FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
The accompanying notes are an integral part of these financial statements - continued.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2016 and 2015
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 13 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 at times be in excess of the FDIC and SIPC insurance limits. 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; three institutions at April 30, 2016 and 2015. 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.
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
April 30, 2016 and 2015
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.
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 was 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 the full amount of 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.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2016 and 2015
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.
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 income taxes, 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 and stock appreciation rights.
Fair Values of Financial Instruments:
Cash and cash equivalents, short-term credit obligations, long term debt and cash surrender value 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.
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
April 30, 2016 and 2015
The weighted average fair value of each option or stock appreciation right (“SAR”) 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
|
|
|
|
2016
|
|
|
2015
|
|
Expected volatility
|
|
|
35
|
%
|
|
|
35
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Risk-free interest rate
|
|
1.35% and 1.50
|
%
|
|
1.50% and 2.38
|
%
|
Expected lives
|
|
5.0 years
|
|
|
5.0 and 8.5 years
|
|
The expected life assumption was determined based on the Company’s historical experience as well as the term of recent SAR agreements. 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. 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 or SARs.
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 March 2016, the Financial Accounting Standards Board (“FASB”) amended the existing accounting standards for stock-based compensation, Accounting Standards Update (“ASU”) 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. The amendments impact several aspects of accounting for share-based payment transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
This guidance requires a mix of prospective, modified retrospective, and retrospective transition to all annual and interim periods presented and is effective for the Company beginning in fiscal 2018. The Company has not determined the full impact of implementation of this standard, but does not expect it will have a material effect on the Company’s financial condition or results of operations.
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842). The objective of the update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments of the ASU 2016-02 are effective for fiscal years beginning after December 31, 2018 and early adoption is permitted. The Company is currently evaluating the impact of this standard on our consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17 (“ASU 2015-17”),
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
. The amendments in ASU 2015-17 seek to simplify the presentation of deferred income taxes and require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early application permitted for all entities as of the beginning of an interim or annual reporting period. The Company has not determined the full impact of implementation of this standard, but believes it will not be material to net income. The Company believes that the main impact of adoption of the standard will be the reclassification of current deferred tax assets to an increase in noncurrent deferred tax assets for the period ending April 30, 2018.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2016 and 2015
In July 2015, the FASB issued ASU 2015-11,
Inventory
(Topic 330): Simplifying the Measurement of Inventory
(“ASU 2015-11”) which changes the measurement principle for inventory from the lower of cost or market to the lower of cost or net realizable value. ASU 2015-11 defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The new guidance must be applied on a prospective basis and is effective for periods beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the effect that the new guidance will have on its consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15
, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”),
which is effective for annual periods after December 15, 2016 and for annual periods and interim periods
thereafter. Early application is permitted. Under ASU 2014-15, entities will be required to formally assess their ability to continue as a going concern and provide disclosures under certain circumstances. While current practice regarding such disclosures is often guided by U.S. auditing standards, the new standard explicitly requires the assessment at interim and annual periods, and provides management with its own disclosure guidance. The standard can be adopted early. The company is currently assessing the impact that adopting these new assessment and disclosure requirements will have on its financial statements and footnote disclosures.
In May 2014, the FASB issued ASU No. 2014-09
, Revenue from Contracts with Customers (Topic 606)
. ASU 2014-09 eliminates most of the existing industry-specific revenue recognition guidance and significantly expands related disclosures. The required disclosures will include both quantitative and qualitative information about the amount, timing and uncertainty of revenue from contracts with customers and the significant judgments used. Entities can retrospectively apply ASU 2014-09 or use an alternative transition method. In July 2015, the FASB approved a one-year deferral of the effective date of this ASU. Although the amending ASU has not yet been issued, since it will be amended, this ASU is effective for public companies for annual reporting periods beginning on or after December 15, 2017 and for the Company, must be adopted for its fiscal year 2019 beginning on May 1, 2018. The Company is in the process of determining the effect that ASU 2014-09 may have on its financial statements
.
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,
|
|
|
|
2016
|
|
|
2015
|
|
Basic EPS Shares outstanding (weighted average)
|
|
|
8,727,874
|
|
|
|
8,610,950
|
|
Effect of Dilutive Securities
|
|
|
209,035
|
|
|
|
298,808
|
|
Diluted EPS Shares outstanding
|
|
|
8,936,909
|
|
|
|
8,909,758
|
|
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, 2016 and 2015, the number of excluded options and SARS were 388,625 and 271,500, respectively.
3.
Costs and Estimated Earnings in Excess of Billings
At April 30, 2016 and 2015, costs and estimated earnings in excess of billings, net, consist of the following:
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Costs and estimated earnings in excess of billings
|
|
$
|
12,460
|
|
|
$
|
14,057
|
|
Billings in excess of costs and estimated earnings
|
|
|
(83
|
)
|
|
|
(1,128
|
)
|
Net asset
|
|
$
|
12,377
|
|
|
$
|
12,929
|
|
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2016 and 2015
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, 2016 and 2015, revenue recognized under percentage of completion contracts was approximately $32.5 million and $46.8 million, respectively. If contract losses are anticipated, costs and estimated earnings in excess of billings are reduced for the full amount of such losses when they are determinable. Total anticipated contract losses at April 30, 2016 and 2015 were approximately $450,000 and $400,000, respectively.
4.
Inventories
Inventories at April 30, 2016 and 2015, respectively, consisted of the following (in thousands):
|
|
2016
|
|
|
2015
|
|
Raw Materials and Component Parts
|
|
$
|
25,110
|
|
|
$
|
24,274
|
|
Work in Progress
|
|
|
12,042
|
|
|
|
9,948
|
|
Finished Goods
|
|
|
4,126
|
|
|
|
4,017
|
|
|
|
$
|
41,278
|
|
|
$
|
38,239
|
|
As of April 30, 2016 and 2015, approximately $35.3 million and $32.0 million, respectively, of total inventory is located in the United States, approximately $5.0 million and $5.4 million, respectively, is located in Belgium and approximately $1.0 million and $0.8 million, respectively, is located in China. The company buys inventory in bulk quantities which may be used over significant time periods; due to its nature the inventory does not deteriorate.
5.
Property, Plant and Equipment and Leases
Property, plant and equipment at April 30, 2016 and 2015, consists of the following (in thousands):
|
|
2016
|
|
|
2015
|
|
Buildings and building improvements
|
|
$
|
5,509
|
|
|
$
|
5,224
|
|
Machinery, equipment and furniture
|
|
|
55,874
|
|
|
|
52,987
|
|
|
|
|
61,383
|
|
|
|
58,211
|
|
Less, accumulated depreciation
|
|
|
48,311
|
|
|
|
45,525
|
|
|
|
$
|
13,072
|
|
|
$
|
12,686
|
|
Depreciation and amortization expense for the years ended April 30, 2016 and 2015 was $2,660,000 and $2,828,000, respectively.
Maintenance and repairs charged to operations for the years ended April 30, 2016 and 2015 was approximately $611,000 and $1,017,000, respectively.
The Company leases its Long Island, New York headquarters building at an annual rent of $800,000 following the Company’s exercise of its option to renew the lease for a second 5-year period. 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 $40,000 through the end of the lease which expires in March 2018. The lease for the FEI-Asia facility is for a one-year term with monthly rent of $5,000 through February 2017. FEI-Zyfer leases office and manufacturing space encompassing 27,850 square feet. Monthly rental payments are currently $31,200 for the remaining 16 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 $1,000 per month.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2016 and 2015
Rent expense under operating leases was approximately $1.5 million for both fiscal years ended April 30, 2016 and 2015. The Company records rent expense on its New York building and FEI-Zyfer facility on the straight-line method over the lives of the respective leases. As a result, as of April 30, 2016 and 2015, the Company’s balance sheet includes deferred rent payable of approximately $214,000 and $290,000, respectively, which will be recognized over the respective rental periods.
Future noncancellable minimum lease payments required by the operating leases are as follows (in thousands):
Years ending
|
|
|
|
April 30,
|
|
Operating Leases
|
|
2017
|
|
$
|
1,713
|
|
2018
|
|
|
1,363
|
|
2019
|
|
|
600
|
|
Total future minimum lease payments
|
|
$
|
3,676
|
|
6.
Marketable Securities
The cost, gross unrealized gains, gross unrealized losses and fair market value of available-for-sale securities at April 30, 2016 and 2015 are as follows (in thousands):
|
|
April 30, 2016
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Fair
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Fixed income securities
|
|
$
|
3,407
|
|
|
$
|
121
|
|
|
$
|
(6
|
)
|
|
$
|
3,522
|
|
Equity securities
|
|
|
7,197
|
|
|
|
974
|
|
|
|
(582
|
)
|
|
|
7,589
|
|
|
|
$
|
10,604
|
|
|
$
|
1,095
|
|
|
$
|
(588
|
)
|
|
$
|
11,111
|
|
|
|
April 30, 2015
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Fair
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Fixed income securities
|
|
$
|
3,379
|
|
|
$
|
104
|
|
|
$
|
(16
|
)
|
|
$
|
3,467
|
|
Equity securities
|
|
|
7,018
|
|
|
|
834
|
|
|
|
(133
|
)
|
|
|
7,719
|
|
|
|
$
|
10,397
|
|
|
$
|
938
|
|
|
$
|
(149
|
)
|
|
$
|
11,186
|
|
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
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
April 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
467
|
|
|
$
|
(6
|
)
|
|
$
|
467
|
|
|
$
|
(6
|
)
|
Equity Securities
|
|
|
574
|
|
|
|
(18
|
)
|
|
|
2,232
|
|
|
|
(564
|
)
|
|
|
2,806
|
|
|
|
(582
|
)
|
|
|
$
|
574
|
|
|
$
|
(18
|
)
|
|
$
|
2,699
|
|
|
$
|
(570
|
)
|
|
$
|
3,273
|
|
|
$
|
(588
|
)
|
April 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities
|
|
$
|
96
|
|
|
$
|
(1
|
)
|
|
$
|
461
|
|
|
$
|
(15
|
)
|
|
$
|
557
|
|
|
$
|
(16
|
)
|
Equity Securities
|
|
|
3,323
|
|
|
|
(133
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
3,323
|
|
|
|
(133
|
)
|
|
|
$
|
3,419
|
|
|
$
|
(134
|
)
|
|
$
|
461
|
|
|
$
|
(15
|
)
|
|
$
|
3,880
|
|
|
$
|
(149
|
)
|
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2016 and 2015
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, 2016 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.
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,
|
|
|
|
2016
|
|
|
2015
|
|
Proceeds
|
|
$
|
1,267
|
|
|
$
|
7,271
|
|
Gross realized gains
|
|
$
|
147
|
|
|
$
|
571
|
|
Gross realized losses
|
|
$
|
(16
|
)
|
|
$
|
(5
|
)
|
Maturities of fixed income securities classified as available-for-sale at April 30, 2016 are as follows (at cost, in thousands):
Current
|
|
$
|
1,101
|
|
Due after one year through five years
|
|
|
516
|
|
Due after five years through ten years
|
|
|
1,790
|
|
|
|
$
|
3,407
|
|
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.
7.
Debt Obligations
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. Proceeds from the Facility will be used for working capital and to finance acquisitions. During the year ended April 30, 2015, the Company borrowed an additional $2.3 million under the Facility primarily to finance the acquisition of additional manufacturing equipment and repaid an aggregate of $6.4 million from its operating cash flow and as a result of redemptions of certain fixed income marketable securities.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2016 and 2015
The Company may make borrowings under the Facility, from either Tranche A or Tranche B or a combination of both, not to exceed $25.0 million. Pursuant to the Credit Agreement, the amount of Tranche A borrowings may not exceed the value of the Pledged Investments (as defined in the Credit Agreement). The amount of Tranche B borrowings may not exceed the lesser of (i) $15.0 million and (ii) the Borrowing Base (as defined in the Credit Agreement). Current outstanding borrowings under the Facility are all under Tranche A. The Facility is fully guaranteed by certain of the Company’s subsidiaries and is secured by, among other things, a pledge of substantially all personal property of the Company and certain of the Company’s subsidiaries.
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.
At April 30, 2016 and 2015, the rate was 1.1913% and 0.9305%, respectively, based on the one-month LIBOR rate.
The principal balance on the Note, along with any accrued and unpaid interest, is due and payable no later than June 5, 2018, which is the maturity date of the Facility. In addition, the Company is required to pay JPMorgan fees equal to 0.1% per annum on any unused portion of the Facility.
The Credit Agreement contains a number of affirmative and negative covenants, including limitations on the incurrence of additional debt, liens on property, acquisitions, loans and guarantees, mergers, consolidations, liquidations and dissolutions, asset sales, and distributions and other payments in respect of the Company’s capital stock. The Credit Agreement also contains certain events of default customary for credit facilities of this type, including nonpayment of principal or interest when due, material incorrectness of representations and warranties when made, breach of covenants, bankruptcy and insolvency, unstayed material judgment beyond specified periods, and acceleration or payment default of other material indebtedness. The Credit Agreement requires the Company to maintain, as of the end of each fiscal quarter, a funded debt to EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) ratio and, if there are any borrowings under Tranche B, an interest charge coverage ratio. The calculation of both ratios is defined in the Credit Agreement. For the year ended April 30, 2016, the Company met the required covenants for its borrowings under Tranche A.
The Company’s European subsidiaries have available 250,000 Euros (approximately $275,000 based on current rates of exchange between the dollar and the Euro) in a bank credit line to meet short-term cash flow requirements. As of April 30, 2016 and 2015, no amounts were outstanding under such line of credit. Borrowings under the bank credit line, if any, must be repaid within one year of receipt of funds. Interest on this credit line is at 1.0% over the EURO Interbank Offered rate (EURIBOR). At April 30, 2016 and 2015, the rate was 0.692% and 1.12% respectively, based on the one-month EURIBOR.
8.
Accrued Liabilities
Accrued liabilities at April 30, 2016 and 2015 consist of the following (in thousands):
|
|
2016
|
|
|
2015
|
|
Vacation and other compensation
|
|
$
|
1,683
|
|
|
$
|
1,633
|
|
Incentive compensation
|
|
|
677
|
|
|
|
1,302
|
|
Payroll taxes
|
|
|
1,254
|
|
|
|
1,012
|
|
Deferred revenue
|
|
|
640
|
|
|
|
720
|
|
Warranty reserve
|
|
|
617
|
|
|
|
617
|
|
Cost conversion
|
|
|
450
|
|
|
|
450
|
|
Commissions
|
|
|
252
|
|
|
|
407
|
|
Other
|
|
|
535
|
|
|
|
489
|
|
|
|
$
|
6,108
|
|
|
$
|
6,630
|
|
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2016 and 2015
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 other assets in the accompanying balance sheets. During the fiscal years ended April 30, 2016 and 2015, the Company acquired product from Morion in the aggregate amount of approximately $140,000 and $201,000, respectively, and the Company sold product to Morion in the aggregate amount of approximately $845,000 and $615,000, respectively. At April 30, 2016, accounts receivable included $33,000 due from Morion and $37,000 was payable to Morion.
On October 22, 2012, the Company entered into an agreement to license its rubidium oscillator production technology to Morion. The agreement required the Company to sell certain fully-depreciated production equipment previously 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. During the fiscal year ended April 30, 2016, sales to Morion included $375,000 for product and training services under this agreement. Per the amended agreement, the balance of $1 million for the transfer of the license will be due once the United States Department of State (“State Department”) approves the removal of certain provisions of the original agreement. The State Department has approved the technology transfer called for under the agreement.
On March 29, 2016, the Company renegotiated the $1 million dollar amendment under the original agreement dated October 22, 2012 to $602,000 due to the U.S. Government easing of export regulations. Of this amount $392,500 was billed and paid during FY 2016 and the balance of $210,000 will be billed during FY 2017.
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 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, 2016 and 2015. The other intangible assets were amortized over a three-year period from the date of acquisition. Amortization expense for the year ended April 30, 2015 was approximately $73,000. As of April 30, 2015 these intangible assets were fully amortized.
11.
Employee Benefit Plans
Profit Sharing Plan:
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, 2016 and 2015, the Company contributed 46,743 and 40,324 shares of common stock, respectively. The approximate value of these shares at the date of contribution was $498,000 in fiscal year 2016 and $485,000 in fiscal year 2015. 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 2016 and 2015, such transactions increased additional paid in capital by $283,000 and $302,000, respectively. As of April 30, 2016, all shares of the Company’s common stock held by the two plans were combined for an aggregate holding of 790,136 shares, which are allocated to the accounts of the individual participants.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2016 and 2015
On May 6, 2015, the ESOP Plan (see below) was merged into the Company’s profit sharing plan.
As of April 30, 2015, the profit sharing plan held an aggregate of 467,975 shares of the Company’s common stock allocated to the accounts of the individual participants.
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. Under these plans, the Company charged approximately $0.7 million and $1.3 million to selling and administrative expenses for the fiscal years ended April 30, 2016 and 2015, respectively.
Employee Stock Plans
:
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 generally expire ten years after the date of grant (the most recent SAR award expires in five years) and are subject to certain restrictions on transferability of the shares obtained on exercise. Under the Company’s 2005 Stock Award Plan (“Plan”) the Company provided 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.
Under the Plan, instruments granted under other plans which expire, are canceled, or are tendered in the exercise of such instruments, increase the shares available under the Plan.
As of April 30, 2013, a consultant, who is the son of the Company’s president, had been granted options to purchase 37,500 shares of Company stock under NQSO plans at a weighted average exercise price of $6.67. During the year ended April 30, 2015, the consultant elected cashless exercises of 20,000 shares at an exercise price of $6.67, resulting in a net issuance of 8,638 shares. As of April 30, 2015, the consultant has no outstanding stock options. At the beginning of fiscal year 2015, eligible employees had been granted options to purchase approximately 172,500 shares of which 95,000 options with a weighted average exercise price of $13.15 were outstanding and exercisable. During the year ended April 30, 2015, 57,000 options expired and were returned to the Plan. The remaining 38,000 shares were exercised by the employees using the cashless method resulting in the net issuance of 6,931 shares of Company stock. Total fiscal year 2015 cashless exercises of stock options under ISO and NQSO plans, including the consultant shares above, aggregated 58,000 shares. Accordingly, the Company issued 15,569 shares on exercise and returned 42,431 shares to the pool of available shares which may be used for future grants under the Plan.
As of April 30, 2016, eligible employees and directors have been granted SARS based on approximately 2,021,000 shares of Company stock, of which approximately 1,653,000 shares are outstanding and approximately 1,314,000 shares with a weighted average exercise price of $8.45 are exercisable. As of April 30, 2015, eligible employees and directors had been granted SARS based on approximately 1,950,000 shares of Company stock, of which approximately 1,603,000 shares were outstanding and approximately 1,131,000 shares with a weighted average exercise price of $8.27 were 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 Plan. During the year ended April 30, 2016, employees exercised SARS representing 19,500 shares of Company stock and received 5,736 shares of Company stock. The 13,764 share difference was returned to the pool of available shares and may be used for future grants. During the year ended April 30, 2015, employees exercised SARS representing 147,500 shares of Company stock and received 70,675 shares of Company stock. The 76,825 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
April 30, 2016 and 2015
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
and stock appreciation rights
activity for the years ended April 30:
|
|
Stock Options and Stock Appreciation Rights
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
Weighted-
|
|
Remaining
|
|
|
|
|
|
|
|
|
Average
|
|
Contractual
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
Term
|
|
Intrinsic Value
|
|
Outstanding – April 30, 2014
|
|
|
1,722,625
|
|
|
$
|
8.60
|
|
6.0 years
|
|
|
|
Granted
|
|
|
145,000
|
|
|
|
13.02
|
|
|
|
|
|
Exercised
|
|
|
(205,500
|
)
|
|
|
7.72
|
|
|
|
$
|
(1,133,640
|
)
|
Expired or Canceled
|
|
|
(59,000
|
)
|
|
|
14.32
|
|
|
|
|
|
|
Outstanding – April 30, 2015
|
|
|
1,603,125
|
|
|
$
|
8.90
|
|
5.8 years
|
|
|
|
|
Granted
|
|
|
72,000
|
|
|
|
12.30
|
|
|
|
|
|
|
Exercised
|
|
|
(19,500
|
)
|
|
|
9.15
|
|
|
|
$
|
(19,110
|
)
|
Expired or Canceled
|
|
|
(3,000
|
)
|
|
|
10.39
|
|
|
|
|
|
|
Outstanding – April 30, 2016
|
|
|
1,652,625
|
|
|
$
|
9.05
|
|
5.1 years
|
|
$
|
2,704,918
|
|
Exercisable
|
|
|
1,313,625
|
|
|
$
|
8.45
|
|
4.3 years
|
|
$
|
2,629,590
|
|
Available for future grants
|
|
|
16,336
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2016, total unrecognized compensation cost related to nonvested options and stock appreciation rights under the plans was approximately $1,094,000. These costs are expected to be recognized over a weighted average period of 2.3 years.
During the years ended April 30, 2016 and 2015, 151,500 and 244,625 shares, respectively, vested, the fair value of which was approximately $661,000 and $1,053,000, respectively. The weighted average grant date fair value of stock appreciation rights granted during the years ended April 30, 2016 and 2015, were approximately $4.06 and $4.45, 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 $265,000 and $394,000 for the years ended April 30, 2016 and 2015, respectively. Selling and administrative expenses include stock-based compensation expense of approximately $559,000 and $683,000 for the years ended April 30, 2016 and 2015, 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, 2016 and 2015, the Company realized $141,000 and $200,000 respectively, of tax benefits from the exercise of stock options and SARS.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2016 and 2015
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 year ended April 30, 2015 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 of an option for 30,000 shares at an exercise price of $14.76 expired during fiscal year 2015.
Restricted Stock Plan:
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, 2016 and 2015, 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 385,626 shares remain in the ESOP. On May 6, 2015, the ESOP plan was merged into the Company’s profit sharing plan.
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, 2016 and 2015 was approximately $959,000 and $1,038,000, respectively.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2016 and 2015
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.
12.
Income Taxes
The income before provision for income taxes consisted of (in thousands):
|
|
Year Ended April 30,
|
|
|
|
2016
|
|
|
2015
|
|
U.S.
|
|
$
|
4,011
|
|
|
$
|
6,201
|
|
Foreign
|
|
|
(1,936
|
)
|
|
|
(1,665
|
)
|
|
|
$
|
2,075
|
|
|
$
|
4,536
|
|
The provision for income taxes consists of the following (in thousands):
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
1,060
|
|
|
$
|
2,170
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
250
|
|
|
|
260
|
|
Current provision
|
|
|
1,310
|
|
|
|
2,430
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(150
|
)
|
|
|
(560
|
)
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
(90
|
)
|
|
|
(160
|
)
|
Deferred benefit
|
|
|
(240
|
)
|
|
|
(720
|
)
|
|
|
|
|
|
|
|
|
|
Total provision
|
|
$
|
1,070
|
|
|
$
|
1,710
|
|
The following table reconciles the reported income tax expense with the amount computed using the federal statutory income tax rate (in thousands):
|
|
2016
|
|
|
2015
|
|
Statutory Rate
|
|
$
|
705
|
|
|
$
|
1,542
|
|
State and local tax
|
|
|
85
|
|
|
|
(126
|
)
|
Valuation allowance on deferred tax assets
|
|
|
833
|
|
|
|
760
|
|
Effect of foreign operations
|
|
|
41
|
|
|
|
73
|
|
Nondeductible expenses
|
|
|
166
|
|
|
|
112
|
|
Domestic production activities deduction
|
|
|
(159
|
)
|
|
|
(190
|
)
|
Nontaxable life insurance cash value increase
|
|
|
(282
|
)
|
|
|
(119
|
)
|
Tax credits
|
|
|
(417
|
)
|
|
|
(191
|
)
|
Other items
|
|
|
98
|
|
|
|
(151
|
)
|
|
|
$
|
1,070
|
|
|
$
|
1,710
|
|
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2016 and 2015
The components of deferred taxes are as follows (in thousands):
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Employee benefits
|
|
$
|
8,310
|
|
|
$
|
7,400
|
|
Inventory
|
|
|
1,860
|
|
|
|
1,580
|
|
Accounts receivable
|
|
|
490
|
|
|
|
570
|
|
Tax credits
|
|
|
1,260
|
|
|
|
860
|
|
Other assets
|
|
|
220
|
|
|
|
270
|
|
Net operating loss carryforwards
|
|
|
3,600
|
|
|
|
3,230
|
|
Total deferred tax asset
|
|
|
15,740
|
|
|
|
13,910
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
200
|
|
|
|
270
|
|
Property, plant and equipment
|
|
|
750
|
|
|
|
890
|
|
Other liabilities
|
|
|
70
|
|
|
|
-
|
|
Deferred State Income Tax
|
|
|
600
|
|
|
|
-
|
|
Net deferred tax asset
|
|
|
14,120
|
|
|
|
12,750
|
|
Valuation allowance
|
|
|
(3,280
|
)
|
|
|
(2,390
|
)
|
Net deferred tax assets
|
|
$
|
10,840
|
|
|
$
|
10,360
|
|
The components of the deferred tax asset, by balance sheet account, were as follows (in thousands):
|
|
2016
|
|
|
2015
|
|
Deferred and prepaid income taxes
|
|
$
|
3,138
|
|
|
$
|
3,000
|
|
Deferred income taxes
|
|
|
7,702
|
|
|
|
7,360
|
|
Net deferred tax asset
|
|
$
|
10,840
|
|
|
$
|
10,360
|
|
A valuation allowance is provided when it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. We consider the level of historical income, scheduled reversal of temporary differences, tax planning strategies and projected future taxable income in determining whether a valuation allowance is warranted. The valuation allowance of $3.3 million as of April 30, 2016, is intended to provide for uncertainty regarding the ultimate realization of U.S. state investment tax credit carryovers and foreign net operating loss and tax credit carryovers. Based on these considerations, we believe it is more likely than not that we will realize the benefit of the net deferred tax asset of $10.8 million as of April 30, 2016, which is net of the valuation allowance.
The consolidated valuation allowance increased by approximately $890,000 during the year ended April 30, 2016. The change consists of an $830,000 deferred tax provision plus a foreign exchange adjustment and reclass of deferred state taxes of $60,000. For the year ended April 30, 2015, the change in valuation allowance was an increase of $270,000 which consists of the $760,000 deferred tax provision less a foreign exchange adjustment of $490,000.
At April 30, 2016, the Company has available approximately $6.4 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 $4.4 million which may be applied in annually limited amounts to offset future U.S.-sourced taxable income over the next 15 years. As of April 30, 2016, the Company has state investment tax credits and foreign research and development credits of $838,000 and $425,000, respectively. The state investment tax credit expires beginning in 2023 through 2031.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2016 and 2015
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. As such, the amount of unrecognized tax benefits at April 30, 2016 and April 30, 2015 were $0. As of April 30, 2016 and April 30, 2015 the Company had $0, accrued for the payment of interest and penalties. It is difficult to predict or estimate the change in the Company’s unrecognized tax benefits over the next twelve months as a result of the progression of ongoing tax audits or other events. The Company believes, however, that there should be no change during the next twelve months.
The Company is subject to taxation in the U.S. and various state, local and foreign jurisdictions. Net operating losses generated by domestic and foreign entities in closed years and utilized in open years are subject to adjustment by the tax authorities.
13.
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 historically minimal sales to outside customers. Beginning in late fiscal year 2014, FEI-Asia began shipping higher volumes of product to third parties as a contract manufacturer. 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.
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.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2016 and 2015
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):
|
|
2016
|
|
|
2015
|
|
Net revenues:
|
|
|
|
|
|
|
FEI-NY
|
|
$
|
44,238
|
|
|
$
|
61,905
|
|
Gillam-FEI
|
|
|
5,942
|
**
|
|
|
8,026
|
**
|
FEI-Zyfer
|
|
|
12,286
|
|
|
|
9,215
|
|
Less intersegment revenues
|
|
|
(2,072
|
)**
|
|
|
(2,582
|
)**
|
Consolidated revenues
|
|
$
|
60,394
|
|
|
$
|
76,564
|
|
Operating profit (loss):
|
|
|
|
|
|
|
|
|
FEI-NY
|
|
$
|
1,228
|
|
|
$
|
4,809
|
|
Gillam-FEI
|
|
|
(1,451
|
)**
|
|
|
(1,706
|
)**
|
FEI-Zyfer
|
|
|
1,996
|
|
|
|
961
|
|
Corporate
|
|
|
(471
|
)
|
|
|
(389
|
)
|
Consolidated operating profit
|
|
$
|
1,302
|
|
|
$
|
3,675
|
|
**For fiscal years ended April 30, 2016 and 2015, includes Gillam-FEI intersegment sales of $847,000 and $1.5 million, respectively, to the
FEI-NY
and FEI-Zyfer segments. Such sales consist principally of design and development of automatic test equipment for satellite hardware production and manufacture of assemblies and units of a wireline synchronization product for ultimate production and sale in the U.S. In the Gillam-FEI segment, these transactions reduced the operating loss in each of the fiscal years.
|
|
2016
|
|
|
2015
|
|
Identifiable assets:
|
|
|
|
|
|
|
FEI-NY (approximately $2.5 and $3 million in China)
|
|
$
|
62,992
|
|
|
$
|
63,541
|
|
Gillam-FEI (all in Belgium or France)
|
|
|
9,610
|
|
|
|
9,878
|
|
FEI-Zyfer
|
|
|
13,275
|
|
|
|
11,088
|
|
less intersegment receivables
|
|
|
(7,651
|
)
|
|
|
(8,775
|
)
|
Corporate
|
|
|
41,988
|
|
|
|
42,093
|
|
Consolidated identifiable assets
|
|
$
|
120,214
|
|
|
$
|
117,825
|
|
Depreciation and amortization (allocated):
|
|
|
|
|
|
|
FEI-NY
|
|
$
|
2,338
|
|
|
$
|
2,562
|
|
Gillam-FEI
|
|
|
199
|
|
|
|
208
|
|
FEI-Zyfer
|
|
|
160
|
|
|
|
159
|
|
Corporate
|
|
|
15
|
|
|
|
15
|
|
Consolidated depreciation and amortization expense
|
|
$
|
2,712
|
|
|
$
|
2,944
|
|
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2016 and 2015
Major Customers
The Company's products are sold to both commercial and governmental customers. For the years ended April 30, 2016 and 2015, approximately 60% and 47% 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 2016, sales to four customers of the FEI-NY segment aggregated $30.7 million or 69% of that segment’s total sales. Two of these customers also exceeded 10% of the Company’s consolidated revenues. During the year ended April 30, 2016, 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 2015, sales to three customers of the FEI-NY segment aggregated $33.1 million or 53% 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, 2015, 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.
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)
|
|
|
|
2016
|
|
|
2015
|
|
Belgium
|
|
$
|
3,559
|
|
|
$
|
3,971
|
|
France
|
|
|
2,202
|
|
|
|
10,937
|
|
China
|
|
|
1,927
|
|
|
|
4,493
|
|
Israel
|
|
|
1,139
|
|
|
|
836
|
|
Russia
|
|
|
853
|
|
|
|
638
|
|
Germany
|
|
|
342
|
|
|
|
1,076
|
|
Other
|
|
|
1,507
|
|
|
|
1,610
|
|
|
|
$
|
11,529
|
|
|
$
|
23,561
|
|
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,
|
|
|
|
2016
|
|
|
2015
|
|
Balance at beginning of year
|
|
$
|
617
|
|
|
$
|
617
|
|
Warranty costs incurred
|
|
|
(322
|
)
|
|
|
(296
|
)
|
Product warranty accrual
|
|
|
322
|
|
|
|
296
|
|
Balance at end of year
|
|
$
|
617
|
|
|
$
|
617
|
|
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2016 and 2015
15.
Other Comprehensive Income (Loss)
Changes in Accumulated Other Comprehensive Income (“AOCI”) by component and reclassifications out of AOCI are as follows (in thousands):
|
|
Change in
|
|
|
Foreign
|
|
|
|
|
|
|
Market Value
|
|
|
Currency
|
|
|
|
|
|
|
of
Marketable
|
|
|
Translation
|
|
|
|
|
|
|
Securities
|
|
|
Adjustment
|
|
|
Total
|
|
Balance April 30, 2014, net of taxes
|
|
|
|
|
$
|
1,016
|
|
|
$
|
2,998
|
|
|
$
|
4,014
|
|
Items of other comprehensive income (loss)
before reclassification, pretax
|
|
|
|
|
|
519
|
|
|
|
(1,093
|
)
|
|
|
(574
|
)
|
Tax effect
|
|
|
|
|
|
(176
|
)
|
|
|
-
|
|
|
|
(176
|
)
|
Items of other comprehensive income (loss)
before reclassification, net of taxes
|
|
|
|
|
|
343
|
|
|
|
(1,093
|
)
|
|
|
(750
|
)
|
Reclassification adjustments, pretax **
|
|
|
(566
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect
|
|
|
192
|
|
|
|
(374
|
)
|
|
|
-
|
|
|
|
(374
|
)
|
Total other comprehensive income (loss), net of taxes
|
|
|
|
|
|
|
(31
|
)
|
|
|
(1,093
|
)
|
|
|
(1,124
|
)
|
Balance April 30, 2015, net of taxes
|
|
|
|
|
|
|
985
|
|
|
|
1,905
|
|
|
|
2,890
|
|
Items of other comprehensive income (loss)
before reclassification, pretax
|
|
|
|
|
|
|
(150
|
)
|
|
|
(753
|
)
|
|
|
(903
|
)
|
Tax effect
|
|
|
|
|
|
|
51
|
|
|
|
-
|
|
|
|
51
|
|
Items of other comprehensive income (loss)
before reclassification, net of taxes
|
|
|
|
|
|
|
(99
|
)
|
|
|
(753
|
)
|
|
|
(852
|
)
|
Reclassification adjustments, pretax **
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect
|
|
|
57
|
|
|
|
(74
|
)
|
|
|
-
|
|
|
|
(74
|
)
|
Total other comprehensive income (loss), net of taxes
|
|
|
|
|
|
|
(173
|
)
|
|
|
(753
|
)
|
|
|
(926
|
)
|
Balance April 30, 2016, net of taxes
|
|
|
|
|
|
$
|
812
|
|
|
$
|
1,152
|
|
|
$
|
1,964
|
|
**The reclassification adjustments represent net realized gains on the sale or redemption of available-for-sale marketable securities that were reclassified from AOCI to Other income (expense), net.