What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-12-11 compared with 2020-09-14 · 90 added, 78 removed, 99 unchanged (63% of the section changed)

5 unchanged sentences

The factors listed above are not exhaustive.

Other sections of this Form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended April 30, 2020, filed on July 29, 2020 with the Securities and Exchange Commission include additional factors that could materially and adversely impact the Company’s business, financial condition and results of operations.

Other sections of this Form 10-Q and in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2020, filed on July 29, 2020 with the Securities and Exchange Commission include additional factors that could materially and adversely impact the Company’s business, financial condition and results of operations.

Moreover, the Company operates in a very competitive and rapidly changing environment.

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Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results.

Any or all of the forward-looking statements contained in this Form 10-K and any other public statement made by the Company or its management may turn out to be incorrect.

Any or all of the forward-looking statements contained in this Form 10-Q and any other public statement made by the Company or its management may turn out to be incorrect.

The Company expressly disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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, 2020, filed on July 29, 2020 with the Securities and Exchange Commission.

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2020, filed on July 29, 2020 with the Securities and Exchange Commission.

The Company believes its most critical accounting policies to be the recognition of revenue and costs on production contracts, income taxes, and the valuation of inventory.

1 unchanged sentence

Changes in estimates can have a material impact on the Company’s financial position and results of operations.

The Company’s significant accounting policies did not change during the three months ended July 31, 2020.

The Company’s significant accounting policies did not change during the six and three months ended October 31, 2020.

Revenue Recognition

9 unchanged sentences

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

For smaller contracts or orders, sales of products and services to customers are reported in operating results based upon (i) shipment of the product or (ii) performance of the services pursuant to terms of the customer order.

1 unchanged sentence

The Company’s products generally carry a one-year warranty, but may vary based on the contract terms.

FREQUENCY ELECTRONICS, INC.

and SUBSIDIARIES

Significant judgment is used in evaluating the financial information for certain contracts to determine an appropriate budget and estimated cost.

9 unchanged sentences

Government agencies.

All marketable securities were held in the custody of one financial institution at July 31, 2020 and April 30, 2020.

All marketable securities were held in the custody of one financial institution at October 31, 2020 and April 30, 2020.

Investments in debt securities are categorized as available-for-sale and are carried at fair value, with unrealized gains and losses excluded from income and recorded directly to stockholders’ equity.

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In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.

The Company’s priority during the COVID-19 outbreak has been to protect the health and safety of its employees while keeping its manufacturing sites open.

The Company’s priority during the COVID-19 outbreak has been to protect the health and safety of its employees while remaining operational.

Within the limitations imposed by governmental health and safety procedures, the Company has continued to manufacture its full range of products at its facilities.

The Company has educated employees about COVID-19 symptoms and hygiene best practices.

The Company’s policies also include taking an employee’s temperature before entering production facilities; mandating handwashing; requiring social distancing and, where social distancing is difficult, requiring face coverings; streamlining onsite personnel; encouraging, and in some cases, requiring remote work for those employees who can work from home; and disinfecting facilities.

As of September 14, 2020, the Company was aware of two employees that have had confirmed cases of COVID-19 since the COVID-19 outbreak began, with no fatalities and both of those employees having returned to work.

The Company’s policies also include taking an employee’s temperature before entering facilities; mandating handwashing; requiring social distancing and, where social distancing is difficult, requiring face coverings; encouraging, and in some cases, requiring remote work for those employees who can work from home; and disinfecting facilities.

As of December 11, 2020, the Company was aware of five employees that have had confirmed cases of COVID-19 since the COVID-19 outbreak began, with no fatalities.

Additional employees have been absent or self-quarantined due to COVID-19; however, such absences have not had a significant impact on production.

Additionally, since the COVID-19 outbreak began, no facilities have been fully shut down (other than temporarily for disinfecting) and such measures to disinfect facilities have not had a significant impact on production.

Additionally, since the COVID-19 outbreak began, facilities have remained open (other than temporary closures for disinfecting) and such measures to disinfect facilities have not had a significant impact on production.

Certain of the Company’s vendors have been unable to deliver materials on time due to the COVID-19 outbreak.

Such delays have negatively impacted the Company’s production, and the Company plans to continue to monitor these and its other vendors and, if necessary, seek alternative suppliers.

FREQUENCY ELECTRONICS, INC.

and SUBSIDIARIES

The full impact of the COVID-19 outbreak continues to evolve as of the date of this report.

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Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2021.

FREQUENCY ELECTRONICS, INC.

and SUBSIDIARIES

On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property.

The CARES Act also appropriated funds for the Small Business Administration (SBA) Paycheck Protection Program loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19.

Since the filing of the Company’s Annual Report on Form 10-K for the year ended April 30, 2020, filed on July 29, 2020, there have been no additional impacts to the Company related to COVID-19.

The Company received a loan under the Paycheck Protection Program in April 2020, which it repaid in full in May 2020.

For more detail regarding the Company’s PPP Loan, see Note K in Part I, Item I of this Quarterly Report on Form 10-Q.

RESULTS OF OPERATIONS

The table below sets forth for the three months ended July 31, 2020 and 2019, respectively, the percentage of consolidated revenues represented by certain items in the Company’s condensed consolidated statements of operations or notes to the condensed consolidated financial statements:

Three months ended July 31,

The table below sets forth for the six and three months ended October 31, 2020 and 2019, respectively, the percentage of consolidated revenues represented by certain items in the Company’s condensed consolidated statements of operations or notes to the condensed consolidated financial statements:

Periods ended October 31,

Less intersegment revenues

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Research and development expenses

Operating loss

Other income (expense), net

Provision for income taxes

Three months ended July 31

(in thousands)

Operating (loss) income

Other income (loss), net

Provision (benefit) for income taxes

Net income (loss)

Periods ended October 31,

Intersegment revenues

For the three months ended July 31, 2020 revenues from commercial and U.S.

Government satellite programs increased approximately $2.8 million, as compared to the same period of fiscal year 2020 and accounted for approximately 51% of consolidated revenues compared to approximately 31% during this same period in fiscal year 2020.

The change in revenue is related to product mix and timing of contract awards.

FREQUENCY ELECTRONICS, INC.

and SUBSIDIARIES

For the six months, ended October 31, 2020 revenues from commercial and U.S.

Government satellite programs increased approximately $4.8 million, as compared to the same period of fiscal year 2020, and accounted for approximately 53% of consolidated revenues compared to approximately 44% of consolidated revenues during this same period in fiscal year 2020.

The change in revenue is related to timing of contract awards.

Revenues on these contracts are recognized primarily under the POC method.

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Revenues from non-space U.S.

Government/Department of Defense (“DOD”) customers, which are recorded in both the FEI-NY and FEI-Zyfer segments, decreased $1.4 million over the same period of fiscal year 2020, and accounted for approximately 41% of consolidated revenues compared to approximately 54% during this same period in fiscal year 2020.

Other commercial and industrial revenues for the three months ended July 31, 2020 were $1.0 million and represented approximately 8% of consolidated revenues compared to $1.9 million, or 15%, in the same period of the prior fiscal year.

Government/Department of Defense (“DOD”) customers, which are recorded in both the FEI-NY and FEI-Zyfer segments, increased $1.9 million as compared to the same period of fiscal year 2020, and accounted for approximately 40% of consolidated revenues compared to approximately 42% of consolidated revenues during this same period in fiscal year 2020.

Other commercial and industrial revenues for the six months ended October 31, 2020 were $1.9 million and represented approximately 7% of consolidated revenues compared to $3.2 million, or 14% of consolidated revenues, in the same period of the prior fiscal year.

For the three months ended October 31, 2020 revenues from commercial and U.S.

Government satellite programs increased approximately $2.0 million, as compared to the same period of fiscal year 2020, and accounted for approximately 54% of consolidated revenues compared to approximately 61% of consolidated revenues during this same period in fiscal year 2020.

The change in revenue is related to timing of contract awards.

Revenues on these contracts are recognized primarily under the POC method.

Revenues from the satellite market are recorded in the FEI-NY segment.

Revenues from non-space U.S.

Government/DOD customers, which are recorded in both the FEI-NY and FEI-Zyfer segments, increased $3.3 million as compared to the same period of fiscal year 2020, and accounted for approximately 39% of consolidated revenues compared to approximately 25% of consolidated revenues during this same period in fiscal year 2020.

Other commercial and industrial revenues for the three months ended October 31, 2020 were $0.9 million and represented approximately 6% of consolidated revenues compared to $1.3 million, or 14% of consolidated revenues, in the same period of the prior fiscal year.

Gross Margin (loss)

Periods ended October 31,

For the six and three-month periods ended October 31, 2020, gross margin and GM Rate increased significantly as compared to the same periods in fiscal year 2020.

The increase in gross margin and GM Rate was due to several programs identified in prior periods that had higher engineering costs incurred that were in the development phase that have since been completed or are near completion.

Selling and Administrative Expenses

Periods ended October 31,

For the six months ended October 31, 2020 and 2019, selling and administrative (“SG&A”) expenses were approximately 27% and 22%, respectively, of consolidated revenues.

For the three months ended October 31, 2020 and 2019, SG&A expenses were approximately 30% and 25%, respectively, of consolidated revenues.

The increase in SG&A expenses is mainly due to increase in professional fees (relating to litigation for which we expect insurance reimbursement for a portion of the legal fees) of $1.3M and $1.6M for the three and six month periods, respectively, and additional insurance costs.

FREQUENCY ELECTRONICS, INC.

and SUBSIDIARIES

Three months ended July 31

(in thousands)

For the three-month period ended July 31, 2020, gross margin and GM Rate increased marginally as compared to the same period in fiscal year 2020.

The increase in gross margin and GM Rate was primarily due to product mix.

Additionally, there were higher engineering costs incurred on several programs in both periods, but as these programs are completed, we expect margins to increase.

Selling and Administrative Expenses

Three months ended July 31,

(in thousands)

For the three months ended July 31, 2020 and 2019, selling and administrative (“SG&A”) expenses were approximately 25% and 20%, respectively, of consolidated revenues.

The increase in SG&A expenses is due to increase in professional fees (relating to litigation for which we expect to get insurance reimbursement for a portion of the legal fees), and additional insurance costs.

Research and Development Expense

Three months ended July 31,

(in thousands)

Periods ended October 31,

Research and development (“R&D”) expenditures represent investments intended to keep the Company’s products at the leading edge of time and frequency technology and enhance future competitiveness.

The R&D rate for the three-month period ended July 31, 2020 was 9% of sales compared to 18% of sales for the same period of the previous fiscal year.

The R&D rate for the six-month period ended October 31, 2020 was 8% of sales compared to 17% of sales for the same period of the previous fiscal year.

The R&D rate for the three-month period ended October 31, 2020 was 7% of sales compared to 16% of sales for the same period of the previous fiscal year.

The Company’s R&D expense decreased year over year as previous R&D efforts have ended and turned into production;

however, the Company plans to continue to invest in R&D.

Operating Loss

Three months ended July 31,

(in thousands)

The Company’s results for the three-month period ended July 31, 2020 reflect improvements in revenues, gross margin and GM rate.

however, the Company plans to continue to invest in R&D to keep its products at the state of the art.

Operating Profit ( Loss )

Periods ended October 31,

The Company’s results for the six and three-month periods ended October 31, 2020 reflect improvements in revenues, gross margin and GM rate.

The Company is pleased with this trend.

Additionally, if certain current bids become contract wins, as anticipated by the Company, we would expect this improvement to continue.

FREQUENCY ELECTRONICS, INC.

and SUBSIDIARIES

As referenced above by the percentages for the six and three-month periods ended October 31, 2020, operating profit (loss) has made a significant improvement from the same period of the prior fiscal year.

Based upon our bookings and backlog we are expecting the improving trend to continue.

Other Income (Expense), net

Three months ended July 31,

(in thousands)

Periods ended October 31,

Investment income

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Earnings on securities may vary based on fluctuating interest rates, dividend payout levels, and the timing of purchases, sales, redemptions or maturities of securities.

There were no dividends received from Morion for the three months ended July 31, 2020.

For the three months ended July 31, 2019, investment income includes a dividend from Morion of $125,000.

For the six-month period ended October 31, 2020 investment income includes a $105,000 dividend from Morion, compared to a $125,000 dividend from Morion in the same period in fiscal 2020.

Income Tax Provision

Three months ended July 31,

(in thousands)

Effective tax rate on pre-tax book loss:

Periods ended October 31,

Effective tax rate on pre-tax book income (loss):

FREQUENCY ELECTRONICS, INC.

and SUBSIDIARIES

The estimated annual effective tax rate for the fiscal year ending April 30, 2021 is 0%.

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The Company maintains a full valuation allowance against its deferred tax assets.

For the three months ended July 31, 2020, the Company recorded an income tax provision of $9,000, which includes a discrete income tax provision of $16,000 primarily related to an accrual of interest for unrecognized tax benefits.

For the three months ended July 31, 2019, the Company recorded a discrete income tax provision of $20,000.

The effective tax rate for the three months ended July 31, 2020 is an income tax provision of 3.6% on a pretax loss of $253,000 compared to an income tax provision of 3.5% on a pretax loss of $571,000 in the comparable prior fiscal year period.

The effective tax rate for the three months ended July 31, 2020 differs from the U.S.

For the six months ended October 31, 2020, the Company recorded a discrete income tax provision of $25,000, which primarily consisted of an accrual of interest for unrecognized tax benefits.

For the six months ended October 31, 2019, the Company recorded a discrete income tax provision of $28,900, which primarily consisted of an accrual of interest for unrecognized tax benefits.

For the three months ended October 31, 2020, the Company recorded an income tax provision of $17,000, which included a discrete income tax provision of $9,000 primarily related to an accrual of interest for unrecognized tax benefits.

For the three months ended October 31, 2019, the Company recorded a discrete income tax provision of $9,000, which primarily consisted of an accrual of interest for unrecognized tax benefits.

The effective tax rate for the six months ended October 31, 2020 is an income tax provision of 27.2% on pretax income of $92,000 compared to an income tax provision of (0.5)% on a pretax loss of $5,471,000 in the comparable prior fiscal year period.

The effective tax rate for the six months ended October 31, 2020 differs from the U.S.

statutory rate of 21% primarily due to state taxes, a discrete income tax provision related to the accrual of interest for unrecognized tax benefits, and domestic losses for which the Company is not recognizing an income tax benefit.

The effective tax rate for the three months ended October 31, 2020 is an income tax provision of 4.9% on pretax income of $346,000 compared to an income tax provision of (0.2)% on a pretax loss of $4,900,000 in the comparable prior fiscal year period.

The effective tax rate for the three months ended October 31, 2020 differs from the U.S.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s consolidated balance sheet continues to reflect a strong working capital position of $38.9 million at July 31, 2020 and $38.3 million at April 30, 2020.

Included in working capital at July 31, 2020 and April 30 2020, is $12.4 million and $14.4 million, respectively, consisting of cash, cash equivalents, and marketable securities.

The Company’s current ratio at July 31, 2020 is 4.6 to 1 compared to 3.9 to 1 as of April 30, 2020.

Cash provided by operating activities for the three months ended July 31, 2020 was $62,000 compared to $153,000 in the comparable prior fiscal year 2020 period.

The decreased cash flow in the fiscal year 2021 period resulted primarily from an increase in accounts receivable balances offset by a decrease in inventory amounts.

For the three-month periods ended July 31, 2020 and 2019, the Company incurred $1.2 million and $1.6 million, respectively, of non-cash operating expenses including right to use asset and liability for leases, depreciation and amortization, inventory reserve adjustments, and accruals for employee benefit programs.

The Company’s consolidated balance sheet continues to reflect a strong working capital position of $39.7 million at October 31, 2020 and $38.3 million at April 30, 2020.

Included in working capital at October 31, 2020 and April 30 2020 is $13.6 million and $14.4 million, respectively, consisting of cash, cash equivalents, and marketable securities.

The Company’s current ratio at October 31, 2020 was 4.5 to 1 compared to 3.9 to 1 as of April 30, 2020.

Net cash provided by operating activities for the six months ended October 31, 2020 was $1.9 million compared to $180,000 in the comparable prior fiscal 2020 period.

The increase cash flow in the fiscal 2021 period resulted mainly due to the net income in the current fiscal year period as compared to a net loss in the prior fiscal year, as well as an increase in accounts receivable balances offset by a decrease in inventory amounts.

For the six-month periods ended October 31, 2020 and 2019, the Company incurred approximately $2.6 million and $3.9 million, respectively, of non-cash operating expenses including ROU assets and liabilities for leases, loss provision accrual, depreciation and amortization, inventory reserve adjustments, and accruals for employee benefit programs.

Net cash used in investing activities for the six months ended October 31, 2020 was $200,000 compared to $1.3 million for the six months ended October 31, 2019.

During the six months ended October 31, 2020 approximately $900,000 of marketable securities were purchased compared to $2.5 million for the same period of fiscal 2020.

The Company acquired property, plant and equipment in the amount of approximately $800,000 for the six-month period ended October 31, 2020 compared to $1.3 million for the six-month period ended October 31, 2019.

The Company may continue to invest in cash equivalents as dictated by its investment strategy.

Net cash used in financing activities for the six months ended October 31, 2020 was approximately $2.0 million related to the repayment of the PPP Loan and the amounts borrowed against the Company’s line of credit with UBS Bank USA.

There was no cash used in financing activities for the six months ended October 31, 2019.

The Company has been authorized by its Board to repurchase up to $5 million worth of shares of its common stock when appropriate opportunities arise.

As of October 31, 2020, the Company has repurchased approximately $4 million of its common stock out of the $5 million authorization.

For the six months ended October 31, 2020 and 2019 there were no repurchases of shares.

FREQUENCY ELECTRONICS, INC.

and SUBSIDIARIES

Net cash provided by investing activities for the three months ended July 31, 2020 was $514,000 compared to $1.6 million of cash used in investing activities for the three months ended July 31, 2019.

During the three months ended July 31, 2020, marketable securities were sold or redeemed in the amount of $725,000 compared to $750,000 during the three months ended July 31, 2019.

There were no purchases related to marketable securities during the three months ended July 31, 2020, while approximately $1.4 million of marketable securities were purchased during the three months ended July 31, 2019.

The Company acquired property, plant and equipment in the amount of approximately $211,000 and $912,000 during the three months ended July 31, 2020 and 2019, respectively.

The Company may continue to invest in cash equivalents as dictated by its investment strategy.

Net cash used in financing activities for the three months ended July 31, 2020 was approximately $2.0 million related to the repayment of the PPP loan and the amounts borrowed against the Company’s line of credit with UBS Bank USA.

There was no cash used in financing activities for the three months ended July 31, 2019.

The Company has been authorized by its Board of Directors to repurchase up to $5 million worth of shares of its common stock when appropriate opportunities arise.

As of July 31, 2020, the Company has repurchased approximately $4 million of its common stock out of the $5 million authorization.

For the three months ended July 31, 2020 and 2019 there were no repurchases of shares.

The Company will continue to expend resources to develop, improve and acquire products for space applications, guidance and targeting systems, and communication systems which management believes will result in future growth and profitability.

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The Company may also pursue acquisitions to expand its range of products and may use internally generated cash and external funding in connection with such acquisitions.

As of July 31, 2020, the Company’s consolidated funded backlog was approximately $38 million compared to $36 million at April 30, 2020, the end of fiscal 2020.

As of October 31, 2020, the Company’s consolidated funded backlog was approximately $42 million compared to $36 million at April 30, 2020, the end of fiscal 2020.

Approximately 79% of this backlog is expected to be realized in the next twelve months.

As of July 31, 2020, there are no amounts included in backlog under cost-plus fixed-fee (“CPFF”) contracts that have not been funded.

As of October 31, 2020, there are no amounts included in backlog under cost-plus fixed-fee (“CPFF”) contracts that have not been funded.

The Company excludes from backlog any contracts or awards for which it has not received authorization to proceed.

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Accordingly, the backlog is not necessarily indicative of the revenues or profits (losses) which may be realized when the results of such contracts are reported.

The Company believes that its liquidity is adequate to meet its operating and investment needs through at least September 14, 2021 and the foreseeable future.

The Company believes that its liquidity is adequate to meet its operating and investment needs through at least December 11, 2021 and the foreseeable future.

Off-Balance Sheet Arrangements

5 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis