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 JanuaryJuly 31, 2013
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from __________ to __________
Commission File No. 1-8061
FREQUENCY ELECTRONICS, INC.
(Exact name of Registrant as specified in its charter)
Delaware | | 11-1986657 |
(State or other jurisdiction of incorporation or organization) | 11-1986657
| (I.R.S. Employer Identification No.) |
| | |
55 CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y. | | 11553 |
(Address of principal executive offices) | 11553
| (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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (do not check if a smaller reporting company) | Smaller Reporting Company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of Registrant's Common Stock, par value $1.00 as of March 11,September 9, 2013 – 8,436,0078,513,673
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Part I. Financial Information: | Page No. |
| |
| 3 |
| |
| 3 |
| |
| 4 |
| |
| 5 |
| |
| 6 5 |
| |
| 7-136-11 |
| |
| 14-2112 |
| |
| 19 |
| |
| 21 |
| |
| 2219 |
| |
Part II. Other Information: | |
| |
| 2320 |
| |
| 2421 |
PART II. FINANCIAL INFORMATION; ITEM 1 - FINANCIAL STATEMENTS
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Condensed Consolidated ItemBalance 1. Financial StatementsSheets __________________________
| | July 31, 2013 | | | April 30, 2013 | |
| | (UNAUDITED) | | | | |
| | | | | | |
| | (In thousands except par value) | |
ASSETS: | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 4,149 | | | $ | 3,460 | |
Marketable securities | | | 16,823 | | | | 18,270 | |
Accounts receivable, net of allowance for doubtful accounts of $288 at July 31, 2013 and April 30, 2013 | | | 12,616 | | | | 7,781 | |
Costs and estimated earnings in excess of billings, net | | | 6,263 | | | | 8,617 | |
Inventories | | | 39,221 | | | | 37,521 | |
Deferred income taxes | | | 3,360 | | | | 3,170 | |
Prepaid expenses and other | | | 1,623 | | | | 2,197 | |
Total current assets | | | 84,055 | | | | 81,016 | |
Property, plant and equipment, at cost, less accumulated depreciation and amortization | | | 9,242 | | | | 8,316 | |
Deferred income taxes | | | 6,320 | | | | 6,320 | |
Goodwill and other intangible assets | | | 758 | | | | 781 | |
Cash surrender value of life insurance and cash held in trust | | | 10,913 | | | | 10,763 | |
Other assets | | | 1,695 | | | | 1,713 | |
Total assets | | $ | 112,983 | | | $ | 108,909 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY: | | | | | | | | |
Current liabilities: | | | | | | | | |
Short-term credit obligations | | $ | 6 | | | $ | 158 | |
Accounts payable - trade | | | 1,341 | | | | 1,205 | |
Accrued liabilities | | | 8,038 | | | | 7,964 | |
Total current liabilities | | | 9,385 | | | | 9,327 | |
Long term debt- noncurrent | | | 9,200 | | | | 6,000 | |
Deferred compensation | | | 10,448 | | | | 10,374 | |
Deferred rent and other liabilities | | | 745 | | | | 756 | |
Total liabilities | | | 29,778 | | | | 26,457 | |
Commitments and contingencies | | | | | | | | |
Stockholders' equity: | | | | | | | | |
Preferred stock - $1.00 par value | | | - | | | | - | |
Common stock - $1.00 par value, issued 9,164 shares | | | 9,164 | | | | 9,164 | |
Additional paid-in capital | | | 52,202 | | | | 51,913 | |
Retained earnings | | | 21,338 | | | | 20,662 | |
| | | 82,704 | | | | 81,739 | |
Common stock reacquired and held in treasury - at cost (652 shares at July 31, 2013 and 701 shares at April 30, 2013) | | | (2,979 | ) | | | (3,200 | ) |
Accumulated other comprehensive income | | | 3,480 | | | | 3,913 | |
Total stockholders' equity | | | 83,205 | | | | 82,452 | |
Total liabilities and stockholders' equity | | $ | 112,983 | | | $ | 108,909 | |
Condensed Consolidated Balance Sheets
| | January 31, | | | April 30, | |
| | 2013 | | | 2012 | |
| | (UNAUDITED) | | | (NOTE A) | |
| | (In thousands except share data) | |
ASSETS: | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 5,222 | | | $ | 4,782 | |
Marketable securities | | | 16,409 | | | | 17,658 | |
Accounts receivable, net of allowance for doubtful accounts of $355 at January 31, 2013 and $400 at April 30, 2012 | | | 8,357 | | | | 10,866 | |
Costs and estimated earnings in excess of billings, net | | | 8,617 | | | | 7,207 | |
Inventories | | | 37,756 | | | | 34,299 | |
Deferred income taxes | | | 2,850 | | | | 3,152 | |
Prepaid expenses and other | | | 1,507 | | | | 1,398 | |
Total current assets | | | 80,718 | | | | 79,362 | |
Property, plant and equipment, at cost ,less accumulated depreciation and amortization | | | 8,391 | | | | 8,374 | |
Deferred income taxes | | | 6,023 | | | | 5,692 | |
Goodwill and other intangible assets | | | 804 | | | | 873 | |
Cash surrender value of life insurance and cash held in trust | | | 10,605 | | | | 10,133 | |
Investment in affiliates | | | 806 | | | | 809 | |
Other assets | | | 933 | | | | 984 | |
Total assets | | $ | 108,280 | | | $ | 106,227 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY: | | | | | | | | |
Current liabilities: | | | | | | | | |
Short-term credit obligations | | $ | 5,178 | | | $ | 6,383 | |
Accounts payable - trade | | | 1,368 | | | | 2,644 | |
Accrued liabilities | | | 8,155 | | | | 6,986 | |
Income taxes payable | | | - | | | | 96 | |
Total current liabilities | | | 14,701 | | | | 16,109 | |
Capital lease obligation- noncurrent | | | - | | | | 15 | |
Deferred compensation | | | 10,314 | | | | 10,179 | |
Deferred rent and other liabilities | | | 819 | | | | 792 | |
Total liabilities | | | 25,834 | | | | 27,095 | |
Commitments and contingencies | | | | | | | | |
Stockholders' equity: | | | | | | | | |
Preferred stock -$1.00 par value | | | - | | | | - | |
Common stock-$1.00 par value, issued 9,163,940 shares | | | 9,164 | | | | 9,164 | |
Additional paid-in capital | | | 51,526 | | | | 50,797 | |
Retained earnings | | | 20,705 | | | | 18,660 | |
| | | | | | | | |
Common stock reacquired and held in treasury - at cost (732,554 shares at January 31, 2013 and 800,787 shares at April 30, 2012) | | | (3,344 | ) | | | (3,659 | ) |
Accumulated other comprehensive income | | | 4,395 | | | | 4,170 | |
Total stockholders' equity | | | 82,446 | | | | 79,132 | |
Total liabilities and stockholders' equity | | $ | 108,280 | | | $ | 106,227 | |
See accompanying notes to condensed consolidated financial statements.
Condensed Consolidated Statements of Income and Comprehensive Income
Nine
Three Months Ended JanuaryJuly 31,
(Unaudited)
| | 2013 | | | 2012 | | | 2013 | | | 2012 | |
| | (In thousands except per share data) | | | (In thousands except share data) | |
| | | | | | | | | | | | |
Revenues | | $ | 51,391 | | | $ | 46,442 | | |
Net revenues | | | $ | 16,827 | | | $ | 16,685 | |
Cost of revenues | | | 31,928 | | | | 27,970 | | | | 10,561 | | | | 10,704 | |
Gross margin | | | 19,463 | | | | 18,472 | | | | 6,266 | | | | 5,981 | |
| | | | | | | | | |
Selling and administrative expenses | | | 10,883 | | | | 10,017 | | | | 3,560 | | | | 3,485 | |
Research and development expense | | | 3,731 | | | | 2,954 | | | | 1,743 | | | | 1,415 | |
Operating profit | | | 4,849 | | | | 5,501 | | | | 963 | | | | 1,081 | |
| | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | |
Investment income | | | 509 | | | | 473 | | | | 143 | | | | 167 | |
Equity loss | | | - | | | | (451 | ) | |
Impairment of investment in and loans receivable from affiliate | | | - | | | | (350 | ) | |
Interest expense | | | (156 | ) | | | (77 | ) | | | (59 | ) | | | (56 | ) |
Other expense, net | | | (73 | ) | | | (132 | ) | |
Other income, net | | | | 9 | | | | 6 | |
Income before provision for income taxes | | | 5,129 | | | | 4,964 | | | | 1,056 | | | | 1,198 | |
Provision for income taxes | | | 1,400 | | | | 1,770 | | | | 380 | | | | 430 | |
Net income | | $ | 3,729 | | | $ | 3,194 | | | $ | 676 | | | $ | 768 | |
| | | | | | | | | | | | | | | | |
Net income per common share | | | | | | | | | |
Net income per common share: | | | | | | | | | |
Basic | | $ | 0.44 | | | $ | 0.38 | | | $ | 0.08 | | | $ | 0.09 | |
Diluted | | $ | 0.43 | | | $ | 0.37 | | | $ | 0.08 | | | $ | 0.09 | |
| | | | | | | | | | | | | | | | |
Weighted average shares outstanding | | | | | | | | | |
Average shares outstanding: | | | | | | | | | |
Basic | | | 8,401,348 | | | | 8,319,740 | | | | 8,489,901 | | | | 8,378,247 | |
Diluted | | | 8,583,616 | | | | 8,537,591 | | | | 8,726,323 | | | | 8,544,052 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Comprehensive Income | | | | | | | | | | | | | | | | |
Net income | | $ | 3,729 | | | $ | 3,194 | | | $ | 676 | | | $ | 768 | |
Other comprehensive income (loss): | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | | 46 | | | | (1,300 | ) | | | (158 | ) | | | (594 | ) |
Change in market value of marketable securities | | | 282 | | | | 26 | | | | (464 | ) | | | 327 | |
Deferred tax effect of change in marketable securities | | | (103 | ) | | | (9 | ) | | | 189 | | | | (119 | ) |
Total other comprehensive income (loss) | | | 225 | | | | (1,283 | ) | |
Total other comprehensive (loss) | | | | (433 | ) | | | (386 | ) |
Comprehensive income | | $ | 3,954 | | | $ | 1,911 | | | $ | 243 | | | $ | 382 | |
See accompanying notes to consolidated condensed consolidated financial statements.
Condensed Consolidated Statements of Income and Comprehensive Income
Three Months Ended January 31,
(Unaudited)
| | 2013 | | | 2012 | |
| | (In thousands except per share data) | |
| | | | | | |
Revenues | | $ | 17,137 | | | $ | 15,448 | |
Cost of revenues | | | 10,387 | | | | 9,233 | |
Gross margin | | | 6,750 | | | | 6,215 | |
| | | | | | | | |
Selling and administrative expenses | | | 3,887 | | | | 3,390 | |
Research and development expense | | | 1,113 | | | | 882 | |
Operating profit | | | 1,750 | | | | 1,943 | |
| | | | | | | | |
Other income (expense): | | | | | | | | |
Investment income | | | 190 | | | | 214 | |
Equity loss | | | - | | | | (335 | ) |
Impairment of investment in and loans receivable from affiliate | | | - | | | | - | |
Interest expense | | | (53 | ) | | | (26 | ) |
Other expense, net | | | (67 | ) | | | (222 | ) |
Income before provision for income taxes | | | 1,820 | | | | 1,574 | |
Provision for income taxes | | | 300 | | | | 500 | |
Net income | | $ | 1,520 | | | $ | 1,074 | |
| | | | | | | | |
| | | | | | | | |
Net income per common share | | | | | | | | |
Basic | | $ | 0.18 | | | $ | 0.13 | |
Diluted | | $ | 0.18 | | | $ | 0.13 | |
| | | | | | | | |
Weighted average shares outstanding | | | | | | | | |
Basic | | | 8,424,162 | | | | 8,323,912 | |
Diluted | | | 8,603,774 | | | | 8,508,297 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Comprehensive Income | | | | | | | | |
Net income | | $ | 1,520 | | | $ | 1,074 | |
Other comprehensive income (loss): | | | | | | | | |
Foreign currency translation adjustment | | | 191 | | | | (996 | ) |
Change in market value of marketable securities | | | (87 | ) | | | 194 | |
Deferred tax effect of change in marketable securities | | | 31 | | | | (70 | ) |
Total other comprehensive income (loss) | | | 135 | | | | (872 | ) |
Comprehensive income | | $ | 1,655 | | | $ | 202 | |
See accompanying notes to condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
Nine
Three Months Ended JanuaryJuly 31,
(Unaudited)
| | 2013 | | | 2012 | | | 2013 | | | 2012 | |
| | (In thousands) | | | (In thousands) | |
| | | | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net income | | $ | 3,729 | | | $ | 3,194 | | | $ | 676 | | | $ | 768 | |
Non-cash charges to earnings, net | | | 3,843 | | | | 4,886 | | | | 1,270 | | | | 1,250 | |
Net changes in operating assets and liabilities | | | (4,347 | ) | | | (6,804 | ) | | | (4,115 | ) | | | (2,420 | ) |
Net cash provided by operating activities | | | 3,225 | | | | 1,276 | | |
Net cash used in operating activities | | | | (2,169 | ) | | | (402 | ) |
| | | | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | |
Proceeds from sale of marketable securities | | | 2,509 | | | | 6,111 | | |
Purchase of marketable securities | | | (1,004 | ) | | | (8,757 | ) | | | (39 | ) | | | (717 | ) |
Loan to affiliate | | | - | | | | (92 | ) | |
Proceeds on redemption of marketable securities | | | | 1,000 | | | | 2,000 | |
Purchase of fixed assets | | | (1,608 | ) | | | (1,124 | ) | | | (1,456 | ) | | | (332 | ) |
Net cash used in investing activities | | | (103 | ) | | | (3,862 | ) | |
Net cash (used in) provided by investing activities | | | | (495 | ) | | | 951 | |
| | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | |
Proceeds from short-term credit obligations | | | 4,000 | | | | 2,350 | | |
Debt payments | | | (5,311 | ) | | | (203 | ) | |
Payment of cash dividend | | | (1,684 | ) | | | - | | |
Exercise of stock options | | | 20 | | | | 13 | | |
Net cash (used in) provided by financing activities | | | (2,975 | ) | | | 2,160 | | |
Borrowings from long-term credit facility | | | | 3,200 | | | | - | |
Proceeds from exercise of stock options | | | | - | | | | 20 | |
Tax benefit from exercise of stock-based compensation | | | | 134 | | | | - | |
Payment of lease obligations | | | | (10 | ) | | | (107 | ) |
Net cash provided by (used in) financing activities | | | | 3,324 | | | | (87 | ) |
| | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | | | | | | | |
before effect of exchange rate changes | | | 147 | | | | (426 | ) | |
Net increase in cash and cash equivalents before effect of exchange rate changes | | | | 660 | | | | 462 | |
| | | | | | | | | | | | | | | | |
Effect of exchange rate changes | | | | | | | | | |
on cash and cash equivalents | | | 293 | | | | (301 | ) | |
Effect of exchange rate changes on cash and cash equivalents | | | | 29 | | | | 217 | |
| | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 440 | | | | (727 | ) | |
Net increase in cash and cash equivalents | | | | 689 | | | | 679 | |
| | | | | | | | | | | | | | | | |
Cash and cash equivalents at beginning of period | | | 4,782 | | | | 5,275 | | | | 3,460 | | | | 4,782 | |
| | | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 5,222 | | | $ | 4,548 | | | $ | 4,149 | | | $ | 5,461 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | |
Supplemental disclosures of cash flow information: | | | | | | | | | | | | | | | | |
Cash paid during the period for: | | | | | | | | | | | | | | | | |
Interest | | $ | 147 | | | $ | 72 | | | $ | 52 | | | $ | 46 | |
Income Taxes | | $ | 1,889 | | | $ | 1,128 | | | $ | 2 | | | $ | 150 | |
See accompanying notes to condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE A – CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management of Frequency Electronics, Inc. (“the Company”), the accompanying unaudited condensed consolidated interim financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly, in all material respects, the consolidated financial position of the Company as of JanuaryJuly 31, 2013 and the results of its operations and cash flows for the nine and three months ended JanuaryJuly 31, 2013 and 2012. The April 30, 20122013 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 Annual Report on Form 10-K for the year ended April 30, 2012 Annual Report to Stockholders on Form 10-K.2013. The results of operations for such interim periods are not necessarily indicative of the operating results for the full fiscal year.
NOTE B – EARNINGS PER SHARE
Reconciliation of the weighted average shares outstanding for basic and diluted Earnings Per Share are as follows:
| | Nine months | | | Three months | |
| | Periods ended January 31, | |
| | 2013 | | | 2012 | | | 2013 | | | 2012 | |
Weighted average shares outstanding: | | | | | | | | | | | | |
Basic | | | 8,401,348 | | | | 8,319,740 | | | | 8,424,162 | | | | 8,323,912 | |
Effect of dilutive securities | | | 182,268 | | | | 217,851 | | | | 179,612 | | | | 184,385 | |
Diluted | | | 8,583,616 | | | | 8,537,591 | | | | 8,603,774 | | | | 8,508,297 | |
| | Three months ended July 31, | |
| | 2013 | | | 2012 | |
Basic EPS Shares outstanding (weighted average) | | | 8,489,901 | | | | 8,378,247 | |
Effect of Dilutive Securities | | | 236,422 | | | | 165,805 | |
Diluted EPS Shares outstanding | | | 8,726,323 | | | | 8,544,052 | |
The computation of diluted earnings per share excludes those options and stock appreciation rights (“SARS”) with an exercise price in excess of the average market price of the Company’s common shares during the periods presented. The inclusion of such options and SARS in the computation of earnings per share would have been antidilutive. The number of excluded options and SARS were:
| | Nine months | | | Three months | |
| | Periods ended January 31, | |
| | 2013 | | | 2012 | | | 2013 | | | 2012 | |
Outstanding options and SARS excluded | | | 942,375 | | | | 733,375 | | | | 942,375 | | | | 746,375 | |
for the three months ended July 31, 2013 and 2012 were 293,375 and 746,375, respectively.
NOTE C – COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS, NET
At JanuaryJuly 31, 2013 and April 30, 2012,2013, costs and estimated earnings in excess of billings, net, consist of the following:
| | January 31, 2013 | | | April 30, 2012 | | | July 31, 2013 | | | April 30, 2013 | |
| | (In thousands) | | | (In thousands) | |
Costs and estimated earnings in excess of billings | | $ | 11,096 | | | $ | 9,552 | | | $ | 10,343 | | | $ | 10,228 | |
Billings in excess of costs and estimated earnings | | | (2,479 | ) | | | (2,345 | ) | | | (4,080 | ) | | | (1,611 | ) |
Net asset | | $ | 8,617 | | | $ | 7,207 | | | $ | 6,263 | | | $ | 8,617 | |
Such amounts represent revenue recognized on long-term contracts that had not been billed at the balance sheet dates or represent a liability for amounts billed in excess of the revenue recognized. Amounts are billed to customers pursuant to contract terms, whereas the related revenue is recognized on the percentage of completion basis at the measurement date. In general, the recorded amounts will be billed and collected or revenue recognized within twelve months of the balance sheet date. Revenue on these long-term contracts is accounted for on the percentage of completion basis. During the nine and three months ended JanuaryJuly 31, 2013 and 2012, revenue recognized under percentage of completion revenuecontracts was approximately $25.9$9.7 million and $8.9$8.6 million, respectively. During the nine and three months ended January 31, 2012, percentage of completion revenue was approximately $26.9 million and $9.0 million, respectively.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE D – TREASURY STOCK TRANSACTIONS
During the ninethree month period ended JanuaryJuly 31, 2013, the Company made a contribution of 39,09111,586 shares of its common stock held in treasury to the Company’s profit sharing plan and trust under section 401(k) of the Internal Revenue Code. Such contribution iscontributions are in accordance with the Company’s discretionary match of employee voluntary contributions to this plan. During the same period, the Company issued 29,14237,472 shares from treasury upon the exercise of stock options and SARSSARs by certain employees.officers and employees of the Company.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE E – INVENTORIES
Inventories, which are reported at the lower of cost or market, consist of the following:
| | | July 31, 2013 | | | April 30, 2013 | |
| | January 31, 2013 | | | April 30, 2012 | | | (In thousands) | |
| | (In thousands) | | | | | | | |
Raw Materials and Component Parts | | $ | 17,017 | | | $ | 15,813 | | | $ | 22,724 | | | $ | 21,066 | |
Work in Progress | | | 17,823 | | | | 15,762 | | | | 13,379 | | | | 13,665 | |
Finished Goods | | | 2,916 | | | | 2,724 | | | | 3,118 | | | | 2,790 | |
| | $ | 37,756 | | | $ | 34,299 | | | $ | 39,221 | | | $ | 37,521 | |
As of JanuaryJuly 31, 2013 and April 30, 2012,2013, approximately $25.9$31.5 million and $25.5$29.9 million, respectively, of total inventory is located in the United States, approximately $11.2$7.0 million and $8.2$6.9 million, respectively, is located in Belgium and $0.7 million and $0.6$0.7 million, respectively, is located in China.
NOTE F – SEGMENT INFORMATION
The Company operates under three reportable segments based on the geographic locations of its subsidiaries:
(1) | FEI-NY – operates out of New York and its operations consist principally of precision time and frequency control products used in three principal markets- communication satellites (both commercial and U.S. Government-funded); terrestrial cellular telephone or other ground-based telecommunication stations and other components and systems for the U.S. military. |
(1) FEI-NY – operates out of New York and its operations consist principally of precision time and frequency control products used in three principal markets- communication satellites (both commercial and U.S. Government-funded); terrestrial cellular telephone or other ground-based telecommunication stations and other components and systems for the U.S. military.
(2) | Gillam-FEI - operates out of Belgium and France and primarily sells wireline synchronization and network management systems in non-U.S. markets. All sales from Gillam-FEI to the United States are to other segments of the Company. |
(2) Gillam-FEI - operates out of Belgium and France and primarily sells wireline synchronization and network management systems in non-U.S. markets. All sales from Gillam-FEI to the United States are to other segments of the Company.
(3) | FEI-Zyfer – operates out of California and its products incorporate Global Positioning System (GPS) technologies into systems and subsystems for secure communications, both government and commercial, and other locator applications. This segment also provides sales and support for the Company’s wireline telecommunications family of products, including US5G, which are sold in the United States market. |
(3) FEI-Zyfer – operates out of California and its products incorporate Global Positioning System (GPS) technologies into systems and subsystems for secure communications, both government and commercial, and other locator applications. This segment also provides sales and support for the Company’s wireline telecommunications family of products, including US5G, which are sold in the United States market.
The FEI-NY segment also includes the operations of the Company’s wholly-owned subsidiaries, FEI-Elcom Tech (“FEI-Elcom”) and FEI-Asia. FEI-Asia functions primarily as a manufacturing facility for the Company’s commercial product subsidiaries with minimal sales to outside customers. FEI-Elcom, in addition to its own product line, provides design and technical support for the FEI-NY segment’s satellite business.
The Company’s Chief Executive Officerchief executive officer measures segment performance based on total revenues and profits generated by each geographic location rather than on the specific types of customers or end- users. Consequently, the Company determined that the segments indicated above most appropriately reflect the way the Company’s management views the business.
The tables 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):
| | Three months ended July 31, | |
| | 2013 | | | 2012 | |
Net revenues: | | | | | | |
FEI-NY | | $ | 13,174 | | | $ | 11,848 | |
Gillam-FEI | | | 2,695 | | | | 1,908 | |
FEI-Zyfer | | | 1,988 | | | | 3,357 | |
less intercompany revenues | | | (1,030 | ) | | | (428 | ) |
Consolidated revenues | | $ | 16,827 | | | $ | 16,685 | |
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 statements of income or the balance sheet for each of the periods. The January 31, 2012 amounts do not include FEI-Elcom (in thousands): | | Three months ended July 31, | |
| | 2013 | | | 2012 | |
Operating profit (loss): | | | | | | |
FEI-NY | | $ | 1,176 | | | $ | 1,122 | |
Gillam-FEI | | | 56 | | | | (116 | ) |
FEI-Zyfer | | | (200 | ) | | | 140 | |
Corporate | | | (69 | ) | | | (65 | ) |
Consolidated operating profit | | $ | 963 | | | $ | 1,081 | |
| | Nine months | | | Three months | |
| | Periods ended January 31, | |
| | 2013 | | | 2012 | | | 2013 | | | 2012 | |
Revenues: | | | | | | | | | | | | |
FEI-NY | | $ | 38,211 | | | $ | 33,050 | | | $ | 14,076 | | | $ | 11,075 | |
Gillam-FEI | | | 6,431 | | | | 7,039 | | | | 1,913 | | | | 3,370 | |
FEI-Zyfer | | | 8,742 | | | | 8,588 | | | | 2,054 | | | | 2,001 | |
less intersegment revenues | | | (1,993 | ) | | | (2,235 | ) | | | (906 | ) | | | (998 | ) |
Consolidated revenues | | $ | 51,391 | | | $ | 46,442 | | | $ | 17,137 | | | $ | 15,448 | |
Operating income (loss): | | | | | | | | | | | | | | | | |
FEI-NY | | $ | 5,178 | | | $ | 6,404 | | | $ | 2,205 | | | $ | 2,348 | |
Gillam-FEI | | | (129 | ) | | | (244 | ) | | | (153 | ) | | | 243 | |
FEI-Zyfer | | | 135 | | | | (230 | ) | | | (162 | ) | | | (472 | ) |
Corporate | | | (335 | ) | | | (429 | ) | | | (140 | ) | | | (176 | ) |
Consolidated operating income | | $ | 4,849 | | | $ | 5,501 | | | $ | 1,750 | | | $ | 1,943 | |
| | July 31, 2013 | | | April 30, 2013 | |
Identifiable assets: | | | | | | | | |
FEI-NY (approximately $3 million in China) | | $ | 60,218 | | | $ | 55,508 | |
Gillam-FEI (all in Belgium or France) | | | 18,720 | | | | 18,071 | |
FEI-Zyfer | | | 11,167 | | | | 10,418 | |
less intersegment balances | | | (20,399 | ) | | | (18,903 | ) |
Corporate | | | 43,277 | | | | 43,815 | |
Consolidated identifiable assets | | $ | 112,983 | | | $ | 108,909 | |
| | January 31, 2013 | | | April 30, 2012 | |
Identifiable assets: | | | | | | |
FEI-NY (approximately $3.6 million in China) | | $ | 54,293 | | | $ | 50,234 | |
Gillam-FEI (all in Belgium or France) | | | 19,818 | | | | 20,407 | |
FEI-Zyfer | | | 7,261 | | | | 9,685 | |
less intersegment balances | | | (15,157 | ) | | | (16,424 | ) |
Corporate | | | 42,065 | | | | 42,325 | |
Consolidated identifiable assets | | $ | 108,280 | | | $ | 106,227 | |
NOTE G – INVESTMENT IN MORION, INC.
The Company has an investment in Morion, Inc., (“Morion”) a privately-held Russian company, which manufactures high precision quartz resonators and crystal oscillators. The Company’s investment consists of 4.6% of Morion’s outstanding shares, accordingly, the Company accounts for its investment in Morion on the cost basis. This investment is included in investment in affiliatesother assets in the accompanying balance sheets.
During the ninethree months ended JanuaryJuly 31, 2013 and 2012, the Company acquired product from Morion in the aggregate amount of approximately $42,000$30,000 and $169,000,$12,000, respectively, and the Company sold product to Morion in the aggregate amount of approximately $200,000$142,000 and $1.1 million,$30,000, respectively. During the three months ended JanuaryAt July 31, 2013 and 2012, the Company acquired productApril 30, 2013, accounts receivable included $121,000 and $144,000, respectively, due from Morion in the aggregate amount of approximatelyand $23,000 and $24,000,$8,000, respectively, and the Company sold product to Morion in the aggregate amount of approximately $103,000 and $63,000, respectively. At January 31, 2013, no amounts werewas payable to Morion and accounts receivable from Morion was approximately $92,000.Morion.
On October 22, 2012, the Company entered into an agreement to license its rubidium oscillator production technology to Morion. The agreement requires the Company to sell certain fully-depreciated production equipment currently owned by the Company and to provide training to Morion employees to enable Morion to produce a minimum of 5,000 rubidium oscillators per year. Morion will pay the Company approximately $2.7 million for the license and the equipment plus 5% royalties on third party sales for a 5-year period following an initial production run. During the same 5-year period, the Company commits to purchase from Morion a minimum of approximately $400,000 worth of rubidium oscillators per year although Morion is not obligated to sell that amount to the Company. In November 2012, Morion paid the Company a $925,000 deposit under this agreement. This amount is considered deferred revenue and is included in accrued liabilities on the accompanying condensed consolidated balance sheet. The United States Department of State has approved the technology transfer which is expected to be completed within a year from the date of the agreement.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE H – ACQUISITION OF ELCOM TECHNOLOGIES, INC.
On February 21, 2012, the Company purchased 74.88% of the capital stock of Elcom Technologies, Inc. (“Elcom” and after the acquisition “FEI-Elcom”). Prior to the acquisition, the Company had a minority ownership interest of 25.12% of the capital stock of Elcom. After the acquisition, the Company owned 100% and changed the subsidiary’s name to FEI-Elcom Tech, Inc. The Company acquired Elcom as, in addition to its own product line, Elcom provides design and technical support for the Company’s satellite business, which accounts for a significant amount of the Company’s consolidated revenue. For the acquisition, the Company paid approximately $4.1 million to the shareholders for their shares of common stock and an additional $910,000 to certain selling shareholders to settle their outstanding debt with Elcom. In addition the Company had notes due from Elcom with a fair value of approximately $1.7 million which was forgiven as an additional investment in Elcom. Based on the amounts paid to the Elcom shareholders, the Company determined that the fair value of Elcom at the date of acquisition was approximately $7.9 million. The Company’s determination of the fair value of Elcom at the date of acquisition included an adjustment for a control premium of 15% based on the total value at the date of acquisition.
The fair value of Elcom at the date of the transaction was allocated to $4.6 million of net tangible assets, deferred taxes of $2.6 million, and approximately $700,000 of intangible assets, including goodwill of approximately $400,000. None of the goodwill is expected to be deductible for income tax purposes.
The FEI-Elcom transaction was accounted for as a “step acquisition” in accordance with generally accepted accounting principles. Accordingly, the Company remeasured its previously held equity interest in Elcom and adjusted it to fair value. The difference between the fair value of the Company’s ownership in Elcom and the Company’s carrying value of its investment resulted in the recognition of a gain of approximately $730,000 at the date of the acquisition during the fourth quarter of fiscal year 2012.
Prior to the acquisition of Elcom, the Company recorded its share of Elcom’s income or loss on the equity method. In addition, periodically the Company measured the market value of Elcom based on comparisons to comparable companies as well as Elcom’s forecasts of future financial results. During the nine and three months ended January 31, 2012, in addition to its equity share in the income or loss of Elcom during the year, the Company determined that its investment was impaired and the collectibility of the notes receivable may be reduced. Accordingly, the Company recorded an investment impairment charge in the amount $200,000 and an additional $150,000 allowance against the notes receivable.
During the nine and three months ended January 31, 2012, prior to the acquisition of Elcom, the Company sold product to Elcom in the amount of $4,000 and acquired technical services from Elcom in the aggregate amount of approximately $16,000 and zero, respectively, and recorded interest income on notes to Elcom in the amount of approximately $75,000 and $32,000, respectively.
The accompanying consolidated statements of income for the nine and three months ended January 31, 2013 include the results of operations of FEI-Elcom. The pro forma financial information set forth below is based upon the Company’s historical consolidated statements of income for the nine and three months ended January 31, 2012, adjusted to give effect to the acquisition of FEI-Elcom as if it had occurred at the beginning of the fiscal year. The financial information includes the results of operations of FEI-Elcom for the nine month period from April 1, 2011 to December 31, 2011 and for the three month period from October 1, 2011 to December 31, 2011.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The pro forma financial information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the acquisition occurred on May 1, 2011, nor does it purport to represent the results of operations for future periods. The pro forma results of operations do not include the gain on the Company’s original investment of $730,000 or the impairment of the Company’s investment in Elcom during fiscal year 2012.
| | Pro forma | |
| | (unaudited) | |
| | Nine months | | | Three months | |
| | Periods ended January 31, 2012 | |
| | (in thousands except per share data) | |
Revenues | | $ | 53,299 | | | $ | 17,462 | |
Operating profit | | $ | 4,058 | | | $ | 984 | |
Net income | | $ | 2,538 | | | $ | 554 | |
Earnings per share- basic | | $ | 0.31 | | | $ | 0.07 | |
Earnings per share- diluted | | $ | 0.30 | | | $ | 0.07 | |
NOTE I – FAIR VALUE OF FINANCIAL INSTRUMENTS
The cost, gross unrealized gains, gross unrealized losses and fair market value of available-for-sale securities at JanuaryJuly 31, 2013 and April 30, 20122013 are as follows (in thousands):
| | January 31, 2013 | | |
| | | | | Gross | | | Gross | | | Fair | | |
| | | | | Unrealized | | | Unrealized | | | Market | | | July 31, 2013 | |
| | Cost | | | Gains | | | Losses | | | Value | | | Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Market Value | |
Fixed income securities | | $ | 9,823 | | | $ | 292 | | | $ | - | | | $ | 10,115 | | | $ | 9,263 | | | $ | 196 | | | $ | (40 | ) | | $ | 9,419 | |
Equity securities | | | 5,630 | | | | 760 | | | | (96 | ) | | | 6,294 | | | | 6,529 | | | | 1,026 | | | | (151 | ) | | | 7,404 | |
| | $ | 15,453 | | | $ | 1,052 | | | $ | (96 | ) | | $ | 16,409 | | | $ | 15,792 | | | $ | 1,222 | | | $ | (191 | ) | | $ | 16,823 | |
| | April 30, 2012 | |
| | | | | Gross | | | Gross | | | Fair | |
| | | | | Unrealized | | | Unrealized | | | Market | |
| | Cost | | | Gains | | | Losses | | | Value | |
Fixed income securities | | $ | 11,573 | | | $ | 297 | | | $ | (6 | ) | | $ | 11,864 | |
Equity securities | | | 5,411 | | | | 552 | | | | (169 | ) | | | 5,794 | |
| | $ | 16,984 | | | $ | 849 | | | $ | (175 | ) | | $ | 17,658 | |
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| | April 30, 2013 | |
| | Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Market Value | |
Fixed income securities | | $ | 10,285 | | | $ | 297 | | | $ | 0 | | | $ | 10,582 | |
Equity securities | | | 6,490 | | | | 1,266 | | | | (68 | ) | | | 7,688 | |
| | $ | 16,775 | | | $ | 1,563 | | | $ | (68 | ) | | $ | 18,270 | |
The following table presents the fair value and unrealized losses, aggregated by investment type and length of time that individual securities have been in a continuous unrealized loss position (in thousands):
| | Less than 12 months | | | 12 Months or more | | | Total | | | Less than 12 months | | | 12 Months or more | | | Total | |
| | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | |
| | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | | |
January 31, 2013 | | | | | | | | | | | | | | | | | | | |
July 31, 2013 | | | | | | | | | | | | | | | | | | | |
Fixed Income Securities | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 443 | | | $ | (40 | ) | | $ | - | | | $ | - | | | $ | 443 | | | $ | (40 | ) |
Equity Securities | | | 708 | | | | (95 | ) | | | 129 | | | | (1 | ) | | | 837 | | | | (96 | ) | | | 1,915 | | | | (59 | ) | | | 358 | | | | (92 | ) | | | 2,273 | | | | (151 | ) |
| | $ | 708 | | | $ | (95 | ) | | $ | 129 | | | $ | (1 | ) | | $ | 837 | | | $ | (96 | ) | | $ | 2,358 | | | $ | (99 | ) | | $ | 358 | | | $ | (92 | ) | | $ | 2,716 | | | $ | (191 | ) |
April 30, 2012 | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed Income Securities | | $ | 301 | | | $ | (6 | ) | | $ | - | | | $ | - | | | $ | 301 | | | $ | (6 | ) | |
Equity Securities | | | 539 | | | | (169 | ) | | | - | | | | - | | | | 539 | | | | (169 | ) | |
| | $ | 840 | | | $ | (175 | ) | | $ | - | | | $ | - | | | $ | 840 | | | $ | (175 | ) | |
April 30, 2013 | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed Income Securities | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Equity Securities | | | - | | | | - | | | | 512 | | | | (68 | ) | | | 512 | | | | (68 | ) |
| | $ | - | | | $ | - | | | $ | 512 | | | $ | (68 | ) | | $ | 512 | | | $ | (68 | ) |
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. The Company does not believe that its investments in marketable securities with unrealized losses at JanuaryJuly 31, 2013 are other-than-temporary due to market volatility of the security’s fair value, analysts’ expectations and the Company’s ability to hold the securities for a period of time sufficient to allow for any anticipated recoveries in market value.
During the nine and three months ended JanuaryJuly 31, 2013 and 2012, the Company sold or redeemed available-for-sale securities in the approximate amountamounts of $2.5$1.0 million and $500,000, respectively, and realized gains of approximately $40,000 during the fiscal year 2013 periods. During the nine and three months ended January 31, 2012, the Company sold or redeemed available-for-sale securities in the approximate amount of $6.1 million and $1.0$2.0 million, respectively, and realized gains of $19,000 and $11,500, respectively. Gains or losses on marketable securities transactions are includedrealizing no gain in the determination of net income for eacheither fiscal period.year.
Maturities of fixed income securities classified as available-for-sale at JanuaryJuly 31, 2013 are as follows, at cost (in thousands):
Current | | $ | 2,005 | | | $ | 2,504 | |
Due after one year through five years | | | 7,497 | | | | 5,956 | |
Due after five years through ten years | | | 321 | | | | 803 | |
| | $ | 9,823 | | | $ | 9,263 | |
The fair value accounting framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below:
| Level 1 | Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access. |
Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
| Level 2 | Inputs to the valuation methodology include: |
Level 2 Inputs to the valuation methodology include:
| - Quoted prices for similar assets or liabilities in active markets; |
- Quoted prices for similar assets or liabilities in active markets;
| - Quoted prices for identical or similar assets or liabilities in inactive markets |
- Quoted prices for identical or similar assets or liabilities in inactive markets
| - Inputs other than quoted prices that are observable for the asset or liability; |
- Inputs other than quoted prices that are observable for the asset or liability;
| - Inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
- Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
| Level 3 | Inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. All of the Company’s investments in marketable securities are valued on a Level 1 basis.
NOTE J – VALUATION ALLOWANCE ON DEFERRED TAX ASSETS
During fiscal years 2012 and 2011, the Company reduced the valuation allowance on the deferred tax assets of its U.S. subsidiaries. Consequently, for the nine and three months ended January 31, 2013 and 2012, the Company recorded provisions for income taxes based on both current taxes due in the United States as well as the tax provision or benefit to be realized from temporary tax differences. As of January 31, 2013 and April 30, 2012, the remaining deferred tax asset valuation allowance is approximately $1.5 million and is primarily related to deferred tax assets of the Company’s non-U.S.-based subsidiaries.
NOTE K – SPECIAL DIVIDEND
On December 12, 2012, the Company’s Board of Directors declared a special cash dividend of $0.20 per share, payable on December 31, 2012 to shareholders of record on December 24, 2012.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE LI – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05 “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU No. 2011-05”). Under ASU No. 2011-5, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Regardless of which option is selected, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU No. 2011-5 eliminates the option (previously utilized by the Company) to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. ASU No. 2011-5 was adopted by the Company at the beginning of the current fiscal year, and affects only the presentation of financial statements and has no financial impact on the Company’s Condensed Consolidated Financial Statements.
In February 2013, the FASB issued Accounting Standard Update No. 2013-02, Other Comprehensive Income. The amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. This ASU is effective for periods beginning after December 15, 2012. The Company does not expect adoption of ASU 2013-02 to have a material effect on its financial statements.
In July 2012, the FASB issued ASU No. 2012-02, Intangibles – Goodwill and Other (Topic 350): Test Indefinite-Lived Intangible Assets for Impairment. Under the requirements of ASU 2012-02 an entity has the option to assess qualitative factors when testing indefinite-lived intangible assets annually to determine whether it is more likely than not that the asset is not impaired. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test or resume performing the qualitative assessment in any subsequent period. If, after assessing the totality of events and circumstances, an entity concludes that it is more likely than not that the indefinite-lived intangible asset is impaired, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Subtopic 350-30. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company will adopt ASU 2012-02 for its fiscal year 2014 which beginsbegan on May 1, 2013. The Company is unable to determine the impact of such adoption until it performs the annual test for impairment in the nextfourth quarter of the current fiscal year.
In February 2013, the FASB issued Accounting Standard Update No. 2013-02, Other Comprehensive Income. The amendment requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. This ASU is effective for periods beginning after December 15, 2012. The Company has adopted ASU 2013-02 but does not expect it to have a material effect on its financial statements.
NOTE J – CREDIT FACILITY
On June 6, 2013, the Company obtained a credit facility (the “Facility”) from JPMorgan Chase Bank, N.A. (“JPMorgan”) pursuant to a credit agreement (the “Credit Agreement”) between the Company and JPMorgan. The maximum aggregate amount of the Facility is $25.0 million, of which the Company immediately borrowed $7.2 million, using the proceeds to repay the outstanding balance under the $9.3 million line of credit with another financial institution which formerly managed a substantial portion of the Company’s investment portfolio. As a result of this refinancing of short-term credit with a long-term obligation, as of April 30, 2013, the Company reclassified the $6.0 million balance payable under the replaced line of credit to long-term debt. Proceeds from the Facility will be used for working capital and to finance acquisitions. During the three-month period ended July 31, 2013, the Company borrowed an additional $2.0 million under the Facility. The additional borrowings were used for working capital and to finance the acquisition of certain fixed assets.
The Company may make borrowings under the Facility from either Tranche A or Tranche B or a combination of both, not to exceed $25.0 million. Pursuant to the Credit Agreement, the amount of Tranche A borrowings may not exceed the value of the Pledged Investments (as defined in the Credit Agreement). The amount of Tranche B borrowings may not exceed the lesser of (i) $15.0 million and (ii) the Borrowing Base (as defined in the Credit Agreement). Current outstanding borrowings under the Facility are all under Tranche A. The Facility is fully guaranteed by certain of the Company’s subsidiaries and is secured by, among other things, a pledge of substantially all personal property of the Company and certain of the Company’s subsidiaries.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Borrowings under the Facility are evidenced by a line of credit note (the “Note”) and bear interest, payable monthly, at a rate equal to the LIBOR Rate, as determined from time to time by JPMorgan pursuant to the terms of the Note, plus a margin of 0.75% for Tranche A borrowings and 1.75% for Tranche B borrowings. The principal balance on the Note, along with any accrued and unpaid interest, is due and payable no later than June 5, 2018, which is the maturity date of the Facility. In addition, the Company is required to pay JPMorgan fees equal to 0.1% per annum on any unused portion of the Facility.
The Credit Agreement contains a number of affirmative and negative covenants, including limitations on the incurrence of additional debt, liens on property, acquisitions, loans and guarantees, mergers, consolidations, liquidations and dissolutions, asset sales, and distributions and other payments in respect of the Company’s capital stock. The Credit Agreement also contains certain events of default customary for credit facilities of this type, including nonpayment of principal or interest when due, material incorrectness of representations and warranties when made, breach of covenants, bankruptcy and insolvency, unstayed material judgment beyond specified periods, and acceleration or payment default of other material indebtedness. The Credit Agreement requires the Company to maintain, as of the end of each fiscal quarter, a funded debt to EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) ratio and an interest charge coverage ratio. The calculation of both ratios is defined in the Credit Agreement. For the period ended July 31, 2013, the Company met the required covenants.
NOTE K – INCOME TAXES
In prior fiscal years, the Company reduced the valuation allowance on the deferred tax assets of its U.S. subsidiaries. Consequently, for the three months ended July 31, 2013 and 2012, the Company recorded provisions for income taxes based on both current taxes due in the United States as well as the tax provision or benefit to be realized from temporary tax differences. As of July 31, 2013 and April 30, 2013, the remaining deferred tax asset valuation allowance is approximately $1.9 million and is primarily related to deferred tax assets of the Company’s non-U.S.-based subsidiaries.
*********************
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995:
The statements in this quarterly report on Form 10-Q regarding future earnings and operations and other statements relating to the future constitute "forward-looking" statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words "believe," "may," "will," "could," "should," "would," "anticipate," "estimate," "expect," "project," "intend," "objective," "seek," "strive," "might," "likely result," "build," "grow," "plan," "goal," "expand," "position," or similar words, or the negatives of these words, or similar terminology, identify forward-looking statements. These statements are based on assumptions that the Company believes are reasonable, but are subject to a wide range of risks and uncertainties, and a number of factors could cause the Company's actual results to differ materially from those expressed in the forward-looking statements referred to above. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company's products in the marketplace, competitive factors, new products and technological changes, product prices and raw material costs, dependence upon third-party vendors, competitive developments, changes in manufacturing and transportation costs, changes in contractual terms, the availability of capital, and other risks detailed in the Company's periodic report filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which relate only to events as of the date on which the statements are made and which reflect management's analysis, judgments, belief, or expectation only as of such date. By making 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 Annual Report on Form 10-K for the year ended April 30, 2012.2013. 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.
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 through a process of aggregating actual costs incurred and updating estimatedestimating 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 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 orders, revenue is recorded as units are delivered with the related cost of sales recognized on each shipment based upon a percentage of estimated final program costs.
Changes in job performance on long-term contracts and production-type orders may result in revisions to costs and income and are recognized in the period in which revisions are determined to be required. Provisions for anticipated losses on contractscustomer orders are made in the period in which they become determinable.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES(Continued)
For customer orders in the Company’s Gillam-FEI and FEI-Zyfer segments or smaller contracts or orders in the FEI-NY segment, including orders for FEI-Elcom products, 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.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Costs and Expenses
Contract costs include all direct material, direct labor costs, manufacturing overhead and other direct costs related to contract performance. Selling, general and administrative costs are charged to expense as incurred.
Inventory
In accordance with industry practice, inventoried costs contain amounts relating to contracts and programs with long production cycles, a portion of which will not be realized within one year. Inventory write downs are established for slow-moving, and obsolete items and costs incurred on programs for which production-level orders cannot be determined as probable. Such write downs are based upon management’s experience and expectations for future business. Any changes arising from revised expectations are reflected in cost of sales in the period the revision is made.
Marketable Securities
All of the Company’s investments in marketable securities are Level 1 securities which trade on public markets and have current prices that are readily available. In general, investments in fixed price securities are only in the commercial paper of financially sound corporations or the bonds of U.S. Government agencies. Although the value of such investments may fluctuate significantly based on economic factors, the Company’s own financial strength enables it to wait for the securities to either recover their value or to mature such that any interim unrealized gains or losses are deemed to be temporary.
RESULTS OF OPERATIONS
Impact of FEI-Elcom Acquisition
Fiscal year 2013 results include the results of operations of the Company’s subsidiary, FEI-Elcom Tech, Inc. (formerly Elcom Technologies, Inc. or “Elcom” and after the acquisition, “FEI-Elcom”), which was acquired during the fourth quarter of fiscal year 2012. FEI-Elcom’s operations are included in the FEI-NY segment. For the nine and three-month periods ended January 31, 2013, FEI-Elcom’s third-party revenues were approximately $6.0 million and $2.9 million, respectively. This subsidiary recorded an operating loss of approximately $750,000 for the nine month period but recorded an operating profit of approximately $130,000 for the three month period ended January 31, 2013. In the comparable nine and three-month periods of the prior fiscal year, before the acquisition, Elcom recorded revenues of approximately $6.9 million and $2.0 million, respectively, operating losses of approximately $880,000 and $620,000, respectively, and net losses of approximately $1.4 million and $900,000, respectively. In the discussion below, all amounts for the nine and three months ended January 31, 2012, do not include FEI-Elcom, with the exception of the Company’s “Other income (expenses)” which includes $451,000 and $335,000, respectively, of equity losses from its minority interest in Elcom at that time. The nine-month period also includes $350,000 of impairment charges against the Company’s investment in Elcom and certain notes receivable from Elcom.
The table below sets forth for the respective periods of fiscal years 20132014 and 20122013 (which end on April 30, 20132014 and 2012,2013, respectively) the percentage of consolidated revenues represented by certain items in the Company’s consolidated statements of income:operations:
| | Nine months | | | Three months | | | Three months ended July 31, | |
| | Periods ended January 31, | | | 2013 | | | 2012 | |
| | 2013 | | | 2012 | | | 2013 | | | 2012 | | |
Revenues | | | | | | | | | | | | | |
Net Revenues | | | | | | | |
FEI-NY | | | 74.4 | % | | | 71.1 | % | | | 82.1 | % | | | 71.7 | % | | | 78.3 | % | | | 71.0 | % |
Gillam-FEI | | | 12.5 | | | | 15.2 | | | | 11.2 | | | | 21.8 | | | | 16.0 | | | | 11.4 | |
FEI-Zyfer | | | 17.0 | | | | 18.5 | | | | 12.0 | | | | 13.0 | | | | 11.8 | | | | 20.1 | |
Less intersegment revenues | | | (3.9 | ) | | | (4.8 | ) | | | (5.3 | ) | | | (6.5 | ) | | | (6.1 | ) | | | (2.5 | ) |
| | | 100.0 | | | | 100.0 | | | | 100.0 | | | | 100.0 | | | | 100.0 | | | | 100.0 | |
Cost of revenues | | | 62.1 | | | | 60.2 | | | | 60.6 | | | | 59.8 | | | | 62.8 | | | | 64.2 | |
Gross Margin | | | 37.9 | | | | 39.8 | | | | 39.4 | | | | 40.2 | | |
Gross margin | | | | 37.2 | | | | 35.8 | |
Selling and administrative expenses | | | 21.2 | | | | 21.5 | | | | 22.7 | | | | 21.9 | | | | 21.1 | | | | 20.9 | |
Research and development expenses | | | 7.3 | | | | 6.4 | | | | 6.5 | | | | 5.7 | | | | 10.4 | | | | 8.4 | |
Operating Profit | | | 9.4 | | | | 11.9 | | | | 10.2 | | | | 12.6 | | |
Other (expense) income, net | | | 0.6 | | | | (1.2 | ) | | | 0.4 | | | | (2.4 | ) | |
Pretax Income | | | 10.0 | | | | 10.7 | | | | 10.6 | | | | 10.2 | | |
Operating profit | | | | 5.7 | | | | 6.5 | |
Other income, net | | | | 0.6 | | | | 0.7 | |
Pretax income | | | | 6.3 | | | | 7.2 | |
Provision for income taxes | | | 2.7 | | | | 3.8 | | | | 1.7 | | | | 3.2 | | | | 2.3 | | | | 2.6 | |
Net Income | | | 7.3 | % | | | 6.9 | % | | | 8.9 | % | | | 7.0 | % | |
Net income | | | | 4.0 | % | | | 4.6 | % |
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
(Note: All dollar amounts in the following tables are in thousands. Dollar amounts in the narratives are in approximate actual amounts.)
Revenues
| | | Three months ended July 31, | |
| | Nine months | | | Three months | | | (in thousands) | |
| | Periods ended January 31, | | | | | | | | Change | |
Segment | | 2013 | | | 2012 | | | Change | | 2013 | | | 2012 | | | Change | | | 2013 | | | 2012 | | | $ | | | % | |
FEI-NY | | $ | 38,211 | | | $ | 33,050 | | | $ | 5,161 | | | | 16 | % | | $ | 14,076 | | | $ | 11,075 | | | $ | 3,001 | | | | 27 | % | | $ | 13,174 | | | $ | 11,848 | | | $ | 1,326 | | | | 11 | % |
Gillam-FEI | | | 6,431 | | | | 7,039 | | | | (608 | ) | | | (9 | %) | | | 1,913 | | | | 3,370 | | | | (1,457 | ) | | | (43 | %) | | | 2,695 | | | | 1,908 | | | | 787 | | | | 41 | % |
FEI-Zyfer | | | 8,742 | | | | 8,588 | | | | 154 | | | | 2 | % | | | 2,054 | | | | 2,001 | | | | 53 | | | | 3 | % | | | 1,988 | | | | 3,357 | | | | (1,369 | ) | | | (41 | %) |
Intersegment revenues | | | (1,993 | ) | | | (2,235 | ) | | | 242 | | | | | | | | (906 | ) | | | (998 | ) | | | 92 | | | | | | |
Intersegment sales | | | | (1,030 | ) | | | (428 | ) | | | (602 | ) | | | | |
| | $ | 51,391 | | | $ | 46,442 | | | $ | 4,949 | | | | 11 | % | | $ | 17,137 | | | $ | 15,448 | | | $ | 1,689 | | | | 11 | % | | $ | 16,827 | | | $ | 16,685 | | | $ | 142 | | | | 1 | % |
For the nine and three months ended JanuaryJuly 31, 2013, revenues from FEI-Elcom, acquired by the Company in late fiscal year 2012, are included in the revenues of the FEI-NY segment. For the nine and three months ended January 31, 2013, FEI-NY revenues from commercial and U.S. Government satellite programs accounted for more than 55% of consolidated revenues and increased 10%by 16% over the same periods in the prior year. Revenues from these programs for the nine-month period ended January 31, 2013 accounted for approximately 50% of consolidated sales, approximately the same ratio as the same nine-month period of fiscal year 2012.2013. Revenues on these long-term contracts are recognized primarily under the percentage of completion method. For the nine-month period ended January 31, 2013, salesRevenues from the satellite market are recorded in the FEI-NY segment. Revenues from non-space U.S. Government/DOD business area,customers, which accounted for more than 25% of consolidated revenues,are recorded in both the FEI-NY and FEI-Zyfer segments, also increased by 40% over the prior year and accounted for approximately one-fourth of consolidated fiscal year 2014 revenues. Network infrastructure revenues forin the fiscal year 2014 period, declined by approximately 40% from the same period of fiscal year 2012 due primarily to the FEI-Elcom acquisition. For the nine2013 and three months ended January 31, 2013, total revenues from both satellite and non-space programs for which the U.S. Government is the end-user accounted for approximately 60% and 70%, respectively,15% of consolidated revenues. Such revenues are recorded in all three segments although the FEI-NY (including FEI-Elcom)largest sales are recorded in the Gillam-FEI and FEI-Zyfer segments. ForGillam-FEI total revenues increased over the nine-months ended January 31, 2013, network infrastructureprior year primarily due to intersegment sales which are recordedeliminated in all three segments, grew approximately 10% year over year and accounted for approximately 20% of consolidated revenues, similar to revenues from this market during the same period of the prior fiscal year. For the first nine months of fiscal year 2013, sales to other industrial and commercial customers not included in the Company’s major market areas, as discussed above, declined by approximately 35% from the same nine-month period of fiscal year 2012.consolidation.
For the nine and three months ended JanuaryJuly 31, 2012, consolidated revenues increased 25% and 22%, respectively, compared to the same periods of fiscal year 2011, primarily due to increased revenues from the FEI-NY segment’s satellite payload programs. In the fiscal year 2012 periods, revenues from commercial and U.S. Government satellite programs accounted for approximately half50% of consolidated revenues compared to approximately 30% during40% for the same periodsperiod of fiscal year 2011.2012. Revenues on these long-term contracts are recognized primarily under the percentage of completion method. Increased network infrastructure revenues generated by the FEI-Zyfer segment were offset by declinesRevenues in that business area in the Gillam-FEI segment and lower wireless infrastructure sales in the FEI-NY segment. Network infrastructure revenues were less than 20% of consolidated revenues for the nine months ended January 31, 2012 compared to approximately 25% for the same period of fiscal year 2011. In the fiscal year 2012 periods, revenues from the U.S. Government/DOD non-space business area which are recorded in the FEI-NY (including FEI-Elcom sales) and FEI-Zyfer segments were lower in fiscal year 2013 and accounted for approximately 20%15% of consolidated revenues compared to more than 25% for the same periods20% of fiscal year 2011. The lower ratio of U.S. Government/DOD revenues to consolidated revenues in the fiscal year 2012 periods is due mostlyperiod. Network infrastructure revenues were lower in the FEI-NY and Gillam-FEI segments and accounted for approximately 25% of consolidated revenues in the three-month period ended July 31, 2012 compared to higher satellite payload revenuesless than 30% in the fiscal year 2012 periods compared to the same periods of fiscal year 2011.period.
Based on the Company’s current backlog, over three-fourths of which represent satellite payload business, and the potential for additional new orders, as well as the Company’s acquisition of FEI-Elcom in laterevenues for fiscal year 2012, revenues for the full fiscal year 20132014 are expected to exceed revenues recorded in the prior fiscal year.grow. Satellite payload revenues will remain the dominant portion of the Company’s business butand represents the Company’s best growth opportunity.
Gross margin
| | Three months ended July 31, | |
| | (in thousands) | |
| | | | | | | | Change | |
| | 2013 | | | 2012 | | | | | | $ | | % |
| | $ | 6,266 | | | $ | 5,981 | | | $ | 285 | | | | 5 | % |
GM Rate | | | 37.2 | % | | | 35.8 | % | | | | | | | | |
Gross margin for the three month period ended July 31, 2013, increased as a result of higher revenues fromparticularly in the other major business areas, U.S. Government/DOD non-spaceFEI-NY segment. The gross margin rate in fiscal year 2014, while improved over the prior year, was reduced by unabsorbed overhead costs. The gross margin rate is also impacted by product mix.
Fiscal year 2013 gross margin was impacted by lower revenues at both Gillam-FEI and FEI-Zyfer. The gross margin rate was reduced by the effect of FEI-Elcom as well as a higher percentage of lower margin network infrastructure are also expected to increase overproduct sales. The fiscal year 2012 levels.2013 first quarter revenues recognized by FEI-Elcom were insufficient to fully cover its production costs such that the consolidated gross margin rate was reduced by approximately 2%.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Gross margin
| | Nine months | | | Three months | |
| | Periods ended January 31, |
| | 2013 | | | 2012 | | | Change | | | 2013 | | | 2012 | | | Change | |
| | $ | 19,463 | | | $ | 18,472 | | | $ | 991 | | | | 5 | % | | $ | 6,750 | | | $ | 6,215 | | | $ | 535 | | | | 9 | % |
GM Rate | | | 37.9 | % | | | 39.8 | % | | | | | | | | | | | 39.4 | % | | | 40.2 | % | | | | | | | | |
For the nine and three months ended January 31, 2013, gross margin increased as a result of the 11% increase in consolidated revenues over the fiscal year 2012 periods. The gross margin rate is impacted by the Company’s product mix. For the nine months of fiscal year 2013, the rate was reduced by the low sales volume at FEI-Elcom in the early portion of the fiscal year. In addition, FEI-Elcom incurred higher costs on certain customer-funded nonrecurring engineering projects.
Gross margins and gross margin rates for the nine and three months ended January 31, 2012 increased as compared to the same periods in the prior fiscal year reflecting the more than 20% increase in revenue recorded in the fiscal year 2012 periods as well a favorable change in product mix. Of the Company’s three segments, the FEI-NY segment experienced the largest gross margin rate improvement as the higher volume of business covered more of that segment’s fixed costs.
The gross margin rates recorded in the fiscal year 2014 and 2013 and 2012 periods are approaching or achievedwere less than the Company’s targeted rate of 40%. As consolidated revenues increase, including highersatellite payload sales volume at FEI-Elcom,increases and as the sales product mix changes, the Company believesanticipates that its gross margin rates for the remainder of fiscal year 20132014 will reach or exceed its target rate.
Selling and administrative expenses
Nine months | | | Three months | |
Periods ended January 31, | |
2013 | | | 2012 | | | Change | | | 2013 | | | 2012 | | | Change | |
$ | 10,883 | | | $ | 10,017 | | | $ | 866 | | | | 9 | % | | $ | 3,887 | | | $ | 3,390 | | | $ | 497 | | | | 15 | % |
Three months ended July 31, | |
(in thousands) | |
| | | | | | Change | |
2013 | | | 2012 | | | $ | | | % | |
$ | 3,560 | | | $ | 3,485 | | | $ | 75 | | | | 2 | % |
For both of the nine and three monthsthree-month periods ended JanuaryJuly 31, 2013 and 2012, selling and administrative expenses were approximately 21% and 23%, respectively, of consolidated revenues compared to 22% for each of the same periods of the prior fiscal year.revenues. The increase in expenses in the fiscal year 2013 periods2014 quarter compared to the same periodsperiod of fiscal year 2012 are2013 is due to selling and administrative expenses incurred at FEI-Elcom of approximately $1.6 million and $500,000, respectively. The expenses of this subsidiary were partially offset by lower expenses at Gillam-FEI due to the 9% decrease in the value of the euro to the U.S. dollar, reduced incentiveincreased stock-based compensation and deferred compensation expenses and lower bad debt expense.as well as greater professional fees. For the remainder of fiscal year 2013,2014, the Company expects selling and administrative expenses to be incurred at approximately the same rate and further expects such expenses will approachapproximate the Company’s target of 20% of revenues.revenues or less.
Research and development expense
Nine months | | | Three months | | |
Periods ended January 31, | |
Three months ended July 31, | | Three months ended July 31, | |
(in thousands) | | (in thousands) | |
| | | | | | | | Change | |
2013 | 2013 | | | 2012 | | | Change | | | 2013 | | | 2012 | | | Change | | 2013 | | | 2012 | | | $ | | | % | |
$ | 3,731 | | | $ | 2,954 | | | $ | 777 | | | | 26 | % | | $ | 1,113 | | | $ | 882 | | | $ | 231 | | | | 26 | % | 1,743 | | | $ | 1,415 | | | $ | 328 | | | | 23 | % |
Research and development (“R&D”) expenditures represent investments intended to keep the Company’s products at the leading edge of time and frequency technology and enhance competitiveness for future revenues. R&D spending for the nine and three-month periods ended JanuaryJuly 31, 2013 and 2012, was less thanapproximately 10% and 8% of revenues, respectively. In the Company’s targetfiscal year 2014 period, the Company accelerated its development of 10%new satellite payload microwave receivers/converters from DC to Ka band. Such products are anticipated to be ready for customer evaluation and new contract awards by the third quarter of revenues. The year-over-yearfiscal year 2014. In the fiscal year 2013 period, the quarter-to-quarter increase in spending is due primarily to product development expenditures at FEI-Elcom of approximately $790,000 and $240,000, respectively, at FEI-Elcom to improve its own product line.$300,000. R&D spending in fiscal year 2013 continued2014, in addition to facilitatethe development of new satellite payload products, from DC to Ka Band,will also include development and improvement of miniaturized rubidium atomic clocks, development of new GPS-based synchronization products and further enhancement of the capabilities of the Company’s line of low g-sensitivity and ruggedized rubidium oscillators. Included in these efforts are product redesign and process improvements to enhance product manufacturability and reduce production costs.
In addition to internal research and development efforts, the Company continues to conduct development activities on customer-funded programs the cost of which appears in cost of revenues, thus reducing the level of internal R&D spending.revenues. The Company will continue to devote significant resources to develop new products, enhance existing products and implement efficient manufacturing processes. For fiscal year 2013,2014, the Company is targeting to spend under 10% of revenues on internal R&Dresearch and development projects. Internally generated cash and cash reserves are adequate to fund these development efforts.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Operating profit
Nine months | | | Three months | | |
Periods ended January 31, | |
Three months ended July 31, | | Three months ended July 31, | |
(in thousands) | | (in thousands) | |
| | | | | | | | Change | |
2013 | 2013 | | | 2012 | | | Change | | | 2013 | | | 2012 | | | Change | | 2013 | | | 2012 | | | $ | | | % | |
$ | 4,849 | | | $ | 5,501 | | | $ | (652 | ) | | | (12 | %) | | $ | 1,750 | | | $ | 1,943 | | | $ | (193 | ) | | | (10 | %) | 963 | | | $ | 1,081 | | | $ | (118 | ) | | | (11 | %) |
As anticipated, for the three months ended January 31, 2013, FEI-Elcom made a positive contribution to operating profit following an operating loss for the first quarter ofHigher revenues and increased gross margin in fiscal year 2013. The fiscal year 2013 year-to-date operating loss at FEI-Elcom reduced consolidated operating profit2014 compared to the first nine months of the prior fiscal year. For the three monthsame period ended January 31, 2013, increased consolidated revenues, including increased revenue at FEI-Elcom, generated higher gross margin but this was offset by higher operating expenses resulting in a 10% decrease in operating profits for the third quarter of fiscal year 2013. Operating profits for the nine and three-month periods of fiscal year 2013 were 9.4%was offset primarily by increased spending on internal research and 10.2%, respectively,development activities. This led to the 11% reduction in operating profit for the period ended July 31, 2013. As a percentage of consolidatedrevenue, fiscal year 2014 operating profit was 5.7% of revenues compared to 11.9% and 12.6%, respectively,6.5% of revenues for the comparable periods of the previous fiscallast year. With increased revenues and higher gross margins, the Company anticipates that for the full fiscal year 2013, it will generate an operating profit that exceeds that of the prior fiscal year.
Other income (expense)
| Nine months | | | Three months | |
| Periods ended January 31, |
| 2013 | | | 2012 | | | Change | | | 2013 | | | 2012 | | | Change | |
Investment income | $ | 509 | | | $ | 473 | | | $ | 36 | | | | 8 | % | | $ | 190 | | | $ | 214 | | | $ | (24 | ) | | | (11 | %) |
Equity loss | | - | | | | (451 | ) | | | 451 | | | NM | | | | - | | | | (335 | ) | | | 335 | | | NM | |
Impairment charge | | - | | | | (350 | ) | | | 350 | | | NM | | | | - | | | | - | | | | - | | | NM | |
Interest expense | | (156 | ) | | | (77 | ) | | | (79 | ) | | | (103 | %) | | | (53 | ) | | | (26 | ) | | | (27 | ) | | | (104 | %) |
Other expense, net | | (73 | ) | | | (132 | ) | | | 59 | | | NM | | | | (67 | ) | | | (222 | ) | | | 155 | | | NM | |
| $ | 280 | | | $ | (537 | ) | | $ | 817 | | | NM | | | $ | 70 | | | $ | (369 | ) | | $ | 439 | | | NM | |
Investment income is derived from the Company’s holdings of marketable securities. Earnings on these securities may vary based on fluctuating interest rate levels, the timing of dividend payments and the timing of purchases or sales of securities. In addition, during the nine and three months ended January 31, 2013, the Company sold or redeemed marketable securities which resulted in realized gains of approximately $40,000. During the same periods of fiscal year 2012, the Company recorded gains of approximately $19,000 and $11,000, respectively.
Equity losses in the nine and three months ended January 31, 2012, represent the Company’s share of the quarterly income recorded by Elcom in which the Company owned a 25% interest prior to its late fiscal year 2012 acquisition of FEI-Elcom. In addition, in the nine-month fiscal year 2012 period, the Company recorded an impairment charge against its investment in the amount of $200,000 and also increased an allowance against notes receivable in the amount of $150,000. In connection with the acquisition of Elcom in the fourth quarter of fiscal year 2012, the Company recorded a gain of $730,000 on its related investment and notes receivable from Elcom.
The increase in interest expense for the nine and three months ended January 31, 2013 compared to the same periods of fiscal year 2012 is due to borrowings under the Company’s line of credit from a financial institution. The Company borrowed $6 million during fiscal year 2012 to finance the acquisition of Elcom and borrowed an additional $2.5 million during the nine months ended January 31, 2013 to meet current working capital requirements. The Company repaid approximately $3.5 million of such borrowings during the third quarter of fiscal year 2013 and expects to reduce interest expense as a result.
Other expense in the nine and three months ended January 31, 2012 resulted from certain transaction costs related to the acquisition of Elcom and the amortization of certain non-operating assets. During the nine month period of fiscal year 2012, such expenses were partially offset by gains of approximately $137,000 derived from the excess of proceeds over the cash values of life insurance policies covering a former employee. No similar gains were recognized during the fiscal year 2013 periods. The fiscal year 2013 expenses are primarily due to uninsured losses incurred in the Company’s Gillam-FEI segment.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
The late fiscal year 2012 addition of FEI-Elcom reduced consolidated operating results for the first quarter of fiscal year 2013. Revenues increased but were offset by higher operating expenses resulting in lower consolidated operating profit in fiscal year 2013 than in fiscal year 2012.
The Company anticipates that for the full fiscal year 2014, it will generate an operating profit that exceeds that of fiscal year 2013.
Other income (expense)
| | Three months ended July 31, | |
| | (in thousands) | |
| | | | | | | | Change | |
| | 2013 | | | 2012 | | | $ | | | % | |
Investment income | | $ | 143 | | | $ | 167 | | | $ | (24 | ) | | | (14 | %) |
Interest expense | | | (59 | ) | | | (56 | ) | | | (3 | ) | | | (5 | %) |
Other income (expenses), net | | | 9 | | | | 6 | | | | 3 | | | | 50 | % |
| | $ | 93 | | | $ | 117 | | | $ | (24 | ) | | | (21 | %) |
Investment income is derived primarily from the Company’s holdings of marketable securities. Earnings on these securities may vary based on fluctuating interest rates and dividend payout levels and the timing of purchases or sales of securities. During the three months ended July 31, 2013, as a result of certain bond redemptions over the preceding quarters, the Company held more low earning cash equivalents than investments earning a higher return in the year-ago period. During the three months ended July 31, 2012, investments were held in higher yielding marketable securities than those held in the prior fiscal year. No investment gains or losses were recorded in either the fiscal year 2014 or 2013 periods.
The increase in interest expense for the three months ended July 31, 2013 compared to the same period of fiscal year 2013 is due to increased borrowings under the Company’s new credit facility from a bank. During the fiscal year 2014 quarter, the Company refinanced the $6 million used to acquire FEI-Elcom during fiscal year 2012 and increased its borrowings by an additional $3.2 million for working capital and capital equipment acquisitions.
Other income in the fiscal year 2014 and 2013 periods consisted of insignificant non-operating expenses.
Income tax provision
| | Nine months | | | Three months | |
| | Periods ended January 31, | |
| | 2013 | | | 2012 | | | Change | | | 2013 | | | 2012 | | | Change | |
| | $ | 1,400 | | | $ | 1,770 | | | $ | (370 | ) | | | (21 | %) | | $ | 300 | | | $ | 500 | | | $ | (200 | ) | | | (40 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Effective tax rate on pre-tax book income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 27.3 | % | | | 35.7 | % | | | | | | | | | | | 16.5 | % | | | 31.8 | % | | | | | | | | |
Three months ended July 31, | |
(in thousands) | |
| | | | | | Change | |
2013 | | | 2012 | | | $ | | | % | |
$ | 380 | | | $ | 430 | | | $ | (50 | ) | | | (12 | %) |
DuringThe provision for income taxes for the three month periodmonths ended JanuaryJuly 31, 2013 certaindecreased from the same period of fiscal year 2013 due to the 12% decrease in pretax income as well as a reduced effective tax law changes were enacted which the Company expects will enable it to utilize its California staterate. The effective tax loss carryforward and to obtain larger federal tax credits. The impact of these changesrate in fiscal year 2014 is expected to reduce the Company’s effective tax rate for fiscal year 2013 tobe in the range of 25%30% to 28%. The actual effective tax rate will depend36% depending on the level of pretax income or loss recorded at the Company’s foreign subsidiaries, which are not currently taxed. subsidiaries.
The effective tax rateprovision for income taxes for the fiscal periodsthree months ended JanuaryJuly 31, 2012 were higher thandecreased from the comparable periodssame period of fiscal year 20112012 due to the non-tax deductible impairment charges related to40% decrease in pretax income. As of July 31, 2013 and April 30, 2013, the Company’s investment in Elcom.remaining deferred tax asset valuation allowance is approximately $1.9 million.
The Company is subject to taxation in several countries as well as the states of New York, New Jersey and California. The statutory federal rates are 34% in the United States and Belgium. The effective rate is impacted by the income or loss of certain of the Company’s European and Asian subsidiaries whichthat are currently not taxed. In addition, the Company utilizes the availability of research and development tax credits and the Domestic Production Activity credit in the United States to lower its tax rate. As of April 30, 2012,2013, the Company’s European subsidiaries had available net operating loss carryforwards of approximately $1.2$2.7 million, which will offset any future taxable income. As a result of the ElcomFEI-Elcom acquisition, the Company has a federal net operating loss carryforward of $6.6 million whichthat may be applied in annually limited amounts to offset future U.S.-sourced taxable income over the next 20 years. For State of California income tax purposes, the Company has a tax loss carryforward of approximately $2.3 million which expires in 2019 years.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Net income
Nine months | | Three months | | |
Periods ended January 31, | | |
Three months ended July 31, | | Three months ended July 31, | |
(in thousands) | | (in thousands) | |
| | | | | | | | Change | |
2013 | 2013 | | 2012 | | Change | | 2013 | | 2012 | | Change | | 2013 | | | 2012 | | | $ | | | % | |
$ | 3,729 | | $ | 3,194 | | $ | 535 | | 17 | % | | $ | 1,520 | | $ | 1,074 | | $ | 446 | | 41 | % | 676 | | | $ | 768 | | | $ | (92 | ) | | | (12 | %) |
As detailed above, for the nine and three months ended JanuaryJuly 31, 2013, higher revenues due to the FEI-Elcom acquisitionand increased gross margin were partially offset by higher operatingresearch and development expenses, plus a lower effective income tax rate, enabled the Company to increase itsreducing net income over that recorded infor the quarter as compared to the prior fiscal year periods.period. Based on consolidatedrecent bookings and its backlog, and the improved operating performance at FEI-Elcom, the Company expects to record higher consolidated revenue and to realize improved gross margins and operating profits over the remainder of fiscal year 2013.2014.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s balance sheet continues to reflect a strong working capital position of $66.0$74.7 million at JanuaryJuly 31, 2013, compared to $63.3working capital of $71.7 million at April 30, 2012.2013. Included in working capital at JanuaryJuly 31, 2013 is $21.6$21.0 million consisting of cash, cash equivalents and marketable securities which is partially offset by $5.1 million of borrowings under the Company’s line of credit.securities. The Company’s current ratio at JanuaryJuly 31, 2013 is 5.58.9 to 1.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
For the ninethree months ended JanuaryJuly 31, 2013, the Company had positiveused cash flowfrom operations in the amount of $2.2 million compared to the use of cash from operating activities of $3.2 million compared to $1.3 million$402,000 in the comparable fiscal year 20122013 period. The increasedreduced cash flow in the fiscal year 20132014 period resulted primarily from higher operating profits, collection ofincreased accounts receivable partially offset by increased costs and estimated earnings in excess of billings (“unbilled accounts receivables”)receivables and increased inventory. Unbilled receivables arise from the useFor both of the percentage of completion method on the Company’s long-term contracts, including satellite payload contracts. Under this method revenue was recognized but contractual milestones were not yet billed in accordance with the terms of the contracts. For the nine monthsthree-month periods ended JanuaryJuly 31, 2013 and 2012, the Company incurred approximately $3.8$1.3 million and $4.9 million, respectively, of non-cash operating expenses, such as depreciation and amortization and accruals for employee benefit programs. For the balance of fiscal year 2013, as contractual milestones are met and customers are invoiced, unbilled receivables will be reduced and2014, the Company expects to generate positive cash flow from operating activities.
Net cash useduse in investing activities for the ninethree months ended JanuaryJuly 31, 2013, was $103,000$495,000 compared to cash used in investing activities of $3.9 million$951,000 provided by such activity for the same period of fiscal year 2012. The Company redeemed2013. During the fiscal year 2014 period, marketable securities were redeemed in the amount of $2.5$1.0 million incompared to $2.0 million of such redemptions during the fiscal year 2013 period and $6.1 million in the fiscal year 2012 period. TheseSome of these proceeds and other cash waswere reinvested in additional marketable securities for the nine-month periods ended JanuaryJuly 31, 2013 and 2012 in the amount of $1.0 million$39,000 and $8.8 million,$717,000, respectively. In the fiscal yearquarters ended July 31, 2013 and 2012, periods, the Company acquired property, plant and equipment in the amount of $1.6approximately $1.5 million and $1.1 million,$332,000, respectively. During the nine months ended January 31, 2012, the Company provided an additional loan to Elcom in the amount of $92,000. The Company may continue to acquire, sellinvest cash equivalents in longer-term securities or redeem marketable securitiesto convert short-term investments to cash equivalents as dictated by its investment strategies as well as by the cash requirements forand acquisition strategies. The Company will continue to acquire more efficient equipment to automate its development activities and capital equipment acquisitions.production process. The Company intends to spend between $2.0$2.5 million and $3.0 million on capital equipment during fiscal year 2013. The Company’s cash, cash reserves, including marketable securities, and internally2014. Internally generated cash are adequateor additional borrowings under the Company’s credit facility will be used to acquire this level of property, plant andcapital equipment.
Net cash used in financing activities for the nine months ended January 31, 2013 was $3.0 million compared to cash provided by financing activities of $2.2 million for the periodthree months ended JanuaryJuly 31, 2012. The principal source of cash2013 was $4.0$3.3 million borrowed againstcompared to $87,000 used in financing during the Company’s line of credit with the financial institution which also manages a substantial portion of its investment in marketable securities.fiscal year 2013 period. During the fiscal 2013year 2014 period, the Company repaid $5.3borrowed $3.2 million under its new credit facility with a bank. Such funds were used for working capital and to finance the acquisition of such borrowings.certain fixed assets. During the ninefiscal year 2014 and 2013 periods, the Company made payments of $10,000 and $107,000, respectively, against capital lease obligations. In addition, during the three months ended JanuaryJuly 31, 2013, the Company declared and paid a special2012, cash dividend of $0.20 per share which aggregated $1.7 million. In the nine month periods ended January 31, 2013 and 2012, the Company received cash inflows of $20,000 and $13,000, respectively,was received upon the exercise of employee stock options.
The Company has been authorized by its Board of Directors to repurchase up to $5 million worth of shares of its common stock for treasury whenever appropriate opportunities arise but it has neither a formal repurchase plan nor commitments to purchase additional shares in the future. As of JanuaryJuly 31, 2013, the Company has repurchased approximately $4 million of its common stock out of the $5 million authorization.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
The Company will continue to expend resources to develop, improve and acquire products for space applications, guidance and targeting systems, and communication systems which management believes will result in future growth and continued profitability. During fiscal year 2013,2014, the Company has and intends to continue to make a substantial investment of capital and technical resources to develop and acquire new products to meet the needs of the U.S. Government, commercial space and telecommunicationsnetwork infrastructure marketplaces and 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 less than 10% of revenues to achieve its development goals. The Company’s cash, cash reserves, including marketable securities, and internally Internally generated cash arewill be adequate to fund these development efforts. The Company may also pursue acquisitions to expand its production and development capabilities as well as the range of products it can offer its customers. The Companyand may use itsinternally generated cash marketable securities orand external funding in connection with such acquisitions.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
As of JanuaryJuly 31, 2013, the Company's consolidated backlog is approximately $63 million.$56 million compared to $51 million at April 30, 2013, the end of fiscal year 2013. Approximately 70% of this backlog is expected to be realized in the next twelve months. Included in the backlog at JanuaryJuly 31, 2013 is approximately $200,000$2 million under cost-plus-fee contracts which the Company believes represent firm commitments from its customers for which the Company has not received full funding to date.to-date. The Company excludes from backlog any contracts or awards for which it has not received authorization to proceed. Onproceed and on fixed price contracts the Company excludes any unfunded portion which, as of January 31, 2013, was in excess of $1.0 million.portion. The Company expects these contracts to become fully funded over time and will be addedwilladd to its backlog at that time.
The Company believes that its liquidity is adequate to meet its operating and investment needs through at least JanuaryJuly 31, 2014.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements, other than operating leases, that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Not applicable.*********************FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.
Item 4. Controls and Procedures
Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on their evaluation, the Company’s chief executive officer and chief financial officer have concluded that, as of JanuaryJuly 31, 2013, for the reasons discussed below, the Company’s disclosure controls and procedures were not effective to ensure that information relating to the Company, including its consolidated subsidiaries, required to be included in its reports that it filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Material Weaknesses in Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As disclosed in its Annual Report on Form 10-K for the year ended April 30, 2012, the CompanyManagement has identified a material weakness in its internal control over financial reporting related to accounting for acquisitions. While the Company did not conduct a full assessment ofassessed the effectiveness of internal controls over financial reporting at January 31, 2013, for the first nine months of fiscal year 2013 there were no substantial changes made to the Company’s internal control over financial reporting since management’s assessmentas of April 30, 2012, and therefore the weakness previously identified by management continued to exist at JanuaryJuly 31, 2013. In order to remediatemaking this assessment, management used the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management has concluded that the Company’s internal control over financial reporting were effective as of July 31, 2013.
A material weakness if and when another acquisition takes place, the Company plans to supplement its technical resources to provide expertiseis a deficiency, or a combination of deficiencies, in accounting for acquisitions. Please refer tointernal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s Annual Reportannual or interim financial statements will not be prevented or detected on Form 10-K for the year ended April 30, 2012 for a more detailed discussion of the weakness previously identified by management.timely basis.
Changes in Internal Control Over Financial Reporting. There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the ninethree months ended JanuaryJuly 31, 2013 to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
PART IIII. OTHER INFORMATION
| | |
31.2 - | |
32 - | |
101- | The following materials from the Frequency Electronics, Inc. Quarterly Report on Form 10-Q for the quarter ended JanuaryJuly 31, 2013 formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income and Comprehensive Income, (iii) Condensed Consolidated Statements of Cash Flows and (iv) Notes to Condensed Consolidated Financial Statements |
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: March 18, 2013 | By: | /s/ Alan Miller | |
| | Alan Miller | |
| | Secretary/Treasurer and Chief Financial Officer
Signing on behalf of the registrant and as principal financial officer
| |
| | | |
FREQUENCY ELECTRONICS, INC.
(Registrant)
Date: September 16, 2013 BY /s/ Alan Miller
Alan Miller
Chief Financial Officer and Treasurer
Signing on behalf of the registrant and as principal financial officer