FREQUENCY ELECTRONICS INC Discussione e analisi della gestione della situazione finanziaria e dei risultati delle operazioni (modulo 10-Q) Leave a comment
Dichiarazione “Safe Harbor” ai sensi del Private Securities Litigation Reform Act del 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 pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, the risks associated with health epidemics and pandemics, including the COVID-19 pandemic and similar outbreaks, such as their impact on our financial condition and results of operations and on our ability to continue manufacturing and distributing our products, and the impact of health epidemics and pandemics on general economic conditions, including any resulting recession, our inability to integrate operations and personnel, actions by significant customers or competitors, general domestic and international economic conditions, reliance on key customers, 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, the availability of capital, and the outcome of any litigation and arbitration proceedings. The factors listed above are not exhaustive. Other sections of this Form 10-Q and in the Company's Annual Report on Form 10-K for the fiscal year endedApril 30, 2021 , filed onJune 30, 2021 with theSecurities and Exchange Commission include additional factors that could materially and adversely impact the Company's business, financial condition and results of operations. Moreover, the Company operates in a very competitive and rapidly changing environment. New factors emerge from time to time and it is not possible for management to predict the impact of all these factors on the Company's business, financial condition or results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this Form 10-Q and any other public statement made 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 statements, whether as a result of new information, future events or otherwise, except as required by law.
Politiche contabili e stime critiche
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 fiscal year endedApril 30, 2021 , filed onJune 30, 2021 with theSecurities 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 reasonable estimates including estimating the cost to complete a contract, the realizable value of its inventory and 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 and six months endedOctober 31, 2021 . 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 one performance obligation which is satisfied by shipped projects and completed services/reports required in the contract. Control over these performance obligations passes to the customer over time and therefore these revenues are reported in operating results over time using 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 revenues 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. For smaller contracts or orders, sales of products and services to customers are reported in operating results based upon (i) shipment of the product or (ii) performance of the services pursuant to terms of the customer order. When payment is contingent upon customer acceptance of the installed system, revenue is deferred until such acceptance is received and installation completed. The Company's products generally carry a one-year warranty, but may vary based on the contract terms. 18
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Significant judgment is used in evaluating the financial information for certain
contracts 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. The Company evaluates the amount of development risk associated with new
contracts which entail the development of new or significantly modified products
and incorporates additional costs to cover these risks. These are estimates
based on the company's best judgement, but because this entails estimations
based on products not heretofore developed, there is risk that the estimates may
ultimately prove to be incorrect and that costs are impacted.
I costi del contratto includono tutto il materiale diretto, i costi diretti della manodopera, le spese generali di produzione e altri costi diretti relativi all’esecuzione del contratto. Le spese di vendita, generali e amministrative sono imputate a conto economico quando sostenute.
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 materials based on percentage of usage over a ten-year period, obsolete items on a gradual basis over five years with no usage 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 revenues in the period the revision is made.
Aggiornamento pandemia COVID-19 e legge CARES
The Company's priority during the COVID-19 pandemic has been to protect the health and safety of its employees while remaining operational. Within the limitations imposed by governmental health and safety procedures, the Company has continued to manufacture its full range of products at its facilities. The Company has educated employees about COVID-19 symptoms and hygiene best practices. The Company's policies also include taking an employee's temperature before entering facilities? mandating handwashing and use of hand sanitizer? requiring social distancing and face coverings? encouraging, and in some cases, requiring remote work for those employees who can work from home? and disinfecting facilities. In addition, unvaccinated employees are required to be tested weekly and show negative results in order to work in the facility. Visitors, contractors, customers and other personnel are required to show proof of vaccination in order to be admitted. As ofOctober 31, 2021 , the Company was aware of fifteen employees that have had confirmed cases of COVID-19 since the pandemic began, with one fatality. Additional employees have been absent or self-quarantined due to possible COVID-19 exposure, although not having tested positive. Since the COVID-19 pandemic began, facilities have remained open except for needing to temporarily vacate certain areas for cleaning and disinfecting following employees either testing positive for COVID-19 or because they had been exposed or possibly exposed to third parties who were positive.Certain Company vendors have been unable to deliver materials on time due to COVID-19 related impacts to their workforces or their supply chains. These delays have impacted the Company's production schedules and increased costs associated with procurement of materials and services. The Company continues to monitor these and its other vendors and seek alternative sources of supply, which, in some cases, are being established. The Company also believes the pandemic has impacted customers, resulting in delays with respect to anticipated new orders due to COVID-19 related administrative delays. The full impact of the COVID-19 pandemic continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic may have on the Company's financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the changing dynamics of the pandemic, it is not possible for the Company to estimate potential future effects on its operations, financial condition, or liquidity. OnMarch 27, 2020 ,President Trump signed into law the "Coronavirus Aid, Relief, and Economic Security (CARES) Act." The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act also appropriated funds for theSmall Business Administration (SBA) Paycheck Protection Program loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by the COVID-19 pandemic. The Company received a PPP Loan inApril 2020 , which it repaid in full inMay 2020 . For more detail regarding the Company's PPP Loan, see Note 8 in Part II, Item 8 of the Annual Report on Form 10-K for the fiscal year endedApril 30, 2021 . 19
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RESULTS OF OPERATIONS
The table below sets forth for the three and six months ended October 31, 2021
and 2020, respectively, 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 Six months
Periods ended October 31,
2021 2020 2021 2020
Revenues
FEI-NY 80.2 % 79.7 % 79.3 % 77.9 %
FEI-Zyfer 20.5 24.5 22.3 27.3
Less intersegment revenues (0.7 ) (4.2 ) (1.6 ) (5.2 )
100.0 100.0 100.0 100.0
Cost of revenues 68.4 62.0 68.5 65.1
Gross margin 31.6 38.0 31.5 34.9
Spese di vendita e amministrative 18,6 29,5 26,3
27.3
Spese di ricerca e sviluppo 10,7 7,0 10,6
8.1
Operating income (loss) 2.3 1.5 (5.4 ) (0.5 )
Other income (loss), net 1.5 0.9 1.2 0.8
Provision for income taxes 0.0 0.1 - 0.1
Net income (loss) 3.8 % 2.5 % (4.2 )% 0.4 %
Revenues
Three months Six months
Periods ended October 31,
(in thousands)
Segment 2021 2020 Change 2021 2020 Change
FEI-NY $ 10,381 $ 11,156 $ (775 ) (6.9 )% $ 20,543 $ 20,996 $ (453 ) (2.2 )%
FEI-Zyfer 2,648 3,430 (782 ) (22.8 ) 5,783 7,353 (1,570 ) (21.4 )
Intersegment revenues (93 ) (596 ) 503 (84.4 ) (436 ) (1,409 ) 973 (69.1 )
$ 12,936 $ 13,990 $ (1,054 ) (7.5 )% $ 25,890 $ 26,940 $ (1,050 ) (3.9 )%
For the three months ended October 31, 2021 revenues from commercial and U.S.
Government satellite programs accounted for approximately 51% of consolidated
revenues compared to approximately 54% of consolidated revenues during this same
period in fiscal year 2021. 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
customers, which are recorded in both the FEI-NY and FEI-Zyfer segments,
accounted for approximately 39% of consolidated revenues for both the three
months ended October 31, 2021 and 2020. Other commercial and industrial revenues
for the three months ended October 31, 2021 were $1.2 million and represented
approximately 10% of consolidated revenues compared to $0.9 million , or 6% of
consolidated revenues, in the same period of the prior fiscal year.
For the six months, ended October 31, 2021 revenues from commercial and U.S.
Government satellite programs accounted for approximately 52% of consolidated
revenues compared to approximately 53% of consolidated revenues during this same
period in fiscal year 2021. 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-NY and FEI-Zyfer segments
accounted for approximately 40% of consolidated revenues for the six months
ended October 31, 2021 and 2020. Other commercial and industrial revenues for
the six months ended October 31, 2021 were $2.0 million and represented
approximately 8% of consolidated revenues compared to $1.9 million , or 7% of
consolidated revenues, in the same period of the prior fiscal year.
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Gross Margin
Three months Six months
Periods ended October 31,
(in thousands)
2021 2020 Change 2021 2020 Change
$ 4,091 $ 5,322 $ (1,231 ) (23.1 )%$ 8,152 $ 9,410 $ (1,258 ) (13.4 )% GM Rate 31.6 % 38.0 % 31.5 % 34.9 % For the three and six-month periods endedOctober 31, 2021 , gross margin andGM Rate decreased as compared to the same periods in fiscal year 2021. The decrease in gross margin and GM Rate was due to increased engineering costs on development phase programs that experienced particularly complex technical challenges, as well as cost impacts on several programs resulting from supply chain problems. Lack of availability of parts and materials and/or quality problems with traditional vendors resulted in the need to redesign certain electronic units to replace unavailable parts with different parts that were available in order to maintain contract delivery schedules. In several cases, re-procurement of circuit boards and mechanical parts was necessitated by quality issues in the supply chain, further contributing to increased costs.
Spese di vendita e amministrative
Three months Six months
Periods ended October 31,
(in thousands)
2021 2020 Change 2021 2020 Change
$ 2,411 $ 4,124 $ (1,713 ) (41.5 )% $ 6,805 $ 7,352 $ (547 ) (7.4 )%
For the three months ended October 31, 2021 and 2020, SG&A expenses were
approximately 19% and 30%, respectively, of consolidated revenues. For the six
months ended October 31, 2021 and 2020, selling and administrative ("SG&A")
expenses were approximately 26% and 27%, respectively, of consolidated
revenues. The decrease in SG&A expenses is mainly due to the decrease in
professional fees. With the previously announced settlement of litigation with
the Company's former Chief Scientist and former members of the Board of
Directors, we expect this trend to continue as expenses normalize.
Spese di ricerca e sviluppo
Three months Six months
Periods ended October 31,
(in thousands)
2021 2020 Change 2021 2020 Change
$ 1,377 $ 979 $ 398 40.7 % $ 2,732 $ 2,177 $ 555 25.5 %
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 future competitiveness. The R&D rate for the three-month period
ended October 31, 2021 was 11% of sales compared to 7% of sales for the same
period of the previous fiscal year. The R&D rate for the six-month period ended
October 31, 2021 was 11% of sales compared to 8% of sales for the same period of
the previous fiscal year. R&D increases in the first and second quarters of
fiscal 2022 were due to higher than usual level of internal R&D associated with
investments the Company is making in new technology developments related to
atomic clocks and low-noise oscillators that are intended to produce long-term
increases in revenue and position the Company to compete in the market place
with next generation products. The Company plans to continue to invest in R&D to
keep its products at the state of the art.
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Operating Income (Loss)
Three months Six months
Periods ended October 31,
(in thousands)
2021 2020 Change 2021 2020 Change
$ 303 $ 219 $ 84 38.4 % $ (1,385 ) $ (119 ) $ (1,266 ) NM
During the three-month period ended October 31, 2021 , the Company reported an
operating profit based upon reduced professional fees as a result of previously
announced settlement of litigation with the Company's former Chief Scientist and
former members of the Board of Directors. The Company's results for the
six-month period ended October 31, 2021 reflects the increased professional fees
and charges related to litigation. During both periods the Company experienced
increased supply chain costs and delays.
Altre entrate (spese), nette
Three months Six months
Periods ended October 31,
(in thousands)
2021 2020 Change 2021 2020 Change
Investment income $ 98 $ 50 $ 48 96.0 % $ 191 $ 157 $ 34 21.7 %
Interest expense (20 ) (36 ) 16 (44.4 )% (40 ) (75 ) 35 (46.7 )%
Other income (expense), net 118 113 5 4.4 % 158 129 29 22.4 %
$ 196 $ 127 $ 69 54.3 % $ 309 $ 211 $ 98 46.4 %
Investment income is derived primarily from the Company's holdings of marketable
securities. Earnings on securities may vary based on fluctuating interest rates,
dividend payout levels, and the timing of purchases, sales, redemptions or
maturities of securities. For the six-month period ended October 31, 2021
investment income includes a $123,000 dividend from Morion, compared to a
$105,000 dividend from Morion in the same period in fiscal 2021.
Income Tax Provision
Three months Six months
Periods ended October 31,
(in thousands)
2021 2020 Change 2021 2020 Change
$ 2 $ 17 $ (15 ) (88.2 )% $ 2 $ 25 $ (23 ) (92.0 )%
Three months Six months
Periods ended October 31,
2021 2020
2021 2020 Aliquota effettiva sul reddito (perdita) contabile ante imposte: 0,4 % 4,9 % (0,2 )% 27,2 %
The estimated annual effective tax rate for the fiscal year endingApril 30, 2022 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 current year valuation allowance. The Company maintains a full valuation allowance against its deferred tax assets. 22
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For the three months ended October 31, 2021 , the Company recorded an income tax
provision of $1,504 . For the three months ended October 31, 2020 , the Company
recorded an income tax provision of $17,000 , which includes a discrete income
tax provision of $9,000 primarily related to an accrual of interest for
unrecognized tax benefits.
For the six months ended October 31, 2021 , the Company recorded an income tax
provision of $2,250 . For the six months ended October 31, 2020 , the Company
recorded a discrete income tax provision of $25,000 , primarily related to an
accrual of interest for unrecognized tax benefits.
The effective tax rate for the three months ended October 31, 2021 is an income
tax provision of 0.4% on pretax income of $499,000 compared to an income tax
provision of 4.9% on pretax income of $346,000 in the comparable prior fiscal
year period. The effective tax rate for the three months ended October 31, 2021
differs from the U.S. statutory rate of 21% primarily due to state taxes and
domestic losses for which the Company is not recognizing an income tax benefit.
The effective tax rate for the six months ended October 31, 2021 is an income
tax provision of (0.2) % on a pretax loss of $1.1 million compared to an income
tax provision of 27.2% on pretax income of $92,000 in the comparable prior
fiscal year period. The effective tax rate for the six months ended October 31,
2021 differs from the U.S. statutory rate of 21% primarily due to state taxes
and domestic losses for which the Company is not recognizing an income tax
benefit.
LIQUIDITÀ E RISORSE DI CAPITALE
The Company's consolidated balance sheet continues to reflect a strong working capital position of$40.5 million atOctober 31, 2021 and$40.6 million atApril 30, 2021 . Included in working capital atOctober 31, 2021 andApril 30, 2021 was$20.6 million and$20.1 million , respectively, consisting of cash, cash equivalents, and marketable securities. The Company's current ratio atOctober 31, 2021 was 5.0 to 1 compared to 6.0 to 1 as ofApril 30, 2021 . Net cash provided by operating activities for the six-month periods endedOctober 31, 2021 and 2020 was$1.7 million and$1.9 million , respectively. The decrease in cash flow in the fiscal 2022 period resulted mainly due to an increase in net loss and non-cash adjustments offset by a decrease in receivables and other assets. For the six-month periods endedOctober 31, 2021 and 2020, the Company incurred approximately$2.8 million and$2.6 million , respectively, of non-cash operating expenses including ROU assets and liabilities for leases, loss provision accrual, depreciation and amortization, inventory reserve adjustments, deferred compensation, and accruals for employee benefit programs. During the fiscal year the Company billed milestones on certain newer contracts that require longer lead times to procure materials and parts required to complete the projects. It has not been determined if this will occur going forward on new contracts or if it is specifically related to the current projects. Net cash used in investing activities for the six-month periods endedOctober 31, 2021 and 2020 was$845,000 and$169,000 , respectively. During the six months endedOctober 31, 2021 marketable securities were sold or redeemed in the amount of$1.4 million compared to$1.5 million for the same period of fiscal year 2021. During the six months endedOctober 31, 2021 approximately$1.2 million of marketable securities were purchased compared to$900,000 for the same period of fiscal year 2021. The Company acquired property, plant and equipment in the amount of approximately$1.1 million and$800,000 for the six-month periods endedOctober 31, 2021 and 2020, respectively. The Company may continue to invest in cash equivalents as dictated by its investment strategy. There was no cash used in financing activities for the six months endedOctober 31, 2021 compared to approximately$2.0 million of net cash used in financing activities related to the repayment of the PPP Loan and the amounts borrowed against the Company's line of credit withUBS Bank USA for the six months endedOctober 31, 2020 . The Company has been authorized by its Board to repurchase up to$5 million worth of shares of its common stock when appropriate opportunities arise. As ofOctober 31, 2021 , the Company has repurchased approximately$4 million of its common stock out of the$5 million authorization. For the three and six months endedOctober 31, 2021 and 2020 there were no repurchases of shares. 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. The Company anticipates securing additional customer funding for a portion of its R&D activities and will allocate internal funds depending on market conditions and identification of new opportunities. The Company expects internally generated cash will be adequate to fund these R&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. 23
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As of October 31, 2021 , the Company's consolidated funded backlog was
approximately $38 million compared to $40 million at April 30, 2021 , the end of
fiscal year 2021. Approximately 82% of this backlog is expected to be realized
in the next twelve months. As of October 31, 2021 , there were no amounts
included in backlog under cost-plus fixed-fee contracts that have not been
funded. The Company excludes from backlog any contracts or awards for which it
has not received authorization to proceed. On fixed price contracts, the Company
excludes any unfunded portion. Over time, as partially funded contracts become
fully funded, 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.
La Società ritiene che la propria liquidità sia adeguata a soddisfare le proprie esigenze operative e di investimento attraverso almeno
Disposizioni fuori bilancio
The Company does not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on the Company's financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.
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