant and equipment, at cost, net of accumulated depreciation and amortization | 14,041 | 14,127 | 13,151 | 13,038 | ||||||||||||
Goodwill and other intangible assets | 617 | 617 | ||||||||||||||
Goodwill | 617 | 617 | ||||||||||||||
Cash surrender value of life insurance and cash held in trust | 14,083 | 13,915 | 14,466 | 14,292 | ||||||||||||
Right-of-Use assets | 11,840 | - | ||||||||||||||
Other assets | 2,733 | 2,850 | 3,553 | 5,923 | ||||||||||||
Non-current assets held for sale | - | 202 | ||||||||||||||
Total assets | $ | 83,533 | $ | 83,584 | $ | 95,164 | $ | 86,771 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY: | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable - trade | $ | 1,264 | $ | 1,841 | ||||||||||||
Accounts payable – trade | $ | 1,061 | $ | 1,188 | ||||||||||||
Accrued liabilities | 3,174 | 3,416 | 3,600 | 3,571 | ||||||||||||
Lease liability, current | 1,883 | - | ||||||||||||||
Current liabilities held for sale | - | 1,078 | ||||||||||||||
Total current liabilities | 4,438 | 5,257 | 6,544 | 5,837 | ||||||||||||
Deferred compensation | 13,626 | 13,541 | 14,296 | 14,216 | ||||||||||||
Deferred rent and other liabilities | 1,500 | 1,524 | ||||||||||||||
Lease liability | 10,193 | - | ||||||||||||||
Other liabilities | 1,295 | 1,376 | ||||||||||||||
Non-current liabilities held for sale | - | 2,253 | ||||||||||||||
Total liabilities | 19,564 | 20,322 | 32,328 | 23,682 | ||||||||||||
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 | ||||||||||||||
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, 9,033 shares outstanding at July 31, 2019; 8,980 shares outstanding at April 30, 2019 | 9,164 | 9,164 | ||||||||||||||
Additional paid-in capital | 56,610 | 56,439 | 56,796 | 56,831 | ||||||||||||
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 deficit | (2,702 | ) | (2,111 | ) | ||||||||||||
63,258 | 63,884 | |||||||||||||||
Common stock reacquired and held in treasury - at cost (131 shares at July 31, 2019 and 184 shares at April 30, 2019) | (602 | ) | (841 | ) | ||||||||||||
Accumulated other comprehensive income | (959 | ) | (915 | ) | 180 | 46 | ||||||||||
Total stockholders’ equity | 63,969 | 63,262 | 62,836 | 63,089 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 83,533 | $ | 83,584 | $ | 95,164 | $ | 86,771 |
See accompanying notes to condensed consolidated financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive (Loss) IncomeLoss
Three Months Ended July 31,
(In thousands except per share data)
(Unaudited)
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 |
2019 | 2018 | |||||||
Condensed Consolidated Statements of Operations | ||||||||
Revenues | $ | 12,554 | $ | 11,011 | ||||
Cost of revenues | 8,601 | 6,737 | ||||||
Gross margin | 3,953 | 4,274 | ||||||
Selling and administrative expenses | 2,453 | 2,540 | ||||||
Research and development expense | 2,280 | 1,649 | ||||||
Operating (loss) income | (780 | ) | 85 | |||||
Other income (expense): | ||||||||
Investment income | 177 | 45 | ||||||
Interest expense | (24 | ) | (18 | ) | ||||
Other income (expense), net | 56 | (74 | ) | |||||
(Loss) income before provision for income taxes | (571 | ) | 38 | |||||
Provision for income taxes | 20 | 7 | ||||||
Net (loss) income | $ | (591 | ) | $ | 31 | |||
Net loss per common share: | ||||||||
Basic | $ | (0.07 | ) | $ | 0.00 | |||
Diluted | $ | (0.07 | ) | $ | 0.00 | |||
Weighted average shares outstanding: | ||||||||
Basic | 9,001 | 8,876 | ||||||
Diluted | 9,001 | 8,990 | ||||||
Condensed Consolidated Statements of Comprehensive Loss | ||||||||
Net (loss) income | $ | (591 | ) | $ | 31 | |||
Other comprehensive loss: | ||||||||
Foreign currency translation adjustment | - | (36 | ) | |||||
Unrealized gain (loss) on marketable securities: | ||||||||
Change in market value of marketable securities before reclassification, net of tax | 135 | (8 | ) | |||||
Reclassification adjustment for realized gains included in net income, net of tax | (1 | ) | - | |||||
Total unrealized gain (loss) on marketable securities, net of tax | 134 | (8 | ) | |||||
Total other comprehensive income (loss) | 134 | (44 | ) | |||||
Comprehensive loss | $ | (457 | ) | $ | (13 | ) |
See accompanying notes to condensed consolidated financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Three Months Ended July 31,
(In thousands)
(Unaudited)
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 | $ | - | $ | - |
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net (loss) income | $ | (591 | ) | $ | 31 | |||
Non-cash charges to earnings | 2,506 | 1,151 | ||||||
Net changes in operating assets and liabilities | (1,762 | ) | (4,743 | ) | ||||
Net cash provided by (used in) operating activities | 153 | (3,561 | ) | |||||
Cash flows from investing activities: | ||||||||
Proceeds on redemption of marketable securities | 750 | 595 | ||||||
Purchase of marketable securities | (1,435 | ) | (1,636 | ) | ||||
Purchase of fixed assets and other assets | (912 | ) | (483 | ) | ||||
Net cash used in investing activities | (1,597 | ) | (1,524 | ) | ||||
Net cash provided by financing activities | - | - | ||||||
Net decrease in cash and cash equivalents before effect of exchange rate changes | (1,444 | ) | (5,085 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | - | (163 | ) | |||||
Net decrease in cash and cash equivalents | (1,444 | ) | (5,248 | ) | ||||
Cash and cash equivalents at beginning of period | 3,683 | 7,869 | ||||||
Cash and cash equivalents at end of period | $ | 2,239 | $ | 2,621 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 24 | $ | 18 | ||||
Income taxes | $ | - | $ | - |
See accompanying notes to condensed consolidated financial statements.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’ Equity
Three Months Ended July 31, 2019 and July 31, 2018
(In thousands except per share data)
(Unaudited)
Additional | (Accumulated Deficit) | Treasury stock | Accumulated other | |||||||||||||||||||||||||||||
Common Stock | paid in | Retained | (at cost) | comprehensive | ||||||||||||||||||||||||||||
Shares | Amount | capital | earnings | Shares | Amount | Income (loss) | Total | |||||||||||||||||||||||||
Balance at April 30, 2018 | 9,163,940 | $ | 9,164 | $ | 56,439 | $ | (65 | ) | 297,083 | $ | (1,361 | ) | $ | (915 | ) | $ | 63,262 | |||||||||||||||
Opening adjustment for adoption of ASU 2014-09 | 483 | 483 | ||||||||||||||||||||||||||||||
Adjusted balance at May 1, 2018 | 9,163,940 | 9,164 | 56,439 | 418 | 297,083 | (1,361 | ) | (915 | ) | 63,745 | ||||||||||||||||||||||
Contribution of stock to 401(k) plan | 50 | (14,339 | ) | 66 | 116 | |||||||||||||||||||||||||||
Stock-based compensation expense | 121 | 121 | ||||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | (44 | ) | (44 | ) | ||||||||||||||||||||||||||||
Net income | 31 | 31 | ||||||||||||||||||||||||||||||
Balance at July 31, 2018 | 9,163,940 | $ | 9,164 | $ | 56,610 | $ | 449 | 282,744 | $ | (1,295 | ) | $ | (959 | ) | $ | 63,969 |
Additional | (Accumulated Deficit) | Treasury stock | Accumulated other | |||||||||||||||||||||||||||||
Common Stock | paid in | Retained | (at cost) | comprehensive | ||||||||||||||||||||||||||||
Shares | Amount | capital | earnings | Shares | Amount | Income | Total | |||||||||||||||||||||||||
Balance at April 30, 2019 | 9,163,940 | $ | 9,164 | $ | 56,831 | $ | (2,111 | ) | 183,661 | $ | (841 | ) | $ | 46 | $ | 63,089 | ||||||||||||||||
Contribution of stock to 401(k) plan | 74 | (10,906 | ) | 50 | 124 | |||||||||||||||||||||||||||
Stock-based compensation expense | 80 | 80 | ||||||||||||||||||||||||||||||
Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price | (189 | ) | (41,325 | ) | 189 | - | ||||||||||||||||||||||||||
Other comprehensive income, net of tax | 134 | 134 | ||||||||||||||||||||||||||||||
Net loss | (591 | ) | (591 | ) | ||||||||||||||||||||||||||||
Balance at July 31, 2019 | 9,163,940 | $ | 9,164 | $ | 56,796 | $ | (2,702 | ) | 131,430 | $ | (602 | ) | $ | 180 | $ | 62,836 |
See accompanying notes to condensed consolidated financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE A – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management of Frequency Electronics, Inc. (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 July 31, 20182019 and the results of its operations and cash flows for the three months ended July 31, 20182019 and 2017.July 31, 2018. The April 30, 20182019 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, 2018,2019, filed on July 30, 2018,26, 2019 with the Securities and Exchange Commission, 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 parties with respect to a potential sale of Gillam-FEI s.a., the Company’s Belgian subsidiary (“Gillam”). However, these parties did not perform their obligations under that agreement, and the Company continued to negotiate with other parties with respect to a potential sale. In April 2017, the Company decided to sell its Gillam business as soon as practicable. Accordingly, the Company determined that the assets and liabilities of this reportable segment met the discontinued operations criteria as defined in U.S. GAAP in the quarter ended April 30, 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) Income for fiscal 2018.
Summarized operating results for the Gillam discontinued operations, for the three months ended July 31, 2017 were as follows:
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)
NOTE C – EARNINGS PER SHARE
Reconciliation of the weighted average shares outstanding for basic and diluted Earnings Per Share were as follows:
Three months ended July 31, | ||||||||||||||||
Three months ended July 31, | ||||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 8,876,416 | 8,826,026 | 9,001,324 | 8,876,416 | ||||||||||||
Effect of dilutive securities | 114,055 | 141,281 | ** | 114,055 | ||||||||||||
Diluted | 8,990,471 | 8,967,307 | 9,001,324 | 8,990,471 |
The computation of diluted Earnings Per Share for** For the three months endingthree-month period ended July 31, 2018 and 2017 excludes those options and stock appreciation rights (“SARS”) with an exercise price in excess of2019, dilutive securities are excluded since the average market price of the Company’s common shares during the periods presented. The inclusion of such options and SARS inshares would be antidilutive due to the computationnet loss for the period. The exercisable shares excluded as of earnings per shareJuly 31, 2019 are 179,000 options. The effect of dilutive securities would have been antidilutive. The number of excluded250,101 options, and SARS were:for the three-month period ended July 31, 2019.
Three months ended July 31, | ||||||||
2018 | 2017 | |||||||
Outstanding options and SARS excluded | 1,129,000 | 893,500 |
NOTE DC – COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS, NET
At July 31, 20182019 and April 30, 2018,2019, costs and estimated earnings in excess of billings, net, consisted of the following:
July 31, 2018 | April 30, 2018 | July 31, 2019 | April 30, 2019 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Costs and estimated earnings in excess of billings | $ | 8,042 | $ | 5,266 | $ | 9,464 | $ | 8,278 | ||||||||
Billings in excess of costs and estimated earnings | (1,310 | ) | (172 | ) | (2,260 | ) | (1,608 | ) | ||||||||
Net asset | $ | 6,732 | $ | 5,094 | $ | 7,204 | $ | 6,670 |
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 (“POC”) basis at the measurement date. For the most part,In general, 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 a percentage of completionthe POC basis. During the three months ended July 31, 20182019 and 2017,2018, revenue recognized under percentage of completionPOC contracts was approximately $9.3$11.5 million and $6.4$9.3 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. Total contractContract losses atof approximately $314,000 were recorded for the three months ended July 31, 2018 were approximately $70,000. There were no contract losses for the same fiscal 2018 period.2019.
NOTE ED – TREASURY STOCK TRANSACTIONS
During the three monthsmonth period ended July 31, 2018,2019, the Company made contributions of 14,33910,906 shares of its common stock held in treasury to the Company’s profit sharingprofit-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.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE FE – INVENTORIES
Inventories, which are reported at the lower of cost orand net realizable value, consisted of the following:
July 31, 2018 | April 30, 2018 | July 31, 2019 | April 30, 2019 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Raw Materials and Component Parts | $ | 15,108 | $ | 16,206 | $ | 15,364 | $ | 11,600 | ||||||||
Work in Progress | 8,540 | 8,216 | 6,445 | 8,896 | ||||||||||||
Finished Goods | 2,693 | 1,764 | 1,392 | 2,860 | ||||||||||||
$ | 26,341 | $ | 26,186 | $ | 23,201 | $ | 23,356 |
The amounts above are net of reserves of $7.2 million and $6.6 million as of July 31, 2019 and April 30, 2019, respectively. As of July 31, 2019 and April 30, 2019, all inventory was located in the United States.
NOTE F – RIGHT-OF-USE ASSETS AND LEASE LIABILITIES
The Company’s leases primarily represent offices, warehouses, vehicles, and manufacturing and research and development facilities which expire at various times through 2029 and are generally operating leases. Contractual arrangements are evaluated at inception to determine if the agreement contains a lease. Certain lease agreements contain renewal options, rent abatement, and escalation clauses that are factored into our determination of lease payments when appropriate. Right-of-use (“ROU”) assets and lease liabilities are recorded based on the present value of future lease payments which will factor in certain qualifying initial direct costs incurred as well as any lease incentives that may have been received. Lease expenses for operating lease payments are recognized on a straight-line basis over the lease term. Lease terms may factor in options to extend or terminate the lease.
The Company elected the practical expedient for short-term leases which allows leases with terms of twelve months or less to be recorded on a straight-line basis over the lease term without being recognized on the balance sheet.
Effective May 1, 2019, the Company adopted ASU 2016-02. The table below presents ROU assets and liabilities recorded on the unaudited condensed consolidated balance sheet related to ASU 2016-02 as follows:
Classification | July 31, 2019 | ||||
(in thousands) | |||||
Assets | |||||
Operating lease ROU assets | Right-of-Use assets | $ | 11,840 | ||
Liabilities | |||||
Operating lease liabilities (short-term) | Lease liability, current | 1,883 | |||
Operating lease liabilities (long-term) | Lease liability | 10,193 | |||
Total lease liabilities | $ | 12,076 |
Total operating lease expense was $504,000 for the three months ended July 31, 2019, the majority of which is included in cost of revenues and the remaining amount in selling and administrative expenses on the unaudited condensed consolidated statement of operations. There were no new leases entered into for the current period ended July 31, 2019. Net non-cash operating activities related to leases was approximately $236,000 for the three months ended July 31, 2019.
As previously disclosed in our April 30, 2019 Annual Report on Form 10-K, and under the previous lease accounting standard, future minimum lease payments for operating leases having initial or remaining non-cancellable lease terms in excess of one year would have been as follows (in thousands):
For the years ending April 30, | Operating Leases | |||
2020 | $ | 1,316 | ||
2021 | 1,521 | |||
2022 | 1,436 | |||
2023 | 1,469 | |||
2024 | 1,502 | |||
Thereafter | 6,349 | |||
Total future minimum lease payments | $ | 13,593 |
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities recorded on the unaudited consolidated balance sheet as of July 31, 2019:
Fiscal Year Ending April 30, | ||||
(in thousands) | ||||
Remainder of 2020 | $ | 1,304 | ||
2021 | 1,919 | |||
2022 | 1,783 | |||
2023 | 1,801 | |||
2024 | 1,834 | |||
Thereafter | 7,215 | |||
Total lease payments | 15,856 | |||
Less imputed interest | (3,780 | ) | ||
Present value of future lease payments | 12,076 | |||
Less current obligations under leases | 1,883 | |||
Long-term lease obligations | 10,193 |
As of July 31, 2018 and April 30, 2018, approximately $25.5 million and $25.2 million, respectively, of total inventory2019, the weighted-average remaining lease term for all operating leases was located8.9 years. The Company does not generally have access to the rate implicit in the United Statesleases and $0.9 million and $1.0 million, respectively,therefore utilized the Company’s borrowing rate as the discount rate. The weighted average discount rate for operating leases as of July 31, 2019 was located in China.6.16%.
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 The FEI-NY segment also includes the operations of the Company’s wholly-owned |
(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. |
The Company’s managementCompany 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.
The accounting policies of the two segments are the same as those described in the “Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended April 30, 2019, filed on July 26, 2019 with the Securities and Exchange Commission. The Company evaluates the performance of its segments and allocates resources to them based on operating profit which is defined as income before investment income, interest expense and taxes. All acquired assets, including intangible assets, are included in the assets of both reporting segments.
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 statementcondensed consolidated statements of operations or the condensed consolidated balance sheetsheets for each of the periods (in thousands):
Three months ended July 31, | ||||||||||||||||
Three months ended July 31, | ||||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Revenues: | ||||||||||||||||
FEI-NY | $ | 8,577 | $ | 9,160 | $ | 9,010 | $ | 8,577 | ||||||||
FEI-Zyfer | 2,561 | 4,272 | 3,701 | 2,561 | ||||||||||||
less intercompany revenues | (127 | ) | (1,409 | ) | (157 | ) | (127 | ) | ||||||||
Consolidated revenues | $ | 11,011 | $ | 12,023 | $ | 12,554 | $ | 11,011 |
Operating profit: | ||||||||||||||||
Operating (loss) profit: | ||||||||||||||||
FEI-NY | $ | (215 | ) | $ | (400 | ) | $ | (1,232 | ) | $ | (215 | ) | ||||
FEI-Zyfer | 386 | 691 | ) | 517 | 386 | |||||||||||
Corporate | (86 | ) | (111 | ) | (65 | ) | (86 | ) | ||||||||
Consolidated operating profit | $ | 85 | $ | 180 | ||||||||||||
Consolidated operating (loss) profit | $ | (780 | ) | $ | 85 |
July 31, 2018 | April 30, 2018 | July 31, 2019 | April 30, 2019 | |||||||||||||
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-NY (approximately $1.5 million in China as of the fiscal year ended April 30, 2019) | $ | 51,621 | $ | 54,295 | ||||||||||||
FEI-Zyfer | 8,562 | 8,168 | 12,824 | 10,478 | ||||||||||||
less intersegment balances | (11,180 | ) | (11,888 | ) | (8,586 | ) | (8,346 | ) | ||||||||
Corporate | 28,903 | 32,123 | 39,305 | 30,344 | ||||||||||||
Consolidated identifiable assets | $ | 83,533 | $ | 83,584 | $ | 95,164 | $ | 86,771 |
Total revenue related to the adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), (“ASU 2014-09”) and recognized over time as POC and Passage of Title (“POT”) were approximately $11.5 million and $1.1 million, respectively, of the $12.6 million reported for the three months ended July 31, 2019. The amounts recognized over time as POC and POT were approximately $9.2 million and $1.8 million of the $11.0 million reported for the three months ended July 31, 2018. The amounts by segment and product line were as follows:
Three Months Ended July 31, 2019 | Three Months Ended July 31, 2018 | |||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||
POC Revenue | POT Revenue | Total Revenue | POC Revenue | POT Revenue | Total Revenue | |||||||||||||||||||
FEI-NY | $ | 8,160 | $ | 850 | $ | 9,010 | $ | 8,079 | $ | 498 | $ | 8,577 | ||||||||||||
FEI-Zyfer | 3,323 | 378 | 3,701 | 1,175 | 1,386 | 2,561 | ||||||||||||||||||
Intersegment | 26 | (183 | ) | (157 | ) | (7 | ) | (120 | ) | (127 | ) | |||||||||||||
Revenue | $ | 11,509 | $ | 1,045 | $ | 12,554 | $ | 9,247 | $ | 1,764 | $ | 11,011 |
Three Months Ended July 31, | ||||||||
2019 | 2018 | |||||||
(In thousands) | ||||||||
Revenue by Product Line: | ||||||||
Satellite Revenue | $ | 3,895 | $ | 5,534 | ||||
Government Non-Space Revenue | 6,744 | 4,781 | ||||||
Other Commercial & Industrial Revenue | 1,915 | 696 | ||||||
Consolidated revenues | $ | 12,554 | $ | 11,011 |
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 condensed consolidated balance sheets. During the three months ended July 31, 20182019 and 2017,2018, the Company acquired product from Morion in the aggregate amount of approximately $68,000$245,000 and $64,000,$68,000, respectively, and the Company sold product and training services to Morion in the aggregate amount of approximately $2,000$47,000 and $182,000,$2,000, respectively, included in revenues in the statementcondensed consolidated statements of operations as part of the FEI-NY segment. At July 31, 2018,2019 there was approximately $4,000 was$54,000 payable to Morion. At July 31, 2018Morion, up from approximately $38,000 at April 30, 2019, and there waswere no receivablereceivables related to Morion.Morion for either period. During the three months ended July 31, 2018, the Company did not receive a dividend from Morion. During the three months ended July 31, 2017,2019, the Company received a dividend from Morion in the amount of approximately $51,000$125,000, which is included in other income, (expense)net in the statementcondensed consolidated statements of operations as part of the FEI-NY segment.
Morion operates as a subsidiary of Gazprombank, a state-owned Russian bank. On July 16, 2014, after the Company’s investment in Morion, Gazprombank became subject to the U. S.U.S. Department of Treasury’s prohibition against U. S.U.S. persons from providing it with new financing.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(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 July 31, 20182019 and April 30, 2018,2019, respectively, were as follows (in thousands):
July 31, 2018 | ||||||||||||||||
Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Market Value | |||||||||||||
Fixed income securities | $ | 7,311 | $ | 11 | $ | (144 | ) | $ | 7,178 |
July 31, 2019 | ||||||||||||||||
Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Market Value | |||||||||||||
Fixed income securities | $ | 8,836 | $ | 182 | $ | (2 | ) | $ | 9,016 |
April 30, 2018 | ||||||||||||||||
Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Market Value | |||||||||||||
Fixed income securities | $ | 6,274 | $ | 10 | $ | (135 | ) | $ | 6,149 |
April 30, 2019 | ||||||||||||||||
Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Market Value | |||||||||||||
Fixed income securities | $ | 8,152 | $ | 71 | $ | (24 | ) | $ | 8,199 |
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 | Less than 12 months | 12 Months or more | Total | |||||||||||||||||||||||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||||||||||||||||||||
July 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
July 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||
Fixed Income Securities | $ | 6,054 | $ | (144 | ) | $ | - | $ | - | $ | 6,054 | $ | (144 | ) | $ | 250 | $ | (0 | ) | $ | 861 | $ | (2 | ) | $ | 1,111 | $ | (2 | ) | |||||||||||||||||||
April 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
April 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||
Fixed Income Securities | $ | 5,334 | $ | (135 | ) | $ | - | $ | - | $ | 5,334 | $ | (135 | ) | $ | 995 | $ | (4 | ) | $ | 3,349 | $ | (20 | ) | $ | 4,344 | $ | (24 | ) |
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 July 31, 20182019 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 three months ended July 31, 20182019, 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 amount $6.3 million,approximately $750,000, realizing gains of approximately $1.0 million.$1,000.
Maturities of fixed income securities classified as available-for-sale at July 31, 2018 were as follows (at cost, in thousands):
Current | $ | 916 | ||
Due after one year through five years | 2,557 | |||
Due after five years through ten years | 3,838 | |||
$ | 7,311 |
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Maturities of fixed income securities classified as available-for-sale at July 31, 2019 were as follows, at cost (in thousands):
Current | $ | 2,403 | ||
Due after one year through five years | 3,981 | |||
Due after five years through ten years | 2,701 | |||
$ | 9,085 |
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(Level 1 measurements) and the lowest priority to unobservable inputs (level(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 |
|
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,August 2018, the Financial Accounting Standards Board (the “FASB”(“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13 Fair Value Measurement (Topic 820) (“ASU 2018-13”) which modifies the disclosure requirement on fair value measurements. 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 its financial statements when adopted in fiscal year 2021.
In January 2017, the FASB issued ASU No. 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,have. However, the Company expects the new standard will likely notto have a materialan immaterial effect on its financial statements.
In June 2016, the FASB issued ASU No. 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 U.S. 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 theits 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. The Company does not intend to adopt this update early and is currently re-evaluating the impact of this standard on its consolidated financial statements, due to the new lease amendment dated July 25, 2018, for the Company’s headquarters in New York, when adopted beginning in fiscal 2020.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Newly Adopted Accounting Standards
Revenue from Contracts with CustomersLeases (Topic 842)
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 Company 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, but is not limited to, identifying performance obligations and estimating 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, 2018,2020 the Company also adopted the guidance in ASC 340-40,ASU No. 2016-02 Other Assets and Deferred Costs - Contracts with CustomersLeases (Topic 842) (“ASC 340-40”ASU 2016-02”), 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 noncurrent portion of deferred commissions are included in prepaid expenses and other current assets, respectively, in the Company’srecognized on its Condensed Consolidated Balance Sheet. AdoptionSheets $12.1 million of ASC 340-40 resulted inlease liabilities with corresponding ROU assets for operating leases. The Company elected 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 end user is the government. The Company’s contracts typically include multiple performance obligations which are satisfied either by shipped projects or the 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. 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 rate for a contract is reflected in revenues in the period in which the change is known. Provisionsprospective application 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 recordednew guidance, 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 contractspermitted under ASU 2016-02, and production-type orders may result in revisions to costs and income and are recognized in the period in which revisions are determinedtherefore prior periods continue to be required. Provisions for anticipated losses on customer orders are madepresented in accordance with Topic 840. We also elected the period inpackage of practical expedients, which they become determinable.
For customer orders in the Company’s FEI-Zyfer segment or smaller contracts or orders in the FEI-NY segment, salesamong other things, does not require reassessment 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 will begin recognizing revenue earlier under these contracts. The Company’s products generally carry a one-year warranty, but may vary based on the contract terms.
Significant judgment is used in evaluating the financial information for certain contracts related to the adoption of this ASU to determine an appropriate budget and estimated cost. The Company evaluates this information continuously and bases its judgments on historical experience, design specifications, and expected costs for material and labor.
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)lease classification.
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 of July 31, 2018,2019, 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
As required by the authoritative guidance on accounting for income taxes, we evaluate the realizability of deferred tax assets in the jurisdiction from which they arise, weon a jurisdictional basis at each reporting date. 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. Based onAccounting for income taxes requires that a valuation allowance be established when it is more likely than not that all or a portion of the weightingdeferred tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets will not be realizable, we establish a valuation allowance. As of all evidence, both positiveJuly 31, 2019, and negative, most notablyApril 30, 2019, the three year cumulative loss, we establishedCompany maintained a full valuation allowance against our U.S.its deferred tax assets during the quarter ended April 30, 2018.assets. 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, the 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”) 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 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 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.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
“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. Any and all of the forward-looking statements contained in this Form 10-Q and any other public statementstatements by the Company or its management may turn out to be incorrect. The Company expressly disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.
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, 2018,2019, filed on July 30, 2018.26, 2019 with the Securities and Exchange Commission. 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 orand the market value of its products. Changes in estimates can have a material impact on the Company’s financial position and results of operations. The Company’s significant accounting policies did not change during the three months ended July 31, 2018,2019, except for those impacted by the newly adopted accounting standard below.regarding leases.
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 customerscustomer’s 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 companyCompany 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 POC 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 rate (“GM 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.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
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.order which then transfers control of the performance obligation to the customer. When payment is contingent upon customer acceptance of the installed system,product, revenue is deferred until such installation completed and acceptance is received and installation completed.received.
Costs and Expenses
Contract costs include all direct material costs, direct labor costs, manufacturing overhead and other direct costs related to contract performance. Selling, general and administrative costs are expensed as incurred, except as otherwise noted in Note J abovewith the exception of sales commissions with an amortization period of greater than one year which are amortized over the length of the contract in relation to the adoption of ASU 2014-09.
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-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-downs are based upon management’s experience and expectations for future business. Any changes arising from revised expectations are reflected in cost of salesrevenues 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 income securities are only inlimited to the commercial paper of financially sound corporations or the bonds and shorter-term notes 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.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
RESULTS OF OPERATIONS
The table below sets forth for the three months ended July 31, 2019 and 2018, and 2017respectively, the percentage of consolidated revenues represented by certain items in the Company’s condensed consolidated statements of operations or notes to the condensed consolidated financial statements:
Three months ended July 31, | ||||||||||||||||
Three months ended July 31, | ||||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Revenues | ||||||||||||||||
FEI-NY | 77.9 | % | 76.2 | % | 71.8 | % | 77.9 | % | ||||||||
FEI-Zyfer | 23.3 | 35.5 | 29.5 | 23.3 | ||||||||||||
Less intersegment revenues | (1.2 | ) | (11.7 | ) | (1.3 | ) | (1.2 | ) | ||||||||
100.0 | 100.0 | 100.0 | 100.0 | |||||||||||||
Cost of revenues | 61.2 | 62.4 | 68.5 | 61.2 | ||||||||||||
Gross margin | 38.8 | 37.6 | 31.5 | 38.8 | ||||||||||||
Selling and administrative expenses | 23.1 | 22.6 | 19.5 | 23.1 | ||||||||||||
Research and development expenses | 15.0 | 13.5 | 18.2 | 15.0 | ||||||||||||
Operating profit | 0.7 | 1.5 | ||||||||||||||
Other (expense) income, net | (0.4 | ) | 9.4 | |||||||||||||
Operating (loss) income | (6.2 | ) | 0.7 | |||||||||||||
Other income (expense), net | 1.7 | (0.4 | ) | |||||||||||||
Provision for income taxes | 0.1 | 4.0 | 0.2 | 0.1 | ||||||||||||
Income from continuing operations | 0.2 | 6.9 | ||||||||||||||
Loss from discontinued operations, net of tax | - | (1.8 | ) | |||||||||||||
Net income | 0.2 | % | 5.1 | % | ||||||||||||
Net (loss) income | (4.7 | )% | 0.2 | % |
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Revenues
Three months ended July 31, (in thousands) | Three months ended July 31 (in thousands) | |||||||||||||||||||||||||||||||
2018 | 2017 | Change | ||||||||||||||||||||||||||||||
Segment | 2019 | 2018 | Change | |||||||||||||||||||||||||||||
FEI-NY | $ | 8,577 | $ | 9,160 | $ | (583 | ) | (6 | %) | $ | 9,010 | $ | 8,577 | $ | 433 | 5.1 | % | |||||||||||||||
FEI-Zyfer | 2,561 | 4,272 | (1,711 | ) | (40 | %) | 3,701 | 2,561 | 1,140 | 44.5 | ||||||||||||||||||||||
Intersegment revenues | (127 | ) | (1,409 | ) | 1,282 | (91 | %) | (157 | ) | (127 | ) | (30 | ) | 23.6 | ||||||||||||||||||
$ | 11,011 | $ | 12,023 | $ | (1,012 | ) | (8 | %) | $ | 12,554 | $ | 11,011 | $ | 1,543 | 14.0 | % |
For the three months ended July 31, 2018,2019, revenues from commercialnon-space U.S. Government/Department of Defense (“DOD”) customers, which are recorded in both the FEI-NY and U.S. Government satellite programsFEI-Zyfer segments, increased approximately $335,000$2.0 million over the same period of fiscal year 2018,2019, and accounted for approximately 50%54% of consolidated revenues compared to approximately 43% during this same period in fiscal 2019. Revenues from commercial and U.S. Government satellite programs decreased approximately $1.6 million for the three months ended July 31, 2019, as compared to the same period of fiscal 2018.year 2019 and accounted for approximately 31% of consolidated revenues compared to approximately 50% during this same period in fiscal 2019. The change in revenue is related to product mix and timing of contract awards. Revenues on these contracts are recognized primarily under the POC 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-NYOther commercial 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 commercialindustrial revenues for the three months ended July 31, 2018 decreased2019 were $1.9 million and represented approximately $1.6 million over the same period of fiscal 2018, and accounted for approximately 6%15% of consolidated revenues compared to 19% during$700,000 or 7% in the same period of the prior year.
Gross Margin
Three months ended July 31 (in thousands) | ||||||||||||||||
2019 | 2018 | Change | ||||||||||||||
$ | 3,953 | $ | 4,274 | $ | (321 | ) | (7.5 | %) | ||||||||
GM Rate | 31.5 | % | 38.8 | % |
For the three month period ended July 31, 2019, gross margin and GM Rate decreased as compared to the same period in fiscal 2018. Intersegment revenues2019. The decrease in gross margin and GM Rate was primarily due to higher engineering costs incurred in several new programs. These programs relate to products that are eliminated in consolidation. Revenue amounts forpushing state of the art technology.
Selling and Administrative Expenses
Three months ended July 31, | |||||||||||||||
(in thousands) | |||||||||||||||
2019 | 2018 | Change | |||||||||||||
$ | 2,453 | $ | 2,540 | $ | (87 | ) | (3.4 | %) |
For the three months ended July 31, 2019 and 2018, include the adoptionselling and administrative (“SG&A”) expenses were approximately 20% and 23%, respectively, 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 percentconsolidated revenues. There was no account or type 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 representexpense that represented a significant portion of the Company’s overall revenue.change in expenses.
Research and Development Expense
Three months ended July 31, | |||||||||||||||
(in thousands) | |||||||||||||||
2019 | 2018 | Change | |||||||||||||
$ | 2,280 | $ | 1,649 | $ | 631 | 38.3 | % |
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 July 31, 2018, selling and administrative (“SG&A”) expenses declined approximately $172,000 as compared to the same period in fiscal year 2018 and were approximately 23% of consolidated revenues. The reduction occurred in various accounts; there was no specific account that made up the majority of the decrease. The Company continues to monitor and manage expenses of the business. SG&A amounts for the three months ended July 31, 2018 include adjustments related to the adoption of ASC 340-40 as previously stated in Note J.
Research and Development Expense
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 contracts. R&D spending for the three months ended July 31, 2018 was comparable to that of the same period of the previous fiscal year.competitiveness. The R&D rate for the three-month period ending July 31, 20182019 was 15%18% of sales compared to 14%15% of sales for the same period of the previous fiscal year. ForThe Company expects to maintain a high level of internally funded activity related to R&D through the balance of the fiscalcurrent year research and development activity will include a significantly higher level of customer funded R&D.beyond to address new large opportunities in secure communications, command and control applications, next generation satellite payload products and additional DOD and commercial applications.
Operating I(Loss) ncomeIncome
Three months ended July 31, | ||||||||||||||
(in thousands) | ||||||||||||||
2018 | 2017 | Change | ||||||||||||
$ | 85 | $ | 180 | $ | (95 | ) | (53 | %) |
Three months ended July 31, | |||||||||||||||
(in thousands) | |||||||||||||||
2019 | 2018 | Change | |||||||||||||
$ | (780 | ) | $ | 85 | $ | (865 | ) | NM |
The Company achieved a lower operating incomeCompany’s results for the three monthsthree-month period ended July 31, 2018 due to an increased2019 reflects improvements in revenues, more than offset by lower gross margin rate, expense managementpercent and increased R&D.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)fiscal 2019.
Other IncomeIncome (Expense)
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 |
Three months ended July 31, | ||||||||||||||||
(in thousands) | ||||||||||||||||
2019 | 2018 | Change | ||||||||||||||
Investment income | $ | 177 | $ | 45 | $ | 132 | NM | |||||||||
Interest expense | (24 | ) | (18 | ) | (6 | ) | 33.3 | % | ||||||||
Other income (expense), net | 56 | (74 | ) | 130 | NM | |||||||||||
$ | 209 | $ | (47 | ) | $ | 256 | 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, sales, redemptions or salesmaturities of securities. For the three months endingthree-month period ended July 31, 20182019 investment income was lower thanincludes a $125,000 dividend from Morion. Other income included the sale of a fixed asset for a gain of $50,000 for the three-month period ended July 31, 2019.
Income Tax Provision
Three months ended July 31, | ||||||||||||||||
(in thousands) | ||||||||||||||||
2019 | 2018 | Change | ||||||||||||||
$ | 20 | $ | 7 | $ | 13 | NM | ||||||||||
Effective tax rate on pre-tax book income: | ||||||||||||||||
(3.5 | )% | 18.4 | % |
The estimated annual effective tax rate for the fiscal year ending April 30, 2020 is 0%. This calculation reflects estimated income tax expense based on our current year annual pretax income forecast which is offset by the estimated change in the same periodcurrent year valuation allowance. As of fiscal year 2017, mainly due to in the quarter ending July 31, 20172019, and April 30, 2019, the Company divested of allmaintained a full valuation allowance against its holdings in equities securities in its investment account, which were converted to cash. As a result, the Company recorded gains of approximately $1.0 million duringdeferred tax assets.
For the three months ended July 31, 2017 as compared to no gain or loss in2019, the same periodCompany recorded a discrete income tax provision of fiscal year 2018.
Income Tax Provision (Benefit)
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 | % |
$20,000, which primarily consisted of an accrual of interest for unrecognized tax benefits. For the three months ended July 31, 2018, the Company recorded an income tax provision of $7,000, which includesincluded a discrete income tax provision of $18,000. The calculation of the overall income tax provision for the three months ended July 31, 2018 primarily consist of foreign taxes and a discrete income tax provision related to the accrual of interest for unrecognized benefits. For the three months ended July 31, 2017, the Company recorded an income tax provision of $485,000.
The effective tax rate for the three months ended July 31, 20182019 is an income tax provision of 23.0%3.5% on a pretax loss of $571,000 compared to 36.9%an income tax provision of 18.4% on pretax income of $38,000 in the comparable prior period. The effective tax rate for the three months ended July 31, 20182019 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, the 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 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.
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
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. On April 26, 2018, the Company 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 sale 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 2018.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s balance sheet continues to reflect a strong working capital position of $47.6$44.9 million at July 31, 20182019 and $46.8$46.9 million at April 30, 2018.2019. Included in working capital at July 31, 20182019 and April 30 2018,2019, is $9.8$11.3 million and $14.0$11.9 million, respectively, consisting of cash, cash equivalents, and short-term investments.marketable securities. The Company’s current ratio at July 31, 2018 was 11.72019 is 8.5 to 1.
Cash used in operationsprovided by operating activities for the three months ended July 31, 20182019 was $153,000 compared to $3.6 million compared to $3.2 million provided byof cash used in operations in the comparable fiscal year 20182019 period. The decrease indecreased cash flow in the fiscal year 20192020 period ended July 31, 2018 resulted primarily from an increase in accounts receivables, compared to the balances as of the end of the previous fiscal year 2018 period ended July 31, 2017.receivable balances. For the three monththree-month periods ended July 31, 20182019 and 2017,2018, the Company incurred approximately$1.6 million and $1.2 million, and $145,000, respectively, of non-cash operating expenses including right to use asset and liability for leases, depreciation and amortization, inventory reserve adjustments, and accruals for employee benefit programs.
Net cash used in investing activities for the three months ended July 31, 2018,2019 was $1.5$1.6 million compared to $5.8 million provided by investing activities in$1.5 for the same period of fiscal yearthree months ended July 31, 2018. During the fiscal year 20192020 period, marketable securities were sold or redeemed in the amount of $595,000$750,000 compared to $6.3 million$595,000 of such redemptions during the fiscal year 20182019 period. For the fiscal year 20192020 period, approximately $1.6$1.4 million of marketable securities were purchased. There were no marketable securities purchased compared to $1.6 million for the same period inof fiscal year 2018. In the three months ended July 31, 2018 and 2017, the2019. The Company acquired property, plant and equipment in the amount of approximately $912,000 and $483,000 for the three-month periods ended July 31, 2019 and $450,000,2018, respectively. The Company may continue to invest in cash equivalents as dictated by its investment and acquisition strategies.strategy.
There was no cash provided by financing activities for either the three months ended July 31, 2018 compared to $1,000 provided in2019 or the three months ended July 31, 2017.2018.
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 wheneverwhen appropriate opportunities arise but it has neither a formal repurchase plan nor commitments to purchase additional shares in the future.arise. As of July 31, 2018,2019, the Company has repurchased approximately $4 million of its common stock out of the $5 million authorization. For the three months ended July 31, 20182019 and 2017,2018, there were no repurchases 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 2018, theThe Company secured partialanticipates securing additional 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 2019, the Company has secured significant additional customer funding for its R&D activities and will allocate internal funds depending on market conditions and identification of new opportunities as in fiscal year 2018.2020. The Company expects internally generated cash will be adequate to fund these developmentR&D 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 July 31, 2018,2019, the Company’s consolidated funded backlog was approximately $37$35 million compared to $30$37 million at April 30, 2018,2019, the end of fiscal year 2018.2019. Approximately 80%85% of this backlog is expected to be realized in the next twelve months. Included in the backlog atAs of July 31, 2018 was approximately $10.4 million2019, there are no amounts included in backlog under cost-plus-feecost-plus fixed-fee (“CPFF”) contracts which the Company believes represent firm commitments from its customers for which the Company hasthat have not received full funding to-date.been funded. The Company excludes from backlog any contracts or awards for which it has not received authorization to proceed and associated funding. Theproceed. On fixed price contracts, the Company expects theseexcludes any unfunded portion. Over time, as partially funded contracts to become fully funded, over time.the Company will add the additional funding to its backlog. The backlog is subject to change for various reasons, including possible cancellation of orders, change orders, terms of the contracts and other factors beyond the Company’s control. Accordingly, the backlog is not necessarily indicative of the revenues or profits (losses) which may be realized when the results of such contracts are reported.
The Company believes that its liquidity is adequate to meet its operating and investment needs through at least September 14, 201917, 2020 and the foreseeable future.
The Company’s international business ismay be subject to changes where contracts are delineated in demand or pricing resulting from fluctuations in currency exchange rates incurrencies other than the Chinese Renminbi to U.S. Dollar exchange rate.US Dollar.
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.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
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. Based on their evaluation, the Company’s chief executive officer and chief financial officer have concluded that, as of July 31, 2018,2019, the Company’s disclosure controls and procedures were effective to ensure that information relating to the Company, including its consolidated subsidiaries, required to be included in its reports that it filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in Securities and Exchange CommissionSEC rules and forms.
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 ended July 31, 20182019 to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
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| The following materials from the Frequency Electronics, Inc. Quarterly Report on Form 10-Q for the quarter ended July 31, |
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: September 14, 2018 BY16, 2019 By: /s/ Steven L. Bernstein
Steven L. Bernstein
Chief Financial Officer, Secretary and Treasurer
Signing on behalf of the registrant and as principal financial officer