Company Quick10K Filing
Quick10K
Frequency Electronics
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$12.19 9 $106
10-Q 2019-01-31 Quarter: 2019-01-31
10-Q 2018-10-31 Quarter: 2018-10-31
10-Q 2018-07-31 Quarter: 2018-07-31
10-K 2018-04-30 Annual: 2018-04-30
10-Q 2018-01-31 Quarter: 2018-01-31
10-Q 2017-10-31 Quarter: 2017-10-31
10-Q 2017-07-31 Quarter: 2017-07-31
10-K 2017-04-30 Annual: 2017-04-30
10-Q 2017-01-31 Quarter: 2017-01-31
10-Q 2016-10-31 Quarter: 2016-10-31
10-Q 2016-07-31 Quarter: 2016-07-31
10-K 2016-04-30 Annual: 2016-04-30
10-Q 2016-01-31 Quarter: 2016-01-31
10-Q 2015-10-31 Quarter: 2015-10-31
10-Q 2015-07-31 Quarter: 2015-07-31
10-K 2015-04-30 Annual: 2015-04-30
10-Q 2015-01-31 Quarter: 2015-01-31
10-Q 2014-10-31 Quarter: 2014-10-31
10-Q 2014-07-31 Quarter: 2014-07-31
10-K 2014-04-30 Annual: 2014-04-30
10-Q 2014-01-31 Quarter: 2014-01-31
8-K 2019-03-14 Earnings, Exhibits
8-K 2019-01-07 Officers, Regulation FD, Exhibits
8-K 2018-12-12 Earnings, Exhibits
8-K 2018-10-25 Shareholder Vote
8-K 2018-09-13 Earnings, Exhibits
8-K 2018-04-30 Enter Agreement, Officers, Exhibits
8-K 2018-04-27 Other Events
NTAP Netapp 19,120
CLH Clean Harbors 4,070
AAT American Assets Trust 2,130
ECPG Encore Capital Group 906
INSW International Seaways 569
SRNE Sorrento Therapeutics 496
QES Quintana Energy Services 165
CATB Catabasis Pharmaceuticals 96
VPRB VPR Brands 0
ACLZ Accelerize 0
FEIM 2019-01-31
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 6. Exhibits
EX-31.1 ex_137703.htm
EX-31.2 ex_137704.htm
EX-32 ex_137705.htm

Frequency Electronics Earnings 2019-01-31

FEIM 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 freqelec20190131_10q.htm FORM 10-Q freqelec20190131_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549   

 


 

FORM 10-Q

 


 

(Mark one)

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period ended January 31, 2019

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File No. 1-8061

 

FREQUENCY ELECTRONICS, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

11-1986657

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

55 CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y.

11553

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: 516-794-4500

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).   Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☐ 

Smaller Reporting Company ☒

Emerging growth company ☐

 

 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ☐   No ☒

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

The number of shares outstanding of Registrant’s Common Stock, par value $1.00 as of March 12, 2019 – 8,729,682

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

 

TABLE OF CONTENTS

 

Part I. Financial Information:

Page No.

 

 

Item 1 - Financial Statements:

 

 

 

Condensed Consolidated Balance Sheets – January 31, 2019 (unaudited) and April 30, 2018

3

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited) Nine Months Ended January 31, 2019 and 2018 (unaudited)

4

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited) Three Months Ended January 31, 2019 and 2018 (unaudited)

5

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) Nine Months Ended January 31, 2019 and 2018 (unaudited)

6

   

Condensed Consolidated Statements of Changes in Stockholders’ Equity Nine Months Ended January 31, 2019 (unaudited)

7

 

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity Nine Months Ended January 31, 2018 (unaudited)

8

   

Notes to Condensed Consolidated Financial Statements (unaudited)

9-19

 

 

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

20-26

 

 

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

26

 

 

Item 4 - Controls and Procedures

27

 

 

Part II. Other Information:

 

 

 

Item 6 - Exhibits

28

 

 

Signatures

29

 

 

 

 

 

PART I. FINANCIAL INFORMATION  

 

Item 1.  Financial Statements

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands except par value)

 

   

January 31,

   

April 30,

 
   

2019

   

2018

 
   

(UNAUDITED)

         

ASSETS:

               

Current assets:

               

Cash and cash equivalents

  $ 2,418     $ 7,869  

Marketable securities

    8,442       6,149  

Accounts receivable, net of allowance for doubtful accounts

of $173 at January 31, 2019 and $181 at April 30, 2018

    7,312       4,268  

Costs and estimated earnings in excess of billings, net

    7,282       5,094  

Inventories, net

    25,065       26,186  

Prepaid income taxes

    417       1,459  

Prepaid expenses and other

    877       1,050  

Total current assets

    51,813       52,075  

Property, plant and equipment, at cost, net of

accumulated depreciation and amortization

    13,783       14,127  

Goodwill and other intangible assets

    617       617  

Cash surrender value of life insurance and cash held in trust

    14,419       13,915  

Other assets

    3,616       2,850  

Total assets

  $ 84,248     $ 83,584  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY:

               

Current liabilities:

               

Accounts payable - trade

  $ 1,120     $ 1,841  

Accrued liabilities

    3,444       3,416  

   Total current liabilities

    4,564       5,257  
                 

Deferred compensation

    13,779       13,541  

Deferred rent and other liabilities

    1,314       1,524  

   Total liabilities

    19,657       20,322  

Commitments and contingencies

               

Stockholders’ equity:

               

Preferred stock - $1.00 par value authorized 600 shares, no shares issued

    -       -  

Common stock - $1.00 par value; authorized 20,000 shares, 9,164 shares issued,

8,955 shares outstanding at January 31, 2019; 8,867 shares outstanding at April 30, 2018

    9,164       9,164  

Additional paid-in capital

    56,696       56,439  

Retained earnings (Accumulated deficit)

    251       (65 )
      66,111       65,538  

Common stock reacquired and held in treasury -

at cost (209 shares at January 31, 2019 and 297 shares at April 30, 2018)

    (960

)

    (1,361

)

Accumulated other comprehensive income

    (560

)

    (915 )

Total stockholders’ equity

    64,591       63,262  

Total liabilities and stockholders’ equity

  $ 84,248     $ 83,584  

 

See accompanying notes to condensed consolidated financial statements.

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

Nine Months Ended January 31,

(In thousands except per share data)

(Unaudited)

 

   

2019

   

2018

 

Condensed Consolidated Statements of Operations

               

Revenues

  $ 36,345     $ 31,932  

Cost of revenues

    23,953       28,060  

Gross margin

    12,392       3,872  

Selling and administrative expenses

    7,838       7,796  

Research and development expense

    5,094       5,071  

Operating loss

    (540

)

    (8,995

)

                 

Other income (expense):

               

Investment income

    242       1,236  

Interest expense

    (57

)

    (61

)

Other income, net

    225       4  

Loss before provision (benefit) for income taxes

    (130

)

    (7,816

)

Provision for income taxes

    38       2,750

 

Net loss from continuing operations

    (168

)

    (10,566

)

Loss from discontinued operations, net of tax

    -       (697

)

Net loss

  $ (168

)

  $ (11,263

)

                 

Net loss per common share:

               

Basic and diluted loss from continued operations

  $ (0.02

)

  $ (1.20

)

Basic and diluted loss from discontinued operations

    -       (0.07

)

Basic and diluted loss per share

    (0.02

)

    (1.27

)

                 

Weighted average shares outstanding:

               

Basic

    8,899       8,836  

Diluted

    8,899       8,836  
                 

Condensed Consolidated Statements of Comprehensive Income (Loss)

               

Net loss

  $ (168

)

  $ (11,263

)

Other comprehensive loss:

               

Foreign currency translation adjustment

    261       623  

Unrealized gain (loss) on marketable securities:

               

Change in market value of marketable securities before

 reclassification, net of tax of $8 in 2018

    95       (54

)

Reclassification adjustment for realized gains included in

 net income, net of tax of $355 in 2018

    (1

)

    (688

)

Total unrealized gain (loss) on marketable securities, net of tax

    94       (742

)

                 

Total other comprehensive income (loss)

    355       (119

)

Comprehensive income (loss)

  $ 187     $ (11,382

)

 

See accompanying notes to condensed consolidated financial statements.

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

Three Months Ended January 31,

(In thousands except per share data)

(Unaudited)

 

   

2019

   

2018

 

Condensed Consolidated Statements of Operations

               

Revenues

  $ 13,193     $ 10,572  

Cost of revenues

    9,093       13,424  

Gross margin (loss)

    4,100       (2,852

)

Selling and administrative expenses

    2,657       2,749  

Research and development expense

    1,837       1,708  

Operating loss

    (394

)

    (7,309

)

                 

Other expense:

               

Investment income

    52       68  

Interest expense

    (23

)

    (19

)

Other income, net

    104       1  

Loss before provision for income taxes

    (261

)

    (7,259

)

Provision for income taxes

    60       2,848  

Net loss from continuing operations

    (321

)

    (10,107

)

Loss from discontinued operations, net of tax

    -       (289

)

Net loss

  $ (321

)

  $ (10,396

)

                 

Net loss per common share:

               

Basic (loss) income from continued operations

  $ (0.04

)

  $ (1.15

)

Basic loss from discontinued operations

    -       (0.03

)

Basic (loss) income per share

    (0.04

)

    (1.18

)

                 

Weighted average shares outstanding:

               

Basic

    8,928       8,846  

Diluted

    8,928       8,846  
                 

Condensed Consolidated Statements of Comprehensive Income (Loss)

               

Net loss

  $ (321

)

  $ (10,396

)

Other comprehensive income:

               

Foreign currency translation adjustment

    343       48  

Unrealized (loss) gain on marketable securities:

               

Change in market value of marketable securities before

 reclassification, net of tax of $39 in 2018

    150       (76

)

Reclassification adjustment for realized gains included in

 net income

    1       -  

Total unrealized gain (loss) on marketable securities, net of tax

    151       (76

)

                 

Total other comprehensive income (loss)

    494       (28

)

Comprehensive income (loss)

  $ 173     $ (10,424

)

 

See accompanying notes to condensed consolidated financial statements.

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

Nine Months Ended January 31,

(In thousands)

(Unaudited)

 

   

2019

   

2018

 

Cash flows from operating activities:

               

Net loss from continuing operations

  $ (168

)

  $ (10,566

)

Net loss from discontinued operations

    -       (697

)

Net loss

    (168

)

    (11,263

)

Non-cash charges to earnings

    3,303       8,285  

Net changes in operating assets and liabilities

    (4,420

)

    5,771  

Cash provided by operating activities – continuing operations

    (1,285

)

    2,793  

Cash provided by operating activities – discontinued operations

    -       1,217  

   Net cash (used in) provided by operating activities

    (1,285

)

    4,010  
                 

Cash flows from investing activities:

               

Proceeds on redemption of marketable securities

    987       6,477  

Purchase of marketable securities

    (3,200

)

    (4,961

)

Purchase of fixed assets and other assets

    (2,175

)

    (1,032

)

Cash (used in) provided by investing activities – continuing operations

    (4,388

)

    484  

Cash used in investing activities – discontinued operations

    -       (44

)

Net (used in) cash provided by investing activities

    (4,388

)

    440  
                 

Cash flows from financing activities:

               

Tax benefit from exercise of stock-based compensation

    -       1  

Net cash provided by financing activities

    -       1  
                 

Net (decrease) increase in cash and cash equivalents before effect of exchange rate changes

    (5,673

)

    4,451  
                 

Effect of exchange rate changes on cash and cash equivalents

    222       738  
                 

Net (decrease) increase in cash and cash equivalents

    (5,451

)

    5,189  
                 

Cash and cash equivalents at beginning of period

    7,869       2,738  
                 

Cash and cash equivalents at end of period

    2,418       7,927  
                 

Less cash and equivalents of discontinued operations at end of period

    -       943  
                 

Cash and cash equivalents of continuing operations at end of period

  $ 2,418     $ 6,984  
                 
                 

Supplemental disclosures of cash flow information:

               

Cash paid during the period for:

               

Interest

  $ 57     $ 61  

Income taxes

  $ 2     $ 325  

 

See accompanying notes to condensed consolidated financial statements.

 

 

FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Nine Months Ended January 31,

(In thousands except per share data)

(Unaudited) 

 

                   

Additional

   

(Accumulated

Deficit)

   

Treasury stock

   

Accumulated other

         
   

Common Stock

   

paid in

   

Retained

   

(at cost)

   

comprehensive

         
   

Shares

   

Amount

   

capital

   

earnings

   

Shares

   

Amount

   

Income (loss)

   

Total

 

Balance at April 30, 2018

    9,163,940     $ 9,164     $ 56,439     $ (65

)

    297,083     $ (1,361

)

  $ (915

)

  $ 63,262  

Opening adjustment for adoption of ASU 2014-09

                            484                               484  

Adjusted balance at May 1, 2018

    9,163,940       9,164       56,439       419       297,083       (1,361

)

    (915

)

    63,746  

Contribution of stock to 401(k) plan

                    50               (14,339

)

    66               116  

Stock-based compensation expense

                    121                                       121  

Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price

                                                               

Other comprehensive income, net of tax

                                                    (44

)

    (44

)

Net income

                            31                               31  

Balance at July 31, 2018

    9,163,940     $ 9,164     $ 56,610     $ 450       282,744     $ (1,295

)

  $ (959

)

  $ 63,970  

Contribution of stock to 401(k) plan

                    58               (10,089

)

    46               104  

Stock-based compensation expense

                    123                                       123  

Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price

                    (81

)

            (17,708

)

    81               -  

Other comprehensive loss, net of tax

                                                    (95

)

    (95

)

Net income

                            122                               122  

Balance at October 31, 2018

    9,163,940     $ 9,164     $ 56,710     $ 572       254,947     $ (1,168

)

  $ (1,054

)

  $ 64,224  

Contribution of stock to 401(k) plan

                    35               (5,829

)

    27               62  

Stock-based compensation expense

                    128               (1,100 )     4               132  

Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price

                    (177

)

            (38,536

)

    177               -  

Other comprehensive income, net of tax

                                                    494       494  

Net loss

                            (321

)

                            (321

)

Balance at January 31, 2019

    9,163,940     $ 9,164     $ 56,696     $ 251       209,482     $ (960

)

  $ (560

)

  $ 64,591  

 

See accompanying notes to condensed consolidated financial statements.

 

 

FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Nine Months Ended January 31,

(In thousands except per share data)

(Unaudited) 

 

                   

Additional

   

(Accumulated

Deficit)

   

Treasury stock

   

Accumulated other

         
   

Common Stock

   

paid in

   

Retained

   

(at cost)

   

comprehensive

         
   

Shares

   

Amount

   

capital

   

earnings

   

Shares

   

Amount

   

Income (loss)

   

Total

 

Balance at April 30, 2017

    9,163,940     $ 9,164     $ 55,767     $ 23,712       347,422     $ (1,592

)

  $ 2,281     $ 89,332  

Contribution of stock to 401(k) plan

                    68               (13,740

)

    63               131  

Stock-based compensation expense

                    153               (100

)

    1               154  

Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price

                    (3

)

            (744

)

    3               -  

Other comprehensive loss, net of tax

                                                    (340

)

    (340

)

Net income

                            614                               614  

Balance at July 31, 2017

    9,163,940     $ 9,164     $ 55,985     $ 24,326       332,838     $ (1,525

)

  $ 1,941     $ 89,891  

Contribution of stock to 401(k) plan

                    57               (11,530

)

    53               110  

Stock-based compensation expense

                    97                                       97  

Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price

                                                               

Other comprehensive income, net of tax

                                                    261       261  

Net loss

                            (1,481

)

                            (1,481

)

Balance at October 31, 2017

    9,163,940     $ 9,164     $ 56,139     $ 22,845       321,308     $ (1,472

)

  $ 2,202     $ 88,878  

Contribution of stock to 401(k) plan

                    36               (7,487

)

    34               70  

Stock-based compensation expense

                    115               (2,750

)

    12               127  

Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price

                    (1

)

            (117

)

    1               -  

Other comprehensive loss, net of tax

                                                    (28

)

    (28

)

Net loss

                            (10,396

)

                            (10,396

)

Balance at January 31, 2018

    9,163,940     $ 9,164     $ 56,289     $ 12,449       310,954     $ (1,425

)

  $ 2,174     $ 78,651  

 

See accompanying notes to condensed consolidated financial statements.

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE A – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

In the opinion of management of Frequency Electronics, Inc. (the “Company”), the accompanying unaudited condensed consolidated interim financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly, in all material respects, the consolidated financial position of the Company as of January 31, 2019 and the results of its operations and cash flows for the nine and three months ended January 31, 2019 and January 31, 2018.  The April 30, 2018 condensed consolidated balance sheet was derived from audited financial statements.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (‘U.S. GAAP”) have been condensed or omitted.  It is suggested that these condensed consolidated financial statements be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended April 30, 2018, filed on July 30, 2018, and the financial statements and notes thereto.  The results of operations for such interim periods are not necessarily indicative of the operating results for the full fiscal year.

 

NOTE B – DISCONTINUED OPERATIONS

 

In April 2017, the Company decided to sell Gillam and determined that the assets and liabilities of this reportable segment met the discontinued operations criteria as defined in U. S. GAAP in the quarter ended April 30, 2017. On April 26, 2018, the Company sold Gillam to a European entity in a stock purchase agreement for $1.0 million in cash, which was received on April 27, 2018, and a note payable in three years for an additional $1.0 million. The loss recorded due to the sale of Gillam was approximately $359,000, which represented the carrying amount of the investment on FEI-NY’s books less the retained earnings and remaining Gillam equity value reduced by the cash received and the value of the note receivable which is recorded in the caption other assets in the accompanying Condensed Consolidated Balance Sheets. As such Gillam’s results have been classified as discontinued operations in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for fiscal 2018.

 

Summarized operating results for the Gillam discontinued operations, for the nine and three months ended January 31, 2018, were as follows:

 

   

Nine months

   

Three months

 
   

(UNAUDITED)

   

(UNAUDITED)

 
   

(In thousands except par value) 

 

Revenues

  $ 3,018     $ 1,063  

Cost of Revenues

    2,089       699  

  Gross Margin

    929       364  

Selling and administrative expenses

    1,285       582  

Research and development expenses

    334       66  

  Operating Loss

    (690

)

    (284

)

Other income (expense):

               

  Investment (loss) income

               

  Other income (expense), net

    (7

)

    (4

)

Loss before provision for income taxes

    (697

)

    (288

)

Provision for income taxes

    -       1  

Net Loss

  $ (697

)

  $ (289

)

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE C – EARNINGS PER SHARE

 

Reconciliation of the weighted average shares outstanding for basic and diluted Earnings Per Share were as follows:

 

   

Nine months

   

Three months

 
   

Periods ended January 31,

 
   

2019

   

2018

   

2019

   

2018

 

Weighted average shares outstanding:

                               

Basic

    8,899,110       8,835,685       8,927,710       8,846,083  

Effect of dilutive securities

    **       **       **       **  

Diluted

    8,899,110       8,835,685       8,927,710       8,846,083  

 

** For the nine and three month periods ended January 31, 2019, dilutive securities are excluded since the inclusion of such shares would be antidilutive due to the net loss for the periods.  The exercisable shares excluded as of January 31, 2019 are 1,207,750 options. The effect of dilutive securities for the periods would have been 204,071 options and 289,322 options, for the nine and three month periods ended January 31, 2019, respectively. For the nine and three month periods ended January 31, 2018, dilutive securities are excluded since the inclusion of such shares would be antidilutive due to the net loss for the periods.  The exercisable shares excluded as of January 31, 2018 are 1,260,250 options. The effect of dilutive securities for the periods would have been 131,638 options and 136,424 options for the nine and three month periods ended January 31, 2018, respectively.

 

NOTE D – COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS, NET

 

At January 31, 2019 and April 30, 2018, costs and estimated earnings in excess of billings, net, consisted of the following:

 

   

January 31, 2019

   

April 30, 2018

 
   

(In thousands)

 

Costs and estimated earnings in excess of billings

  $ 8,962     $ 5,266  

Billings in excess of costs and estimated earnings

    (1,680

)

    (172

)

Net asset

  $ 7,282     $ 5,094  

 

Such amounts represent revenue recognized on long-term contracts that had not been billed at the balance sheet dates or represent a liability for amounts billed in excess of the revenue recognized.  Amounts are billed to customers pursuant to contract terms, whereas the related revenue is recognized on the percentage of completion basis at the measurement date.  In general, 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 January 31, 2019, revenue recognized under percentage of completion contracts was approximately $33.3 million and $12.9 million, respectively.  During the nine and three months ended January 31, 2018, revenue recognized under percentage of completion contracts was approximately $13.7 million and $2.8 million, respectively. If contract losses are anticipated, costs and estimated earnings in excess of billings are reduced for the full amount of such losses when they are determinable.

 

NOTE E – TREASURY STOCK TRANSACTIONS

 

During the nine and three months period ended January 31, 2019, the Company made contributions of 30,257 shares and 5,829 shares, respectively, of its common stock held in treasury to the Company’s profit sharing plan and trust under Section 401(k) of the Internal Revenue Code.  Such contributions are in accordance with the Company’s discretionary match of employee voluntary contributions to this plan.

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE F – INVENTORIES

 

Inventories, which are reported at the lower of cost or market, consisted of the following: 

 

   

January 31, 2019

   

April 30, 2018

 
   

(In thousands)

 

Raw Materials and Component Parts

  $ 13,135     $ 16,206  

Work in Progress

    8,884       8,216  

Finished Goods

    3,046       1,764  
    $ 25,065     $ 26,186  

 

As of January 31, 2019 and April 30, 2018, approximately $24.2 million and $25.2 million, respectively, of total inventory was located in the United States and $0.9 million and $1.0 million, respectively, was located in China.

 

NOTE G – SEGMENT INFORMATION

 

The Company operates under two reportable segments based on the geographic locations of its subsidiaries:

 

 

(1)

FEI-NY – operates out of New York and its operations consist principally of precision time and frequency control products used in three principal markets: 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. The FEI-NY segment also includes the operations of the Company’s wholly-owned subsidiaries, FEI-Elcom and FEI-Asia. FEI-Asia functions as a manufacturing facility for the FEI-NY segment with historically minimal sales to outside customers. In fiscal 2015 and 2016, they had higher sales to outside customers, producing product for third parties as a contract manufacturer. FEI-Elcom, in addition to its own product line, provides design and technical support the FEI-NY segment’s satellite business.

 

 

(2)

FEI-Zyfer – operates out of California and its products incorporate timing synchronization and distribution technologies into systems and subsystems for secure communications, both government and commercial.

 

The Company’s management 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 present 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):

 

   

Nine months

   

Three months

 
   

Periods ended January 31,

 
   

2019

   

2018

   

2019

   

2018

 

Revenues:

                               

FEI-NY

  $ 28,076     $ 22,184     $ 9,754     $ 6,444  

FEI-Zyfer

    8,746       12,378       3,644       4,514  

less intersegment revenues

    (477

)

    (2,630

)

    (205

)

    (386

)

Consolidated revenues

  $ 36,345     $ 31,932     $ 13,193     $ 10,572  

 

Operating loss:

                               

FEI-NY

  $ (1,745

)

  $ (11,312

)

  $ (939

)

  $ (8,554

)

FEI-Zyfer

    1,305       2,629       847       1,354  

Corporate

    (100

)

    (312

)

    (302

)

    (109

)

Consolidated operating loss

  $ (540

)

  $ (8,995

)

  $ (394

)

  $ (7,309

)

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

   

January 31, 2019

   

April 30, 2018

 

Identifiable assets:

               

FEI-NY (approximately $1.4 and $1.7 million, respectively in China)

  $ 56,969     $ 55,181  

FEI-Zyfer

    9,998       8,168  

less intersegment balances

    (11,577

)

    (11,888

)

Corporate

    28,858       32,123  

Consolidated identifiable assets

  $ 84,248     $ 83,584  

 

NOTE H – INVESTMENT IN MORION, INC.

 

The Company has an investment in Morion, Inc. (“Morion”), a privately-held Russian company, which manufactures high precision quartz resonators and crystal oscillators.  The Company’s investment consists of 4.6% of Morion’s outstanding shares, accordingly, the Company accounts for its investment in Morion on the cost basis.  This investment is included in other assets in the accompanying balance sheets. During the nine months ended January 31, 2019 and 2018, the Company acquired product from Morion in the aggregate amount of approximately $291,000 and $279,000, respectively, and the Company sold product and training services to Morion in the aggregate amount of approximately $2,000 and $192,000, respectively, included in revenues in the statement of operations as part of the FEI-NY segment. During the three months ended January 31, 2019 and 2018, the Company acquired product from Morion in the aggregate amount of approximately $145,000 and $108,000, respectively, and the Company sold product and training services to Morion in the aggregate amount of approximately $9,000 for the same period in 2018, included in revenues in the statement of operations as part of the FEI-NY segment.  At January 31, 2019 there was no payable nor receivable related to Morion. During the nine months ended January 31, 2019 and 2018, the Company received a dividend from Morion in the amount of approximately $105,000 and $85,000, respectively, included in other income, net in the statement of operations as part of the FEI-NY segment.

 

Morion operates as a subsidiary of Gazprombank, a state-owned Russian bank. On July 16, 2014, after the Company’s investment in Morion, Gazprombank became subject to the U. S. Department of Treasury’s prohibition against U. S. persons from providing it with new financing.

 

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 January 31, 2019 and April 30, 2018, respectively, were as follows (in thousands):

 

   

January 31, 2019

 
   

Cost

   

Gross Unrealized Gains

   

Gross Unrealized Losses

   

Fair Market Value

 

 Fixed income securities

  $ 8,473     $ 42     $ (73

)

  $ 8,442  

 

   

April 30, 2018

 
   

Cost

   

Gross Unrealized Gains

   

Gross Unrealized Losses

   

Fair Market Value

 

 Fixed income securities

  $ 6,274     $ 10     $ (135

)

  $ 6,149  

 

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following table presents the fair value and unrealized losses, aggregated by investment type and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

 

   

Less than 12 months

   

12 Months or more

   

Total

 
   

Fair Value

   

Unrealized Losses

   

Fair Value

   

Unrealized Losses

   

Fair Value

   

Unrealized Losses

 

January 31, 2019

                                               

 Fixed Income Securities

  $ 1,695     $ (15

)

  $ 4,546     $ (58

)

  $ 6,241     $ (73

)

                                                 

April 30, 2018

                                               

 Fixed Income Securities

  $ 5,334     $ (135

)

  $ -     $ -     $ 5,334     $ (135

)

 

The Company regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment.  The Company does not believe that its investments in marketable securities with unrealized losses at January 31, 2019 were other-than-temporary due to market volatility of the security’s fair value, analysts’ expectations, and the Company’s ability to hold the securities for a period of time sufficient to allow for any anticipated recoveries in market value.

 

During the nine months ended January 31, 2019, the Company sold or redeemed available-for-sale securities of approximately $987,000, realizing gains of approximately $2,000. During the nine months ended January 31, 2018, the Company sold or redeemed available-for-sale securities in the amounts of approximately $6.5 million, realizing gains of approximately $1 million.

 

Maturities of fixed income securities classified as available-for-sale at January 31, 2019 were as follows, at cost (in thousands):

 

Current

  $ 1,572  

Due after one year through five years

    3,997  

Due after five years through ten years

    2,904  
    $ 8,473  

 

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 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.

 

The Company believes that the fair value of its financial instruments comprising notes receivable approximate the carrying amount.

 

NOTE J – RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test.  Under ASU 2017-04 goodwill impairment will be tested by comparing the fair value of a reporting unit with its carrying amount, and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.  The new guidance must be applied on a prospective basis and is effective for periods beginning after December 15, 2019, with early adoption permitted. The Company will not be adopting ASU 2017-04 early, and is in the process of determining the effect that ASU 2017-04 may have, however, the Company expects the new standard to have an immaterial effect on its financial statements.

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) which replaces the incurred loss impairment methodology in current generally accepted accounting principles (“GAAP”) with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance is effective for fiscal years beginning after December 15, 2019. The Company is evaluating the effect, if any, the update will have on the financial statements when adopted in fiscal year 2021.

 

In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842) (“ASU 2016-02”). The objective of the update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  The standard requires a modified retrospective transition approach for existing leases. The amendments of ASU 2016-02 are effective for fiscal years beginning after December 31, 2018 and early adoption is permitted. The Company will adopt this update on May 1, 2019, the effective date of initial application, using a modified retrospective transition approach. The Company will continue to apply ASC-840, including disclosure requirements, in the comparative periods in the year the Company adopts the new guidance. The new standard provides a number of optional practical expedients. The Company expects to elect the package of three practical expedients which permits the Company not to reassess under the new standard the Company’s prior conclusions about lease identification and initial direct costs. The Company does not expect to elect the practical expedients to use hindsight or pertaining to land easements, the latter not being applicable to the Company. The Company expects this standard will have a material effect on our financial statements, with the most significant effects related to: (i) the recognition of new right of use assets and lease liabilities on our balance sheet for primarily real estate operating leases and (ii) providing significant new disclosures regarding lease activities. The Company does not expect a significant change in our leasing activities between now and adoption.

 

In August 2018, the FASB issued ASU No. 2018-13 Fair Value Measurement (Topic 820) (“ASU 2018-13”) which modifies the disclosure requirement on fair value measurements. The new guidance is effective for fiscal years beginning after December 15, 2019. The Company is evaluating the effect, if any, the update will have on the financial statements when adopted in fiscal 2021.

 

Newly Adopted Accounting Standards

 

Revenue from Contracts with Customers

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), as amended, which establishes new guidance for revenue recognition. ASU 2014-09 eliminates most of the existing industry-specific revenue recognition guidance and significantly expands related disclosures. Additionally, it supersedes some cost guidance in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts, and creates a new Subtopic 340-40, Other Assets and Deferred Costs-Contracts with Customers. The Company determines revenue recognition through the following steps: identification of the contract, or contracts, with the customer; identification of the performance obligations in the contract; determination of the transaction price; allocation of the transaction price to the performance obligations in the contract; and recognize revenue when, or as, the entity satisfies a performance obligation. The core principle of the guidance is that the Company will recognize revenue upon the transfer of the promised goods and services to its customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods and services. The new guidance requires significant additional judgement and estimation (as compared to the previous guidance) that may include, but is not limited to, identifying performance obligations and estimating the amount of variable consideration, if any, to include in the transaction price, and allocation of the transaction price to the performance obligations. The new standard allows for two methods of adoption, either by (i) retrospectively to each prior reporting period presented (“full retrospective method”) or (ii) retrospectively with the cumulative effect of initially applying the new guidance recognized at the date of initial application (“modified-retrospective method”). The Company adopted ASU 2014-09 in the first quarter of fiscal 2019 using the modified-retrospective method, which resulted in a cumulative effect increase of $484,000, including the adoption of ASC 340-40 as noted below, as of the date of adoption on May 1, 2018, to retained earnings. The adoption of ASU 2014-09 effected all new and open contracts as of the adoption date.

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

In connection with the adoption of ASU 2014-09 on May 1, 2018, the Company also adopted the guidance in ASC 340-40, Other Assets and Deferred Costs - Contracts with Customers (“ASC 340-40”), with respect to capitalization and amortization of incremental costs of obtaining a contract. The new cost guidance requires the capitalization of all incremental costs incurred to obtain a contract with a customer that it would not have incurred if the contract had not been obtained, provided it expects to recover the costs. The Company expects that sales commissions as a result of obtaining customer contracts are recoverable, and therefore the Company defers and capitalizes them as contract costs. As a result of this new guidance, the Company capitalizes sales commissions for which the expected amortization period is greater than one year. The Company classifies the unamortized portion of deferred commissions as current or noncurrent assets based upon the timing of when the Company expects to recognize the expense. The current and noncurrent portion of deferred commissions are included in prepaid expenses and other current assets, respectively, in the Company’s Condensed Consolidated Balance Sheet. Adoption of ASC 340-40 resulted in a cumulative effect adjustment of $87,000 to total assets, $109,000 to total liabilities, and a $22,000 reduction to retained earnings, as of the date of adoption, on May 1, 2018.

 

The Company’s new accounting policies as a result of adopting ASU 2014-09 are discussed below.

 

Revenue Recognition

 

Revenue is recognized when a performance obligation is satisfied, which is when the expected goods or services are transferred to the customer, in an amount that reflects the consideration to which the Company expects to receive. A performance obligation is a distinct product or service that is transferred to the customer based on the contract. The transaction price is allocated to each performance obligation and is recognized as revenue upon satisfaction of that performance obligation. The company derives revenue from contracts with customers by units sold with specific specifications and frequencies that are used by a specific customer and contracts where the end user is the government. The Company’s contracts typically include multiple performance obligations which are satisfied either by shipped projects or the completion of milestones as defined in the contract. The transaction price is allocated either (i) based on the sale price of each item shipped or (ii) as defined by the milestones stated in the contract.

 

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 (“POC”) method.  On fixed-price contracts, which are typical for commercial and U.S. Government satellite programs and other long-term U.S. Government projects, and which require initial design and development of the product, revenue is recognized on the cost-to-cost method.  Under this method, revenue is recorded based upon the ratio that incurred costs bear to total estimated contract costs with related cost of sales recorded as the costs are incurred.  Each month management reviews estimated contract costs through a process of aggregating actual costs incurred and estimating additional costs to completion based upon the current available information and status of the contract.  The effect of any change in the estimated gross margin rate (“GM Rate”) for a contract is reflected in revenues in the period in which the change is known.  Provisions for the full amount of anticipated losses on contracts are made in the period in which they become determinable.

 

On production-type orders, revenue is recorded as units are delivered with the related cost of sales recognized on each shipment based upon a percentage of estimated final program costs.  Changes in job performance on long-term contracts and production-type orders may result in revisions to costs and income and are recognized in the period in which revisions are determined to be required.  Provisions for anticipated losses on customer orders are made in the period in which they become determinable.

 

For customer orders in the Company’s FEI-Zyfer segment or smaller contracts or orders in the FEI-NY segment, sales of products and services to customers are reported in operating results based upon (i) shipment of the product or (ii) performance of the services pursuant to terms of the customer order.  When payment is contingent upon customer acceptance of the installed system, revenue is deferred until such acceptance is received and installation completed.

 

 

 

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

In connection with the adoption of ASU 2019-09, there were changes to the timing of the Company’s revenue recognition associated with the significant portion of our business that was not being accounted for as percentage of completion in prior years for contracts where the end customer was the U.S. Government. These production-type contracts under which revenue was previously recorded as Passage of Title (“POT”) are currently being recognized as POC following adoption of this ASU. As a result, the Company will begin recognizing revenue earlier under these contracts. The Company’s products generally carry a one-year warranty, but may vary based on the contract terms.

 

Significant judgment is used in evaluating the financial information for certain contracts related to the adoption of this ASU to determine an appropriate budget and estimated cost. The Company evaluates this information continuously and bases its judgments on historical experience, design specifications, and expected costs for material and labor.

 

Practical Expedients

 

The Company expenses sales commissions as sales and marketing expenses in the period they are incurred if the expected amortization period is one year or less.

 

The Company expenses costs, other than sales commissions, to obtain a contract in the period for which they are incurred as these amounts would have been incurred even if the contract had not been obtained.

 

Disaggregation of Revenue

 

Total revenue related to the adoption ASU 2014-09 and recognized over time as POC was approximately $33.3 million of the $36.4 million reported for the nine months ended January 31, 2019, and $12.9 million of the $13.2 million reported for the three months ended January 31, 2019. The amounts by segment and product line were as follows:

 

   

Nine Months Ended January 31, 2019

 
   

(In thousands)

 
   

POC Revenue

   

POT Revenue

   

Total Revenue

 

FEI-NY

  $ 26,611     $ 1,465     $ 28,076  

FEI-Zyfer

    6,680       2,066       8,746  

Intersegment

    (25

)

    (452

)

    (477

)

Revenue

  $ 33,266     $ 3,079     $ 36,345  

 

   

Three Months Ended January 31, 2019

 
   

(In thousands)

 
   

POC Revenue

   

POT Revenue

   

Total Revenue

 

FEI-NY

  $ 9,412     $ 342     $ 9,754  

FEI-Zyfer

    3,447       197       3,644  

Intersegment

    11       (216

)

    (205

)

Revenue

  $ 12,870     $ 323     $ 13,193  

 

   

Periods ended January 31,

 
   

Nine months

   

Three months

 
   

2019

   

2018

   

2019

   

2018

 
   

(In thousands)

 

Revenue by Product Line:

                               

Satellite Revenue

  $ 17,289     $ 11,448     $ 5,987     $ 2,450  

Government Non-Space Revenue

    17,058       13,928       6,639       6,222  

Other Commercial & Industrial Revenue

    1,998       6,556       567       1,900  

Consolidated revenues

  $ 36,345     $ 31,932     $ 13,193     $ 10,572  

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The cumulative effect of changes made to the Condensed Consolidated Balance Sheet as of May 1, 2018 was as follows (in thousands):

 

   

Balance at

April 30, 2018

   

Adjustments

     

Balance at

May 1, 2018

 

ASSETS

                         

Costs and estimated earnings in excess of billings, net

  $ 5,094     $ 1,435  

(a)

  $ 6,529  

Inventories, net

    26,186       (929

)

(b)

    25,257  

Prepaid expenses and other

    1,050       77  

(c)

    1,127  

Total current assets

    52,075       583         52,658  

Other assets

    2,850       10  

(d)

    2,860  

Total assets

    83,584       593         84,177  
                           

LIABILITIES AND STOCKHOLDERS’ EQUITY

                         

Accrued liabilities

  $ 3,416     $ 97  

(e)

  $ 3,513  

Total current liabilities

    5,257       97         5,354  

Deferred rent and other liabilities

    1,524       12  

(f)

    1,536  

Total liabilities

    20,322       109         20,431  

(Accumulated deficit) Retained Earnings

    (65

)

    484  

(g)

    419  

Total stockholders’ equity

    63,262       484         63,746  

Total liabilities and stockholders’ equity

    83,584       593         84,177  

 

Notes:

(a)  Adjustment to unbilled accounts receivable for additional revenue recognized for which amounts have not been invoiced due to adoption of ASU 2019-09.

(b)  Adjustment for additional allocated inventory costs related to additional revenue recognized due to adoption of ASU 2019-09.

(c)  Adjustment for short-term capitalization of sales commissions, net of amortized amounts, due to adoption of ASC 340-40.

(d)  Adjustment for long-term capitalization of sales commissions, net of amortized amounts, due to adoption of ASC 340-40.

(e)  Adjustment to record short-term liability of sales commissions, net of amounts paid, due to adoption of ASC 340-40.

(f)  Adjustment to record long-term liability of sales commissions, net of amounts paid, due to adoption of ASC 340-40.

(g) The cumulative effect of initially adopting ASU 2019-09 and ASC 340-40 using the modified-retrospective method as an adjustment to the beginning balance of (Accumulated deficit) Retained Earnings. 

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The impact of adopting the standard on the Company’s consolidated financial statements for the nine and three months ended January 31, 2019 were as follows (in thousands):

 

Condensed Consolidated Balance Sheet

 

   

As Reported

   

Adjustments

     

Balances Without

Adoption of ASU 2014-09

 

ASSETS

                         

Costs and estimated earnings in excess of billings, net

  $ 7,282     $ 4,286  

(a)

  $ 2,996  

Inventories, net

    25,065       (3,115

)

(b)

    28,180  

Prepaid expenses and other

    877       35  

(c)

    842  

Total current assets

    51,813       1,206         50,607  

Other assets

    3,616       15  

(d)

    3,601  

Total assets

    84,248       1,221         83,027  
                           

LIABILITIES AND STOCKHOLDERS’ EQUITY

                         

Accrued liabilities

  $ 3,444       39  

(e)

    3,405  

Total current liabilities

    4,564       39         4,525  

Deferred rent and other liabilities

    1,314       12  

(f)

    1,302  

Total liabilities

    19,657       51         19,606  

Retained Earnings (Accumulated deficit)

    251       1,170  

(g)

    (919

)

Total stockholders’ equity

    64,591       1,170         63,421  

Total liabilities and stockholders’ equity

    84,248       1,221         83,027  

 

Notes:

(a)  Cumulative adjustment to unbilled accounts receivable for additional revenue recognized for which amounts have not been invoiced due to adoption of ASU 2019-09.

(b)  Cumulative adjustment for additional allocated inventory costs related to additional revenue recognized due to adoption of ASU 2019-09.

(c)  Cumulative adjustment for short-term capitalization of sales commissions, net of amortized amounts, due to adoption of ASC 340-40.

(d)  Cumulative adjustment for long-term capitalization of sales commissions, net of amortized amounts, due to adoption of ASC 340-40.

(e)  Cumulative adjustment to record short-term liability of sales commissions, net of amounts paid, due to adoption of ASC 340-40.

(f)  Cumulative adjustment to record long-term liability of sales commissions, net of amounts paid, due to adoption of ASC 340-40.

(g) The cumulative effect of initially adopting for ASU 2019-09 and ASC 340-40 using the modified-retrospective method as an adjustment to the balance of Retained earnings (Accumulated deficit).

 

Condensed Consolidated Statement of Operations

 

Nine Months Ended January 31, 2019:

 

As Reported

   

Adjustments

     

Balances Without

Adoption of

ASU 2014-09

 

Revenues

  $ 36,345     $ 2,861       $ 33,484  

Cost of revenues

    23,953       2,186         21,767  

Gross profit

    12,392       677         11,715  

Selling and administrative expenses

    7,838       (10

)

(a)

    7,848  

Operating loss

    (540

)

    686         (1,226

)

Loss before provision for income taxes

    (130

)

    686         (816

)

Net loss

    (168

)

    686         (854

)

 

Note:

(a)  Additional expense related the amortization of sales commissions due to the adoptions of ASC 340-40.

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Three Months Ended January 31, 2019:

 

As Reported

   

Adjustments

     

Balances Without

Adoption of

ASU 2014-09

 

Revenues

  $ 13,193     $ 809       $ 12,384  

Cost of revenues

    9,093       1,121         7,972  

Gross profit

    4,100       (312

)

      4,412  

Selling and administrative expenses

    2,657       (10

)

(a)

    2,667  

Operating loss

    (394

)

    (302

)

      (92

)

(Loss) income before provision for income taxes

    (261

)

    (302

)

      41  

Net loss

    (321

)

    (302

)

      (19

)

 

Note: 

(a)  Additional expense related the amortization of sales commissions due to the adoptions of ASC 340-40.

 

NOTE K – CREDIT FACILITY

 

As of January 30, 2019, the Company had available credit at variable terms based on its securities holdings under an advisory arrangement, under which no borrowings have been made.

 

NOTE L – VALUATION ALLOWANCE ON DEFERRED TAX ASSETS

 

 Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover deferred tax assets in the jurisdiction from which they arise, we consider all positive and negative evidence, including the reversal of deferred tax liabilities, projected future taxable income, tax planning strategies, and results of recent operations. Based on the weighting of all evidence, both positive and negative, most notably the three year cumulative loss, we established a full valuation allowance against our U.S. deferred tax assets during the quarter ended April 30, 2018. If these estimates and assumptions change in the future, the Company may be required to adjust its existing valuation allowance resulting in changes to deferred income tax expense. The Company evaluates the likelihood of realizing its deferred tax assets quarterly.

 

On December 22, 2017, the legislation commonly known as the Tax Cuts and Jobs Act (the “TCJA” or the “Tax Act”) was enacted into law. In response to the TCJA, the U.S. Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of TCJA. The purpose of SAB 118 was to address any uncertainty in applying ASC Topic 740, Income Taxes in the reporting period in which the TCJA was enacted. SAB 118 addresses situations where the accounting is incomplete for certain income tax effects of the TCJA upon issuance of a company’s financial statements for the reporting period which include the enactment date. SAB 118 allows for a provisional amount to be recorded if it is a reasonable estimate of the impact of the TCJA. Additionally, SAB 118 allows for a measurement period to finalize the impacts of the TCJA, not to extend beyond one year from the date of enactment.

 

As of the period ended April 30, 2018, the Company’s accounting for certain elements of the TCJA was incomplete. The Company recorded a provisional noncash charge to income tax expense of $5.3 million related to the revaluation of our deferred tax assets at the lower federal corporate tax rate of 21%. During the quarter ended January 31, 2019, the Company finalized the accounting for the tax effects of TCJA with no material changes to the provisional estimate recorded in prior periods.

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995:

 

The statements in this quarterly report on Form 10-Q regarding future earnings and operations and other statements relating to the future constitute “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1933 or the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  The words “believe,” “may,” “will,” “could,” “should,” “would,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “objective,” “seek,” “strive,” “might,” “likely result,” “build,” “grow,” “plan,” “goal,” “expand,” “position,” or similar words, or the negatives of these words, or similar terminology, identify forward-looking statements.  All statements by the Company that address activities, events or developments that the Company expects or anticipates will occur in the future, including all statements by the Company regarding its expected financial position, revenues, cash flows and other operating results, business position, legal proceedings or similar matters, are forward-looking statements.  These statements are based on assumptions that the Company believes are reasonable, but are subject to a wide range of risks and uncertainties, and a number of factors could cause the Company’s actual results to differ materially from those expressed in the forward-looking statements referred to above.  Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company’s products in the marketplace, competitive factors, new products and technological changes, product prices and raw material costs, dependence upon third-party vendors, competitive developments, changes in manufacturing and transportation costs, changes in contractual terms, the availability of capital, and other risks detailed in the Company’s periodic report filings with the Securities and Exchange Commission.  Readers are cautioned not to place undue reliance on these forward-looking statements, which relate only to events as of the date on which the statements are made and which reflect management’s analysis, judgments, belief, or expectation only as of such date.  Any and all of the forward-looking statements contained in this Form 10-Q and any other public statements by the Company or its management may turn out to be incorrect. The Company expressly disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.

 

Critical Accounting Policies and Estimates

 

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended April 30, 2018, filed on July 30, 2018.  The Company believes its most critical accounting policies to be the recognition of revenue and costs on production contracts, income taxes, and the valuation of inventory.  Each of these areas requires the Company to make use of reasoned estimates including estimating the cost to complete a contract, the realizable value of its inventory and the market value of its products.  Changes in estimates can have a material impact on the Company’s financial position and results of operations. The Company’s significant accounting policies did not change during the nine and three months ended January 31, 2019, except for those impacted by the newly adopted accounting standard below.

 

Revenue Recognition

 

Revenue is recognized when a performance obligation is satisfied, when the expected goods or services are transferred to the customer, in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. A performance obligation is a distinct product or service that is transferred to the customer’s control based on the contract. The transaction price is allocated to each performance obligation and is recognized as revenue upon satisfaction of that performance obligation. The company derives revenue either as (i) units with specifications and frequencies that can be used by multiple customers (POT) or (ii) units with specific specifications and frequencies that are used by a specific customer or for government end use (POC).

 

In prior years, a significant portion of our business that was not being accounted for as POC was from contracts where the end customer is the U.S. Government. These production-type contracts under which revenue was previously recorded as POT are currently being recognized as POC following adoption of ASU 2014-09 as noted in Note J to the condensed consolidated financial statements in Part I, Item I of this form 10-Q. As a result, the Company will begin recognizing revenue earlier under these contracts.

 

Revenues under larger, long-term contracts which generally require billings based on achievement of milestones rather than delivery of product, are reported in operating results using the POC method.  On fixed-price contracts, which are typical for commercial and U.S. Government satellite programs and other long-term U.S. Government projects, and which require initial design and development of the product, revenue is recognized on the cost-to-cost method.  Under this method, revenue is recorded based upon the ratio that incurred costs bear to total estimated contract costs with related cost of sales recorded as the costs are incurred.  Each month management reviews estimated contract costs through a process of aggregating actual costs incurred and estimating additional costs to completion based upon the current available information and status of the contract.  The effect of any change in the estimated GM Rate for a contract is reflected in revenues in the period in which the change is known.  Provisions for the full amount of anticipated losses on contracts are made in the period in which they become determinable.

 

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

 

On production-type orders, revenue is recorded as units are delivered with the related cost of sales recognized on each shipment based upon a percentage of estimated final program costs. Changes in job performance on long-term contracts and production-type orders may result in revisions to costs and income and are recognized in the period in which revisions are determined to be required.  Provisions for anticipated losses on customer orders are made in the period in which they become determinable.

 

For customer orders in the Company’s FEI-Zyfer segment or smaller contracts or orders in the FEI-NY segment, sales of products and services to customers are reported in operating results based upon (i) shipment of the product or (ii) performance of the services pursuant to terms of the customer order.  When payment is contingent upon customer acceptance of the installed system, revenue is deferred until such acceptance is received and installation completed.

 

Costs and Expenses

 

Contract costs include all direct material costs, direct labor costs, manufacturing overhead and other direct costs related to contract performance.  Selling, general and administrative costs are expensed as incurred, except as otherwise noted in Note J above in relation to the adoption of ASU 2014-09.

 

Inventory

 

In accordance with industry practice, inventoried costs contain amounts relating to contracts and programs with long production cycles, a portion of which will not be realized within one year.  Inventory write-downs are established for slow-moving, 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 income 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

 

The table below sets forth for the nine and three months ended January 31, 2019 and 2018, respectively, the percentage of consolidated revenues represented by certain items in the Company’s consolidated statements of operations or notes to the condensed consolidated financial statements:

 

   

Nine months

   

Three months

 
   

Periods ended January 31,

 
   

2019

   

2018

   

2019

   

2018

 

Revenues

                               

FEI-NY

    77.2

%

    69.5

%

    73.9

%

    61.0

%

FEI-Zyfer

    24.1       38.8       27.6       42.7  

Less intersegment revenues

    (1.3

)

    (8.3

)

    (1.5

)

    (3.7

)

      100.0       100.0       100.0       100.0  

Cost of revenues

    65.9       87.9       68.9       127.0  

Gross margin

    34.1       12.1       31.1       (27.0

)

Selling and administrative expenses

    21.6       24.4       20.1       26.0  

Research and development expenses

    14.0       15.9       13.9       16.2  

Operating loss

    (1.5

)

    (28.2

)

    (2.9

)

    (69.2

)

Other income, net

    1.1       3.7       1.0       0.5  

Provision for income taxes

    0.1       8.6       0.5       27.0  

Loss from continued operations

    (0.5

)

    (33.1

)

    (2.4

)

    (95.7

)

Loss from discontinued operations, net assets

    (0

)

    (2.2

)

    (0

)

    (2.7

)

Net loss

    (0.5

)%

    (35.3

)%

    (2.4

)%

    (98.4

)%

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

 

Revenues

(in thousands)

 

   

Nine months

   

Three months

 
   

Periods ended January 31,

 

Segment

 

2019

   

2018

   

Change

   

2019

   

2018

   

Change

 

FEI-NY

  $ 28,076     $ 22,184     $ 5,892       26.6

%

  $ 9,754     $ 6,444     $ 3,310       51.4

%

FEI-Zyfer

    8,746       12,378       (3,632

)

    (29.3

)

    3,644       4,514       (870

)

    (19.3

)

Intersegment revenues

    (477

)

    (2,630

)

    2,153       (81.9

)

    (205

)

    (386

)

    181       (46.9

)

    $ 36,345     $ 31,932     $ 4,413       13.8

%

  $ 13,193     $ 10,572     $ 2,621       24.8

%

 

For the nine months ended January 31, 2019, revenues from commercial and U.S. Government satellite programs increased approximately $5.8 million over the same period of fiscal year 2018, and accounted for approximately 48% of consolidated revenues compared to approximately 36% during this same period in fiscal 2018.  Revenues on these contracts are recognized primarily under the POC method.  Revenues from the satellite market are recorded in the FEI-NY segment.  Revenues from non-space U.S. Government/Department of Defense (“DOD”) customers, which are recorded in both the FEI-NY and FEI-Zyfer segments, increased $3.1 million over the same period of fiscal 2018, and accounted for approximately 47% of consolidated revenues compared to approximately 44% during this same period in fiscal 2018.  Other commercial and industrial revenues for the nine months ended January 31, 2019 accounted for approximately 5% of consolidated revenues compared to 20% in the prior year. Changes in revenue for the current year are partially due to implementation of ASU 2014-09 (see Note J).  Intersegment revenues are eliminated in consolidation.

 

For the three months ended January 31, 2019 revenues from commercial and U.S. Government satellite programs increased approximately $3.5 million over the same period of fiscal year 2018, and accounted for approximately 45% of consolidated revenues compared to approximately 23% during this same period in fiscal 2018.  Revenues from non-space U.S. Government/DOD customers, which are recorded in both the FEI-NY and FEI-Zyfer segments, increased $0.4 million over the same period of fiscal 2018, and accounted for approximately 50% of consolidated revenues compared to approximately 59% during this same period in fiscal 2018. Other commercial and industrial revenues for the three months ended January 31, 2019 accounted for approximately 5% of consolidated revenues compared to 18% during this same period in the prior year. Intersegment revenues are eliminated in consolidation.

  

Gross Margin

(in thousands)

 

   

Nine months

   

Three months

 
   

Periods ended January 31,

 
   

2019

   

2018

   

Change

   

2019

   

2018

   

Change

 
    $ 12,392     $ 3,872     $ 8,520       220.0

%

  $ 4,100     $ (2,852

)

  $ 6,952       (243.8

)%

GM Rate

    34.1

%

    12.1

%

                    31.1

%

    (27.0

)%

               

 

For the nine and three month period ended January 31, 2019, gross margin and GM Rate increased over the same period in fiscal 2018. The prior year’s gross margin and GM Rate was affected by a $5.0 million inventory write-down, lower revenues, increased repair costs and unabsorbed manufacturing overhead costs.

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

 

Selling and Administrative Expenses

(in thousands)

 

Nine months

 

 

Three months

 

Periods ended January 31,

 

2019

 

 

2018

 

 

Change

 

 

2019

 

 

2018

 

 

Change

 

$

7,838

 

 

$

7,796

 

 

$

42

 

 

 

0.5

%

 

$

2,657

 

 

$

2,749

 

 

$

(92

)

 

(3.3

)%

 

For the nine months ended January 31, 2019 and 2018, selling and administrative (“SG&A”) expenses were approximately 22% and 24%, respectively, of consolidated revenues.  For the three months periods ended January 31, 2019 and 2018, SG&A expenses were approximately 20% and 26% respectively, of consolidated revenues.  The dollar value of SG&A expenses were comparable for both the nine and three months ended January 31, 2019 and 2018; however, the percentage decreased due to the increase in revenue during the fiscal 2019 year.

 

Research and Development Expense

(in thousands)

 

Nine months

 

 

Three months

 

Periods ended January 31,

 

2019

 

 

2018

 

 

Change

 

 

2019

 

 

2018

 

 

Change

 

$

5,094

 

 

$

5,071

 

 

$

23

 

 

 

0.5

%

 

$

1,837

 

 

$

1,708

 

 

$

129

 

 

7.6

%

 

Research and development (“R&D”) expenditures represent investments intended to keep the Company’s products at the leading edge of time and frequency technology and enhance future competitiveness.  The R&D rate for the nine month period ending January 31, 2019 was 14% of sales compared to 16% of sales for the same period of the previous fiscal year.  The R&D rate for the three month period ending January 31, 2019 was 14% of sales compared to 16% of sales for the same period of the previous fiscal year.  The Company expects the total level of activity related to R&D to continue at a similar rate through the balance of the current year and beyond to address new large opportunities in secure communications, command and control applications, next generation satellite payload products and additional DOD and commercial applications.

.

 

Operating Loss

(in thousands)

 

Nine months

 

 

Three months

 

Periods ended January 31,

 

2019

 

 

2018

 

 

Change

 

 

2019

 

 

2018

 

 

Change

 

$

(540