Notes to Condensed Consolidated Financial
Statements
(Unaudited)
NOTE D – TREASURY STOCK TRANSACTIONS
During the six month
period ended October 31, 2012, the Company made a contribution of 28,429 shares of its common stock held in treasury to the Company’s
profit sharing plan and trust under section 401(k) of the Internal Revenue Code. Such contribution is in accordance with the Company’s
discretionary match of employee voluntary contributions to this plan. During the same period, the Company issued 15,371 shares
from treasury upon the exercise of stock options and SARS by certain employees.
NOTE E - INVENTORIES
Inventories, which
are reported at the lower of cost or market, consist of the following:
|
|
October 31, 2012
|
|
|
April 30, 2012
|
|
|
|
(In thousands)
|
|
Raw Materials and Component Parts
|
|
$
|
17,058
|
|
|
$
|
15,813
|
|
Work in Progress
|
|
|
15,478
|
|
|
|
15,762
|
|
Finished Goods
|
|
|
2,811
|
|
|
|
2,724
|
|
|
|
$
|
35,347
|
|
|
$
|
34,299
|
|
As of October 31,
2012 and April 30, 2012, approximately $25.0 million and $25.5 million, respectively, of total inventory is located in the United
States, approximately $9.6 million and $8.2 million, respectively, is located in Belgium and $0.7 million and $0.6 million, respectively,
is located in China.
NOTE F – SEGMENT INFORMATION
The Company operates under three reportable
segments based on the geographic locations of its subsidiaries:
|
(1)
|
FEI-NY – operates out
of New York and its operations consist principally of precision
time and frequency control products used in three principal
markets- communication satellites (both commercial and U.S.
Government-funded); terrestrial cellular telephone or other
ground-based telecommunication stations and other components
and systems for the U.S. military.
|
|
(2)
|
Gillam-FEI - operates out of
Belgium and France and primarily sells wireline synchronization
and network management systems in non-U.S. markets. All sales
from Gillam-FEI to the United States are to other segments
of the Company.
|
|
(3)
|
FEI-Zyfer – operates
out of California and its products incorporate Global Positioning
System (GPS) technologies into systems and subsystems for secure
communications, both government and commercial, and other locator
applications. This segment also provides sales and support
for the Company’s wireline telecommunications family
of products, including US5G, which are sold in the United States
market.
|
The FEI-NY segment
also includes the operations of the Company’s wholly-owned subsidiaries, FEI-Elcom Tech (“FEI-Elcom”) and FEI-Asia.
FEI-Asia functions primarily as a manufacturing facility for the Company’s commercial product subsidiaries with minimal
sales to outside customers. FEI-Elcom, in addition to its own product line, provides design and technical support for the FEI-NY
segment’s satellite business.
The Company’s
Chief Executive Officer measures segment performance based on total revenues and profits generated by each geographic location
rather than on the specific types of customers or end- users. Consequently, the Company determined that the segments indicated
above most appropriately reflect the way the Company’s management views the business.
Frequency
Electronics, Inc.
and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The table below presents
information about reported segments with reconciliation of segment amounts to consolidated amounts as reported in the statements
of income or the balance sheet for each of the periods. The October 31, 2011 amounts do not include FEI-Elcom (in thousands):
|
|
Six months
|
|
|
Three months
|
|
|
|
Periods ended October 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FEI-NY
|
|
$
|
24,135
|
|
|
$
|
21,975
|
|
|
$
|
12,287
|
|
|
$
|
11,361
|
|
Gillam-FEI
|
|
|
4,518
|
|
|
|
3,669
|
|
|
|
2,610
|
|
|
|
1,680
|
|
FEI-Zyfer
|
|
|
6,688
|
|
|
|
6,587
|
|
|
|
3,331
|
|
|
|
2,814
|
|
less intersegment revenues
|
|
|
(1,087
|
)
|
|
|
(1,237
|
)
|
|
|
(659
|
)
|
|
|
(800
|
)
|
Consolidated revenues
|
|
$
|
34,254
|
|
|
$
|
30,994
|
|
|
$
|
17,569
|
|
|
$
|
15,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FEI-NY
|
|
$
|
2,973
|
|
|
$
|
4,055
|
|
|
$
|
1,851
|
|
|
$
|
2,165
|
|
Gillam-FEI
|
|
|
24
|
|
|
|
(487
|
)
|
|
|
140
|
|
|
|
(257
|
)
|
FEI-Zyfer
|
|
|
297
|
|
|
|
242
|
|
|
|
157
|
|
|
|
49
|
|
Corporate
|
|
|
(195
|
)
|
|
|
(251
|
)
|
|
|
(130
|
)
|
|
|
(182
|
)
|
Consolidated operating profit
|
|
$
|
3,099
|
|
|
$
|
3,559
|
|
|
$
|
2,018
|
|
|
$
|
1,775
|
|
|
|
October 31, 2012
|
|
|
April 30, 2012
|
|
Identifiable assets:
|
|
|
|
|
|
|
|
|
FEI-NY (approximately $3 million in China)
|
|
$
|
54,312
|
|
|
$
|
50,234
|
|
Gillam-FEI (all in Belgium or France)
|
|
|
19,509
|
|
|
|
20,407
|
|
FEI-Zyfer
|
|
|
7,577
|
|
|
|
9,685
|
|
less intersegment balances
|
|
|
(14,832
|
)
|
|
|
(16,424
|
)
|
Corporate
|
|
|
44,152
|
|
|
|
42,325
|
|
Consolidated identifiable assets
|
|
$
|
110,718
|
|
|
$
|
106,227
|
|
Note
G – INVESTMENT IN mORION, INC.
The Company has an
investment in Morion, Inc., a privately-held Russian company, which manufactures high precision quartz resonators and crystal
oscillators. The Company’s investment consists of 4.6% of Morion’s outstanding shares, accordingly, the Company accounts
for its investment in Morion on the cost basis. This investment is included in investment in affiliates in the accompanying balance
sheets.
During the
six months ended October 31, 2012 and 2011, the Company acquired product from Morion in the aggregate amount of approximately $18,000
and $145,000, respectively, and the Company sold product to Morion in the aggregate amount of approximately $96,000 and $1.0 million,
respectively. During the three months ended October 31, 2012 and 2011, the Company acquired product from Morion in the aggregate
amount of approximately $6,000 and $60,000, respectively, and the Company sold product to Morion in the aggregate amount of approximately
$66,000 and $241,000, respectively. At October 31, 2012, $6,000 was payable to Morion and accounts receivable from Morion was $972,000,
including $925,000 for the license agreement described below.
On October
22, 2012, the Company entered into an agreement to license its rubidium oscillator production technology to Morion. The agreement
requires the Company to sell certain production equipment currently owned by the Company and to provide training to Morion employees
to enable Morion to produce a minimum of 5,000 rubidium oscillators per year. Morion will pay the Company approximately $2.7 million
for the license and the equipment plus 5% royalties on third party sales for a 5-year period following an initial production run.
During the same 5-year period, the Company commits to purchase from Morion a minimum of approximately $400,000 worth of rubidium
oscillators per year although Morion is not obligated to sell that amount to the Company. In November 2012, Morion paid the Company
a $925,000 deposit under this agreement. This amount is considered deferred revenue and is included in accrued liabilities on
the accompanying condensed consolidated balance sheet. The United States Department of State has approved the technology transfer
which is expected to be completed within a year from the date of the agreement.
Frequency
Electronics, Inc.
and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
NOTE H –ACQUISITION OF ELCOM TECHNOLOGIES,
INC.
On February 21, 2012,
the Company purchased 74.88% of the capital stock of Elcom Technologies, Inc. (“Elcom” and after the acquisition “FEI-Elcom”).
Prior to the acquisition, the Company had a minority ownership interest of 25.12% of the capital stock of Elcom. After the acquisition,
the Company owned 100% and changed the subsidiary’s name to FEI-Elcom Tech, Inc. The Company acquired Elcom as, in addition
to its own product line, Elcom provides design and technical support for the Company’s satellite business, which accounts
for a significant amount of the Company’s consolidated revenue. For the acquisition, the Company paid approximately $4.1
million to the shareholders for their shares of common stock and an additional $910,000 to certain selling shareholders to settle
their outstanding debt with Elcom. In addition the Company had notes due from Elcom with a fair value of approximately $1.7 million
which was forgiven as an additional investment in Elcom. Based on the amounts paid to the Elcom shareholders, the Company determined
that the fair value of Elcom at the date of acquisition was approximately $7.9 million. The Company’s determination of the
fair value of Elcom at the date of acquisition included an adjustment for a control premium of 15% based on the total value at
the date of acquisition.
The fair value of
Elcom at the date of the transaction was allocated to $4.6 million of net tangible assets, deferred taxes of $2.6 million, and
approximately $700,000 of intangible assets, including goodwill of approximately $400,000. None of the goodwill is expected to
be deductible for income tax purposes.
The FEI-Elcom transaction
was accounted for as a “step acquisition” in accordance with generally accepted accounting principles. Accordingly,
the Company remeasured its previously held equity interest in Elcom and adjusted it to fair value. The difference between the
fair value of the Company’s ownership in Elcom and the Company’s carrying value of its investment resulted in the
recognition of a gain of approximately $730,000 at the date of the acquisition during the fourth quarter of fiscal year 2012.
Prior to the acquisition
of Elcom, the Company recorded its share of Elcom’s income or loss on the equity method. In addition, periodically the Company
measured the market value of Elcom based on comparisons to comparable companies as well as Elcom’s forecasts of future financial
results. During the six and three months ended October 31, 2011, in addition to its equity share in the income or loss of Elcom
during the year, the Company determined that its investment was impaired and the collectibility of the notes receivable may be
reduced. Accordingly, the Company recorded an investment impairment charge in the amount $200,000 and an additional $150,000 allowance
against the notes receivable.
During the six and
three months ended October 31, 2011, prior to the acquisition of Elcom, the Company sold product to Elcom in the amount of $4,000
and acquired technical services from Elcom in the aggregate amount of approximately $16,000 and zero, respectively, and recorded
interest income on notes to Elcom in the amount of approximately $43,000 and $21,000, respectively.
The accompanying
consolidated statements of income for the six and three months ended October 31, 2012 include the results of operations of FEI-Elcom.
The pro forma financial information set forth below is based upon the Company’s historical consolidated statements of income
for the six and three months ended October 31, 2011, adjusted to give effect to the acquisition of FEI-Elcom as if it had occurred
at the beginning of the fiscal year. The financial information includes the results of operations of FEI-Elcom for the six month
period from April 1, 2011 to September 30, 2011 and for the three month period from July 1, 2011 to September 30, 2011.
Frequency
Electronics, Inc.
and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The pro forma financial
information is presented for informational purposes only and may not be indicative of what actual results of operations would
have been had the acquisition occurred on May 1, 2011, nor does it purport to represent the results of operations for future periods.
The pro forma results of operations do not include the gain on the Company’s original investment of $730,000 or the impairment
of the Company’s investment in Elcom during fiscal year 2012.
|
|
Pro forma
|
|
|
|
(unaudited)
|
|
|
|
Six months
|
|
|
Three months
|
|
|
|
Periods ended October 31, 2011
|
|
|
|
(in thousands except per share data)
|
|
Revenues
|
|
$
|
35,837
|
|
|
$
|
16,850
|
|
Operating profit
|
|
$
|
3,074
|
|
|
$
|
1,262
|
|
Net income
|
|
$
|
1,984
|
|
|
$
|
672
|
|
Earnings per share- basic
|
|
$
|
0.24
|
|
|
$
|
0.08
|
|
Earnings per share- diluted
|
|
$
|
0.23
|
|
|
$
|
0.08
|
|
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 October 31, 2012 and April 30, 2012 are
as follows (in thousands):
|
|
October 31, 2012
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Fair
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Fixed income securities
|
|
$
|
10,187
|
|
|
$
|
357
|
|
|
$
|
-
|
|
|
$
|
10,544
|
|
Equity securities
|
|
|
5,701
|
|
|
|
687
|
|
|
|
(1
|
)
|
|
|
6,387
|
|
|
|
$
|
15,888
|
|
|
$
|
1,044
|
|
|
$
|
(1
|
)
|
|
$
|
16,931
|
|
|
|
April 30, 2012
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Fair
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Fixed income securities
|
|
$
|
11,573
|
|
|
$
|
297
|
|
|
$
|
(6
|
)
|
|
$
|
11,864
|
|
Equity securities
|
|
|
5,411
|
|
|
|
552
|
|
|
|
(169
|
)
|
|
|
5,794
|
|
|
|
$
|
16,984
|
|
|
$
|
849
|
|
|
$
|
(175
|
)
|
|
$
|
17,658
|
|
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
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
October 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Equity Securities
|
|
|
-
|
|
|
|
-
|
|
|
|
129
|
|
|
|
(1
|
)
|
|
|
129
|
|
|
|
(1
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
129
|
|
|
$
|
(1
|
)
|
|
$
|
129
|
|
|
$
|
(1
|
)
|
April 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities
|
|
$
|
301
|
|
|
$
|
(6
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
301
|
|
|
$
|
(6
|
)
|
Equity Securities
|
|
|
539
|
|
|
|
(169
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
539
|
|
|
|
(169
|
)
|
|
|
$
|
840
|
|
|
$
|
(175
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
840
|
|
|
$
|
(175
|
)
|
Frequency
Electronics, Inc.
and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The Company regularly
reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. The Company
does not believe that its investments in marketable securities with unrealized losses at October 31, 2012 are other-than-temporary
due to market volatility of the security’s fair value, analysts’ expectations and the Company’s ability to hold
the securities for a period of time sufficient to allow for any anticipated recoveries in market value.
During the six months
ended October 31, 2012 and 2011, the Company redeemed available-for-sale securities in the amount of $2.0 million and $5.1 million,
respectively, and realized no gain or loss during the fiscal year 2013 period and a gain of $7,000 for the same period in fiscal
year 2012. These amounts are included in the determination of net income for each period.
Maturities of fixed
income securities classified as available-for-sale at October 31, 2012 are as follows, at cost (in thousands):
Current
|
|
$
|
1,003
|
|
Due after one year through five years
|
|
|
8,522
|
|
Due after five years through ten years
|
|
|
662
|
|
|
|
$
|
10,187
|
|
The fair value accounting
framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level
1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy
are described below:
|
Level 1
|
Inputs to
the valuation methodology are unadjusted
quoted prices for identical assets or liabilities
in active markets that the Company has the
ability to access.
|
|
|
|
|
Level 2
|
Inputs to
the valuation methodology include:
|
|
|
- Quoted prices for similar assets
or liabilities in active markets;
|
|
|
- Quoted prices for identical or similar
assets or liabilities in inactive markets
|
|
|
- Inputs other than quoted prices that
are observable for the asset or liability;
|
|
|
- Inputs that are derived principally
from or corroborated by observable market data by correlation or other
means.
|
|
Level 3
|
Inputs to
the valuation methodology are unobservable
and significant to the fair value measurement.
|
The asset’s or
liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that
is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize
the use of unobservable inputs. All of the Company’s investments in marketable securities are valued on a Level 1 basis.
Note
J – INCOME TAXES
During fiscal years
2012 and 2011, the Company reduced the valuation allowance on the deferred tax assets of its U.S. subsidiaries. Consequently,
for the six and three months ended October 31, 2012 and 2011, the Company recorded provisions for income taxes based on both current
taxes due in the United States as well as the tax provision or benefit to be realized from temporary tax differences. As of October
31, 2012 and April 30, 2012, the remaining deferred tax asset valuation allowance is approximately $1.5 million and is primarily
related to deferred tax assets of the Company’s non-U.S.-based subsidiaries.
NOTE K – SUBSEQUENT EVENT
On December
12, 2012, the Company’s Board of Directors declared a special cash dividend of $0.20 per share, payable on December 31, 2012
to shareholders of record on December 24, 2012.
NOTE L – RECENTLY ISSUED ACCOUNTING PROUNCEMENTS
In June 2011, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) NO. 2011-05 “Comprehensive Income (Topic 220): Presentation of Comprehensive
Income” (“ASU No. 2011-05”). Under ASU No. 2011-5, an entity has the option to present the total of comprehensive
income, the components of net income, and the components of other comprehensive income either in a single continuous statement
of comprehensive income or in two separate but consecutive statements. Regardless of which option is selected, an entity is required
to present each component of net income along with total net income, each component of other comprehensive income along with a
total for other comprehensive income, and a total amount for comprehensive income. ASU No. 2011-5 eliminates the option (previously
utilized by the Company) to present the components of other comprehensive income as part of the statement of changes in stockholders’
equity. ASU No. 2011-5 was adopted by the Company at the beginning of the current fiscal year, and affects only the presentation
of financial statements and has no financial impact on the Company’s Condensed Consolidated Financial Statements.
*********************
Frequency
Electronics, Inc.
and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Item 2
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
“Safe Harbor” Statement
under the Private Securities Litigation Reform Act of 1995
:
The statements in
this quarterly report on Form 10-Q regarding future earnings and operations and other statements relating to the future constitute
"forward-looking" statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995.
The words "believe," "may," "will,"
"could," "should," "would," "anticipate," "estimate," "expect," "project,"
"intend," "objective," "seek," "strive," "might," "likely result,"
"build," "grow," "plan," "goal," "expand," "position," or similar
words, or the negatives of these words, or similar terminology, identify forward-looking statements. These statements are based
on assumptions that the Company believes are reasonable, but are subject to a wide range of risks and uncertainties, and a number
of factors
could cause
the Company's
actual results
to differ materially from
those expressed in
the forward-looking
statements
referred to above
. Factors that would cause or contribute
to such differences include, but are not limited to, continued acceptance of the Company's products in the marketplace, competitive
factors, new products and technological changes, product prices and raw material costs, dependence upon third-party vendors, competitive
developments, changes in manufacturing and transportation costs, changes in contractual terms, the availability of capital, and
other risks detailed in the Company's periodic report filings with the Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on these forward-looking statements, which relate only to events as of the date
on which the statements are made and which reflect management's analysis, judgments, belief, or expectation only as of such date.
By making these forward-looking statements, the Company undertakes no obligation to update these statements for revisions
or changes after the date of this report.
Critical Accounting
Policies and Estimates
The Company’s
significant accounting policies are described in Note 1 to the consolidated financial statements included in the Company’s
Annual Report on Form 10-K for the year ended April 30, 2012. The Company believes its most critical accounting policies to be
the recognition of revenue and costs on production contracts and the valuation of inventory. Each of these areas requires the
Company to make use of reasoned estimates including estimating the cost to complete a contract, the realizable value of its inventory
or the market value of its products. Changes in estimates can have a material impact on the Company’s financial position
and results of operations.
Revenue Recognition
Revenues under larger, long-term contracts
which generally require billings based on achievement of milestones rather than delivery of product, are reported in operating
results using the percentage of completion method. On fixed-price contracts, which are typical for commercial and U.S. Government
satellite programs and other long-term U.S. Government projects, and which require initial design and development of the product,
revenue is recognized on the cost-to-cost method. Under this method, revenue is recorded based upon the ratio that incurred costs
bear to total estimated contract costs with related cost of sales recorded as the costs are incurred. Each month management reviews
estimated contract costs through a process of aggregating actual costs incurred and updating estimated costs to completion based
upon the current available information and status of the contract. The effect of any change in the estimated gross margin percentage
for a contract is reflected in revenues in the period in which the change is known. Provisions for anticipated losses on contracts
are made in the period in which they become determinable.
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
may result in revisions to costs and income and are recognized in the period in which revisions are determined to be required.
Provisions for anticipated losses on contracts are made in the period in which they become determinable.
For customer orders
in the Company’s Gillam-FEI and FEI-Zyfer segments or smaller contracts or orders in the FEI-NY segment, including orders
for FEI-Elcom products, sales of products and services to customers are reported in operating results based upon (i) shipment of
the product or (ii) performance of the services pursuant to terms of the customer order. When payment is contingent upon customer
acceptance of the installed system, revenue is deferred until such acceptance is received and installation completed.
Costs and Expenses
Contract costs include
all direct material, direct labor costs, manufacturing overhead and other direct costs related to contract performance. Selling,
general and administrative costs are charged to expense as incurred.
Inventory
In accordance with industry
practice, inventoried costs contain amounts relating to contracts and programs with long production cycles, a portion of which
will not be realized within one year. Inventory write downs are established for slow-moving and obsolete items and 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
A
ll
of the Company’s investments in marketable securities are Level 1 securities which trade on public markets and have current
prices that are readily available. In general, investments in fixed price securities are only in the commercial paper of financially
sound corporations or the bonds of U.S. Government agencies. Although the value of such investments may fluctuate significantly
based on economic factors, the Company’s own financial strength enables it to wait for the securities to either recover their
value or to mature such that any interim unrealized gains or losses are deemed to be temporary.
RESULTS OF OPERATIONS
Impact of FEI-Elcom Acquisition
Fiscal year 2013 results
include the results of operations of the Company’s recently acquired subsidiary, FEI-Elcom Tech, Inc. (formerly Elcom Technologies,
Inc. or “Elcom” and after the acquisition, “FEI-Elcom”), which is included in the FEI-NY segment. For the
six and three-month periods ended October 31, 2012, FEI-Elcom’s third-party revenues were approximately $3.1 million and
$2.2 million, respectively. This subsidiary recorded an operating loss of approximately $900,000 for the six month period but recorded
a $15,000 profit for the three month period ended October 31, 2012. In the comparable six and three-month periods of the prior
fiscal year, before the acquisition, Elcom recorded revenues of approximately $4.9 million and $1.8 million, respectively, operating
losses of approximately $260,000 and $400,000, respectively, and net losses of approximately $460,000 and $540,000, respectively.
In the discussion below, all amounts for the six and three months ended October 31, 2011, do not include FEI-Elcom, with the exception
of the Company’s “Other income (expenses)” which includes $117,000 and $136,000, respectively, of equity losses
from its minority interest in Elcom at that time. The six month period also includes $350,000 of impairment charges against the
Company’s investment in Elcom and certain notes receivable from Elcom.
Frequency
Electronics, Inc.
and
Subsidiaries
(Continued)
The table below sets
forth for the respective periods of fiscal years 2013 and 2012 (which end on April 30, 2013 and 2012, respectively) the percentage
of consolidated revenues represented by certain items in the Company’s consolidated statements of income:
|
|
Six months
|
|
|
Three months
|
|
|
|
Periods ended October 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FEI-NY
|
|
|
70.5
|
%
|
|
|
70.9
|
%
|
|
|
69.9
|
%
|
|
|
75.4
|
%
|
Gillam-FEI
|
|
|
13.2
|
|
|
|
11.8
|
|
|
|
14.9
|
|
|
|
11.2
|
|
FEI-Zyfer
|
|
|
19.5
|
|
|
|
21.3
|
|
|
|
19.0
|
|
|
|
18.7
|
|
Less intersegment revenues
|
|
|
(3.2
|
)
|
|
|
(4.0
|
)
|
|
|
(3.8
|
)
|
|
|
(5.3
|
)
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of revenues
|
|
|
62.9
|
|
|
|
60.5
|
|
|
|
61.7
|
|
|
|
59.4
|
|
Gross margin
|
|
|
37.1
|
|
|
|
39.5
|
|
|
|
38.3
|
|
|
|
40.6
|
|
Selling and administrative expenses
|
|
|
20.4
|
|
|
|
21.4
|
|
|
|
20.0
|
|
|
|
23.0
|
|
Research and development expenses
|
|
|
7.6
|
|
|
|
6.7
|
|
|
|
6.8
|
|
|
|
5.8
|
|
Operating profit
|
|
|
9.1
|
|
|
|
11.4
|
|
|
|
11.5
|
|
|
|
11.8
|
|
Other income (expense), net
|
|
|
0.6
|
|
|
|
(0.5
|
)
|
|
|
0.5
|
|
|
|
(2.4
|
)
|
Pretax income
|
|
|
9.7
|
|
|
|
10.9
|
|
|
|
12.0
|
|
|
|
9.4
|
|
Provision for income taxes
|
|
|
3.2
|
|
|
|
4.1
|
|
|
|
3.8
|
|
|
|
4.2
|
|
Net income
|
|
|
6.5
|
%
|
|
|
6.8
|
%
|
|
|
8.2
|
%
|
|
|
5.2
|
%
|
Revenues
|
|
(in millions)
|
|
|
|
Six months
|
|
|
Three months
|
|
|
|
Periods ended October 31,
|
|
Segment
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
FEI-NY
|
|
$
|
24,135
|
|
|
$
|
21,975
|
|
|
$
|
2,160
|
|
|
|
10
|
%
|
|
$
|
12,287
|
|
|
$
|
11,361
|
|
|
$
|
926
|
|
|
|
8
|
%
|
Gillam-FEI
|
|
|
4,518
|
|
|
|
3,669
|
|
|
|
849
|
|
|
|
23
|
%
|
|
|
2,610
|
|
|
|
1,680
|
|
|
|
930
|
|
|
|
55
|
%
|
FEI-Zyfer
|
|
|
6,688
|
|
|
|
6,587
|
|
|
|
101
|
|
|
|
2
|
%
|
|
|
3,331
|
|
|
|
2,814
|
|
|
|
517
|
|
|
|
18
|
%
|
Intersegment revenues
|
|
|
(1,087
|
)
|
|
|
(1,237
|
)
|
|
|
150
|
|
|
|
|
|
|
|
(659
|
)
|
|
|
(800
|
)
|
|
|
141
|
|
|
|
|
|
|
|
$
|
34,254
|
|
|
$
|
30,994
|
|
|
$
|
3,260
|
|
|
|
11
|
%
|
|
$
|
17,569
|
|
|
$
|
15,055
|
|
|
$
|
2,514
|
|
|
|
17
|
%
|
For the six and three
months ended October 31, 2012, revenues from recently-acquired FEI-Elcom are included in the revenues of the FEI-NY segment. For
the six months ended October 31, 2012, FEI-NY revenues from commercial and U.S. Government satellite programs increased 10% over
the prior year. Revenues from these programs accounted for just under 50% of consolidated sales, approximately the same ratio as
the same six-month period of fiscal year 2012. Revenues on these long-term contracts are recognized primarily under the percentage
of completion method. Sales from the U.S. Government/DOD business area, which accounted for more than 20% of consolidated revenues,
increased almost 20% over fiscal year 2012 revenues due primarily to the FEI-Elcom acquisition. Between sales from FEI-NY (including
FEI-Elcom) and FEI-Zyfer, total revenues from U.S. Government satellite and non-space programs exceeded 50% for the six months
ended October 31, 2012 and neared 60% for the three month period then ended. Network infrastructure sales, which are recorded in
all three segments, grew approximately 15% year over year and accounted for approximately 20% of consolidated revenues, similar
to the prior fiscal year.
For the six and three months ended October
31, 2011, consolidated revenues increased by 26% and 20%, respectively, compared to the same periods of fiscal year 2011, and were
generated primarily from satellite payload programs as a result of recent contract bookings in the FEI-NY segment. In the fiscal
year 2012 periods, revenues from commercial and U.S. Government satellite programs accounted for approximately half of consolidated
revenues compared to approximately 30% during the same periods of fiscal year 2011. Revenues on these long-term contracts are recognized
primarily under the percentage of completion method. Increased network infrastructure revenues generated by the FEI-Zyfer segment
were offset by declines in that business area in the Gillam-FEI segment. Network infrastructure revenues were approximately 20%
of consolidated revenues for the six months ended October 31, 2011 compared to approximately 25% for the same period of fiscal
year 2011. In the fiscal year 2012 periods, revenues from the U.S. Government/DOD business area, which are recorded in the FEI-NY
and FEI-Zyfer segments, were approximately 20% of consolidated revenues compared to more than 25% for the same periods of fiscal
year 2011. The percentage decreases in the network infrastructure and U.S. Government/DOD market areas are mostly due to higher
satellite payload revenues recorded in fiscal year 2012.
Frequency
Electronics, Inc.
and
Subsidiaries
(Continued)
Based on the Company’s
current backlog, three-fourths of which represent satellite payload business, the potential for additional new orders, as well
as the Company’s acquisition of FEI-Elcom in late fiscal year 2012, revenues for the full fiscal year 2013 are expected to
grow. Satellite payload revenues will remain the dominant portion of the Company’s business but revenues from the other major
business areas, U.S. Government/DOD non-space and network infrastructure, are also expected to increase over fiscal year 2012 levels.
Gross margin
|
|
Six months
|
|
|
Three months
|
|
|
|
Periods ended October 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
$
|
12,713
|
|
|
$
|
12,256
|
|
|
$
|
457
|
|
|
|
4
|
%
|
|
$
|
6,732
|
|
|
$
|
6,112
|
|
|
$
|
620
|
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GM Rate
|
|
|
37.1
|
%
|
|
|
39.5
|
%
|
|
|
|
|
|
|
|
|
|
|
38.3
|
%
|
|
|
40.6
|
%
|
|
|
|
|
|
|
|
|
For the six and three
months ended October 31, 2012, gross margin increased as a result of the 11% and 17%, respectively, increase in consolidated revenues.
The gross margin rate is impacted by the Company’s product mix. In both periods of fiscal year 2013, the rate was reduced
by the low sales volume at FEI-Elcom as well as by higher costs incurred on certain customer-funded nonrecurring engineering projects
at that subsidiary.
Gross margin for the
six and three months ended October 31, 2011 increased as compared to the same periods in the prior fiscal year reflecting increased
revenue recorded in the fiscal year 2012 periods. The different mix of programs on which the Company is working in the fiscal year
2012 periods accounted for the increases in gross margin rates compared to the six and three months ended October 31, 2010. Of
the Company’s three segments, the FEI-NY segment experienced the largest gross margin rate improvement as the higher volume
of business covered more of that segment’s fixed costs.
The gross margin rates
recorded in the fiscal year 2013 and 2012 periods were less than the Company’s targeted rate of 40%. As consolidated revenues
increase, including higher sales volume at FEI-Elcom, and as the sales product mix changes, the Company anticipates that its gross
margin rates for the remainder of fiscal year 2013 will reach or exceed its target rate.
Selling and administrative expenses
Six months
|
|
|
Three months
|
|
Periods ended October 31,
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
$
|
6,996
|
|
|
$
|
6,626
|
|
|
$
|
370
|
|
|
|
6
|
%
|
|
$
|
3,511
|
|
|
$
|
3,464
|
|
|
$
|
47
|
|
|
|
1
|
%
|
For the six and three
months ended October 31, 2012, selling and administrative expenses were approximately 20% of consolidated revenues compared to
21% and 23%, respectively, for the same periods of the prior fiscal year. The increase in expenses in the fiscal year 2013 periods
compared to the same periods of fiscal year 2012 are due to selling and administrative expenses incurred at FEI-Elcom of approximately
$1.1 million and $500,000, respectively. The expenses of this subsidiary were partially offset by lower expenses at Gillam-FEI
due to the 11% decrease in the value of the euro to the U.S. dollar, reduced incentive and deferred compensation expenses and lower
bad debt expense. For the remainder of fiscal year 2013, the Company expects selling and administrative expenses to be incurred
at approximately the same rate and should approach the Company’s target of 20% of revenues or less.
Frequency
Electronics, Inc.
and
Subsidiaries
(Continued)
Research and development expense
Six months
|
|
|
Three months
|
|
Periods ended October 31,
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
$
|
2,618
|
|
|
$
|
2,071
|
|
|
$
|
547
|
|
|
|
26
|
%
|
|
$
|
1,203
|
|
|
$
|
873
|
|
|
$
|
330
|
|
|
|
38
|
%
|
Research and development
(“R&D”) expenditures represent investments intended to keep the Company’s products at the leading edge of
time and frequency technology and enhance competitiveness for future revenues. R&D spending for the six and three-month periods
ended October 31, 2012 and 2011, was less than the Company’s target of 10% of revenues. The year-over-year increase in spending
is due primarily to product development expenditures of $550,000 and $230,000, respectively, at FEI-Elcom to improve its own product
line. R&D spending in fiscal year 2013 continued to facilitate development of new satellite payload products from DC to Ka
Band, development and improvement of miniaturized rubidium atomic clocks, development of new GPS-based synchronization products
and further enhancement of the capabilities of the Company’s line of low g-sensitivity and ruggedized rubidium oscillators.
Included in these efforts are product redesign and process improvements to enhance product manufacturability and reduce production
costs. In addition, the Company continues to conduct development activities on customer-funded programs the cost of which appears
in cost of revenues, thus reducing the level of internal research and development spending. The Company will continue to devote
significant resources to develop new products, enhance existing products and implement efficient manufacturing processes. For fiscal
year 2013, the Company is targeting to spend under 10% of revenues on internal research and development projects. Internally generated
cash and cash reserves are adequate to fund these development efforts.
Operating profit
Six months
|
|
|
Three months
|
|
Periods ended October 31,
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
$
|
3,099
|
|
|
$
|
3,559
|
|
|
$
|
(460
|
)
|
|
|
(13
|
)%
|
|
$
|
2,018
|
|
|
$
|
1,775
|
|
|
$
|
243
|
|
|
|
14
|
%
|
As anticipated, for
the three months ended October 31, 2012, FEI-Elcom made a positive contribution to operating profit following an operating loss
for the first quarter of fiscal year 2013. The year-to-date operating loss at FEI-Elcom reduced consolidated operating profit compared
to the prior fiscal year. Increased consolidated revenues, including increased revenue at FEI-Elcom, generated higher gross margins
for the six and three month periods ended October 31, 2012, which offset higher operating expenses. This resulted in an increased
consolidated operating profit for the latest three-month period of fiscal year 2013 over the same period of fiscal year 2012 and
narrowed the year-to-date operating profit difference between fiscal years 2013 and 2012. Operating profits for the six and three-month
periods of fiscal year 2013 were 9.1% and 11.5%, respectively, of consolidated revenues compared to 11.4% and 11.8%, respectively,
of revenues for the comparable periods of the previous fiscal year. With increased revenues and higher gross margins, the Company
anticipates that for the full fiscal year 2013, it will generate an operating profit that exceeds that of the prior fiscal year.
Other income (expense)
|
|
Six months
|
|
|
Three months
|
|
|
|
Periods ended October 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
Investment income
|
|
$
|
319
|
|
|
$
|
260
|
|
|
$
|
59
|
|
|
|
23
|
%
|
|
$
|
152
|
|
|
$
|
135
|
|
|
$
|
17
|
|
|
|
13
|
%
|
Equity (loss) income
|
|
|
-
|
|
|
|
(117
|
)
|
|
|
117
|
|
|
|
NM
|
|
|
|
-
|
|
|
|
(136
|
)
|
|
|
136
|
|
|
|
NM
|
|
Impairment charge
|
|
|
-
|
|
|
|
(350
|
)
|
|
|
350
|
|
|
|
NM
|
|
|
|
-
|
|
|
|
(350
|
)
|
|
|
350
|
|
|
|
NM
|
|
Interest expense
|
|
|
(103
|
)
|
|
|
(50
|
)
|
|
|
(53
|
)
|
|
|
(106
|
)%
|
|
|
(47
|
)
|
|
|
(26
|
)
|
|
|
(21
|
)
|
|
|
(80
|
)%
|
Other expense, net
|
|
|
(6
|
)
|
|
|
88
|
|
|
|
(94
|
)
|
|
|
NM
|
|
|
|
(12
|
)
|
|
|
8
|
|
|
|
(20
|
)
|
|
|
NM
|
|
|
|
$
|
210
|
|
|
$
|
(169
|
)
|
|
$
|
379
|
|
|
|
NM
|
|
|
$
|
93
|
|
|
$
|
(369
|
)
|
|
$
|
462
|
|
|
|
NM
|
|
Investment income is derived primarily
from the Company’s holdings of marketable securities. Earnings on these securities may vary based on fluctuating interest
rate levels and the timing of purchases or sales of securities. During the six and three months ended October 31, 2012, investments
were held in higher yielding marketable securities than those held in the prior fiscal year. In addition, in the fiscal year 2012
periods, the Company redeemed marketable securities which resulted in realized gains of approximately $7,000. No investment gains
or losses were recorded in the fiscal 2013 periods.
Frequency
Electronics, Inc.
and
Subsidiaries
(Continued)
Equity losses in the
six and three months ended October 31, 2011, represent the Company’s share of the quarterly income recorded by Elcom in which
the Company owned a 25% interest prior to its late fiscal year 2012 acquisition of FEI-Elcom. In addition, in the same fiscal periods
the Company recorded an impairment charge against its investment in the amount of $200,000 and also increased an allowance against
notes receivable in the amount of $150,000. In connection with the acquisition of FEI-Elcom in the fourth quarter of fiscal year
2012, the Company recorded a gain of $730,000 on its related investment and notes receivable from Elcom. .
The increase in interest
expense for the six and three months ended October 31, 2012 compared to the same periods of fiscal year 2012 is due to borrowings
under the Company’s line of credit from a financial institution. The Company borrowed $6 million during fiscal year 2012
to finance the acquisition of FEI-Elcom and borrowed an additional $2.5 million during the quarter ended October 31, 2012 to meet
current working capital requirements.
Other income in the
six and three months ended October 31, 2011 resulted primarily from realized gains of approximately $137,000 and $46,000, respectively,
derived from the excess of proceeds over the cash values of life insurance policies covering a former employee. No similar gains
were recognized during the fiscal year 2013 periods. The fiscal year 2012 gains were partially offset by other insignificant non-operating
expenses that were similar in type and amount to the current fiscal year.
Income tax provision
|
|
Six months
|
|
|
Three months
|
|
|
|
Periods ended October 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
$
|
1,100
|
|
|
$
|
1,270
|
|
|
$
|
(170
|
)
|
|
|
(13
|
)%
|
|
$
|
670
|
|
|
$
|
630
|
|
|
$
|
40
|
|
|
|
6
|
%
|
Effective tax rate on pre-tax book income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33.3
|
%
|
|
|
37.5
|
%
|
|
|
|
|
|
|
|
|
|
|
31.8
|
%
|
|
|
44.8
|
%
|
|
|
|
|
|
|
|
|
The provision for
income taxes for the six months ended October 31, 2012 decreased from the same period of fiscal year 2012 due to the decrease in
pretax income and a reduced effective tax rate. Higher pretax income for the three month period ended October 31, 2012 compared
to the same period of fiscal year 2012, created a higher tax provision for that period but at a lower effective rate. The effective
tax rate in fiscal year 2013 is expected to be in the range of 32% to 36% depending on the level of pretax income or loss recorded
at the Company’s foreign subsidiaries. The effective tax rate for the fiscal periods ended October 31, 2011 were higher than
the comparable periods of fiscal year 2013 due to the non-tax deductible impairment charges related to the Company’s investment
in Elcom.
The Company is subject
to taxation in several countries as well as the states of New York, New Jersey and California. The statutory federal rates are
34% in the United States and Belgium. The effective rate is impacted by the income or loss of certain of the Company’s European
and Asian subsidiaries which are currently not taxed. In addition, the Company utilizes the availability of research and development
tax credits and the Domestic Production Activity credit in the United States to lower its tax rate. As of April 30, 2012, the Company’s
European subsidiaries had available net operating loss carryforwards of approximately $1.2 million, which will offset future taxable
income. As a result of the FEI-Elcom acquisition, the Company has a federal net operating loss carryforward of $6.6 million which
may be applied in annually limited amounts to offset future U.S.-sourced taxable income over the next 20 years. For State of California
income tax purposes, the Company has a tax loss carryforward of approximately $2.3 million which expires in 20 years.
Frequency
Electronics, Inc.
and
Subsidiaries
(Continued)
Net income
Six months
|
|
|
Three months
|
|
Periods ended October 31,
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
$
|
2,209
|
|
|
$
|
2,120
|
|
|
$
|
89
|
|
|
|
4
|
%
|
|
$
|
1,441
|
|
|
$
|
776
|
|
|
$
|
665
|
|
|
|
86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As detailed above,
for the six and three months ended October 31, 2012, higher revenues due to the FEI-Elcom acquisition were partially offset by
higher operating expenses, plus a lower effective income tax rate, enabled the Company to increase its net income over that recorded
in the prior fiscal year periods. Based on consolidated backlog and the improved operating performance at FEI-Elcom, the Company
expects to record higher consolidated revenue and to realize improved gross margins and operating profits over the remainder of
fiscal year 2013.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s
balance sheet continues to reflect a strong working capital position of $66.5 million at October 31, 2012, compared to $63.3 million
at April 30, 2012. Included in working capital at October 31, 2012 is $23.9 million of cash, cash equivalents and marketable securities
which is partially offset by $8.5 million of borrowings under the Company’s line of credit. The Company’s current ratio
at October 31, 2012 is 4.8 to 1.
For the six months ended
October 31, 2012, the Company used cash in operating activities of $981,000 compared to $412,000 of positive cash from operations
in the comparable fiscal year 2012 period. The reduced cash flow in the fiscal year 2013 period resulted from the operating loss
incurred by recently acquired FEI-Elcom, increased costs and estimated earnings in excess of billings (“unbilled accounts
receivables”), increased inventory and payments made against accounts payable-trade. Unbilled receivables arise from the
use of the percentage of completion method on the Company’s long-term contracts, including satellite payload contracts. Under
this method revenue was recognized but contractual milestones were not yet billed in accordance with the terms of the contracts.
For the six months ended October 31, 2012 and 2011, the Company incurred approximately $2.6 million and $3.0 million, respectively,
of non-cash operating expenses, such as depreciation and amortization and accruals for employee benefit programs. For the balance
of fiscal year 2013, as contractual milestones are met and customers are invoiced, unbilled receivables will be reduced and the
Company expects to generate positive cash flow from operating activities.
Net cash provided by
investing activities for the six months ended October 31, 2012 was $447,000 compared to cash used in investing activities of $4.1
million for the same period of fiscal year 2012. The Company redeemed marketable securities in the amount of $2.0 million in the
fiscal year 2013 period and $5.1 million in the fiscal year 2012 period. These proceeds and other cash was reinvested in additional
marketable securities for the periods ended October 31, 2012 and 2011 in the amount of $947,000 and $8.2 million, respectively.
In the fiscal year 2013 and 2012 periods, the Company acquired property, plant and equipment in the amount of $612,000 and $855,000,
respectively. During the six months ended October 31, 2011, the Company provided an additional loan to Elcom in the amount of $92,000.
The Company may continue to acquire, sell or redeem marketable securities as dictated by its investment strategies as well as by
the cash requirements for its development activities and capital equipment acquisitions. The Company intends to spend between $2.0
million and $3.0 million on capital equipment during fiscal year 2013. The Company’s cash, cash reserves, including marketable
securities, and internally generated cash are adequate to acquire this level of property, plant and equipment.
Net
cash provided by financing activities for the
six months ended October 31, 2012 was $2.3 million compared to cash used in
financing activities of
$125,000 for the period ended October 31, 2011.
The principle source of cash was $4.0 million borrowed against the Company’s line of credit with the financial institution
which also manages a substantial portion of its investment in marketable securities. During the period the Company repaid $1.5
million of such borrowings. In the six months ended October 31, 2012 and 2011, the Company made payments against its capital lease
obligations in the amount of $231,000 and $138,000, respectively, and received cash inflows of $20,000 and $13,000, respectively,
upon the exercise of employee stock options.
On December
12, 2012, the Company’s Board of Directors declared a special cash dividend of $0.20 per share, payable on December 31, 2012
to shareholders of record on December 24, 2012. The Company’s cash, cash reserves, marketable securities and internally generated
cash are adequate to pay this special dividend.
Frequency
Electronics, Inc.
and
Subsidiaries
(Continued)
The Company has been
authorized by its Board of Directors to repurchase up to $5 million worth of shares of its common stock for treasury whenever appropriate
opportunities arise but it has neither a formal repurchase plan nor commitments to purchase additional shares in the future. As
of October 31, 2012, the Company has repurchased approximately $4 million of its common stock out of the $5 million authorization.
The
Company will continue to expend resources to develop, improve and acquire products for space applications, guidance and targeting
systems, and communication systems which management believes will result in future growth and continued profitability. During fiscal
year 2013, the Company intends to make a substantial investment of capital and technical resources to develop and acquire new products
to meet the needs of the U.S. Government, commercial space and telecommunications infrastructure marketplaces and to invest in
more efficient product designs and manufacturing procedures. Where possible, the Company will secure partial customer funding for
such development efforts but is targeting to spend its own funds at a rate of less than 10% of revenues to achieve its development
goals.
The Company’s cash, cash reserves, including marketable securities, and internally
generated
cash are adequate to fund these development efforts. The Company may also pursue acquisitions to expand its production and development
capabilities as well as the range of products it can offer its customers. The Company may use its cash, marketable securities or
external funding in connection with such acquisitions.
As of October 31, 2012,
the Company's consolidated backlog is approximately $63 million. Approximately 70% of this backlog is expected to be realized in
the next twelve months. Included in the backlog at October 31, 2012 is approximately $1 million under cost-plus-fee contracts which
the Company believes represent firm commitments from its customers for which the Company has not received full funding to date.
The Company excludes from backlog any contracts or awards for which it has not received authorization to proceed. On fixed price
contracts, the Company excludes any unfunded portion which, as of October 31, 2012, was in excess of $5 million. The Company expects
these contracts to become fully funded over time and will be added to its backlog at that time.
The Company believes
that its liquidity is adequate to meet its operating and investment needs through at least October 31, 2013.
Off-Balance Sheet Arrangements
The Company does not
have any off-balance sheet arrangements, other than operating leases, that have or are reasonably likely to have a current or future
effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to investors.
Item 3.