Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE A – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management of Frequency Electronics, Inc. (the “Company”), the accompanying unaudited condensed consolidated interim financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly, in all material respects, the consolidated financial position of the Company as of July 31, 2018 and the results of its operations and cash flows for the three months ended July 31, 2018 and 2017. The April 30, 2018 condensed consolidated balance sheet was derived from audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended April 30, 2018, filed on July 30, 2018, and the financial statements and notes thereto. The results of operations for such interim periods are not necessarily indicative of the operating results for the full fiscal year.
NOTE B – DISCONTINUED OPERATIONS
In December 2016, the Company entered into a contingent share purchase agreement with certain foreign parties with respect to a potential sale of Gillam-FEI s.a., the Company’s Belgian subsidiary (“Gillam”). However, these parties did not perform their obligations under that agreement, and the Company continued to negotiate with other parties with respect to a potential sale. In April 2017, the Company decided to sell its Gillam business as soon as practicable. Accordingly, the Company determined that the assets and liabilities of this reportable segment met the discontinued operations criteria as defined in U.S. GAAP in the quarter ended April 30, 2017. On April 26, 2018, the Company sold Gillam to a European entity in a stock purchase agreement for $1.0 million in cash, which was received on April 27, 2018, and a note payable in three years for an additional $1.0 million. The loss recorded due to the sale of Gillam was approximately $359,000, which represented the carrying amount of the investment on FEI-NY’s books less the retained earnings and remaining Gillam equity value reduced by the cash received and the value of the note receivable. As such Gillam’s results have been classified as discontinued operations in the accompanying Consolidated Statements of Operations and Comprehensive (Loss) Income for fiscal 2018.
Summarized operating results for the Gillam discontinued operations, for the three months ended July 31, 2017 were as follows:
|
|
July 31,
|
|
|
|
2017
|
|
|
|
(UNAUDITED)
|
|
|
|
(In thousands except par value)
|
|
Revenues
|
|
$
|
1,012
|
|
Cost of revenues
|
|
|
716
|
|
Gross Margin
|
|
|
296
|
|
Selling and administrative expenses
|
|
|
357
|
|
Research and development expenses
|
|
|
150
|
|
Operating Loss
|
|
|
(211
|
)
|
Other income (expense):
|
|
|
|
|
Other income (expense), net
|
|
|
(1
|
)
|
Loss before provision for income taxes
|
|
|
(212
|
)
|
Provision for income taxes
|
|
|
(4
|
)
|
Net loss
|
|
$
|
(216
|
)
|
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE C – EARNINGS PER SHARE
Reconciliation of the weighted average shares outstanding for basic and diluted Earnings Per Share were as follows:
|
|
Three months ended July 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,876,416
|
|
|
|
8,826,026
|
|
Effect of dilutive securities
|
|
|
114,055
|
|
|
|
141,281
|
|
Diluted
|
|
|
8,990,471
|
|
|
|
8,967,307
|
|
The computation of diluted Earnings Per Share for the three months ending July 31, 2018 and 2017 excludes those options and stock appreciation rights (“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. The number of excluded options and SARS were:
|
|
Three months ended July 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Outstanding options and SARS excluded
|
|
|
1,129,000
|
|
|
|
893,500
|
|
NOTE D – COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS, NET
At July 31, 2018 and April 30, 2018, costs and estimated earnings in excess of billings, net, consisted of the following:
|
|
July 31, 2018
|
|
|
April 30, 2018
|
|
|
|
(In thousands)
|
|
Costs and estimated earnings in excess of billings
|
|
$
|
8,042
|
|
|
$
|
5,266
|
|
Billings in excess of costs and estimated earnings
|
|
|
(1,310
|
)
|
|
|
(172
|
)
|
Net asset
|
|
$
|
6,732
|
|
|
$
|
5,094
|
|
Such amounts represent revenue recognized on long-term contracts that had not been billed at the balance sheet dates or represent a liability for amounts billed in excess of the revenue recognized. Amounts are billed to customers pursuant to contract terms, whereas the related revenue is recognized on the percentage of completion basis at the measurement date. For the most part, 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 a percentage of completion basis. During three months ended July 31, 2018 and 2017, revenue recognized under percentage of completion contracts was approximately $9.3 million and $6.4 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 contract losses at July 31, 2018 were approximately $70,000. There were no contract losses for the same fiscal 2018 period.
NOTE E – TREASURY STOCK TRANSACTIONS
During three months period ended July 31, 2018, the Company made contributions of 14,339 shares of its common stock held in treasury to the Company’s profit sharing plan and trust under Section 401(k) of the Internal Revenue Code. Such contributions are in accordance with the Company’s discretionary match of employee voluntary contributions to this plan.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE F – INVENTORIES
Inventories, which are reported at the lower of cost or net realizable value, consisted of the following:
|
|
J
ul
y 31, 2018
|
|
|
April 30, 201
8
|
|
|
|
(In thousands)
|
|
|
|
|
|
Raw Materials and Component Parts
|
|
$
|
15,108
|
|
|
$
|
16,206
|
|
Work in Progress
|
|
|
8,540
|
|
|
|
8,216
|
|
Finished Goods
|
|
|
2,693
|
|
|
|
1,764
|
|
|
|
$
|
26,341
|
|
|
$
|
26,186
|
|
As of July 31, 2018 and April 30, 2018, approximately $25.5 million and $25.2 million, respectively, of total inventory was located in the United States and $0.9 million and $1.0 million, respectively, was located in China.
NOTE G – SEGMENT INFORMATION
The Company operates under two reportable segments based on the geographic locations of its subsidiaries:
|
(1)
|
FEI-NY – operates out of New York and its operations consist principally of precision time and frequency control products used in three principal markets- 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. 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.
|
|
(2)
|
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 U. S. market.
|
The Company’s management measures segment performance based on total revenues and profits generated by each geographic location rather than on the specific types of products, customers or end-users. Consequently, the Company determined that the segments indicated above most appropriately reflect the way the Company’s management views the business.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The tables below present information about reported segments with reconciliation of segment amounts to consolidated amounts as reported in the statement of operations or the balance sheet for each of the periods (in thousands):
|
|
Three months ended July 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
201
8
|
|
|
201
7
|
|
Revenues:
|
|
|
|
|
|
|
|
|
FEI-NY
|
|
$
|
8,577
|
|
|
$
|
9,160
|
|
FEI-Zyfer
|
|
|
2,561
|
|
|
|
4,272
|
|
less intercompany revenues
|
|
|
(127
|
)
|
|
|
(1,409
|
)
|
Consolidated revenues
|
|
$
|
11,011
|
|
|
$
|
12,023
|
|
Operating profit:
|
|
|
|
|
|
|
|
|
FEI-NY
|
|
$
|
(215
|
)
|
|
$
|
(400
|
)
|
FEI-Zyfer
|
|
|
386
|
|
|
|
691
|
)
|
Corporate
|
|
|
(86
|
)
|
|
|
(111
|
)
|
Consolidated operating profit
|
|
$
|
85
|
|
|
$
|
180
|
|
|
|
July 31, 201
8
|
|
|
April 30, 201
8
|
|
Identifiable assets:
|
|
|
|
|
|
|
|
|
FEI-NY (approximately $1.5 and $1.7 million in China in fiscal years 2019 and 2018, respectively)
|
|
$
|
57,248
|
|
|
$
|
55,181
|
|
FEI-Zyfer
|
|
|
8,562
|
|
|
|
8,168
|
|
less intersegment balances
|
|
|
(11,180
|
)
|
|
|
(11,888
|
)
|
Corporate
|
|
|
28,903
|
|
|
|
32,123
|
|
Consolidated identifiable assets
|
|
$
|
83,533
|
|
|
$
|
83,584
|
|
NOTE H – INVESTMENT IN MORION, INC.
The Company has an investment in Morion, Inc., (“Morion”) a privately-held Russian company, which manufactures high precision quartz resonators and crystal oscillators. The Company’s investment consists of 4.6% of Morion’s outstanding shares, accordingly, the Company accounts for its investment in Morion on the cost basis. This investment is included in other assets in the accompanying balance sheets. During the three months ended July 31, 2018 and 2017, the Company acquired product from Morion in the aggregate amount of approximately $68,000 and $64,000, respectively, and the Company sold product and training services to Morion in the aggregate amount of approximately $2,000 and $182,000, respectively, included in revenues in the statement of operations as part of the FEI-NY segment. At July 31, 2018, approximately $4,000 was payable to Morion. At July 31, 2018 there was no receivable related to Morion. During the three months ended July 31, 2018, the Company did not receive a dividend from Morion. During the three months ended July 31, 2017, the Company received a dividend from Morion in the amount of approximately $51,000 included in other income (expense) in the statement of operations as part of the FEI-NY segment.
Morion operates as a subsidiary of Gazprombank, a state-owned Russian bank. On July 16, 2014, after the Company’s investment in Morion, Gazprombank became subject to the U. S. Department of Treasury’s prohibition against U. S. persons from providing it with new financing.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE I – FAIR VALUE OF FINANCIAL INSTRUMENTS
The cost, gross unrealized gains, gross unrealized losses, and fair market value of available-for-sale securities at July 31, 2018 and April 30, 2018, respectively, were as follows (in thousands):
|
|
J
ul
y 31, 2018
|
|
|
|
Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Fair Market Value
|
|
Fixed income securities
|
|
$
|
7,311
|
|
|
$
|
11
|
|
|
$
|
(144
|
)
|
|
$
|
7,178
|
|
|
|
April 30, 2018
|
|
|
|
Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Fair Market Value
|
|
Fixed income securities
|
|
$
|
6,274
|
|
|
$
|
10
|
|
|
$
|
(135
|
)
|
|
$
|
6,149
|
|
The following table presents the fair value and unrealized losses, aggregated by investment type and length of time that individual securities have been in a continuous unrealized loss position (in thousands):
|
|
Less than 12 months
|
|
|
12 Months or more
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
July 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities
|
|
$
|
6,054
|
|
|
$
|
(144
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,054
|
|
|
$
|
(144
|
)
|
April 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities
|
|
$
|
5,334
|
|
|
$
|
(135
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,334
|
|
|
$
|
(135
|
)
|
The Company regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. The Company does not believe that its investments in marketable securities with unrealized losses at July 31, 2018 were other-than-temporary due to market volatility of the security’s fair value, analysts’ expectations, and the Company’s ability to hold the securities for a period of time sufficient to allow for any anticipated recoveries in market value.
During the three months ended July 31, 2018 the Company sold or redeemed available-for-sale securities in the amounts of $595,000, with no material losses. During the three months ended July 31, 2017, the Company sold or redeemed available-for-sale securities in the amount $6.3 million, realizing gains of approximately $1.0 million.
Maturities of fixed income securities classified as available-for-sale at July 31, 2018 were as follows (at cost, in thousands):
Current
|
|
$
|
916
|
|
Due after one year through five years
|
|
|
2,557
|
|
Due after five years through ten years
|
|
|
3,838
|
|
|
|
$
|
7,311
|
|
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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; and
- Inputs that are derived principally from or corroborated by observable market data by correlation or
other means.
Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. All of the Company’s investments in marketable securities are valued on a Level 1 basis.
NOTE J – RECENT ACCOUNTING PRONOUNCEMENTS
In January 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2017-04,
Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”), which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Under ASU 2017-04 goodwill impairment will be tested by comparing the fair value of a reporting unit with its carrying amount, and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new guidance must be applied on a prospective basis and is effective for periods beginning after December 15, 2019, with early adoption permitted. The Company will not be adopting ASU 2017-04 early, and is in the process of determining the effect that ASU 2017-04 may have, however, the Company expects the new standard will likely not have a material effect on its financial statements.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(“ASU 2016-13”) which replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance is effective for fiscal years beginning after December 15, 2019. The Company is evaluating the effect, if any, the update will have on the financial statements when adopted in fiscal year 2021.
In February 2016, the FASB issued ASU No. 2016-02
Leases (Topic 842
) (“ASU 2016-02”). The objective of the update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The standard requires a modified retrospective transition approach for existing leases. The amendments of ASU 2016-02 are effective for fiscal years beginning after December 31, 2018 and early adoption is permitted. The Company does not intend to adopt this update early and is currently re-evaluating the impact of this standard on its consolidated financial statements, due to the new lease amendment dated July 25, 2018, for the Company’s headquarters in New York, when adopted beginning in fiscal 2020.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Newly Adopted Accounting Standards
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“ASU 2014-09”), as amended, which establishes new guidance for revenue recognition. ASU 2014-09 eliminates most of the existing industry-specific revenue recognition guidance and significantly expands related disclosures. Additionally, it supersedes some cost guidance in Subtopic 605-35,
Revenue Recognition-Construction-Type and Production-Type Contracts
, and creates a new Subtopic 340-40,
Other Assets and Deferred Costs-Contracts with Customers
. The Company determines revenue recognition through the following steps: identification of the contract, or contracts, with the customer; identification of the performance obligations in the contract; determination of the transaction price; allocation of the transaction price to the performance obligations in the contract; and recognize revenue when, or as, the entity satisfies a performance obligation. The core principle of the guidance is that the Company will recognize revenue upon the transfer of the promised goods and services to its customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods and services. The new guidance requires significant additional judgement and estimation (as compared to the previous guidance) that may include, but is not limited to, identifying performance obligations and estimating the amount of variable consideration, if any, to include in the transaction price, and allocation of the transaction price to the performance obligations. The new standard allows for two methods of adoption, either by (i) retrospectively to each prior reporting period presented (“full retrospective method”) or (ii) retrospectively with the cumulative effect of initially applying the new guidance recognized at the date of initial application (“modified-retrospective method”). The Company adopted ASU 2014-09 in the first quarter of fiscal 2019 using the modified-retrospective method, which resulted in a cumulative effect increase of $484,000, including the adoption of ASC 340-40 as noted below, as of the date of adoption on May 1, 2018, to retained earnings. The adoption of ASU 2014-09 effected all new and open contracts as of the adoption date.
In connection with the adoption of Topic 606 on May 1, 2018, the Company also adopted the guidance in ASC 340-40,
Other Assets and Deferred Costs - Contracts with Customers
(“ASC 340-40”), with respect to capitalization and amortization of incremental costs of obtaining a contract. The new cost guidance requires the capitalization of all incremental costs incurred to obtain a contract with a customer that it would not have incurred if the contract had not been obtained, provided it expects to recover the costs. The Company expects that sales commissions as a result of obtaining customer contracts are recoverable, and therefore the Company defers and capitalizes them as contract costs. As a result of this new guidance, the Company capitalizes sales commissions for which the expected amortization period is greater than one year. The Company classifies the unamortized portion of deferred commissions as current or noncurrent assets based upon the timing of when the Company expects to recognize the expense. The current and noncurrent portion of deferred commissions are included in prepaid expenses and other current assets, respectively, in the Company’s Condensed Consolidated Balance Sheet. Adoption of ASC 340-40 resulted in a cumulative effect adjustment of $87,000 to total assets, $109,000 to total liabilities, and a $22,000 reduction to retained earnings, as of the date of adoption, on May 1, 2018.
The Company’s new accounting policies as a result of adopting ASU 2014-09 are discussed below.
Revenue Recognition
Revenue is recognized when a performance obligation is satisfied, which is when the expected goods or services are transferred to the customer, in an amount that reflects the consideration to which the Company expects to receive. A performance obligation is a distinct product or service that is transferred to the customer based on the contract. The transaction price is allocated to each performance obligation and is recognized as revenue upon satisfaction of that performance obligation. The company derives revenue from contracts with customers by units sold with specific specifications and frequencies that are used by a specific customer and contracts where the end user is the government. The Company’s contracts typically include multiple performance obligations which are satisfied either by shipped projects or the completion of milestones as defined in the contract. The transaction price is allocated either (i) based on the sale price of each item shipped or (ii) as defined by the milestones stated in the contract.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Revenues under larger, long-term contracts which generally require billings based on achievement of milestones rather than delivery of product, are reported in operating results using the POC method. On fixed-price contracts, which are typical for commercial and U.S. Government satellite programs and other long-term U.S. Government projects, and which require initial design and development of the product, revenue is recognized on the cost-to-cost method. Under this method, revenue is recorded based upon the ratio that incurred costs bear to total estimated contract costs with related cost of sales recorded as the costs are incurred. Each month management reviews estimated contract costs through a process of aggregating actual costs incurred and estimating additional costs to completion based upon the current available information and status of the contract. The effect of any change in the estimated gross margin rate for a contract is reflected in revenues in the period in which the change is known. Provisions for the full amount of anticipated losses on contracts are made in the period in which they become determinable.
On production-type orders, revenue is recorded as units are delivered with the related cost of sales recognized on each shipment based upon a percentage of estimated final program costs. Changes in job performance on long-term contracts and production-type orders may result in revisions to costs and income and are recognized in the period in which revisions are determined to be required. Provisions for anticipated losses on customer orders are made in the period in which they become determinable.
For customer orders in the Company’s FEI-Zyfer segment or smaller contracts or orders in the FEI-NY segment, sales of products and services to customers are reported in operating results based upon (i) shipment of the product or (ii) performance of the services pursuant to terms of the customer order. When payment is contingent upon customer acceptance of the installed system, revenue is deferred until such acceptance is received and installation completed.
In connection with the adoption of Topic 606, there were changes to the timing of the Company’s revenue recognition associated with the significant portion of our business that was not being accounted for as percentage of completion in prior years for contracts where the end customer was the U.S. Government. These production-type contracts under which revenue was previously recorded as Passage of Title (“POT”) are currently being recognized as Percentage of Completion (“POC”) following adoption of this ASU. As a result, the Company will begin recognizing revenue earlier under these contracts. The Company’s products generally carry a one-year warranty, but may vary based on the contract terms.
Significant judgment is used in evaluating the financial information for certain contracts related to the adoption of this ASU to determine an appropriate budget and estimated cost. The Company evaluates this information continuously and bases its judgments on historical experience, design specifications, and expected costs for material and labor.
Practical Expedients
The Company expenses sales commissions as sales and marketing expenses in the period they are incurred if the expected amortization period is one year or less.
The Company expenses costs, other than sales commissions, to obtain a contract in the period for which they are incurred as these amounts would have been incurred even if the contract had not been obtained.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Disaggregation of Revenue
Total revenue related to the adoption ASU 2014-09 and recognized over time as POC was approximately $9.3 million of the $11.0 million reported for the three months ended July 31, 2018. The amounts by segment are as follows:
|
|
July 31, 2018
|
|
|
|
(In thousands)
|
|
|
|
POC Revenue
|
|
|
POT Revenue
|
|
|
Total Revenue
|
|
FEI-NY
|
|
$
|
8,079
|
|
|
$
|
498
|
|
|
$
|
8,577
|
|
FEI-Zyfer
|
|
|
1,175
|
|
|
|
1,386
|
|
|
|
2,561
|
|
Intersegment
|
|
|
(7
|
)
|
|
|
(120
|
)
|
|
|
(127
|
)
|
Revenue
|
|
$
|
9,247
|
|
|
$
|
1,764
|
|
|
$
|
11,011
|
|
The cumulative effect of changes made to the Condensed Consolidated May 1, 2018 Balance Sheet was as follows (in thousands):
|
|
Balance at
April 30, 2018
|
|
|
Adjustments
|
|
|
|
Balance at
May 1, 2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings, net
|
|
$
|
5,094
|
|
|
$
|
1,435
|
|
(a)
|
|
$
|
6,529
|
|
Inventories, net
|
|
|
26,186
|
|
|
|
(929
|
)
|
(b)
|
|
|
25,257
|
|
Prepaid expenses and other
|
|
|
1,050
|
|
|
|
77
|
|
(c)
|
|
|
1,127
|
|
Total current assets
|
|
|
52,075
|
|
|
|
583
|
|
|
|
|
52,658
|
|
Other assets
|
|
|
2,850
|
|
|
|
10
|
|
(d)
|
|
|
2,860
|
|
Total assets
|
|
|
83,584
|
|
|
|
593
|
|
|
|
|
84,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
3,416
|
|
|
$
|
97
|
|
(e)
|
|
$
|
3,513
|
|
Total current liabilities
|
|
|
5,257
|
|
|
|
97
|
|
|
|
|
5,354
|
|
Deferred rent and other liabilities
|
|
|
1,524
|
|
|
|
12
|
|
(f)
|
|
|
1,536
|
|
Total liabilities
|
|
|
20,322
|
|
|
|
109
|
|
|
|
|
20,431
|
|
(Accumulated deficit) Retained Earnings
|
|
|
(65
|
)
|
|
|
484
|
|
(g)
|
|
|
419
|
|
Total stockholders’ equity
|
|
|
63,262
|
|
|
|
484
|
|
|
|
|
63,746
|
|
Total liabilities and stockholders’ equity
|
|
|
83,584
|
|
|
|
593
|
|
|
|
|
84,177
|
|
Notes:
(a) Adjustment to unbilled accounts receivable for additional revenue recognized for which amounts have not been invoiced due to adoption of Topic 606
(b) Adjustment for additional allocated inventory costs related to additional revenue recognized due to adoption of Topic 606
(c) Adjustment for short-term capitalization of sales commissions, net of amortized amounts, due to adoption of ASC 340-40
(d) Adjustment for long-term capitalization of sales commissions, net of amortized amounts, due to adoption of ASC 340-40
(e) Adjustment to record short-term liability of sales commissions, net of amounts paid, due to adoption of ASC 340-40
(f) Adjustment to record long-term liability of sales commissions, net of amounts paid, due to adoption of ASC 340-40
(g) The cumulative effect of initially adopting Topic 606 and ASC 340-40 using the modified-retrospective method as an adjustment to the beginning balance of (Accumulated deficit) Retained earnings.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The impact of adopting the standard on the Company’s consolidated financial statements for the three months ended July 31, 2018 were as follows (in thousands):
Condensed Consolidated Balance Sheet
|
|
As Reported
|
|
|
Adjustments
|
|
|
|
Balance
s
Without
Adoption of ASU 2014-09
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings, net
|
|
$
|
6,732
|
|
|
$
|
2,246
|
|
(a)
|
|
$
|
4,486
|
|
Inventories, net
|
|
|
26,341
|
|
|
|
(1,155
|
)
|
(b)
|
|
|
27,496
|
|
Prepaid expenses and other
|
|
|
1,247
|
|
|
|
62
|
|
(c)
|
|
|
1,185
|
|
Total current assets
|
|
|
52,059
|
|
|
|
1,153
|
|
|
|
|
50,906
|
|
Other assets
|
|
|
2,733
|
|
|
|
2
|
|
(d)
|
|
|
2,731
|
|
Total assets
|
|
|
83,533
|
|
|
|
1,155
|
|
|
|
|
82,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
3,174
|
|
|
|
84
|
|
(e)
|
|
|
3,090
|
|
Total current liabilities
|
|
|
4,438
|
|
|
|
84
|
|
|
|
|
4,354
|
|
Deferred rent and other liabilities
|
|
|
1,500
|
|
|
|
12
|
|
(f)
|
|
|
1,488
|
|
Total liabilities
|
|
|
19,564
|
|
|
|
96
|
|
|
|
|
19,468
|
|
Retained Earnings (Accumulated deficit)
|
|
|
449
|
|
|
|
1,059
|
|
(g)
|
|
|
(610
|
)
|
Total stockholders’ equity
|
|
|
63,969
|
|
|
|
1,059
|
|
|
|
|
62,910
|
|
Total liabilities and stockholders’ equity
|
|
|
83,533
|
|
|
|
1,155
|
|
|
|
|
82,378
|
|
Notes:
(a) Cumulative adjustment to unbilled accounts receivable for additional revenue recognized for which amounts have not been invoiced due to adoption of Topic 606
(b) Cumulative adjustment for additional allocated inventory costs related to additional revenue recognized due to adoption of Topic 606
(c) Cumulative adjustment for short-term capitalization of sales commissions, net of amortized amounts, due to adoption of ASC 340-40
(d) Cumulative adjustment for long-term capitalization of sales commissions, net of amortized amounts, due to adoption of ASC 340-40
(e) Cumulative adjustment to record short-term liability of sales commissions, net of amounts paid, due to adoption of ASC 340-40
(f) Cumulative adjustment to record long-term liability of sales commissions, net of amounts paid, due to adoption of ASC 340-40
(g) The cumulative effect of initially adopting and adjustment for the three months ended July 31, 2018 for Topic 606 and ASC 340-40 using the modified-retrospective method as an adjustment to the balance of Retained earnings (Accumulated deficit).
Condensed Consolidated Statement of Operations
|
|
As Reported
|
|
|
Adjustments
|
|
|
|
Balance
s
Without
Adoption of
ASU 2014-09
|
|
Revenues
|
|
$
|
11,011
|
|
|
$
|
811
|
|
|
|
$
|
10,200
|
|
Cost of revenues
|
|
|
6,737
|
|
|
|
226
|
|
|
|
|
6,511
|
|
Gross profit
|
|
|
4,274
|
|
|
|
585
|
|
|
|
|
3,689
|
|
Selling and administrative expenses
|
|
|
2,540
|
|
|
|
10
|
|
(a)
|
|
|
2,530
|
|
Operating profit (loss)
|
|
|
85
|
|
|
|
575
|
|
|
|
|
(490
|
)
|
Income (loss) before provision for income taxes
|
|
|
38
|
|
|
|
575
|
|
|
|
|
(537
|
)
|
Net income (loss)
|
|
|
31
|
|
|
|
575
|
|
|
|
|
(544
|
)
|
Note:
(a) Additional expense related the amortization of sales commissions due to the adoptions of ASC 340-40
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE K – CREDIT FACILITY
On January 30, 2017, the Company repaid the principal balance due on its credit facility, dated June 6, 2013, with JPMorgan Chase Bank, N.A. Subsequently, the Company voluntarily terminated this credit facility with JPMorgan Chase Bank, N.A to reduce the fees and expenses associated with maintaining that facility. The Company did not incur any early termination fees associated with its voluntary termination of this credit facility. If, in the future, the Company determines that it would be beneficial to have a credit facility in place, the Company believes that alternative facilities are available. As of July 31, 2018, the Company had available credit at variable terms based on its securities holdings under an advisory arrangement, under which no borrowings have been made.
NOTE L – VALUATION ALLOWANCE ON DEFERRED TAX ASSETS
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover deferred tax assets in the jurisdiction from which they arise, we consider all positive and negative evidence, including the reversal of deferred tax liabilities, projected future taxable income, tax planning strategies, and results of recent operations. Based on the weighting of all evidence, both positive and negative, most notably the three year cumulative loss, we established a full valuation allowance against our U.S. deferred tax assets during the quarter ended April 30, 2018. If these estimates and assumptions change in the future, the Company may be required to adjust its existing valuation allowance resulting in changes to deferred income tax expense. The Company evaluates the likelihood of realizing its deferred tax assets quarterly.
On December 22, 2017, the legislation commonly known as the Tax Cuts and Jobs Act (the “TCJA” or the “Tax Act”) was enacted into law. In response to the TCJA, the U.S. Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of TCJA. The purpose of SAB 118 was to address any uncertainty in applying ASC Topic 740,
Income Taxes
in the reporting period in which the TCJA was enacted. SAB 118 addresses situations where the accounting is incomplete for certain income tax effects of the TCJA upon issuance of a company’s financial statements for the reporting period which include the enactment date. SAB 118 allows for a provisional amount to be recorded if it is a reasonable estimate of the impact of the TCJA. Additionally, SAB 118 allows for a measurement period to finalize the impacts of the TCJA, not to extend beyond one year from the date of enactment.
The Company’s accounting for certain elements of the TCJA was incomplete as of April 30, 2018, and remains incomplete as of July 31, 2018. However, the Company was able to make reasonable estimates of the effects and, therefore, recorded provisional estimates for these items during the three-month and six-month periods ended January 31, 2018 and April 30, 2018. There were no changes to the estimates during the three months ended July 31, 2018.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES