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, 2019 and the results of its operations and cash flows for the three months ended July 31, 2019 and July 31, 2018. The April 30, 2019 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, 2019, filed on July 26, 2019 with the Securities and Exchange Commission, 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 – 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,
|
|
|
|
2019
|
|
|
2018
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,001,324
|
|
|
|
8,876,416
|
|
Effect of dilutive securities
|
|
|
**
|
|
|
|
114,055
|
|
Diluted
|
|
|
9,001,324
|
|
|
|
8,990,471
|
|
** For the three-month period ended July 31, 2019, dilutive securities are excluded since the inclusion of such shares would be antidilutive due to the net loss for the period. The exercisable shares excluded as of July 31, 2019 are 179,000 options. The effect of dilutive securities would have been 250,101 options, for the three-month period ended July 31, 2019.
NOTE C – COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS, NET
At July 31, 2019 and April 30, 2019, costs and estimated earnings in excess of billings, net, consisted of the following:
|
|
July 31, 2019
|
|
|
April 30, 2019
|
|
|
|
(In thousands)
|
|
Costs and estimated earnings in excess of billings
|
|
$
|
9,464
|
|
|
$
|
8,278
|
|
Billings in excess of costs and estimated earnings
|
|
|
(2,260
|
)
|
|
|
(1,608
|
)
|
Net asset
|
|
$
|
7,204
|
|
|
$
|
6,670
|
|
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 (“POC”) basis at the measurement date. 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 POC basis. During the three months ended July 31, 2019 and 2018, revenue recognized under POC contracts was approximately $11.5 million and $9.3 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. Contract losses of approximately $314,000 were recorded for the three months ended July 31, 2019.
NOTE D – TREASURY STOCK TRANSACTIONS
During the three month period ended July 31, 2019, the Company made contributions of 10,906 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 E – INVENTORIES
Inventories, which are reported at the lower of cost and net realizable value, consisted of the following:
|
|
July 31, 2019
|
|
|
April 30, 2019
|
|
|
|
(In thousands)
|
|
Raw Materials and Component Parts
|
|
$
|
15,364
|
|
|
$
|
11,600
|
|
Work in Progress
|
|
|
6,445
|
|
|
|
8,896
|
|
Finished Goods
|
|
|
1,392
|
|
|
|
2,860
|
|
|
|
$
|
23,201
|
|
|
$
|
23,356
|
|
The amounts above are net of reserves of $7.2 million and $6.6 million as of July 31, 2019 and April 30, 2019, respectively. As of July 31, 2019 and April 30, 2019, all inventory was located in the United States.
NOTE F – RIGHT-OF-USE ASSETS AND LEASE LIABILITIES
The Company’s leases primarily represent offices, warehouses, vehicles, and manufacturing and research and development facilities which expire at various times through 2029 and are generally operating leases. Contractual arrangements are evaluated at inception to determine if the agreement contains a lease. Certain lease agreements contain renewal options, rent abatement, and escalation clauses that are factored into our determination of lease payments when appropriate. Right-of-use (“ROU”) assets and lease liabilities are recorded based on the present value of future lease payments which will factor in certain qualifying initial direct costs incurred as well as any lease incentives that may have been received. Lease expenses for operating lease payments are recognized on a straight-line basis over the lease term. Lease terms may factor in options to extend or terminate the lease.
The Company elected the practical expedient for short-term leases which allows leases with terms of twelve months or less to be recorded on a straight-line basis over the lease term without being recognized on the balance sheet.
Effective May 1, 2019, the Company adopted ASU 2016-02. The table below presents ROU assets and liabilities recorded on the unaudited condensed consolidated balance sheet related to ASU 2016-02 as follows:
|
Classification
|
|
July 31, 2019
|
|
|
|
|
(in thousands)
|
|
Assets
|
|
|
|
|
|
Operating lease ROU assets
|
Right-of-Use assets
|
|
$
|
11,840
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Operating lease liabilities (short-term)
|
Lease liability, current
|
|
|
1,883
|
|
Operating lease liabilities (long-term)
|
Lease liability
|
|
|
10,193
|
|
Total lease liabilities
|
|
$
|
12,076
|
|
Total operating lease expense was $504,000 for the three months ended July 31, 2019, the majority of which is included in cost of revenues and the remaining amount in selling and administrative expenses on the unaudited condensed consolidated statement of operations. There were no new leases entered into for the current period ended July 31, 2019. Net non-cash operating activities related to leases was approximately $236,000 for the three months ended July 31, 2019.
As previously disclosed in our April 30, 2019 Annual Report on Form 10-K, and under the previous lease accounting standard, future minimum lease payments for operating leases having initial or remaining non-cancellable lease terms in excess of one year would have been as follows (in thousands):
For the years ending
April 30,
|
|
Operating Leases
|
|
2020
|
|
$
|
1,316
|
|
2021
|
|
|
1,521
|
|
2022
|
|
|
1,436
|
|
2023
|
|
|
1,469
|
|
2024
|
|
|
1,502
|
|
Thereafter
|
|
|
6,349
|
|
Total future minimum lease payments
|
|
$
|
13,593
|
|
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities recorded on the unaudited consolidated balance sheet as of July 31, 2019:
Fiscal Year Ending April 30,
|
|
(in thousands)
|
|
|
|
|
|
|
Remainder of 2020
|
|
$
|
1,304
|
|
2021
|
|
|
1,919
|
|
2022
|
|
|
1,783
|
|
2023
|
|
|
1,801
|
|
2024
|
|
|
1,834
|
|
Thereafter
|
|
|
7,215
|
|
Total lease payments
|
|
|
15,856
|
|
Less imputed interest
|
|
|
(3,780
|
)
|
Present value of future lease payments
|
|
|
12,076
|
|
Less current obligations under leases
|
|
|
1,883
|
|
Long-term lease obligations
|
|
|
10,193
|
|
As of July 31, 2019, the weighted-average remaining lease term for all operating leases was 8.9 years. The Company does not generally have access to the rate implicit in the leases and therefore utilized the Company’s borrowing rate as the discount rate. The weighted average discount rate for operating leases as of July 31, 2019 was 6.16%.
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: 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 subsidiary, FEI-Elcom. 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. FEI-Zyfer’s products also incorporate precision time references for terrestrial secure communications and command and control, and frequency products that incorporate GPS. FEI-Zyfer’s GPS capability complements the Company’s existing technologies and permits the combined entities to provide a broader range of embedded systems for a variety of timing functions and anti-spoofing (“SAASM”) applications.
|
The Company 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 two segments are the same as those described in the “Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended April 30, 2019, filed on July 26, 2019 with the Securities and Exchange Commission. 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. All acquired assets, including intangible assets, are included in the assets of both reporting segments.
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 condensed consolidated statements of operations or the condensed consolidated balance sheets for each of the periods (in thousands):
|
|
Three months ended July 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
|
FEI-NY
|
|
$
|
9,010
|
|
|
$
|
8,577
|
|
FEI-Zyfer
|
|
|
3,701
|
|
|
|
2,561
|
|
less intercompany revenues
|
|
|
(157
|
)
|
|
|
(127
|
)
|
Consolidated revenues
|
|
$
|
12,554
|
|
|
$
|
11,011
|
|
Operating (loss) profit:
|
|
|
|
|
|
|
|
|
FEI-NY
|
|
$
|
(1,232
|
)
|
|
$
|
(215
|
)
|
FEI-Zyfer
|
|
|
517
|
|
|
|
386
|
|
Corporate
|
|
|
(65
|
)
|
|
|
(86
|
)
|
Consolidated operating (loss) profit
|
|
$
|
(780
|
)
|
|
$
|
85
|
|
|
|
July 31, 2019
|
|
|
April 30, 2019
|
|
Identifiable assets:
|
|
|
|
|
|
|
|
|
FEI-NY (approximately $1.5 million in China as of the fiscal year ended April 30, 2019)
|
|
$
|
51,621
|
|
|
$
|
54,295
|
|
FEI-Zyfer
|
|
|
12,824
|
|
|
|
10,478
|
|
less intersegment balances
|
|
|
(8,586
|
)
|
|
|
(8,346
|
)
|
Corporate
|
|
|
39,305
|
|
|
|
30,344
|
|
Consolidated identifiable assets
|
|
$
|
95,164
|
|
|
$
|
86,771
|
|
Total revenue related to the adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), (“ASU 2014-09”) and recognized over time as POC and Passage of Title (“POT”) were approximately $11.5 million and $1.1 million, respectively, of the $12.6 million reported for the three months ended July 31, 2019. The amounts recognized over time as POC and POT were approximately $9.2 million and $1.8 million of the $11.0 million reported for the three months ended July 31, 2018. The amounts by segment and product line were as follows:
|
|
Three Months Ended July 31, 2019
|
|
|
Three Months Ended July 31, 2018
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
POC Revenue
|
|
|
POT Revenue
|
|
|
Total Revenue
|
|
|
POC Revenue
|
|
|
POT Revenue
|
|
|
Total Revenue
|
|
FEI-NY
|
|
$
|
8,160
|
|
|
$
|
850
|
|
|
$
|
9,010
|
|
|
$
|
8,079
|
|
|
$
|
498
|
|
|
$
|
8,577
|
|
FEI-Zyfer
|
|
|
3,323
|
|
|
|
378
|
|
|
|
3,701
|
|
|
|
1,175
|
|
|
|
1,386
|
|
|
|
2,561
|
|
Intersegment
|
|
|
26
|
|
|
|
(183
|
)
|
|
|
(157
|
)
|
|
|
(7
|
)
|
|
|
(120
|
)
|
|
|
(127
|
)
|
Revenue
|
|
$
|
11,509
|
|
|
$
|
1,045
|
|
|
$
|
12,554
|
|
|
$
|
9,247
|
|
|
$
|
1,764
|
|
|
$
|
11,011
|
|
|
|
Three Months Ended July 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
Revenue by Product Line:
|
|
|
|
|
|
|
|
|
Satellite Revenue
|
|
$
|
3,895
|
|
|
$
|
5,534
|
|
Government Non-Space Revenue
|
|
|
6,744
|
|
|
|
4,781
|
|
Other Commercial & Industrial Revenue
|
|
|
1,915
|
|
|
|
696
|
|
Consolidated revenues
|
|
$
|
12,554
|
|
|
$
|
11,011
|
|
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 condensed consolidated balance sheets. During the three months ended July 31, 2019 and 2018, the Company acquired product from Morion in the aggregate amount of approximately $245,000 and $68,000, respectively, and the Company sold product and training services to Morion in the aggregate amount of approximately $47,000 and $2,000, respectively, included in revenues in the condensed consolidated statements of operations as part of the FEI-NY segment. At July 31, 2019 there was approximately $54,000 payable to Morion, up from approximately $38,000 at April 30, 2019, and there were no receivables related to Morion for either period. During the three months ended July 31, 2019, the Company received a dividend from Morion in the amount of approximately $125,000, which is included in other income, net in the condensed consolidated statements 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.
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, 2019 and April 30, 2019, respectively, were as follows (in thousands):
|
|
July 31, 2019
|
|
|
|
Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Fair Market Value
|
|
Fixed income securities
|
|
$
|
8,836
|
|
|
$
|
182
|
|
|
$
|
(2
|
)
|
|
$
|
9,016
|
|
|
|
April 30, 2019
|
|
|
|
Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Fair Market Value
|
|
Fixed income securities
|
|
$
|
8,152
|
|
|
$
|
71
|
|
|
$
|
(24
|
)
|
|
$
|
8,199
|
|
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, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities
|
|
$
|
250
|
|
|
$
|
(0
|
)
|
|
$
|
861
|
|
|
$
|
(2
|
)
|
|
$
|
1,111
|
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities
|
|
$
|
995
|
|
|
$
|
(4
|
)
|
|
$
|
3,349
|
|
|
$
|
(20
|
)
|
|
$
|
4,344
|
|
|
$
|
(24
|
)
|
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, 2019 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, 2019, the Company sold or redeemed available-for-sale securities of approximately $750,000, realizing gains of approximately $1,000.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Maturities of fixed income securities classified as available-for-sale at July 31, 2019 were as follows, at cost (in thousands):
Current
|
|
$
|
2,403
|
|
Due after one year through five years
|
|
|
3,981
|
|
Due after five years through ten years
|
|
|
2,701
|
|
|
|
$
|
9,085
|
|
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 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 August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13 Fair Value Measurement (Topic 820) (“ASU 2018-13”) which modifies the disclosure requirement on fair value measurements. 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 its financial statements when adopted in fiscal year 2021.
In January 2017, the FASB issued ASU No. 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 to have an immaterial effect on its financial statements.
In June 2016, the FASB issued ASU No. 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 U.S. 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 its financial statements when adopted in fiscal year 2021.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Newly Adopted Accounting Standards
Leases (Topic 842)
In the first quarter of fiscal 2020 the Company adopted ASU No. 2016-02 Leases (Topic 842) (“ASU 2016-02”) and recognized on its Condensed Consolidated Balance Sheets $12.1 million of lease liabilities with corresponding ROU assets for operating leases. The Company elected a prospective application for the new guidance, as permitted under ASU 2016-02, and therefore prior periods continue to be presented in accordance with Topic 840. We also elected the package of practical expedients, which among other things, does not require reassessment of lease classification.
NOTE K – CREDIT FACILITY
As of July 31, 2019, 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.
As required by the authoritative guidance on accounting for income taxes, we evaluate the realizability of deferred tax assets on a jurisdictional basis at each reporting date. 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. Accounting for income taxes requires that a valuation allowance be established when it is more likely than not that all or a portion of the deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets will not be realizable, we establish a valuation allowance. As of July 31, 2019, and April 30, 2019, the Company maintained a full valuation allowance against its deferred tax assets. 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.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES