NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Summary of Accounting Policies
Principles of Consolidation
:
The consolidated financial statements include the accounts of Frequency Electronics, Inc. and its wholly-owned subsidiaries (the "Company" or "Registrant"). References to “FEI” are to the parent company alone and do not refer to any of its subsidiaries. The Company is principally engaged in the design, development and manufacture of precision time and frequency control products and components for microwave integrated circuit applications. See Note 15 for information regarding the Company’s FEI-NY (which includes the subsidiaries FEI Government Systems, Inc., FEI Communications, Inc., Frequency Electronics, Inc. Asia (“FEI-Asia”) and FEI-Elcom Tech, Inc. (“FEI-Elcom”)), Gillam-FEI, and FEI-Zyfer business segments. Intercompany accounts and significant intercompany transactions are eliminated in consolidation. To accommodate the different fiscal periods of Gillam-FEI, the Company recognizes its share of net income or loss on a one month lag. Any material events which may occur during the intervening month at Gillam-FEI will be accounted for in the consolidated financial statements.
These financial statements have been prepared in conformity with United States generally accepted accounting principles (“U.S. GAAP”) and require management to make estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Actual results could differ from these estimates.
Cash Equivalents:
The Company considers certificates of deposit and other highly liquid investments with maturities of three months or less when purchased to be cash equivalents. The Company places its temporary cash investments with high credit quality financial institutions. Such investments may be in excess of the FDIC insurance limit. No losses have been experienced on such investments.
Marketable Securities:
Marketable securities consist of investments in common stocks, including exchange-traded funds, corporate debt securities and debt securities of U.S. government agencies. All marketable securities were held in the custody of financial institutions; five institutions at April 30, 2013 and 2012. Investments in debt and equity 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. The Company recognizes gains or losses when securities are sold using the specific identification method.
Allowance for Doubtful Accounts:
Losses from uncollectible accounts receivable are provided for by utilizing the allowance for doubtful accounts method based upon management’s estimate of uncollectible accounts. Management analyzes accounts receivable and the potential for bad debts, customer concentrations, credit worthiness, current economic trends and changes in customer payment terms when evaluating the amount recorded for the allowance for doubtful accounts.
Inventories
:
Inventories, which consist of finished goods, work-in-process, raw materials and components, are accounted for at the lower of cost (specific and average) or market.
Property, Plant and Equipment:
Property, plant and equipment are recorded at cost and include interest on funds borrowed to finance construction. Expenditures for renewals and betterments are capitalized; maintenance and repairs are charged to income when incurred. When fixed assets are sold or retired, the cost and related accumulated depreciation and amortization are eliminated from the respective accounts and any gain or loss is credited or charged to income.
If events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the long-lived asset, an impairment loss is recognized. To date, no impairment losses have been recognized.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Depreciation and Amortization:
Depreciation of fixed assets is computed on the straight-line method based upon the estimated useful lives of the assets (40 years for buildings and 3 to 10 years for other depreciable assets). Leasehold improvements and equipment acquired under capital leases are amortized on the straight-line method over the shorter of the term of the lease or the useful life of the related asset.
Amortization of identifiable intangible assets is based upon the expected lives of the assets and is recorded at a rate which approximates the Company’s utilization of the assets.
Intangible Assets:
Intangible assets consist of the ISO 9000 certification arising from the acquisition of FEI-Elcom in the assignment of fair value to its acquired assets including intangibles. The certification is valued at fair value and amortized over the estimated useful life of 3 years from the date of acquisition.
Goodwill:
The Company records goodwill as the excess of purchase price over the fair value of identifiable net assets acquired. Goodwill is tested for impairment on at least an annual basis at year end. When it is determined that the carrying value of goodwill may not be recoverable, the Company writes down the goodwill to an amount commensurate with the revised value of the acquired assets. The Company measures impairment based on revenue projections, recent transactions involving similar businesses and price/revenue multiples at which they were bought and sold, price/revenue multiples of competitors, and the present market value of publicly-traded companies in the Company’s industry.
Revenue and Cost 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. For U.S. Government and other fixed-price contracts that 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. Costs and estimated earnings in excess of billings on uncompleted contracts, net of billings on uncompleted contracts in excess of costs and estimated earnings, are included in current assets.
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 and production-type orders may result in revisions to costs and revenue and are recognized in the period in which revisions are determined to be required. Provisions for anticipated losses are made in the period in which they become determinable.
For customer orders in the Company’s subsidiaries, and smaller contracts or orders in the other business segments, sales of products and services to customers are reported in operating results upon shipment of the product or performance of the services pursuant to terms of the customer order.
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.
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.
Program costs for which production-level orders cannot be determined as probable are written down in the period in which that assessment is made.
Comprehensive Income:
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes changes in unrealized gains or losses, net of tax, on securities available for sale during the year and the effects of foreign currency translation adjustments.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Research and Development expenses:
The Company engages in research and development activities to identify new applications for its core technologies, to improve existing products and to improve manufacturing processes to achieve cost reductions and manufacturing efficiencies. Research and development costs include direct labor, manufacturing overhead, direct materials and contracted services. Such costs are expensed as incurred.
Income Taxes:
The Company recognizes deferred tax liabilities and assets based on the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established and adjusted when necessary to increase or reduce deferred tax assets to the amount expected to be realized.
The Company analyzes its tax positions under accounting standards which prescribe recognition thresholds that must be met before a tax benefit is recognized in the financial statements and provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. An entity may only recognize or continue to recognize tax positions that meet a "more likely than not" threshold. When and if the Company were to recognize interest or penalties related to unrecognized tax benefits, it would be reported net of the federal tax benefit in the tax provision.
Earnings Per Share:
Basic earnings per share are computed by dividing net earnings by the weighted average number of shares of common stock outstanding. Diluted earnings per share are computed by dividing net earnings by the sum of the weighted average number of shares of common stock and the if-converted effect of unexercised stock options.
Fair Values of Financial Instruments:
Cash and cash equivalents and short-term credit obligations are reflected in the accompanying consolidated balance sheets at amounts considered by management to reasonably approximate fair value based upon the nature of the instrument and current market conditions. Management is not aware of any factors that would significantly affect the value of these amounts. The Company also has an investment in a privately-held company, Morion, Inc. (“Morion”). The Company is unable to reasonably estimate a fair value for this investment. Additionally, the Company had a non-controlling interest in Elcom Technologies, Inc. (“Elcom” and, after the acquisition, “FEI-Elcom”) in 2012 (through the date of acquisition). See Note 11 - Acquisition of Elcom Technologies, Inc.
Foreign Operations and Foreign Currency Adjustments:
The Company maintains manufacturing operations in Belgium and the People’s Republic of China. The Company is vulnerable to currency risks in these countries. The local currency is the functional currency of each of the Company’s non-U.S. subsidiaries. No foreign currency gains or losses are recorded on intercompany transactions since they are effected at current rates of exchange. The results of operations of foreign subsidiaries, when translated into U.S. dollars, reflect the average rates of exchange for the periods presented. The balance sheets of foreign subsidiaries, except for equity accounts which are translated at historical rates, are translated into U.S. dollars at the rates of exchange in effect on the date of the balance sheet. As a result, similar results in local currency can vary upon translation into U.S. dollars if exchange rates fluctuate significantly from one period to the next.
Equity-based Compensation:
The Company values its share-based payment transactions using the Black-Scholes valuation model. Such value is recognized as expense on a straight-line basis over the service period of the awards, which is generally the vesting period, net of estimated forfeitures.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The weighted average fair value of each option or stock appreciation right has been estimated on the date of grant using the Black-Scholes option pricing model with the following range of weighted average assumptions used for grants:
|
|
Years ended April 30
|
|
|
|
2013
|
|
|
2012
|
|
Expected volatility
|
|
|
|
|
|
40
|
%
|
|
|
|
|
|
40
|
%
|
Dividend yield
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
0.0
|
%
|
Risk-free interest rate
|
|
|
1.31
|
%
|
to
|
1.35
|
%
|
|
|
1.30
|
%
|
to
|
1.34
|
%
|
Expected lives
|
|
|
|
|
|
8.5 years
|
|
|
|
|
|
|
10 years
|
|
The expected life assumption was determined based on the Company’s historical experience. The expected volatility assumption was based on the historical volatility of the Company’s common stock. The dividend yield assumption was determined based upon the Company’s past history of dividend payments and the Company’s current decision to suspend payment of dividends. On December 21, 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. Due to the one-time nature of the special dividend it was not factored into the Black Scholes fair value calculations. The risk-free interest rate assumption was determined using the implied yield currently available for zero-coupon U.S. government issues with a remaining term equal to the expected life of the stock options.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash and cash equivalents and trade receivables. The Company maintains accounts at several commercial banks at which the balances exceed Federal Deposit Insurance Corporation limits. The Company has not experienced any losses on such amounts. Concentration of credit risk with respect to trade receivables is generally diversified due to the large number of entities comprising the Company’s customer base and their dispersion across geographic areas principally within the United States. The Company routinely addresses the financial strength of its customers and, as a consequence, believes that its receivable credit risk exposure is limited. The Company does not require customers to post collateral.
New Accounting Pronouncements:
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05 “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU No. 2011-05”). Under ASU No. 2011-5, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Regardless of which option is selected, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU No. 2011-5 eliminates the option (previously utilized by the Company) to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. ASU No. 2011-5 was adopted by the Company at the beginning of the current fiscal year, and affects only the presentation of financial statements and has no financial impact on the Company’s Consolidated Financial Statements.
In September 2011, the FASB issued ASU No. 2011-08,
Testing Goodwill for Impairment
”
(“ASU No. 2011-08”), which is intended to reduce the complexity and costs to test goodwill for impairment. The amendment allows an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity will no longer be required to calculate the fair value of a reporting unit unless the entity determines, based on its qualitative assessment, that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. ASU No. 2011-08 also expands upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendment became effective for annual and interim goodwill impairment tests performed by the Company in the fourth quarter of the fiscal year ended April 30, 2012. The adoption of ASU 2011-08 did not have a material impact on its consolidated financial statements
.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In February 2013, the FASB issued Accounting Standard Update No. 2013-02
, Other Comprehensive Income
. The amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. This ASU is effective for periods beginning after December 15, 2012. The Company does not expect adoption of ASU 2013-02 to have a material effect on its financial statements.
In July 2012, the FASB issued ASU No. 2012-02,
Intangibles – Goodwill and Other (Topic 350): Test Indefinite-Lived Intangible Assets for Impairment
. Under the requirements of ASU 2012-02 an entity has the option to assess qualitative factors when testing indefinite-lived intangible assets annually to determine whether it is more likely than not that the asset is not impaired. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test or resume performing the qualitative assessment in any subsequent period. If, after assessing the totality of events and circumstances, an entity concludes that it is more likely than not that the indefinite-lived intangible asset is impaired, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with
Subtopic 350-30
. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company will adopt ASU 2012-02 for its fiscal year 2014 which begins on May 1, 2013. The Company is unable to determine the impact of such adoption until it performs the annual test for impairment in the next fiscal year.
2.
Earnings Per Share
Reconciliations of the weighted average shares outstanding for basic and diluted Earnings Per Share are as follows:
|
|
Years ended April 30,
|
|
|
|
2013
|
|
|
2012
|
|
Basic EPS Shares outstanding (weighted average)
|
|
|
8,412,633
|
|
|
|
8,329,081
|
|
Effect of Dilutive Securities
|
|
|
192,018
|
|
|
|
211,874
|
|
Diluted EPS Shares outstanding
|
|
|
8,604,651
|
|
|
|
8,540,955
|
|
Dilutive securities consist of unexercised stock options and stock appreciation rights (“SARS”). The computation of diluted shares outstanding excludes those options and SARS with an exercise price in excess of the average market price of the Company’s common shares during the periods presented. The inclusion of such options and SARS in the computation of earnings per share would have been antidilutive. For the years ended April 30, 2013 and 2012, the number of excluded options and SARS were 939,375 and 733,375, respectively.
3.
Costs and Estimated Earnings in Excess of Billings
At April 30, 2013 and 2012, costs and estimated earnings in excess of billings, net, consist of the following:
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands)
|
|
Costs and estimated earnings in excess of billings
|
|
$
|
10,228
|
|
|
$
|
9,552
|
|
Billings in excess of costs and estimated earnings
|
|
|
(1,611
|
)
|
|
|
(2,345
|
)
|
Net asset
|
|
$
|
8,617
|
|
|
$
|
7,207
|
|
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. 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 years ended April 30, 2013 and 2012, revenue recognized under percentage of completion contracts was approximately $35.6 million and $36.1 million, respectively.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
4.
Inventories
Inventories at April 30, 2013 and 2012, respectively, consisted of the following (in thousands):
|
|
2013
|
|
|
2012
|
|
Raw Materials and Component Parts
|
|
$
|
21,066
|
|
|
$
|
15,813
|
|
Work in Progress
|
|
|
13,665
|
|
|
|
15,762
|
|
Finished Goods
|
|
|
2,790
|
|
|
|
2,724
|
|
|
|
$
|
37,521
|
|
|
$
|
34,299
|
|
As of April 30, 2013 and 2012, approximately $29.9 million and $25.5 million, respectively, of total inventory is located in the United States, approximately $6.9 million and $8.2 million, respectively, is located in Belgium and approximately $0.7 million and $0.6 million, respectively, is located in China.
5.
Marketable Securities
The cost, gross unrealized gains, gross unrealized losses and fair market value of available-for-sale securities at April 30, 2013 and 2012 are as follows (in thousands):
|
|
April 30, 2013
|
|
|
|
Cost
|
|
|
Gross Unrealized
Gains
|
|
|
Gross Unrealized
Losses
|
|
|
Fair Market
Value
|
|
Fixed income securities
|
|
$
|
10,285
|
|
|
$
|
297
|
|
|
$
|
0
|
|
|
$
|
10,582
|
|
Equity securities
|
|
|
6,490
|
|
|
|
1,266
|
|
|
|
(68
|
)
|
|
|
7,688
|
|
|
|
$
|
16,775
|
|
|
$
|
1,563
|
|
|
$
|
(68
|
)
|
|
$
|
18,270
|
|
|
|
April 30, 2012
|
|
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross Unrealized
Losses
|
|
|
Fair Market
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:
|
|
Less than 12 months
|
|
|
12 Months or more
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
April 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Equity Securities
|
|
|
-
|
|
|
|
-
|
|
|
|
512
|
|
|
|
(68
|
)
|
|
|
512
|
|
|
|
(68
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
512
|
|
|
$
|
(68
|
)
|
|
$
|
512
|
|
|
$
|
(68
|
)
|
|
|
Less than 12 months
|
|
|
12 Months or more
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
April 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities
|
|
$
|
301
|
|
|
$
|
(6
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
301
|
|
|
$
|
(6
|
)
|
Equity Securities
|
|
|
539
|
|
|
|
(169
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
539
|
|
|
|
(169
|
)
|
|
|
$
|
840
|
|
|
$
|
(175
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
840
|
|
|
$
|
(175
|
)
|
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 April 30, 2013 are other-than-temporary due to market volatility of the security’s fair value, analysts’ expectations and the Company’s ability to hold the securities for a period of time sufficient to allow for any anticipated recoveries in market value.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Proceeds from the sale or redemption of available-for-sale securities and the resulting gross realized gains and losses included in the determination of net income (loss) are as follows (in thousands):
|
|
For the years ended April 30,
|
|
|
|
2013
|
|
|
2012
|
|
Proceeds
|
|
$
|
3,006
|
|
|
$
|
6,636
|
|
Gross realized gains
|
|
$
|
47
|
|
|
$
|
20
|
|
Gross realized losses
|
|
$
|
-
|
|
|
$
|
-
|
|
Maturities of fixed income securities classified as available-for-sale at April 30, 2013 are as follows (at cost, in thousands):
Current
|
|
$
|
2,003
|
|
Due after one year through five years
|
|
|
7,478
|
|
Due after five years through ten years
|
|
|
804
|
|
|
|
$
|
10,285
|
|
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 Level 1 assets.
6.
Property, Plant and Equipment and Leases
Property, plant and equipment at April 30, 2013 and 2012, consists of the following (in thousands):
|
|
2013
|
|
|
2012
|
|
Buildings and building improvements
|
|
$
|
5,477
|
|
|
$
|
5,500
|
|
Machinery, equipment and furniture
|
|
|
44,758
|
|
|
|
42,850
|
|
|
|
|
50,235
|
|
|
|
48,350
|
|
Less, accumulated depreciation
|
|
|
41,919
|
|
|
|
39,976
|
|
|
|
$
|
8,316
|
|
|
$
|
8,374
|
|
Depreciation and amortization expense for the years ended April 30, 2013 and 2012 was $2,250,000 and $2,222,000, respectively.
Maintenance and repairs charged to operations for the years ended April 30, 2013 and 2012 was approximately $993,000 and $807,000, respectively.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The Company leases its Long Island, New York headquarters building at an annual rental of $600,000. During fiscal year 2013, the Company exercised its option to renew the lease for a second 5-year period at an annual rental of $800,000 beginning February 2014. The lease will end in January 2019.
Under the terms of the lease, the Company is required to pay its proportionate share of real estate taxes, insurance and other charges.
In addition, the Company’s subsidiaries in New Jersey, China, France and California lease their office and manufacturing facilities. FEI-Elcom leases 32,000 square feet of office and manufacturing space at current monthly rental of approximately $27,000, increasing to $28,000 in the last two years of the lease which expires in March 2016. The lease for the FEI-Asia facility is for a one-year term with monthly rent of $6,800 through February 2014. FEI-Zyfer leases office and manufacturing space encompassing 27,850 square feet. Monthly rental payments are currently $28,700 and increase each year over the remaining 52 months of the lease term. Satel-FEI, a wholly-owned subsidiary of Gillam-FEI, occupies office space under a 9-year lease, cancelable after three years, at an approximate rate of $1,100 per month.
Rent expense under operating leases was approximately $1.3 million and $1.0 million for the fiscal years ended April 30, 2013 and 2012. The Company records rent expense on its New York building and FEI-Zyfer facility on the straightline method over the lives of the respective leases. As a result, as of April 30, 2013 and 2012, the Company’s balance sheet includes deferred rent payable of approximately $310,000 and $338,000, respectively, which will be amortized over the respective rental periods.
Included in the assets of FEI-Elcom is machinery and equipment with a value of approximately $300,000 obtained under capital leases prior to the Company’s acquisition of FEI-Elcom. (See Note 11. Acquisition of Elcom Technologies, Inc.) FEI-Elcom’s remaining capital lease obligation at the date of acquisition was approximately $234,000.
Future minimum lease payments required by the leases are as follows (in thousands):
Years ending
April 30,
|
|
Operating Leases
|
|
|
Capital Lease
|
|
2014
|
|
$
|
1,397
|
|
|
$
|
16
|
|
2015
|
|
|
1,503
|
|
|
|
-
|
|
2016
|
|
|
1,473
|
|
|
|
-
|
|
2017
|
|
|
1,174
|
|
|
|
-
|
|
2018
|
|
|
925
|
|
|
|
-
|
|
Thereafter
|
|
|
600
|
|
|
|
-
|
|
Less amounts representing interest
|
|
|
-
|
|
|
|
(1
|
)
|
Present value of future minimum lease payments
|
|
$
|
7,072
|
|
|
$
|
15
|
|
7.
Debt Obligations and Subsequent Event
On June 6, 2013, the Company obtained a credit facility (the “Facility”) from JPMorgan Chase Bank, N.A. (“JPMorgan”) pursuant to a credit agreement (the “Credit Agreement”) between the Company and JPMorgan. The maximum aggregate amount of the Facility is $25.0 million, of which the Company immediately borrowed $7.2 million, using the proceeds to repay the outstanding balance under the $9.3 million line of credit with another financial institution which formerly managed a substantial portion of the Company’s investment portfolio. As a result of this refinancing of short-term credit with a long-term obligation, as of April 30, 2013, the Company reclassified the $6.0 million balance payable under the replaced line of credit to long-term debt. Proceeds from the Facility will be used for working capital and to finance acquisitions.
The Company may make borrowings under the Facility from either Tranche A or Tranche B or a combination of both, not to exceed $25.0 million. Pursuant to the Credit Agreement, the amount of Tranche A borrowings may not exceed the value of the Pledged Investments (as defined in the Credit Agreement). The amount of Tranche B borrowings may not exceed the lesser of (i) $15.0 million and (ii) the Borrowing Base (as defined in the Credit Agreement). The Facility is fully guaranteed by certain of the Company’s subsidiaries and is secured by, among other things, a pledge of substantially all personal property of the Company and certain of the Company’s subsidiaries.
Borrowings under the Facility are evidenced by a line of credit note (the “Note”) and bear interest, payable monthly, at a rate equal to the LIBOR Rate, as determined from time to time by JPMorgan pursuant to the terms of the Note, plus a margin of 0.75% for Tranche A borrowings and 1.75% for
Tranche B borrowings. The principal balance on the Note, along with any accrued and unpaid interest, is due and payable no later than June 5, 2018, which is the maturity date of the Facility. In addition, the Company is required to pay JPMorgan fees equal to 0.1% per annum on any unused portion of the Facility.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The Credit Agreement contains a number of affirmative and negative covenants, including limitations on the incurrence of additional debt, liens on property, acquisitions, loans and guarantees, mergers, consolidations, liquidations and dissolutions, asset sales, and distributions and other payments in respect of the Company’s capital stock. The Credit Agreement also contains certain events of default customary for credit facilities of this type, including nonpayment of principal or interest when due, material incorrectness of representations and warranties when made, breach of covenants, bankruptcy and insolvency, unstayed material judgment beyond specified periods, and acceleration or payment default of other material indebtedness. The Credit Agreement requires the Company to maintain, as of the end of each fiscal quarter, a funded debt to EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) ratio and an interest charge coverage ratio. The calculation of both ratios is defined in the Credit Agreement.
Under the Company’s subsequently replaced $9.3 million line of credit with the financial institution which formerly managed a substantial portion of its investment in marketable securities, during the fiscal year ended April 30, 2013, the Company borrowed $5.0 million and repaid the same amount. The highest borrowings under this line of credit during fiscal year 2013 was $8.5 million. The line was secured by the investments and had no maturity date so long as the Company maintained its investments with the financial institution. During fiscal years 2013 and 2012, advances against the line of credit bore interest at variable interest rates between 1.70% and 1.80%.
The Company’s European subsidiaries have available 500,000 Euros (approximately $650,000 based on current rates of exchange between the dollar and the Euro) in bank credit lines to meet short-term cash flow requirements. As of April 30, 2013 and 2012, no amounts were outstanding under such lines of credit. Borrowings under the bank credit lines, if any, must be repaid within one year of receipt of funds. Interest on these credit lines varies from 0.5% to 1.5% over the EURO Interbank Offered rate (EURIBOR). At April 30, 2013 and 2012, the rate was 1.117% and 1.244%, respectively, based on the one-month EURIBOR.
Accrued liabilities at April 30, 2013 and 2012 consist of the following (in thousands):
|
|
2013
|
|
|
2012
|
|
Vacation and other compensation
|
|
$
|
1,794
|
|
|
$
|
1,712
|
|
Incentive compensation
|
|
|
1,634
|
|
|
|
1,799
|
|
Payroll taxes
|
|
|
1,323
|
|
|
|
1,485
|
|
Deferred revenue
|
|
|
1,620
|
|
|
|
137
|
|
Warranty reserve
|
|
|
598
|
|
|
|
778
|
|
Other
|
|
|
995
|
|
|
|
1,075
|
|
|
|
$
|
7,964
|
|
|
$
|
6,986
|
|
9.
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 and loans receivable from affiliates in the accompanying balance sheets.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
During the fiscal years ended April 30, 2013 and 2012, the Company acquired product from Morion in the aggregate amount of approximately $54,000 and $224,000, respectively, and the Company sold product to Morion in the aggregate amount of approximately $355,000 and $1,162,000, respectively. At April 30, 2013, accounts receivable included $144,000 due from Morion and $8,000 were payable to Morion.
On October 22, 2012, the Company entered into an agreement to license its rubidium oscillator production technology to Morion. The agreement requires the Company to sell certain fully-depreciated production equipment currently owned by the Company and to provide training to Morion employees to enable Morion to produce a minimum of 5,000 rubidium oscillators per year. Morion will pay the Company approximately $2.7 million for the license and the equipment plus 5% royalties on third party sales for a 5-year period following an initial production run. During the same 5-year period, the Company commits to purchase from Morion a minimum of approximately $400,000 worth of rubidium oscillators per year although Morion is not obligated to sell that amount to the Company. In November 2012, Morion paid the Company a $925,000 deposit under this agreement. This amount is considered deferred revenue and is included in accrued liabilities on the accompanying 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.
10.
Goodwill and Other Intangible Assets
During fiscal year 2004, the Company acquired FEI-Zyfer, Inc. (“FEI-Zyfer”). This acquisition resulted in the recording of $218,000 in goodwill. In February 2012, the Company acquired FEI-Elcom (see Note 11 Acquisition of Elcom Technologies, Inc.) resulting in the recording of goodwill in the amount of $398,000 plus other intangible assets with a value of $275,000. Management has determined that goodwill is not impaired as of April 30, 2013 and 2012. The other intangible asset will be amortized over a
three-year period from the date of acquisition. Amortization expense for the years ended April 30, 2013 and 2012 was approximately $91,000 and $19,000, respectively.
11.
Acquisition of Elcom Technologies, Inc.
On February 21, 2012, the Company purchased 74.88% of the capital stock of 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 book 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 is considered a “step acquisition” by generally accepted accounting principles. Such an acquisition required the Company to remeasure its previously held equity interest in Elcom and adjust 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.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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. For the year ended April 30, 2012, in addition to its equity share in the income or loss of Elcom during the year, the Company determined that its investment was impaired and recorded impairment charges in the amount $350,000.
During the fiscal years ended April 30, 2012, prior to the acquisition of Elcom, the Company acquired technical services from Elcom in the aggregate amount of approximately $16,000; sold product to Elcom in the amount of approximately $5,000; and the Company recorded interest income on notes to Elcom in the amount of approximately $87,000.
The estimated fair value of Elcom has been allocated as follows.
Cash
|
|
$
|
763
|
|
Accounts receivable
|
|
|
342
|
|
Inventory
|
|
|
3,233
|
|
Other current assets
|
|
|
61
|
|
Fixed assets
|
|
|
2,100
|
|
Goodwill and other intangible assets
|
|
|
673
|
|
Deferred tax assets
|
|
|
2,573
|
|
Other assets
|
|
|
180
|
|
Accounts payable
|
|
|
(350
|
)
|
Accrued expenses
|
|
|
(1,461
|
)
|
Capital lease obligations
|
|
|
(234
|
)
|
|
|
$
|
7,880
|
|
The Company incurred approximately $230,000 in acquisition related costs applicable to the transaction during fiscal year 2012. These expenses are included in selling and administrative expenses in the Company’s consolidated statements of income.
The
accompanying consolidated statements of income for the years ended April 30, 2013 and 2012 include the results of operations of FEI-Elcom since the date of acquisition, February 21, 2012. For the period from the acquisition date to April 30, 2012, FEI-Elcom had revenue of $840,000 and recorded an operating loss of $700,000. The pro forma financial information set forth below is based upon the Company’s historical consolidated statements of income for the year ended April 30, 2012, adjusted to give effect to the acquisition of FEI-Elcom as if it had occurred at the beginning of fiscal year 2012.
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)
|
|
|
|
Year ended
April 30,
2012
|
|
|
(in thousands except per share data)
|
Revenues
|
|
$
|
70,955
|
|
Operating profit
|
|
$
|
5,147
|
|
Net income
|
|
$
|
5,863
|
|
Earnings per share- basic
|
|
$
|
0.70
|
|
Earnings per share- diluted
|
|
$
|
0.69
|
|
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
12.
Employee Benefit Plans
The Company provides its U.S.-based employees with a profit sharing plan and trust under section 401(k) of the Internal Revenue Code. This plan allows all eligible employees to defer a portion of their income through voluntary contributions to the plan. In accordance with the provisions of the plan, the Company can make discretionary matching contributions in the form of cash or common stock. For the years ended April 30, 2013 and 2012, the Company contributed 52,715 and 42,370 shares of common stock, respectively. The approximate value of these shares at the date of contribution was $456,000 in fiscal year 2013 and $360,000 in fiscal year 2012. Contributed shares are drawn from the Company’s common stock held in treasury and are removed at the Company’s original cost of acquisition of such shares on a specific identification basis. In addition to changes in the treasury stock accounts, during fiscal years 2013 and 2012, such transactions increased additional paid in capital by $214,000 and $154,000, respectively.
Income Incentive Pool:
The Company maintains incentive bonus programs for certain employees which are based on operating profits of the individual subsidiaries to which the employees are assigned. The Company also adopted a plan for the President and Chief Executive Officer of the Company, which formula is based on consolidated pre-tax profits. The Company charged approximately $1.6 million and $1.8 million to selling and administrative expenses under these plans for the fiscal years ended April 30, 2013 and 2012, respectively.
The Company has various stock plans, some of which have been approved by the Company’s stockholders, for key management employees, including officers and directors who are employees, certain consultants and independent members of the Board of Directors. The plans are Nonqualified Stock Options (“NQSO”) plans, Incentive Stock Option ("ISO”) plans and Stock Appreciation Rights (“SARS”). Under these plans, options or SARS are granted at the discretion of the Stock Option Committee at an exercise price not less than the fair market value of the Company's common stock on the date of grant.
Typically, options and SARS vest over a four-year period from the date of grant. The options and SARS expire ten years after the date of grant and are subject to certain restrictions on transferability of the shares obtained on exercise. As of April 30, 2012, a consultant, who is the son of the Company’s president, had been granted options to purchase 56,625 shares of Company stock under NQSO plans at a weighted average exercise price of $5.60. During the year ended April 30, 2013, the consultant elected a cashless exercise of 19,125 shares at an exercise price of $3.50 per share (resulting in a net issuance of 11,011 shares) and the remaining 37,500 options are outstanding and exercisable at an exercise price of $6.67. The options expire one year after the termination of the consulting agreement which has no expiration date. As of April 30, 2013, eligible employees had been granted options to purchase approximately 231,200 shares of Company stock under ISO plans, of which approximately 172,500 options with a weighted average exercise price of $11.55 are both outstanding and exercisable. During the year ended April 30, 2013, employees exercised ISOs for 58,700 shares of Company stock. During fiscal year 2013, the Company gave option holders the opportunity to exercise stock options either by paying the exercise price for the shares or to do a cashless exercise whereby the individual receives the net number of shares of stock equal in value to the exercised number of shares times the difference between the current market value of the Company’s stock and the exercise price. For the year ended April 30, 2013, the Company received approximately $20,000 upon the exercise of options for 3,000 shares. The balance of stock option exercises under ISO and NQSO plans, including the consultant shares above, which aggregated 74,825 shares were conducted under the cashless option. Accordingly, the Company issued 25,897 shares for cashless exercises and returned 48,928 shares to the pool of available shares which may be used for future grants. As of April 30, 2013, eligible employees and
directors have been granted SARS based on approximately 1,550,000 shares of Company stock, of which approximately 1,498,625 shares are outstanding and approximately 871,000 with a weighted average exercise price of $7.93 are exercisable. When the SARS become exercisable, the Company will settle the SARS by issuing to exercising recipients the number of shares of stock equal to the appreciated value of the Company’s stock between the grant date and exercise date. At the time of exercise, the quantity of shares under the SARS grant equal to the exercise value divided by the then market value of the shares will be returned to the pool of available shares for future grant under the Company’s stock plan. During the year ended April 30, 2013, employees exercised SARS representing 35,250 shares of Company stock and received 18,685 shares of Company stock. The 16,565 share difference was returned to the pool of available shares and may be used for future grants.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The excess of the consideration received over the par value of the common stock or cost of treasury stock issued under both types of option plans is recognized as an increase in additional paid-in capital.
The following table summarizes information about stock option activity for the years ended April 30:
|
|
Stock Options and Stock Appreciation Rights
|
|
|
|
Shares
|
|
|
Weighted- Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic Value
|
|
Outstanding – May 1, 2011
|
|
|
1,433,525
|
|
|
$
|
8.22
|
|
6.6 years
|
|
|
|
Granted
|
|
|
253,000
|
|
|
|
7.36
|
|
|
|
|
|
Exercised
|
|
|
(7,950
|
)
|
|
|
5.35
|
|
|
|
|
|
Expired or Canceled
|
|
|
(48,875
|
)
|
|
|
11.10
|
|
|
|
|
|
Outstanding – April 30, 2012
|
|
|
1,629,700
|
|
|
$
|
7.95
|
|
6.4 years
|
|
|
|
Granted
|
|
|
209,000
|
|
|
|
8.82
|
|
|
|
|
|
Exercised
|
|
|
(113,075
|
)
|
|
|
5.63
|
|
|
|
|
|
Expired or Canceled
|
|
|
(17,000
|
)
|
|
|
5.16
|
|
|
|
|
|
Outstanding – April 30, 2013
|
|
|
1,708,625
|
|
|
$
|
8.23
|
|
6.1 years
|
|
$
|
3,697,430
|
|
Exercisable
|
|
|
1,081,000
|
|
|
$
|
8.46
|
|
4.8 years
|
|
$
|
2,324,626
|
|
Available for future grants
|
|
|
166,743
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2013, total unrecognized compensation cost related to nonvested options and stock appreciation rights under the plans was approximately $2,149,000. These costs are expected to be recognized over a weighted average period of 3.0 years.
During the years ended April 30, 2013 and 2012, 254,813 and 221,969 shares, respectively, vested, the fair value of which was approximately $847,000 and $748,000, respectively. The weighted average grant date fair value of stock appreciation rights granted during the years ended April 30, 2013 and 2012, were approximately $4.16 and $3.73, respectively.
Stock-based compensation costs capitalized as part of work in process inventory or included in the cost of sales of programs on which the Company recognizes revenue under the percentage of completion method were approximately $410,000 and $363,000 for the years ended April 30, 2013 and 2012, respectively. Selling and administrative expenses include stock-based compensation expense of approximately $537,000 and $359,000 for the years ended April 30, 2013 and 2012, respectively.
The Company classifies cash flows resulting from the tax benefits from tax deductions recognized upon the exercise of stock options or SARS (tax benefits) as financing cash flows. For the years ended April 30, 2013 and 2012, the Company realized $152,000 and $9,000 respectively, of tax benefits from the exercise of stock options and SARS.
Independent Contractor Stock Option Plan:
The Company had an Independent Contractor Stock Option Plan under which up to 350,000 shares could be granted. This plan was terminated in fiscal year 2006. An Independent Contractor Stock Option Committee determined to whom options may be granted from among eligible participants, the timing and
duration of option grants, the option price, and the number of shares of common stock subject to each option. Options were granted to certain independent contractors at a price equal to the then fair market value of the Company’s common stock. The options were exercisable over specified periods per terms of the individual agreements. No compensation expense was recorded during the years ended April 30, 2013 and 2012 as no other grants were made in those years and previous grants have been fully expensed. As a result of the adoption by the stockholders of the 2005 Stock Award Plan, the Independent Contractor Stock Option Plan was discontinued. No additional grants will be made under this plan and the outstanding grant will expire in fiscal year 2015.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
At April 30, 2013 and 2012, options for 30,000 shares, at a weighted average exercise price of $14.76, were issued and outstanding under this plan. No other activities occurred during the two year period ended April 30, 2013.
During fiscal year 1990, the Company adopted a Restricted Stock Plan which provided that key management employees could be granted rights to purchase an aggregate of 375,000 shares of the Company's common stock. The grants, transferability restrictions and purchase price were determined at the discretion of a special committee of the board of directors. The purchase price could not be less than the par value of the common stock. Transferability of shares is restricted for a four-year period, except in the event of a change in control as defined. As a result of the adoption by the Company’s stockholders of the 2005 Stock Award Plan, the Restricted Stock Plan was discontinued. No additional grants will be made under this plan. As of April 30, 2013 and 2012, grants for 7,500 shares are available to be purchased at a price of $4.00 per share.
Employee Stock Ownership Plan/Stock Bonus Plan:
During 1990, the Company amended its Stock Bonus Plan to become an Employee Stock Ownership Plan (“ESOP”). By means of a bank note, subsequently repaid, the Company reacquired 561,652 shares of its common stock during fiscal year 1990. These shares plus approximately 510,000 additional shares issued by the Company from its authorized, unissued shares were sold to the ESOP in May 1990. Shares were released for allocation to participants based on a formula as specified in the ESOP document. By the end of fiscal year 2000, all shares (1,071,652) had been allocated to participant accounts of which 406,102 shares remain in the ESOP.
Deferred Compensation Agreements:
The Company has a series of agreements with key employees providing for the payment of benefits upon retirement or death. Under these agreements, each key employee receives specified retirement payments for the remainder of the employee's life with a minimum payment of ten years' benefits to either the employee or his beneficiaries. The agreements also provide for lump sum payments upon termination of employment without cause and reduced benefits upon early retirement. The Company pays the benefits out of its working capital, but has also purchased whole life or term life insurance policies on the lives of certain of the participants to cover the optional lump sum obligations of the agreements upon the death of the participant. Deferred compensation expense charged to selling and administrative expenses during the years ended April 30, 2013 and 2012 was approximately $616,000 and $796,000, respectively.
Life Insurance Policies and Cash Held in Trust:
The whole-life insurance policies on the lives of certain participants covered by deferred compensation agreements have been placed in a trust. Upon the death of any insured participant, cash received from life insurance policies in excess of the Company’s deferred compensation obligations to the estate or beneficiaries of the deceased, are also placed in the trust. These assets belong to the Company until a change of control event, as defined in the trust agreement, should occur. At that time, the Company is required to add sufficient cash to the trust so as to match the deferred compensation liability described above. Such funds will be used to continue the deferred compensation arrangements following a change of control.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
13.
Income Taxes
The income before benefit for income taxes consisted of (in thousands):
|
|
Year Ended April 30,
|
|
|
|
2013
|
|
|
2012
|
|
U.S.
|
|
$
|
7,028
|
|
|
$
|
7,426
|
|
Foreign
|
|
|
(1,942
|
)
|
|
|
(612
|
)
|
|
|
$
|
5,086
|
|
|
$
|
6,814
|
|
The benefit for income taxes consists of the following (in thousands):
|
|
2013
|
|
|
2012
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
1,680
|
|
|
$
|
2,534
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
40
|
|
|
|
6
|
|
Current provision
|
|
|
1,720
|
|
|
|
2,540
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(145
|
)
|
|
|
16
|
|
Foreign
|
|
|
(585
|
)
|
|
|
(49
|
)
|
State
|
|
|
(80
|
)
|
|
|
(10
|
)
|
Deferred benefit
|
|
|
(810
|
)
|
|
|
(43
|
)
|
Change in valuation allowance
|
|
|
490
|
|
|
|
(3,057
|
)
|
Total benefit
|
|
$
|
1,400
|
|
|
$
|
(560
|
)
|
The following table reconciles the reported income tax (benefit) expense with the amount computed using the federal statutory income tax rate (in thousands):
|
|
2013
|
|
|
2012
|
|
Computed "expected" tax expense
|
|
$
|
1,729
|
|
|
$
|
2,316
|
|
State and local tax, net of federal benefit
|
|
|
(81
|
)
|
|
|
(3
|
)
|
Valuation allowance on deferred tax assets
|
|
|
490
|
|
|
|
(3,057
|
)
|
Nontaxable income from foreign subsidiaries
|
|
|
29
|
|
|
|
72
|
|
Nondeductible expenses
|
|
|
178
|
|
|
|
143
|
|
Nontaxable life insurance cash value increase
|
|
|
(168
|
)
|
|
|
(150
|
)
|
Write off benefit from equity investment losses
|
|
|
-
|
|
|
|
466
|
|
Tax credits
|
|
|
(299
|
)
|
|
|
(350
|
)
|
Other items, net, none of which individually exceeds 5% of federal taxes at statutory rates
|
|
|
(478
|
)
|
|
|
3
|
|
|
|
$
|
1,400
|
|
|
$
|
(560
|
)
|
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The components of deferred taxes are as follows (in thousands):
|
|
2013
|
|
|
2012
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Employee benefits
|
|
$
|
6,490
|
|
|
$
|
5,320
|
|
Inventory
|
|
|
1,980
|
|
|
|
2,055
|
|
Accounts receivable
|
|
|
470
|
|
|
|
525
|
|
Tax credits
|
|
|
990
|
|
|
|
1,140
|
|
Other liabilities
|
|
|
270
|
|
|
|
332
|
|
Net operating loss carryforwards
|
|
|
3,040
|
|
|
|
2,800
|
|
Total deferred tax asset
|
|
|
13,240
|
|
|
|
12,172
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
540
|
|
|
|
243
|
|
Property, plant and equipment
|
|
|
1,310
|
|
|
|
1,630
|
|
Net deferred tax asset
|
|
|
11,390
|
|
|
|
10,299
|
|
Valuation allowance
|
|
|
(1,900
|
)
|
|
|
(1,455
|
)
|
Net deferred tax assets
|
|
$
|
9,490
|
|
|
$
|
8,844
|
|
Net deferred tax assets are comprised of the following (in thousands):
|
|
2013
|
|
|
2012
|
|
Gross current assets
|
|
$
|
3,890
|
|
|
$
|
4,092
|
|
Valuation allowance
|
|
|
-
|
|
|
|
(697
|
)
|
Current liabilities
|
|
|
(720
|
)
|
|
|
(243
|
)
|
Net current deferred tax assets
|
|
|
3,170
|
|
|
|
3,152
|
|
|
|
|
|
|
|
|
|
|
Gross noncurrent assets
|
|
|
9,600
|
|
|
|
8,080
|
|
Valuation allowance
|
|
|
(1,900
|
)
|
|
|
(758
|
)
|
Noncurrent liabilities
|
|
|
(1,380
|
)
|
|
|
(1,630
|
)
|
Net noncurrent deferred tax assets
|
|
|
6,320
|
|
|
|
5,692
|
|
Net deferred tax assets
|
|
$
|
9,490
|
|
|
$
|
8,844
|
|
The total valuation allowance relates to deferred tax assets of both domestic and foreign subsidiaries. For the year ended April 30, 2013, the change in valuation allowance was an increase of $445,000 which consists of the $490,000 deferred tax provision less a foreign exchange adjustment of $45,000. The change in valuation allowance during the year ended April 30, 2012 was a decrease of $3.1 million, including foreign exchange adjustments of $58,000 and the $43,000 tax effect of unrealized gains on marketable securities.
During the fourth quarter of fiscal year 2012, the Company reduced its valuation allowance against deferred tax assets in the amounts of $3.1 million. This recognition was the result of an evaluation of the Company’s net operating losses incurred in prior years, its recent history of three consecutive years of increasing profitability and recent contract bookings which increased the Company’s long-term backlog to a higher level. Company management believed such contracts would enable the Company to continue to generate operating profits in fiscal year 2013 and beyond. These adjustments were made in the fourth quarter of fiscal year 2012 as the Company waited until it had results for the full year to make final its determination, given the existence of a loss in recent years, that it met the accounting threshold for determination that the recovery of the deferred tax asset was more likely than not and to estimate the appropriate balance of the valuation allowance, based on all available information. The amount of the non-cash valuation allowance reduction was based on management’s estimates of taxable income by reporting segment and taxing jurisdictions and the periods over which the Company believes deferred tax assets will be recoverable.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
At April 30, 2013, the Company has available approximately $2.7 million in net operating losses available to offset future income of certain of its foreign subsidiaries. These loss carryforwards have no expiration date. As a result of the acquisition of FEI-Elcom, 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 19 years.
The Company has evaluated its tax positions and has concluded that the tax positions meet the more-likely-than-not recognition threshold as specified under accounting standards. It is difficult to predict what would occur to change the Company’s unrecognized tax benefits over the next twelve months. The Company believes, however, that there should be no change during the next twelve months. The Company's tax returns for April 30, 2006 and 2007 have been examined by the Internal Revenue Service, which resulted in no material adjustments. The Company's tax years from April 30, 2005 through April 30, 2013 remain open to examination by state tax authorities and tax years from April 30, 2008 through April 30, 2013 remain open for examination by the Internal Revenue Service.
14.
Product Warranties
The Company generally provides its customers with a one-year warranty regarding the manufactured quality and functionality of its products. For some limited products, the warranty period has been extended. The Company establishes warranty reserves based on its product history, current information on repair costs and annual sales levels. Changes in the carrying amount of accrued product warranty costs are as follows (in thousands):
|
|
Year Ended April 30,
|
|
|
|
2013
|
|
|
2012
|
|
Balance at beginning of year
|
|
$
|
778
|
|
|
$
|
145
|
|
Acquired reserve of FEI-Elcom
|
|
|
|
|
|
|
370
|
|
Warranty costs incurred
|
|
|
(324
|
)
|
|
|
(192
|
)
|
Product warranty accrual
|
|
|
144
|
|
|
|
455
|
|
Balance at end of year
|
|
$
|
598
|
|
|
$
|
778
|
|
15.
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 and FEI-Asia. FEI-Asia functions as a manufacturing facility for the FEI-NY segment 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.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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.
The accounting policies of the three segments are the same as those described in the “Summary of Significant Accounting Policies.” The Company evaluates the performance of its segments and allocates resources to them based on operating profit which is defined as income before investment income, interest expense and taxes. The European-based director of Gillam-FEI and the president of FEI-Zyfer manage the assets of these segments. All acquired assets, including intangible assets, are included in the assets of these two segments.
The table below presents information about reported segments for each of the years ended April 30 with reconciliation of segment amounts to consolidated amounts as reported in the statement of operations or the balance sheet for each of the years (in thousands):
|
|
2013
|
|
|
2012
|
|
Net revenues:
|
|
|
|
|
|
|
FEI-NY
|
|
$
|
52,567
|
|
|
$
|
44,711
|
|
Gillam-FEI
|
|
|
11,825
|
**
|
|
|
12,811
|
**
|
FEI-Zyfer
|
|
|
10,523
|
|
|
|
11,494
|
|
less intersegment revenues
|
|
|
(5,983
|
)**
|
|
|
(5,421
|
)**
|
Consolidated revenues
|
|
$
|
68,932
|
|
|
$
|
63,595
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss):
|
|
|
|
|
|
|
|
|
FEI-NY
|
|
$
|
7,334
|
|
|
$
|
7,938
|
|
Gillam-FEI
|
|
|
(1,643
|
)**
|
|
|
138
|
**
|
FEI-Zyfer
|
|
|
(552
|
)
|
|
|
(511
|
)
|
Corporate
|
|
|
(460
|
)
|
|
|
(862
|
)
|
Consolidated operating profit
|
|
$
|
4,679
|
|
|
$
|
6,703
|
|
|
**For fiscal years ended April 30, 2013 and 2012, includes Gillam-FEI intersegment sales of $4.1 million and $3.9 million, respectively, to the FEI-NY and FEI-Zyfer segments. Such sales consist principally of manufacture of assemblies and units of a wireline synchronization product for ultimate production and sale in the U.S. plus the costs of ongoing research and development costs to support the product line. In the Gillam-FEI segment, these transactions increased the operating profit in each of the fiscal years. In addition, during the fourth quarter of fiscal year 2013, Gillam-FEI wrote down $1.4 million of accumulated costs related to hardware and software design of a product in connection with the French government’s smart electrical grid initiative. Based on slower than anticipated rollout of this project, the Company has less visibility regarding the probable schedule for obtaining production-level orders, which are now anticipated to occur no earlier than fiscal year 2015.
|
|
|
2013
|
|
|
2012
|
|
Identifiable assets:
|
|
|
|
|
|
|
FEI-NY (approximately $3 million in China)
|
|
$
|
55,508
|
|
|
$
|
50,234
|
|
Gillam-FEI (all in Belgium or France)
|
|
|
18,071
|
|
|
|
20,407
|
|
FEI-Zyfer
|
|
|
10,418
|
|
|
|
9,685
|
|
less intersegment receivables
|
|
|
(18,903
|
)
|
|
|
(16,424
|
)
|
Corporate
|
|
|
43,815
|
|
|
|
42,325
|
|
Consolidated identifiable assets
|
|
$
|
108,909
|
|
|
$
|
106,227
|
|
Depreciation and amortization (allocated):
|
|
|
|
|
|
|
FEI-NY
|
|
$
|
1,892
|
|
|
$
|
1,590
|
|
Gillam-FEI
|
|
|
304
|
|
|
|
425
|
|
FEI-Zyfer
|
|
|
202
|
|
|
|
207
|
|
Corporate
|
|
|
15
|
|
|
|
19
|
|
Consolidated depreciation and amortization expense
|
|
$
|
2,413
|
|
|
$
|
2,241
|
|
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Major Customers
The Company's products are sold to both commercial and governmental customers. For the years ended April 30, 2013 and 2012, approximately 62% and 46% respectively, of the Company's sales were made under contracts to the U.S. Government or subcontracts for U.S. Government end-use.
In fiscal year 2013, sales to three customers of the FEI-NY segment aggregated $34.1 million or 65% of that segment’s total sales. Each of these customers also exceeded 10% of the Company’s consolidated revenues. During the year ended April 30, 2013, in the Gillam-FEI segment, sales to one customer exceeded 10% of that segment’s revenues. In the FEI-Zyfer segment, two customers accounted for more than 10% of that segment’s sales. None of the customers in the Gillam-FEI and FEI-Zyfer segments accounted for more than 10% of consolidated revenues.
In fiscal year 2012, sales to three customers of the FEI-NY segment aggregated $29.3 million or 66% of that segment’s total sales. Each of these customers also exceeded 10% of the Company’s consolidated revenues. During the year ended April 30, 2012, in the Gillam-FEI segment, sales to one customer exceeded 10% of that segment’s revenues. In the FEI-Zyfer segment, one customer accounted for more than 10% of that segment’s sales. None of the customers in the Gillam-FEI and FEI-Zyfer segments accounted for more than 10% of consolidated revenues.
The loss by the Company of any one of these customers would have a material adverse effect on the Company’s business. The Company believes its relationship with these customers to be mutually satisfactory. Sales to major customers above can include commercial and governmental end users.
Foreign Sales
Revenues in each of the Company’s segments include sales to foreign governments or to companies located in foreign countries. Revenues, based on the location of the procurement entity and excluding intersegment sales, were derived from the following countries:
|
|
(in thousands)
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
France
|
|
$
|
9,527
|
|
|
$
|
8,480
|
|
Belgium
|
|
|
4,240
|
|
|
|
4,254
|
|
China
|
|
|
565
|
|
|
|
899
|
|
Other
|
|
|
3,390
|
|
|
|
7,533
|
|
|
|
$
|
17,722
|
|
|
$
|
21,166
|
|