UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period ended October 31,2006January 31, 2007
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 (I.R.S. Employer Identification No.)
incorporation or organization)
55 CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y. 11553
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 516-794-4500
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___No
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer ____ Accelerated filer ____ Non-accelerated filer__X__filer X
---- ---- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes ____ No __X______
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of Registrant's Common Stock, par value $1.00
as of December 8, 2006March 9, 2007 - 8,600,6598,676,884
Page 1 of 25
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets -
OctoberJanuary 31, 20062007 and April 30, 2006 3
Condensed Consolidated Statements of Operations
SixNine Months Ended OctoberJanuary 31, 20062007 and 20052006 4
Condensed Consolidated Statements of Operations
Three Months Ended OctoberJanuary 31, 20062007 and 20052006 5
Condensed Consolidated Statements of Cash Flows
SixNine Months Ended OctoberJanuary 31, 20062007 and 20052006 6
Notes to Condensed Consolidated Financial Statements 7-127-13
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-19
Item 3- Quantitative and Qualitative Disclosures about Market Risk 1919-20
Item 4- Controls and Procedures 20
Part II. Other Information:
Items 1, 1A, 2, 3, 4 and 5 are omitted because they are not applicable
Item 4 - Submission of Matters to a Vote of Security Holders 20
Item 6 - Exhibits 20
Signatures 21
Exhibits 22-25
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Condensed Consolidated Balance Sheets
--------------------------
OctoberJanuary 31, April 30,
20062007 2006
---- ----
(UNAUDITED) (NOTE A)
(In thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 4,7942,481 $ 2,639
Marketable securities 19,04915,457 21,836
Accounts receivable, net of allowance for
doubtful accounts of $276 at OctoberJanuary 31, 2007
and April 30, 2006 13,75410,985 15,868
Inventories 26,47630,546 22,971
Deferred income taxes 1,9021,747 2,135
Income tax receivable 88397 68
Prepaid expenses and other 1,4341,953 1,246
-------- --------
Total current assets 67,49763,566 66,763
Property, plant and equipment, at cost,
less accumulated depreciation and
amortization 6,8997,152 6,663
Deferred income taxes 2,7192,825 2,842
Goodwill and other Intangible assets, net 483468 513
Cash surrender value of life insurance 6,5586,678 6,318
Investment in and loans receivable from affiliates 7,212 2,825
Other assets 3,847 3,6421,008 817
-------- --------
Total assets $ 88,00388,909 $ 86,741
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable - trade $ 2,7802,910 $ 2,202
Accrued liabilities and other 3,3234,287 3,929
Income taxes payable - -
Dividend payable 860- 857
-------- --------
Total current liabilities 6,9637,197 6,988
Deferred compensation 8,3758,492 8,122
Deferred gain and other liabilities 824734 998
-------- --------
Total liabilities 16,16216,423 16,108
-------- --------
Stockholders' equity:
Preferred stock - $1.00 par value - -
Common stock - $1.00 par value 9,164 9,164
Additional paid-in capital 46,17446,840 45,688
Retained earnings 15,75214,999 15,527
-------- --------
71,09071,003 70,379
Common stock reacquired and held in treasury
-at cost, 565,581505,056 shares at OctoberJanuary 31, 20062007
and 592,194 shares at April 30, 2006 (2,356)(2,172) (2,437)
Accumulated other comprehensive income 3,1073,655 2,691
-------- --------
Total stockholders' equity 71,84172,486 70,633
-------- --------
Total liabilities and stockholders' equity $ 88,00388,909 $ 86,741
======== ========
See accompanying notes to condensed consolidated
financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Condensed Consolidated Statements of Operations
SixNine Months Ended OctoberJanuary 31,
(Unaudited)
2007 2006 2005
---- ----
(In thousands except per share data)
Net sales $28,634 $22,556$40,751 $37,668
Cost of sales 18,441 14,36126,781 24,011
------- -------
Gross margin 10,193 8,19513,970 13,657
Selling and administrative expenses 5,455 5,0778,344 8,154
Research and development expense 4,028 2,951expenses 6,628 4,124
------- -------
Operating (loss) profit 710 167(1,002) 1,379
Other income (expense):
Investment income 579 2,666785 2,951
Equity in Morion 274 229566 423
Interest expense (57) (59)(74) (83)
Other income, net 100 767270 928
------- -------
Income before provision for income taxes 1,606 3,770545 5,598
Provision for income taxes 521 1,296213 1,876
------- -------
Net income $ 1,085332 $ 2,4743,722
======= =======
Net income per common share
Basic $ 0.130.04 $ 0.290.44
======= =======
Diluted $ 0.120.04 $ 0.290.43
======= =======
Average shares outstanding
Basic 8,584,409 8,525,6298,600,700 8,530,926
========= =========
Diluted 8,732,393 8,665,8108,747,110 8,668,685
========= =========
See accompanying notes to consolidated condensed
financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three Months Ended OctoberJanuary 31,
(Unaudited)
2007 2006 2005
---- ----
(In thousands except per share data)
Net sales $14,320 $11,499$12,117 $15,113
Cost of sales 8,980 7,4018,340 9,651
------- -------
Gross margin 5,340 4,0983,777 5,462
Selling and administrative expenses 2,674 2,5332,889 3,077
Research and development expense 2,647 1,5092,600 1,173
------- -------
Operating (loss) profit 19 56(1,712) 1,212
Other income (expense):
Investment income 280 1,341206 285
Equity in Morion 71 85292 194
Interest expense (21) (31)(17) (24)
Other income (expense), net 19 698169 161
------- -------
(Loss) Income before (benefit) provision
for income taxes 368 2,149(1,062) 1,828
(Benefit) Provision for income taxes 181 817(308) 580
------- -------
Net (loss) income $ 187(754) $ 1,3321,248
======= =======
Net (loss) income per common share
Basic $ 0.02(0.09) $ 0.160.15
======= =======
Diluted $ 0.02(0.09) $ 0.150.14
======= =======
Average shares outstanding
Basic 8,592,113 8,531,2388,633,283 8,541,519
========= =========
Diluted 8,744,852 8,674,2808,633,283 8,674,434
========= =========
See accompanying notes to condensed consolidated
financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
SixNine Months Ended OctoberJanuary 31,
(Unaudited)
2007 2006 2005
---- ----
(In thousands)
Cash flows from operating activities:
Net income $ 1,085332 $ 2,4743,722
Non-cash charges (income) to earnings net 1,785 (1,512)2,507 (1,346)
Net changes in other assets and liabilities (2,163) (2,863)(3,669) (4,224)
------- -------
Net cash provided by (used in)used in operating activities 707 (1,901)(830) (1,848)
------- -------
Cash flows from investing activities:
Payment for acquisitionacquisitions (1,811) (103)
Loan to affiliate (1,500) - (103)
Proceeds from sale of marketable securities 4,104 12,5688,053 12,818
Purchase of marketable securities (935) (8,802)(1,253) (11,518)
Purchase of fixed assets (1,013) (933)
Other - net 45 -(1,675) (1,260)
------- -------
Net cash provided by (used in)
investing activities 2,201 2,7301,814 (63)
------- -------
Cash flows from financing activities:
Payment of cash dividend (857) (852)(1,717) (1,706)
Proceeds from stock option exercises 62short-term credit obligations - 1,000
Other - net - 21158 17
------- -------
Net cash used in financing activities (795) (831)(1,559) (689)
------- -------
Net increase (decrease)decrease in cash and cash equivalents
before effect of exchange rate changes 2,113 (2)(575) (2,600)
Effect of exchange rate changes
on cash and cash equivalents 42 113417 65
------- -------
Net increasedecrease in cash 2,155 111(158) (2,535)
Cash at beginning of period 2,639 6,701
------- -------
Cash at end of period $ 4,7942,481 $ 6,8124,166
======= =======
See accompanying notes to condensed consolidated
financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE A - CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management of 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 OctoberJanuary 31, 20062007 and the results of its operations and cash flows for the
sixnine and three months ended OctoberJanuary 31, 20062007 and 2005.2006. The April 30, 2006
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 have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's April 30, 2006 Annual
Report to Stockholders. The results of operations for such interim periods are
not necessarily indicative of the operating results for the full year.
NOTE B - EARNINGS PER SHARE
Reconciliation of the weighted average shares outstanding for basic and
diluted Earnings Per Share are as follows:
SixNine months Three months
---------- -------------------------------- ---------------------
Periods ended OctoberJanuary 31,
2007 2006 20052007 2006 2005
---- ---- ---- ----
Basic EPS Shares outstanding
(weighted average) 8,584,409 8,525,629 8,592,113 8,531,2388,600,700 8,530,926 8,633,283 8,541,519
Effect of Dilutive Securities 147,984 140,181 152,739 143,042146,410 137,759 *** 132,915
--------- --------- --------- ---------
Diluted EPS Shares outstanding 8,732,393 8,665,810 8,744,852 8,674,2808,747,110 8,668,685 8,633,283 8,674,434
========= ========= ========= =========
*** Dilutive securities are excluded for the three month period ended
January 31, 2007 since the inclusion of such shares would be antidilutive
due to the net loss for the period then ended.
The computation of diluted earnings per share excludes those options with
an exercise price in excess of the average market price of the Company's common
shares during the periods presented. The inclusion of such options in the
computation of earnings per share would have been antidilutive. The number of
excluded options were:
SixNine months Three months
---------- ------------
Periods ended OctoberJanuary 31,
2007 2006 20052007 2006 2005
---- ---- ---- ----
Outstanding Options excluded 571,550 570,550 571,550 570,550
------- ------- ------- -------======= ======= ======= =======
NOTE C - ACCOUNTS RECEIVABLE
Accounts receivable at OctoberJanuary 31, 20062007 and April 30, 2006 include costs
and estimated earnings in excess of billings on uncompleted contracts accounted
for on the percentage of completion basis of approximately $1,725,000$3,108,000 and
$4,857,000, respectively. Such amounts represent revenue recognized on long-term
contracts that had not been billed at the balance sheet dates. Such amounts are
billed pursuant to contract terms.
NOTE D - INVENTORIES
Inventories, which are reported net of reserves of $4,326,000$4,356,000 and
$3,923,000 at OctoberJanuary 31, 20062007 and April 30, 2006, respectively, consist of the
following:
OctoberJanuary 31, 20062007 April 30, 2006
(In thousands)
Raw materials and Component parts $13,336$14,950 $11,172
Work in progress 13,14015,596 11,799
------- -------
$26,476$30,546 $22,971
======= =======
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE E - -COMPREHENSIVECOMPREHENSIVE INCOME
For the sixnine months ended OctoberJanuary 31, 20062007 and 2005,2006 total comprehensive
income was $1,501,000$1,296,000 and $755,000,$1,821,000, respectively. Comprehensive income is
composed of net income or loss for the period plus the impact of foreign
currency translation adjustments and the change in the valuation allowance on
marketable securities.
NOTE FF- INVESTMENT IN AFFILIATES
The Company's investment in affiliates consists of a 36% interest in
Morion, Inc., a privately-held Russian crystal oscillator manufacturer, and a
20% interest in Elcom Technologies, Inc., a privately-held designer and
manufacturer of high switching speed, low phase noise instruments and
components. In addition to its initial investment, the Company has also extended
a loan to Elcom in the form of a convertible note. Due to the timing of the
Elcom investment in late December 2006, the transaction had no impact on the
Company's financial results for any period. Summarized financial data for the
operations of Morion for the nine and three month periods ended January 31, 2007
and 2006, are as follows: (in thousands)
Nine months Three months
Periods ended January 31,
2007 2006 2007 2006
---- ---- ---- ----
Operating Revenues $11,417 $8,795 $3,705 $2,674
Operating Income 1,587 1,288 872 694
Net Income 1,312 1,056 720 584
NOTE G - EQUITY-BASED COMPENSATION
Effective May 1, 2006, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123(R),
"Share-Based Payment" ("FAS 123(R)"), using the modified prospective transition
method. Under the modified prospective transition method, compensation cost of
$277,000$438,000 and $162,000 was recognized during the sixnine and three months ended
OctoberJanuary 31, 2006,2007, respectively, and includes: (a) compensation cost for all
share-based payments granted prior to, but not yet vested as of May 1, 2006,
based on the grant date fair value estimated in accordance with the original
provisions of FAS 123, and (b) compensation cost for all share-based payments
granted subsequent to May 1, 2006, based on the grant-date fair value estimated
in accordance with the provisions of FAS 123(R). Results for prior periods have
not been restated.
Upon adoption of FAS 123(R), the Company elected to continue to value its
share-based payment transactions using the Black-Scholes valuation model, which
was previously used by the Company for purposes of preparing the pro forma
disclosures under FAS 123. Such value is recognized as expense on a
straight-line basis over the service period of the awards, which is generally
the vesting period, net of estimated forfeitures. This is the same attribution
method that was used by the Company for purposes of its pro forma disclosures
under FAS 123.
At OctoberJanuary 31, 2006,2007, unrecognized compensation cost for all the Company's
stock-based compensation awards was approximately $1.5$1.4 million. The unrecognized
compensation cost for stock-based compensation awards at OctoberJanuary 31, 20062007 is
expected to be recognized over a weighted average period of 3.12.9 years.
In addition, the Company applied the provisions of Staff Accounting
Bulletin No. 107 ("SAB 107"), issued by the Securities and Exchange Commission
in March 2005 in its adoption of FAS 123(R). SAB 107 requires stock-based
compensation to be classified in the same expense line items as cash
compensation. Accordingly, during the sixnine and three months ended OctoberJanuary 31,
2006,2007, stock-based compensation expense was $140,000$226,000 and $87,000, respectively,
in cost of sales and $137,000$212,000 and $75,000, respectively, in selling, general and
administrative expense.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Prior to the adoption of FAS 123(R), the Company presented all tax benefits
resulting from tax deductions associated with the exercise of stock options by
employees as cash flows from operating activities in the Consolidated Statements
of Cash Flows. Under FAS 123(R) "excess tax benefits" are to be classified as
cash flows from financing activities in the Consolidated Statement of Cash
Flows. For this purpose, the excess tax benefits are tax benefits related to the
difference between the total tax deduction associated with the exercise of stock
options by employees and the amount of compensation cost recognized for those
options. For the sixnine and three months ended OctoberJanuary 31, 2006,2007, there were no
excess tax benefits to be included within Other Financing Activities of the Cash
Flows from Financing Activities pursuant to this requirement of FAS 123(R).
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Effect of Adoption of FAS 123(R)
--------------------------------
The application of FAS 123(R) had the following effect on the reported
amounts for the sixnine and three months ended OctoberJanuary 31, 2006,2007, relative to
amounts that would have been reported using the intrinsic value method under
previous accounting (in thousands, except for per share amounts.)amounts).
Using Intrinsic FAS 123(R) As
Value Method Adjustments Reported
--------------- ----------- --------
SixNine Months ended OctoberJanuary 31, 2006:
----------------------------------2007:
-----------------------------------
Operating Profit $ 987Loss ($277) $ 710 564) ($438) ($ 1,002)
Income before provision
for income taxes $1,883$983 ($277) $1,606438) $545
Net Income $1,362$770 ($277) $1,085438) $332
Basic Earnings per Share $0.16$0.09 ($0.03) $0.130.05) $0.04
Diluted Earnings per Share $0.15$0.09 ($0.03) $0.120.05) $0.04
Three Months ended OctoberJanuary 31, 2006:2007:
------------------------------------
Operating Profit $ 181Loss ($1,550) ($162) $ 19
Income($ 1,712)
Loss before provisionbenefit
for income taxes $530($900) ($162) $368($1,062)
Net Income $349Loss ($592) ($162) $187($754)
Basic Earnings per Share $0.04($0.07) ($0.02) $0.02($0.09)
Diluted Earnings per Share $0.04($0.07) ($0.02) $0.02($0.09)
The weighted average fair value of each option has been estimated on the
date of grant using the Black-Scholes options pricing model with the following
weighted average assumptions used for grants in the sixnine and three months ended
OctoberJanuary 31, 2006,2007, and each of the years ended April 30, 2006 and 2005: dividend
yield of 1.4%, 1.4%, and 1.1%; expected volatility of 59%; risk free interest
rate of 5.0%, 4.1%, and 3.9%; and expected lives of six and one-half years,
respectively.
The expected life assumption was determined based on the Company's
historical experience. For purposes of both FAS 123 and FAS 123(R), the expected
volatility assumption was based on the historical volatility of the Company's
common stock. The dividend yield assumption was determined based upon the
Company's past history of dividend payments and its intention to make future
dividend payments. The risk-free interest rate assumption was determined using
the implied yield currently available for zero-coupon U.S. government issues
with a remaining term equal to the expected life of the stock options.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Employee Stock Option Plans
- ---------------------------
The Company has various stock option plans for key management employees,
including officers and directors who are employees. The plans include
Nonqualified Stock Option ("NQSO") plans, Incentive Stock Option ("ISO") plans,
and Stock Appreciation Rights ("SARs"). Under these plans, options and awards
are granted at the discretion of the Stock Option committee at an exercise price
not less than the fair market value of the Company's common stock on the date of
grant. Under one NQSO plan the options are exercisable one year after the date
of grant. Under the remaining plans the options/awards are exercisable over a
four-year period beginning one year after the date of grant. The options/awards
expire ten years after the date of grant and are subject to certain restrictions
on transferability of the shares obtained on exercise. As of OctoberJanuary 31, 2006,2007,
eligible employees had been granted awards to purchaseacquire 167,500 shares of Company
stock under SARs, all of which are outstanding and are not exercisable. As of
OctoberJanuary 31, 2006,2007, eligible employees had been granted options to purchase
1,182,500
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited) shares of Company stock under ISO plans of which approximately 392,000389,000
options are outstanding and approximately 287,000284,000 are exercisable. Through
OctoberJanuary 31, 2006,2007, eligible employees have been granted options to acquire
1,090,000 shares of Company stock under NQSO plans. Of the NQSO options,
approximately 732,000722,000 are both outstanding and exercisable (see tables below).
The excess of the consideration received over the par value of the common
stock or cost of treasury stock issued under both types of option plans has been
recognized as an increase in additional paid-in capital prior to the adoption of
FAS 123(R). During the nine and three months ended OctoberJanuary 31, 2006,2007, the Company
recorded compensation charges of approximately $129,000 and $65,000,
respectively, with respect to the fiscal year 2007 SARs grant. Unrecognized
compensation charges for nonvested awards relating to the SARs grant is
approximately $968,000$903,000 which will be recognized over a weighted average period
of 3.83.5 years. Unrecognized compensation charges for nonvested awards relating to
the ISO plan is approximately $552,000$455,000 which will be recognized over a weighted
average period of 1.61.7 years. For the sixnine and three months ended OctoberJanuary 31,
2006,2007, the Company recorded compensation charges related to the ISO plans of
approximately $212,000$309,000 and $97,000, respectively, using the fair value method.
Although the Company continues to maintain a stock repurchase program, no
stock repurchases will be necessary to process stock exercises during the fiscal
year. Shares issued to individuals during stock exercises will be taken from
available treasury stock.
Transactions under these stock award plans, including the weighted average
exercise prices of the options, are as follows:
SixNine months ended OctoberJanuary 31, 20062007
Wtd Avg
Shares Price
------ -----
Outstanding at beginning of period 1,133,387 $11.32
Granted 167,500 $11.95
Exercised (9,000) $6.90(22,300) $7.07
Expired or canceled - -
-------------------
Outstanding at end of period 1,291,887 $11.431,278,587 $11.48
=========
Exercisable at end of period 1,019,637 $11.291,006,337 $11.34
=========
Available for grant at end of period 231,500
=======
Weighted average fair value
of options granted during the period $6.54
=====
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes information about stock-based awards
outstanding at OctoberJanuary 31, 2006:2007:
Options Outstanding Options Exercisable
----------------------------------------------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Actual Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 10/1/31/0607 Life Price at 10/1/31/0607 Price
- --------------- ----------- ----------- -------- ----------- --------
---------- ---- ----- ---------- -----
$6.615 - 9.970 479,700 3.9466,400 3.7 $ 7.65 449,0757.66 435,775 $ 7.557.56
10.167 - 16.625 730,187 5.55.3 12.53 488,562 12.63
23.75 82,000 3.83.5 23.75 82,000 23.75
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Fiscal year 2006
- ----------------
Stock-based compensation in fiscal year 2006 was determined using the
intrinsic value method. The following table provides supplemental information
for the sixnine and three months ended OctoberJanuary 31, 20052006 as if stock-based
compensation had been computed under FAS 123(R).
(in thousands, except per share data):
SixNine months Three months
---------- ------------
Periods ended OctoberJanuary 31, 20052006
Net income, as reported $2,474 $1,332$3,722 $1,248
Cost of stock options, net of tax (146) (93)(240) (59)
------ ------
Net income - pro forma $2,328 $1,239$3,482 $1,189
====== ======
Earnings per share, as reported:
Basic $ 0.290.44 $ 0.160.15
====== ======
Diluted $ 0.290.43 $ 0.150.14
====== ======
Earnings per share- pro forma
Basic $ 0.270.41 $ 0.150.14
====== ======
Diluted $ 0.270.40 $ 0.14
====== ======
NOTE GH - SEGMENT INFORMATION
The Company operates under three reportable segments:
(1) FEI-NY - consists principally of precision time and frequency control
products used in three principal markets- communication satellites (both
commercial and U.S. Government-funded); terrestrial cellular telephone or
other ground-based telecommunication stations and other components and
systems for the U.S. military.
(2) Gillam-FEI - the Company's Belgian subsidiary primarily sells wireline
synchronization and network monitoring systems.
(3) FEI-Zyfer - the products of the Company's subsidiary incorporate Global
Positioning System (GPS) technologies into systems and subsystems for
secure communications, both government and commercial, and other locator
applications.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Beginning with the first quarter of fiscal year 2007, the Company is
reporting its segment information on a geographic basis. The former Commercial
Communications and U.S. Government segments, which operate out of the Company's
New York headquarters facility, have been combined into the new segment, FEI-NY.
This segment also includes the operations of the Company's wholly-owned
subsidiary, FEI-Asia, which functions primarily as a manufacturing facility for
the FEI-NY segment.
Previously, the Company identified its New York-based U.S. Government
business as a separate segment even though that segment shared the same
facility, equipment and personnel with the Commercial Communications segment.
With the acquisition of FEI-Zyfer in fiscal year 2004, the Company now does
business on U.S. Government programs out of two separate subsidiaries. The
Company's Chief Executive Officer measures segment performance based on total
revenues and profits generated by each geographic center rather than on the
specific types of customers or end-users. Consequently, the Company determined
that limiting the number of segments to the three indicated above more
appropriately reflects the way the Company's management views the business.
Prior year segment information has been reclassified to conform to the new
segment presentation. This includes reclassifying the property, plant and
equipment located in the New York facility to the FEI-NY segment and not to
corporate assets.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The table below presents information about reported segments with
reconciliation of segment amounts to consolidated amounts as reported in the
statement of operations or the balance sheet for each of the periods (in
thousands):
Six months Three months
---------- ------------
Periods ended October 31,
2006 2005 2006 2005
---- ---- ---- ----
Net sales:
FEI-NY $20,205 $14,579 $ 9,540 $ 7,723
Gillam-FEI 4,451 4,059 2,421 1,844
FEI-Zyfer 4,738 5,132 2,831 2,687
less intersegment sales (760) (1,214) (472) (755)
------- ------- ------- -------
Consolidated sales $28,634 $22,556 $14,320 $11,499
Nine months Three months
Periods ended January 31,
2007 2006 2007 2006
---- ---- ---- ----
Net sales:
FEI-NY $28,449 $24,934 $ 8,244 $10,355
Gillam-FEI 7,470 6,206 3,019 2,147
FEI-Zyfer 6,155 7,895 1,417 2,763
less intersegment sales (1,323) (1,367) (563) (152)
------- ------- ------- -------
Consolidated sales $40,751 $37,668 $12,117 $15,113
======= ======= ======= =======
Operating (loss) profit:
FEI-NY $(1,063) $ 1,404 $(1,511) $ 1,198
Gillam-FEI 344 (613) 182 (185)
FEI-Zyfer 53 1,013 (318) 298
Corporate (336) (425) (65) (99)
------- ------- ------- -------
Consolidated operating (loss) profit $(1,002) $ 1,379 $(1,712) $ 1,212
======= ======= ======= =======
Operating profit (loss):
FEI-NY $ 448 $ 206 $ (413) $ 272
Gillam-FEI 162 (428) 170 (362)
FEI-Zyfer 371 715 429 382
Corporate (271) (326) (167) (236)
------ ------ ------ ------
Consolidated operating profit $ 710 $ 167 $ 19 $ 56
====== ====== ====== ======
October
January 31, 20062007 April 30, 2006
---------------- --------------
Identifiable assets:
FEI-NY $41,078$42,990 $44,111
Gillam-FEI 12,80214,167 13,755
FEI-Zyfer 5,8304,895 5,356
less intercompany balances (10,075)(10,523) (14,585)
Corporate 38,36837,380 38,104
------- -------
Consolidated Identifiable Assets $88,003$88,909 $86,741
======= =======
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE HI - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued Financial Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109."
("FIN 48") This interpretation clarifies the accounting for uncertainty in
income taxes recognized in an entity's financial statements and prescribes
recognition thresholds and measurement attributes for tax positions taken in a
tax return. FIN 48 is effective for the Company beginning in fiscal year 2008.
The Company will comply with the provisions of FIN 48 but the impact of such
adoption is not determinable at this time.
In September 2006, the FASB issued Statement No. 157, "Fair Value
Measurements." ("FAS 157") This statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
("GAAP") and expands disclosures about fair value measurements. FAS 157 does not
require any new fair value measurements but simplifies and codifies related
guidance. The Company will comply with the provisions of FAS 157 when it becomes
effective in fiscal year 2009. The impact of such adoption is not expected to
have a material impact on the Company's financial statements since the Company
utilizes fair value measures wherever required by current GAAP.
---------------------------------------
FREQUENCY ELECTRONICS, INC.The SEC issued Staff Accounting Bulletin No. 108 ("SAB 108") in September
2006. SAB 108 expresses the views of the SEC staff regarding the process of
quantifying the materiality of financial misstatements. SAB 108 requires both
the balance sheet (iron curtain) and SUBSIDIARIESincome statement (rollover) approaches be
used when quantifying the materiality of misstatement amounts. In addition, SAB
108 contains guidance on correcting errors under the dual approach and provides
transition guidance for correcting errors existing in prior years. SAB 108 is
effective in the Company's quarter and fiscal year ending April 30, 2007. The
Company is in the process of determining the impact of this bulletin on the
Company's consolidated financial statements.
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 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, 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. By making these
forward-looking statements, the Company undertakes no obligation to update these
statements for revisions or changes after the date of this report.
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 April 30, 2006
Annual Report to Stockholders. The Company believes its most critical accounting
policies to be the recognition of revenue and costs on production contracts 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
realizable value of its inventory or the market value of its products. Changes
in estimates can have a material impact on the Company's financial position and
results of operations.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Revenue Recognition
-------------------
Revenues under larger, long-term contracts, which generally require
billings based on achievement of milestones rather than delivery of product, are
reported in operating results using the percentage of completion 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. The effect of any change in the estimated gross margin
percentage for a contract is reflected in revenues in the period in which the
change is known. Provisions for anticipated losses on contracts are made in the
period in which they become determinable.
On production-type contracts, revenue is recorded as units are delivered
with the related cost of sales recognized on each shipment based upon a
percentage of estimated final contract costs. Changes in job performance 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 contracts are made in the period in which they become determinable.
For contracts in the Company's Gillam-FEI and FEI-Zyfer segments, smaller
contracts or orders in the FEI-NY segment and sales of products and services to
customers are reported in operating results based upon shipment of the product
or performance of the services pursuant to contractual terms. When payment is
contingent upon customer acceptance of the installed system, revenue is deferred
until such acceptance is received and installation completed.
Costs and Expenses
------------------
Contract costs include all direct material, direct labor, manufacturing
overhead and other direct costs related to contract performance. Selling,
general and administrative costs are charged to expense as incurred.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
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 reserves are established
for slow-moving and obsolete items and are based upon management's experience
and expectations for future business. Any changes in reserves arising from
revised expectations are reflected in cost of sales in the period the revision
is made.
Stock-based Compensation
------------------------
Effective May 1, 2006, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123(R),
"Share-Based Payment" ("FAS 123(R)"), using the modified prospective transition
method. Under the modified prospective transition method, compensation cost of
$277,000$438,000 and $162,000 was recognized during the sixnine and three months ended
OctoberJanuary 31, 2006,2007, respectively, and includes: (a) compensation cost for all
share-based payments granted prior to, but not yet vested as of May 1, 2006,
based on the grant date fair value estimated in accordance with the original
provisions of FAS 123, and (b) compensation cost for all share-based payments
granted subsequent to May 1, 2006, based on the grant-date fair value estimated
in accordance with the provisions of FAS 123(R). Results for prior periods have
not been restated.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
RESULTS OF OPERATIONS
The table below sets forth for the respective periods of fiscal years 20062007
and 20052006 the percentage of consolidated net sales represented by certain items
in the Company's consolidated statements of operations:
SixNine months Three months
---------- ------------
Periods ended OctoberJanuary 31,
2007 2006 20052007 2006 2005
---- ---- ---- ----
Net Sales
FEI-NY 70.6% 64.6% 66.6% 67.2%69.8% 66.2% 68.0% 68.5%
Gillam-FEI 15.5 18.0 16.9 16.018.3 16.5 24.9 14.2
FEI-Zyfer 16.5 22.8 19.8 23.415.1 21.0 11.7 18.3
Less intersegment sales (2.6) (5.4) (3.3) (6.6)(3.2) (3.7) (4.6) (1.0)
----- ----- ----- -----
100.0 100.0 100.0 100.0
Cost of Sales 64.465.7 63.7 62.7 64.468.8 63.9
----- ----- ----- -----
Gross Margin 35.634.3 36.3 37.3 35.631.2 36.1
Selling and administrative expenses 19.0 22.5 18.7 22.020.5 21.6 23.8 20.3
Research and development expenses 14.1 13.1 18.5 13.116.3 11.0 21.5 7.8
----- ----- ----- -----
Operating (Loss) Profit 2.5 0.7 0.1 0.5(2.5) 3.7 (14.1) 8.0
Other income, net 3.1 16.0 2.4 18.23.8 11.2 5.4 4.1
----- ----- ----- -----
Pretax Income 5.6 16.7 2.5 18.7(Loss) 1.3 14.9 (8.7) 12.1
Provision (Benefit) for income taxes 1.8 5.7 1.2 7.10.5 5.0 (2.5) 3.8
----- ----- ----- -----
Net Income 3.8% 11.0% 1.3% 11.6%(Loss) 0.8% 9.9% (6.2)% 8.3%
===== ===== ===== ===========
(Note: All dollar amounts in following tables are in thousands,
except Net Sales which are in millions)
Net sales (in millions)
- ---------
(in millions)
SixNine months Three months
---------------------------- ------------------------------ ---------------------------
Periods ended OctoberJanuary 31,
Segment2007 2006 2005 Change 2007 2006 2005 Change
-------
---- ---- ------ ---- ---- ------
FEI-NY $20.2 $14.6 $5.6 39% $ 9.5 $ 7.7 $1.8 24%$28.4 $24.9 $3.5 14% $8.2 $10.3 ($2.1) (20%)
Gillam-FEI 4.5 4.1 0.4 10% 2.4 1.8 0.6 31%7.5 6.2 1.3 20% 3.0 2.1 0.9 41%
FEI-Zyfer 4.7 5.1 (0.4) (8%6.2 7.9 (1.7) (22%) 1.4 2.8 2.7 0.1 5%(1.4) (49%)
Intersegment sales (0.8) (1.2) 0.5(1.3) (1.3) 0.0 (0.5) (0.1) (0.4)
(0.7) 0.3
----- ------------ ---- ----- ----- ----
$28.6 $22.6 $6.1 27% $14.3 $11.5 $2.8 25%$40.8 $37.7 $3.1 8% $12.1 $15.1 ($3.0) (20%)
===== ===== ==== ===== ===== ====
Revenues for the nine month period ended January 31, 2007 increased by 8%
over the same period of fiscal year 2006 principally on the strength of
increased revenues from commercial and US Government-related satellite payload
programs. Such revenue growth was not sustained during the three month period
ended January 31, 2007, after the Company increased its estimate of costs to
complete two major satellite programs. Such increased cost estimates had the
effect of delaying recognition of revenue into subsequent periods when the work
is completed. Similarly, revenues from wireless infrastructure have increased
during the nine month period ended January 31, 2007 compared to the same period
of fiscal year 2006. However, in the third quarter of fiscal year 2007, such
revenues declined both sequentially from the second quarter of the year and
compared to the same period of fiscal year 2006. The Gillam-FEI segment
continued to grow its fiscal year 2007 revenues, mainly in the network
management market. The Company's FEI-Zyfer segment, which derives approximately
two-thirds of its revenues from government sources, has recorded reduced
revenues in fiscal year 2007 compared to the prior year as customer orders have
been delayed. The Company expects fiscal year 2007 fourth quarter revenues to
increase over the third quarter as the Company begins work on new satellite
payload programs and as telecommunication infrastructure customers increase
their orders. Based on its current backlog and expected new bookings,
principally for satellite payloads, the Company expects to realize continued
growth in revenues in fiscal year 2008.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
As illustratedGross margin
Nine months Three months
---------------------------- --------------------------------
Periods ended January 31,
2007 2006 Change 2007 2006 Change
---- ---- -------- ---- ---- ------------
$13,970 $13,657 $313 2% $3,777 $5,462 ($1,685) (31%)
GM Rate 34.3% 36.3% 31.2% 36.1%
The decline in the table above, the 27% and 25% increases in revenuesgross margin rate for the sixnine and three month periods ended October 31, 2006, respectively, were
driven by the 39% and 24%, respectively, improvement in revenues in the FEI-NY
segment. Revenues from space programs were significantly higher than in the
prior fiscal year while sales to wireless infrastructure equipment manufacturers
also strengthened. Revenues in the Gillam-FEI segment also improved 10% and 31%,
respectively, from the same periods of fiscal year 2006 due primarily to a
significant increase in business from its major customer. Revenues for the
FEI-Zyfer segment declined by 8% for the six months ended
OctoberJanuary 31, 2006 and
improved by 5% for the three month period then ended as2007, compared to the same periods of fiscal year 2006.2006, is due
primarily to increased engineering costs on certain satellite payload programs.
The decrease in the fiscal year 2007 six month
period is primarily due to customer delays in releasing orders for additional
product during the first quarter of the year. Total revenues from U.S.
Government related programs, which are recorded in both the FEI-NY and FEI-Zyfer
segments, were lower in the six month period ended October 31, 2006, but were
higher in the three month period then ended compared to the same periods of
fiscal year 2006. As U.S. Government programs receive funding, the Company
expects to realize increased revenues from such programs in the future periods
of fiscal year 2007. In particular, the Company expects revenues from both U.S.
Government and commercial satellite programs to show sequential growth in the
second half of fiscal year 2007. Similarly, revenues from wireless equipment
manufacturers are expected to increase, particularly when China and India make
decisions regarding the implementation of their new networks.
Gross margin
- ------------
Six months Three months
--------------------------------- --------------------------------
Periods ended October 31,
2006 2005 Change 2006 2005 Change
---- ---- ------------ ---- ---- ------------
$10,193 $8,195 $1,998 24% $5,340 $4,098 $1,242 30%
GM Rate 35.6% 36.3% 37.3% 35.6%
The 24% and 30%2% improvement in gross margin for the six and threenine months
ended October 31, 2006, respectively, is primarily due to the increase in
revenues over the same periods of fiscal year 2006. The2007
compared to the same period ended January 31, 2006, is due to increased sales
volume. Similarly, the decline in total gross margin rate for the sixthree month period
ended OctoberJanuary 31, 2006, was2007 is due to both lower than that forsales and to higher engineering
costs compared to the same period of the prior year reflecting high engineering costs applied to certain of
the Company's long-term contracts primarily during the first quarter of fiscal
year 2007. The level of engineering effort applied to such contracts decreased
in the second quarter of fiscal year 2007 which led to the improved gross margin
rate for the three months ended October 31, 2006.year. As revenues increase and
engineering costs return to more normal levels, the Company expects the gross
margin rate to approach and exceed its target of 40%.
Also, for the sixnine and three months ended OctoberJanuary 31, 2006,2007, gross margin
was reduced by $140,000$226,000 and $87,000,$86,000, respectively, due to the inclusion in cost
of sales of a charge for stock compensation expense. As disclosed in the
footnotes to the financial statements, as of May 1, 2006, the Company is
complying with the provisions of FAS 123(R), Accounting for Stock-Based
Compensation. In the prior fiscal year, the Company applied the disclosure-only
provisions of FAS No. 148, "Accounting for Stock-Based Compensation- Transition
and Disclosure" and measured compensation cost in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees." This method did not result
in compensation cost upon the grant of options under a qualified stock option
plan.
Selling and administrative expenses
- -----------------------------------
SixNine months Three months
------------------------------------------------------------- --------------------------------
Periods ended OctoberJanuary 31,
2007 2006 2005 Change 2007 2006 2005 Change
---- ---- -------------------- ---- ---- ------------
$5,455 $5,077 $378 7% $2,674 $2,533 $141 6%$8,344 $8,154 $190 2% $2,889 $3,077 ($188) (6%)
For the sixnine and three months ended OctoberJanuary 31, 2006,2007, selling and
administrative expenses were 19%20% and 24%, respectively, of fiscal year 2007
revenues which achieved the Company's targetcompared to 22% and 20%, respectively, for such expenses. For the comparable periods of
fiscal year 2006, selling and
administrative expenses were 22% of revenues, reflecting2006. These ratios primarily reflect the lower level of sales for those
periods, which, on higher revenues, are typically in line with the Company's
target of less than 20% of revenue. In periods when revenues temporarily decline
compared to the administrative structure of the Company.Company, the ratios are higher
than target. The primary increases in expenses in the fiscal year 2007 periods
were related to compensation, including additional personnel, accruals for incentive
compensation, normal salary
increases and stock compensation costs as indicated in the next paragraph.
Increased compensation expense in the United States operations were partially
offset by decreases in personnel costs in the Company's European subsidiaries.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Included in selling and administrative expenses for the sixnine and three
months ended OctoberJanuary 31, 2006,2007, is $137,000$212,000 and $75,000, respectively, related to
stock compensation expense as described above and in the footnotes to the
financial statements.
WithAs fiscal year 2007 and 2008 revenues atincrease from current or increasing levels, the
Company expects selling and administrative expenses to be incurred at 20% or
less of revenues.
Research and development expense
- --------------------------------
SixNine months Three months
------------------------------------------------------------- --------------------------------
Periods ended OctoberJanuary 31,
2007 2006 2005 Change 2007 2006 2005 Change
---- ---- -------------------- ---- ---- ------------
$4,028 $2,951 $1,077 36% $2,647 $1,509 $1,138 75%$6,628 $4,124 $2,504 61% $2,600 $1,173 $1,427 122%
Research and development expenditures represent investments that keep the
Company's products at the leading edge of time and frequency technology and
enhance competitiveness for future sales. Particularly during the second quarterand
third quarters of fiscal year 2007, the Company incurred high engineering costs
to design and substantially improve the manufacturability of certain products
for current and anticipated satellite payload programs. Such efforts account for
the 36%61% and 75%122% increases in R&D
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
spending for the sixnine and three months ended OctoberJanuary 31, 2006,2007, respectively,
compared to the same periods of fiscal year 2006. The Company also spent
development money on new initiatives to design a ruggedized rubidium clock for
secure military communications, enhance and miniaturize products for wireless
communications, upgrade its GPS-based synchronization product line, and to
develop enhanced network monitoringmanagement equipment and software.
Research and development spending for the sixnine and three months ended
OctoberJanuary 31, 2006,2007, was 14.1%16% and 18.5%21% of revenues, respectively, compared to 13.1%11% and
8% of revenues, respectively, for the same periods of fiscal year 2006. The
Company targets research and development spending at approximately 10% of sales,
but the rate of spending can increase or decrease from quarter to quarter as new
projects are identified and others are concluded. The Company will continue to
devote significant resources to develop new products, enhance existing products
and implement efficient manufacturing processes. Where possible, the Company
attempts to obtain development contracts from its customers. For programs
without such funding, internally generated cash and cash reserves are adequate
to fund these development efforts.
Operating (Loss) Profit
- ----------------
SixNine months Three months
------------------------------------------------------------- --------------------------------
Periods ended OctoberJanuary 31,
2007 2006 2005 Change 2007 2006 2005 Change
---- ---- -------------------- ---- ---- ------------
$710 $167 $543 325% $19 $56 ($37) (66%)
The improvement in1,002) $1,379 ($2,381) NM ($1,712) $1,212 ($2,924) NM
During the nine and three month periods ended January 31, 2007, the Company
recorded operating profit for the six months ended October 31,
2006,losses as compared to operating profits in the same periodperiods
of fiscal year 20062006. This is due toprimarily the result of the increased revenuesengineering
costs discussed above which had the impact of $6.1 million (27%). The operating profit was reduced by increased
spending on researchincreasing program costs and development. Such increased spending onthe
level of research and development is alsospending as well as delaying the primary reasonrecognition
of revenue on certain long-term satellite payload programs. The Company expects
that as such engineering costs abate its gross margins will improve, research
and development spending will decline to its targeted rate and operating profits
were lower for the
three month period ended October 31, 2006, compared to fiscal year 2006 even
though revenues were 25% higher in the fiscal year 2007 period.will increase.
Other income (expense)
- ----------------------
SixNine months Three months
--------------------------------- -------------------------------------------------------------- ----------------------------
Periods ended OctoberJanuary 31,
2007 2006 2005 Change 2007 2006 2005 Change
---- ---- -------------- ---- ---- --------------------------
Investment income $579 $2,666$785 $2,951 ($2,087) (78%2,166) (73%) $280 $1,341$206 $285 ($1,061) (79%79) (28%)
Equity in Morion 274 229 45 20% 71 85 (14) (16%)566 423 143 34% 292 194 98 51%
Interest expense (57) (59) 2 3% (21) (31) 10 32%(74) (83) 9 11% (17) (24) 7 29%
Other income 100 767 (667) (87%270 928 (658) (71%) 19 698 (679) (97%)
----169 161 8 5%
------ ------ ------- ---- ------ -------
$896 $3,603---- ----
$1,547 $4,219 ($2,707) (75%2,672) (63%) $349 $2,093 ($1,744) (83%)$650 $616 $34 6%
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
The decrease in investment income for the six and threenine months ended OctoberJanuary 31,
2006,2007, is due to realized gains of approximately $2.1 million and
$1.1 million, respectively, recorded in the
prior fiscal year periods on the sale of a portion of the shares of Reckson Associates
Realty Corp. stock ("REIT"). Such shares were obtained during fiscal year 2005
upon the conversion of certain REIT units related to the Company's fiscal year
1998 sale and leaseback of its headquarters building. Similar gains were not
recorded in the fiscal year 2007 periods.periods or in the third quarter of fiscal year
2006. The decreased investment income in the three month period ended January
31, 2007 compared to the same period of fiscal 2006 is attributable to less cash
invested in marketable securities.
The Company records equity income in Morion, Inc. based on its 36%
ownership interest in Morion's outstanding shares. The fluctuation in equity
income is due to higher profitability at Morion for the sixnine and three months
ended OctoberJanuary 31, 2006 but lower profits recorded for the three months then ended2007 as compared to the same periods of fiscal year 2006.
Morion recorded higher revenues and increased profitability in each of the
fiscal year 2007 periods than the prior year but higher costs in the
second quarter of fiscal year 2007 reduced its profitability compared to the same periodperiods of fiscal year 2006.
The increasedecrease in interest expense for the sixnine and three month periodperiods ended
OctoberJanuary 31, 2006 resulted2007 primarily from an increasereflects a decrease in borrowings under the Company's
line of credit during the first quarter of fiscal year 2007. The line was repaid in
the second quarter thus reducing interest expense during the fiscal year 2007 quarterperiods as compared to the three month period ended October 31, 2005.same
periods of fiscal year 2006.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Under the provisions of sale and leaseback accounting, a portion of the
capital gain realized on the real estate transaction referred to above is
deferred and recognized in income over the initial lease term. Under the caption
"Other income" the Company recognized deferred gain of $176,000$265,000 and $88,000 for
the sixnine and three months ended OctoberJanuary 31, 2007 and 2006, and 2005, respectively.
Offsetting the gain in the fiscal year 2007 periods is realized foreign exchange
losses at the Company's European subsidiary. In the
second quarter of fiscal year 2006, thea European subsidiary recorded a $680,000
gain on the sale of a building to the subsidiary's president. Other
insignificant income and expense items are also recorded under this caption.
Net income - ----------
Six(loss)
Nine months Three months
----------------------------------- ------------------------------------------------------------- ------------------------------
Periods ended OctoberJanuary 31,
2007 2006 2005 Change 2007 2006 2005 Change
---- ---- ---------------------------- ---- ---- ---------------
$1,085 $2,474-------------
$332 $3,722 ($1,389) (56%) $187 $1,3323,390) (91)% ($1,145) (86%)754) $1,248 ($2,002) NM
Net income (loss) for the sixnine and three months ended OctoberJanuary 31, 2006,2007, was
lower than that realized in the same periods of fiscal year 2006 primarily as
the result of the operating losses discussed above as well as nonoperating gains
recognized in the prior year. As indicated above, the Company recognized gainsa gain
of $2.1 million and $1.1 million, respectively, on the sale of certain marketable securities during the six and three months ended October 31,
2005 and, in the three month period then ended, recorded a gain
of $680,000 on the sale of a subsidiary's building. Excludingbuilding during the effects of those gains, net
income for the sixnine months ended
OctoberJanuary 31, 2006, was higher2006. Higher than the same
period of fiscal year 2006 largely on the basis of the 27% increase in revenues.
For the three month period ended October 31, 2006, net income was approximately
the same as the prior year period exclusive of the gains. Although revenues were
25% higher in the fiscal year 2007 three month period,anticipated engineering costs and increased
investment in research and development reduced profitability during the fiscal
year 2007 periods compared to the same period of
fiscal yearnine and three month periods ended
January 31, 2006.
Income Taxes
- ------------
The Company is subject to taxation in several countries as well as the
states of New York and California. The statutory federal rates vary from 34% in
the United States to 35% in Europe. The effective rate is impacted by the income
or loss of certain of the Company's European and Asian subsidiaries which are
currently not taxed. In addition, the Company utilizes the availability of
research and development tax credits in the United States to lower its tax rate.
The Company's European subsidiaries have available net operating loss
carryforwards of approximately $2.4 million to offset future taxable income.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet continues to reflect a strong working capital
position of $61$56 million at OctoberJanuary 31, 2006,2007, which is comparablecompared to working
capital$60 million at
April 30, 2006. Included in working capital at OctoberJanuary 31, 20062007 is $23.8$17.9 million
of cash, cash equivalents and marketable securities. The Company's current ratio
at OctoberJanuary 31, 20062007 is 9.78.8 to 1.
For the sixnine months ended OctoberJanuary 31, 2006,2007, the Company generated $707,000used $830,000 in
cash from operating activities compared to $1.9$1.8 million used byin operations in
the comparable fiscal year 2006 period. The most significant use of cash in the
fiscal year 2007 period was for the acquisition of additional parts inventory to
support large programs currently in process and expected to be booked in the
near future. Cash was generated by the collection of accounts receivable as well
as by an increase in accounts payable. In the six month period ended October 31,
2005, the significantThis decrease in cash used from
operating cash flow wasactivities is due primarily to the
payment of income taxes related to the investment gains realized in the previous
fiscal year as well as increases in the value of the Company's
inventory. This increase was partially offset by collections on accounts
receivable and inventory.receivable. For the full fiscal year 2007, the Company expects to continue to
use cash in operating activities but, based on increased revenues and improving
margins, that it will generate positive operating cash flow from operating activities, particularly as billing
milestones are achieved on certain of its large production contracts.in fiscal year 2008.
Net cash provided by investing activities for the sixnine months ended OctoberJanuary
31, 2006,2007, was $2.2$1.8 million, compared to $2.7 milliona use of cash of $63,000 for the same
period of fiscal year 2006. The principal source of cash in the fiscal year 2007 period
was the sale or
redemption of certain marketable securities aggregating $6.8 million, net of
purchases aggregating $3.2 million. In the same period of the prior year, $3.8 million was
recognized on the net salesother marketable securities. The redemption of marketable
securities including REIT unitswas used to fund operations as described abovewell as to make an investment in the Resultsan
engineering company to provided additional resources in support of Operations section. During the six months
ended October 31, 2006 and 2005, thecurrent
operations. The Company also acquired capital equipment for approximately $1.0 million and $933,000, respectively.$1.7
million. The Company may continue to acquire or sell marketable securities as
dictated by its investment strategies as well as by the cash requirements for
its development activities. Capital equipment purchases for all of fiscal year
2007 are expected to aggregatebe approximately $2.5$2.0 million. Internally generated cash is
adequate to acquire this level of capital equipment.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Net cash used in financing activities for the sixnine months ended OctoberJanuary 31,
2006,2007, was $795,000$1.6 million compared to $852,000$689,000 during the comparable fiscal year
2006 period. Included in both fiscal periods is payment of the Company's
semiannual dividend in the amount of $857,000 and $852,000, respectively.$1.7 million. During the three
months ended July 31,third quarter of
fiscal year 2006, the Company borrowed $1.6obtained $1.0 million underfrom its line of credit
which was repaid prior to fund current operations rather than liquidating additional marketable
securities. Such borrowings were repaid early in the second quarterend of that fiscal year 2007.year.
The Company has been authorized by its Board of Directors to repurchase up
to $5 million worth of shares of its common stock for treasury whenever
appropriate opportunities arise but it has neither a formal repurchase plan nor
commitments to purchase additional shares in the future. During the quarter
ended OctoberJanuary 31, 2006,2007, the Company did not acquire any shares of its stock
under this authorization.
The Company will continue to expend resources to develop and improve
products for wireless and wireline communication systems which management
believes will result in future growth and continued profitability.
During fiscal year 2007, the Company has made and intends to make a
substantial investment of capital and technical resources to develop new
products to meet the needs of the satellite payload market (both U.S. Government
commercial space and commercial communications marketplacessatellites), the telecommunication infrastructure market and the
requirements for U.S. Government/DOD programs. The Company will continue to
invest in more efficient product designs and manufacturing procedures. Where
possible, the Company will secure partial customer funding for such development
efforts but is targeting to spend its own funds at a rate of at least 10% of
revenues to achieve its development goals. Internally generated cash will be
adequate to fund these development efforts.
At OctoberJanuary 31, 2006,2007, the Company's backlog amounted to approximately $37$42
million compared to $36 million at April 30, 2006. Of this backlog,
approximately 80% is realizable in the next twelve months.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Off-Balance Sheet Arrangements
------------------------------
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, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
is material to investors.
Contractual obligations
-----------------------
As of OctoberJanuary 31, 20062007
Total Less than More than
Contractual Obligations (in thousands) 1 Year 1 to 3 Years 3 to 5 Years 5 Years
----------------------- -------------- ------ ------------ ------------ -------
Operating Lease Obligations $1,264 $ 584 $ 572878 $368 $403 $ 72 $ 3635
Deferred Compensation 8,375* 317 332 191 7,5358,492* 305 321 177 7,689
------ ----- ----- --------- ---- ---- ------
Total $9,639 $ 901 $ 904 $ 263 $7,571$9,370 $673 $724 $249 $7,724
====== ===== ===== ===== ======
*Deferred Compensation liability reflects payments due to current retirees
receiving benefits. The amount of $7,535==== ==== ==== ======
*Deferred Compensation liability reflects payments due to current retirees
receiving benefits. The amount of $7,689 in the more than 5 years column
includes benefits due to participants in the plan who are not yet receiving
benefits although some participants may opt to retire and begin receiving
benefits within the next 5 years.
--------------------------------
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
The Company is exposed to market risk related to changes in interest rates
and market values of securities. The Company's investments in fixed income and
equity securities were approximately $19.0$15.4 million and $87,000,$96,000, respectively, at
OctoberJanuary 31, 2006.2007. The investments are carried at fair value with changes in
unrealized gains and losses recorded as adjustments to stockholders' equity. The
fair value of investments in marketable securities is generally based on quoted
market prices. Typically, the fair market value of investments in fixed interest
rate debt securities will increase as interest rates fall and decrease as
interest rates rise. Based on the Company's overall interest rate exposure at
OctoberJanuary 31, 2006,2007, a 10% change in market interest rates would not have a
material effect on the fair value of the Company's fixed income securities or
results of operations.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Foreign Currency Risk
The Company is subject to foreign currency translation risk. The Company
does not have any near-term intentions to repatriate invested cash in any of its
foreign-based subsidiaries. For this reason, the Company does not intend to
initiate any exchange rate hedging strategies which could be used to mitigate
the effects of foreign currency fluctuations. The effects of foreign currency
rate fluctuations will be recorded in the equity section of the balance sheet as
a component of other comprehensive income. As of OctoberJanuary 31, 2006,2007, the amount
related to foreign currency exchange rates is a $3,333,000$3,816,000 unrealized gain.
The results of operations of foreign subsidiaries, when translated into US
dollars, will reflect the average rates of exchange for the periods presented.
As a result, similar results of operations measured in local currencies can vary
significantly upon translation into US dollars if exchange rates fluctuate
significantly from one period to the next.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
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 such evaluation, the Company's chief executive officer and
chief financial officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective (i) to ensure that
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms and
(ii) to ensure that information required to be disclosed by the Company in the
reports that it submits under the Exchange Act is accumulated and communicated
to its management, including the Company's principal executive and principal
financial officers, or persons performing similar functions, as appropriate, to
allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting.
------------------------------------------
There have not been any 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 period 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
ITEMS 1, 1A, 2, 3, 4 and 5 are omitted because they are not applicable.
ITEM 4 Submission of Matters to a Vote of Security Holders
On September 27, 2006, at the Annual Meeting of Stockholders, the following
matters were approved by the shareholders of the Company:
1. Election of the following six directors:
DIRECTOR FOR WITHHELD BROKER NON-VOTES
-------- --- -------- ----------------
Joseph P. Franklin 6,524,723 1,278,834 0
Martin B. Bloch 6,550,769 1,252,788 0
Joel Girsky 6,551,396 1,252,161 0
E. Donald Shapiro 7,704,510 99,047 0
S. Robert Foley, Jr. 7,706,609 96,948 0
Richard Schwartz 7,605,235 198,322 0
2. Ratification of the appointment of Holtz Rubenstein Reminick LLP as
independent auditors for fiscal year 2007. The results of the voting
were as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTES
--------- ------- ------- ----------------
7,737,922 48,180 17,455 0
ITEM 6 - Exhibits
31.1 - Certification by the Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 - Certification by the Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 - Certification by the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 - Certification by the Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FREQUENCY ELECTRONICS, INC.
(Registrant)
Date: December 15, 2006March 16, 2007 BY /s/ Alan Miller
---------------------------
Alan Miller
Treasurer and
Chief Financial Officer
(principal financial officer
and duly authorized officer)
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
Certification of CEO
I, Martin B. Bloch, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Frequency
Electronics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation;
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Martin Bloch December 15, 2006
--------------------------March 16, 2007
-------------------------
Martin B. Bloch
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
Certification of CFO
I, Alan L. Miller, certify that
1. I have reviewed this quarterly report on Form 10-Q of Frequency
Electronics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation;
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Alan Miller December 15, 2006
---------------------------March 16, 2007
------------------------
Alan L. Miller
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Certification of CEO
In connection with the Quarterly Report of Frequency Electronics, Inc. (the
"Company") on Form 10-Q for the period ended OctoberJanuary 31, 20062007 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Martin
B. Bloch, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Martin Bloch December 15, 2006
--------------------------March 16, 2007
-------------------------
Martin B. Bloch
Chief Executive Officer
A signed original of this written statement required by Section 906,
or other document authenticating, acknowledging, or otherwise adopting
the signature that appears in typed form within the electronic version
of this written statement required by Section 906, has been provided
to the Company and will be retained by the Company and furnished to
the Securities and Exchange Commission or its staff upon request.
This certification accompanies this Report on Form 10-Q pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to
the extent required by such Act, be deemed filed by the Company for
purposes of Section 18 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Such certification will not be deemed to
be incorporated by reference into any filing under the Securities Act
of 1933, as amended, or the Exchange Act, except to the extent that
the Company specifically incorporates it by reference.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Certification of CFO
In connection with the Quarterly Report of Frequency Electronics, Inc. (the
"Company") on Form 10-Q for the period ended OctoberJanuary 31, 20062007 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Alan L.
Miller, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Alan Miller December 15, 2006
--------------------------March 16, 2007
------------------------
Alan L. Miller
Chief Financial Officer
A signed original of this written statement required by Section 906,
or other document authenticating, acknowledging, or otherwise adopting
the signature that appears in typed form within the electronic version
of this written statement required by Section 906, has been provided
to the Company and will be retained by the Company and furnished to
the Securities and Exchange Commission or its staff upon request.
This certification accompanies this Report on Form 10-Q pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to
the extent required by such Act, be deemed filed by the Company for
purposes of Section 18 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Such certification will not be deemed to
be incorporated by reference into any filing under the Securities Act
of 1933, as amended, or the Exchange Act, except to the extent that
the Company specifically incorporates it by reference.