UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
one)
|
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
Quarterly Period ended October 31, 2010
OR
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from __________ to __________
Commission
File No. 1-8061
FREQUENCY
ELECTRONICS, INC.
(Exact
name of Registrant as specified in its charter)
|
Delaware
|
11-1986657
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
|
incorporation
or organization)
|
|
55
CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y.
|
11553
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant's
telephone number, including area code: 516-794-4500
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and smaller reporting company in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer o
Accelerated filer o
Non-accelerated filer o Smaller Reporting
Company x
(do
not check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No
x
APPLICABLE
ONLY TO CORPORATE ISSUERS:
The
number of shares outstanding of Registrant's Common Stock, par value $1.00 as of
December 10, 2010 – 8,256,350
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
INDEX
|
Page
No.
|
|
|
Part
I. Financial Information:
|
|
|
Item
1 - Financial Statements:
|
|
|
Condensed
Consolidated Balance Sheets -
|
|
|
October
31, 2010 and April 30, 2010
|
3
|
|
Condensed
Consolidated Statements of Operations
|
|
|
Six
Months Ended October 31, 2010 and 2009
|
4
|
|
Condensed
Consolidated Statements of Operations
|
|
|
Three
Months Ended October 31, 2010 and 2009
|
5
|
|
Condensed
Consolidated Statements of Cash Flows
|
|
|
Six
Months Ended October 31, 2010 and 2009
|
6
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
7-12
|
|
Item
2 - Management's Discussion and Analysis of
|
|
|
Financial
Condition and Results of Operations
|
12-18
|
|
|
|
|
Item
3 – Quantitative and Qualitative Disclosures About Market
Risk
|
18
|
|
|
|
|
Item
4- Controls and Procedures
|
19
|
|
Part
II. Other Information:
|
|
|
|
|
|
Item
6 - Exhibits
|
19
|
|
Signatures
|
20
|
|
Exhibits
|
|
2 of
20
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
Condensed
Consolidated Balance Sheets
|
October
31,
|
April
30,
|
|||||||
|
2010
|
2010
|
|||||||
|
(UNAUDITED)
|
(AUDITED)
|
|||||||
|
(NOTE
A)
|
||||||||
|
(In
thousands except share data)
|
||||||||
|
ASSETS:
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 7,384 | $ | 9,954 | ||||
|
Marketable
securities
|
11,577 | 10,418 | ||||||
|
Accounts
receivable, net of allowance for doubtful accounts of $258 at October 31,
2010 and $266 at April 30, 2010
|
11,855 | 10,504 | ||||||
|
Costs
and estimated earnings in excess of billings, net
|
2,466 | 1,667 | ||||||
|
Inventories,
net
|
28,954 | 26,975 | ||||||
|
Prepaid
income taxes
|
255 | - | ||||||
|
Prepaid
expenses and other
|
1,141 | 1,122 | ||||||
|
Total
current assets
|
63,632 | 60,640 | ||||||
|
Property,
plant and equipment, at cost, less accumulated depreciation and
amortization
|
6,811 | 7,015 | ||||||
|
Goodwill
and other intangible assets
|
218 | 218 | ||||||
|
Cash
surrender value of life insurance and cash held in trust
|
9,181 | 8,917 | ||||||
|
Investment
in and loans receivable from affiliates
|
3,841 | 3,813 | ||||||
|
Other
assets
|
817 | 817 | ||||||
|
Total
assets
|
$ | 84,500 | $ | 81,420 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY:
|
||||||||
|
Current
liabilities:
|
||||||||
|
Short-term
credit and lease obligations
|
$ | 254 | $ | 246 | ||||
|
Accounts
payable - trade
|
2,496 | 1,720 | ||||||
|
Income
taxes payable
|
- | 295 | ||||||
|
Accrued
liabilities
|
5,043 | 5,047 | ||||||
|
Total
current liabilities
|
7,793 | 7,308 | ||||||
|
Lease
obligation- noncurrent
|
313 | 441 | ||||||
|
Deferred
compensation
|
9,737 | 9,624 | ||||||
|
Deferred
rent and other liabilities
|
703 | 664 | ||||||
|
Total
liabilities
|
18,546 | 18,037 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders'
equity:
|
||||||||
|
Preferred
stock - $1.00 par value
|
- | - | ||||||
|
Common
stock - $1.00 par value
|
9,164 | 9,164 | ||||||
|
Additional
paid-in capital
|
49,763 | 49,580 | ||||||
|
Retained
earnings
|
6,106 | 5,271 | ||||||
| 65,033 | 64,015 | |||||||
|
Common
stock reacquired and held in treasury - at cost (907,590 shares at October
31, 2010 and 946,172 shares at April 30, 2010)
|
(4,379 | ) | (4,651 | ) | ||||
|
Accumulated
other comprehensive income
|
5,300 | 4,019 | ||||||
|
Total
stockholders' equity
|
65,954 | 63,383 | ||||||
|
Total
liabilities and stockholders' equity
|
$ | 84,500 | $ | 81,420 | ||||
See
accompanying notes to condensed consolidated financial
statements.
3 of
20
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
Condensed
Consolidated Statements of Operations
Six
Months Ended October 31,
(Unaudited)
|
2010
|
2009
|
|||||||
|
(In thousands except per share data)
|
||||||||
|
Revenues
|
$ | 24,652 | $ | 23,836 | ||||
|
Cost
of revenues
|
15,102 | 15,141 | ||||||
|
Gross
margin
|
9,550 | 8,695 | ||||||
|
Selling
and administrative expenses
|
5,560 | 5,340 | ||||||
|
Research
and development expense
|
2,389 | 2,454 | ||||||
|
Operating
profit
|
1,601 | 901 | ||||||
|
Other
income (expense):
|
||||||||
|
Investment
income
|
179 | 253 | ||||||
|
Equity
income (loss)
|
28 | (195 | ) | |||||
|
Impairment
of investment in affiliate
|
- | (200 | ) | |||||
|
Interest
expense
|
(64 | ) | (78 | ) | ||||
|
Other
expense, net
|
(89 | ) | (156 | ) | ||||
|
Income
before provision for income taxes
|
1,655 | 525 | ||||||
|
Provision
for income taxes
|
820 | - | ||||||
|
Net
income
|
$ | 835 | $ | 525 | ||||
|
Net
income per common share
|
||||||||
|
Basic
|
$ | 0.10 | $ | 0.06 | ||||
|
Diluted
|
$ | 0.10 | $ | 0.06 | ||||
|
Weighted
average shares outstanding
|
||||||||
|
Basic
|
8,242,481 | 8,172,643 | ||||||
|
Diluted
|
8,302,405 | 8,184,764 | ||||||
See
accompanying notes to consolidated condensed financial
statements.
4 of
20
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
Condensed
Consolidated Statements of Operations
Three
Months Ended October 31,
(Unaudited)
|
2010
|
2009
|
|||||||
|
(In thousands except per share data)
|
||||||||
|
Revenues
|
$ | 12,528 | $ | 11,395 | ||||
|
Cost
of revenues
|
7,724 | 7,001 | ||||||
|
Gross
margin
|
4,804 | 4,394 | ||||||
|
Selling
and administrative expenses
|
2,765 | 2,773 | ||||||
|
Research
and development expense
|
1,227 | 1,379 | ||||||
|
Operating
profit
|
812 | 242 | ||||||
|
Other
income (expense):
|
||||||||
|
Investment
income
|
99 | 125 | ||||||
|
Equity
loss
|
(1 | ) | (145 | ) | ||||
|
Impairment
of investment in affiliate
|
- | (200 | ) | |||||
|
Interest
expense
|
(29 | ) | (34 | ) | ||||
|
Other
expense, net
|
(83 | ) | (117 | ) | ||||
|
Income
(loss) before provision for income taxes
|
798 | (129 | ) | |||||
|
Provision
for income taxes
|
470 | - | ||||||
|
Net
income (loss)
|
$ | 328 | $ | (129 | ) | |||
|
Net
income (loss) per common share
|
||||||||
|
Basic
|
$ | 0.04 | $ | (0.02 | ) | |||
|
Diluted
|
$ | 0.04 | $ | (0.02 | ) | |||
|
Weighted
average shares outstanding
|
||||||||
|
Basic
|
8,251,391 | 8,180,659 | ||||||
|
Diluted
|
8,323,303 | 8,180,659 | ||||||
See
accompanying notes to condensed consolidated financial
statements.
5 of
20
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
Six
Months Ended October 31,
(Unaudited)
|
2010
|
2009
|
|||||||
|
(In thousands)
|
||||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
income
|
$ | 835 | $ | 525 | ||||
|
Non-cash
charges to earnings and non-operating income or loss, net
|
1,988 | 2,541 | ||||||
|
Net
changes in operating assets and liabilities
|
(4,665 | ) | (406 | ) | ||||
|
Net
cash (used in) provided by operating activities
|
(1,842 | ) | 2,660 | |||||
|
Cash
flows from investing activities:
|
||||||||
|
Proceeds
from sale of marketable securities and investments
|
1,500 | - | ||||||
|
Purchase
of marketable securities
|
(2,500 | ) | - | |||||
|
Purchase
of fixed assets
|
(694 | ) | (280 | ) | ||||
|
Net
cash used in investing activities
|
(1,694 | ) | (280 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Payment
of short-term credit and lease obligations
|
(120 | ) | (1,243 | ) | ||||
|
Net
cash used in financing activities
|
(120 | ) | (1,243 | ) | ||||
|
Net
(decrease) increase in cash and cash equivalents before effect of exchange
rate changes
|
(3,656 | ) | 1,137 | |||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
1,086 | (349 | ) | |||||
|
Net
(decrease) increase in cash and cash equivalents
|
(2,570 | ) | 788 | |||||
|
Cash
and cash equivalents at beginning of period
|
9,954 | 4,911 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 7,384 | $ | 5,699 | ||||
|
Supplemental
disclosures of cash flow information:
|
||||||||
|
Cash
paid during the period for:
|
||||||||
|
Interest
|
$ | 60 | $ | 40 | ||||
|
Income
Taxes
|
$ | 1,370 | - | |||||
See
accompanying notes to condensed consolidated financial
statements.
6 of
20
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
NOTE A -
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 October 31, 2010 and the results of its
operations and cash flows for the six and three months ended October 31, 2010
and 2009. The April 30, 2010 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 have been condensed or
omitted. These condensed consolidated financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's April 30, 2010 Annual Report to Stockholders on Form
10-K. 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 are as follows:
|
Six months
|
Three months
|
|||||||||||||||
|
Periods ended October 31,
|
||||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Weighted
average shares outstanding:
|
||||||||||||||||
|
Basic
|
8,242,481 | 8,172,643 | 8,251,391 | 8,180,659 | ||||||||||||
|
Effect
of dilutive securities
|
59,924 | 12,121 | 71,912 | *** | ||||||||||||
|
Diluted
|
8,302,405 | 8,184,764 | 8,323,303 | 8,180,659 | ||||||||||||
|
***
|
Dilutive
securities are excluded for the three month period ended October 31, 2009
since the inclusion of such shares would be antidilutive due to the net
loss for the period then ended.
|
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. The number of
excluded options and SARS were:
|
Six months
|
Three months
|
|||||||||||||||
|
Periods ended October 31,
|
||||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Outstanding
options and SARS excluded
|
966,775 | 869,213 | 966,775 | 869,213 | ||||||||||||
NOTE C –
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS, NET
At
October 31, 2010 and April 30, 2010, costs and estimated earnings in excess of
billings, net, consist of the following:
|
October 31, 2010
|
April 30, 2010
|
|||||||
|
(In
thousands)
|
||||||||
|
Costs
and estimated earnings in excess of billings
|
$ | 3,814 | $ | 2,917 | ||||
|
Billings
in excess of costs and estimated earnings
|
(1,348 | ) | (1,250 | ) | ||||
|
Net
asset
|
$ | 2,466 | $ | 1,667 | ||||
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 six and three months
ended October 31, 2010, revenue recognized under percentage of completion
contracts was
approximately $10.5 million and $5.5 million, respectively. For the
six and three months ended October 31, 2009, such revenue was approximately $9.7
million and $5.1 million, respectively.
7 of
20
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
NOTE D -
INVENTORIES
Inventories,
which are reported at the lower of cost or market at October 31, 2010 and April
30, 2010, respectively, consist of the following:
|
October 31, 2010
|
April 30, 2010
|
|||||||
|
(In
thousands)
|
||||||||
|
Raw
Materials and Component Parts
|
$ | 11,679 | $ | 13,192 | ||||
|
Work
in Progress
|
14,224 | 11,039 | ||||||
|
Finished
Goods
|
3,051 | 2,744 | ||||||
| $ | 28,954 | $ | 26,975 | |||||
As of
October 31, 2010 and April 30, 2010, approximately $18.6 million and $18.2
million, respectively, of total inventory is located in the United States,
approximately $9.6 million and $7.9 million, respectively, is located in Belgium
and approximately $800,000 and $900,000, respectively, is located in
China.
NOTE E –
COMPREHENSIVE INCOME
For the
six and three months ended October 31, 2010 and 2009, comprehensive income is
composed of (in thousands):
|
Six months
|
Three months
|
|||||||||||||||
|
Periods ended October 31,
|
||||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Net
income (loss)
|
$ | 835 | $ | 525 | $ | 328 | $ | (129 | ) | |||||||
|
Foreign
currency translation adjustment
|
1,082 | 644 | 2,012 | 272 | ||||||||||||
|
Change
in market value of marketable securities
|
199 | 834 | 113 | 511 | ||||||||||||
|
Comprehensive
income
|
$ | 2,116 | $ | 2,003 | $ | 2,453 | $ | 654 | ||||||||
NOTE F –
SEGMENT INFORMATION
The
Company operates under three reportable segments based on the geographic
locations of its subsidiaries:
|
|
(1)
|
FEI-NY
– operates out of New York and its operations consist principally of
precision time and frequency control products used in three principal
markets- communication satellites (both commercial and U.S.
Government-funded); terrestrial cellular telephone or other ground-based
telecommunication stations and other components and systems for the U.S.
military.
|
|
|
(2)
|
Gillam-FEI
- operates out of Belgium and France and primarily sells wireline
synchronization and network management systems in non-U.S.
markets. All sales from Gillam-FEI to the United States are to
other segments of the Company.
|
|
|
(3)
|
FEI-Zyfer
– operates out of California and its products incorporate Global
Positioning System (GPS) technologies into systems and subsystems for
secure communications, both government and commercial, and other locator
applications. This segment also provides sales and support for
the Company’s wireline telecommunications family of products, including
US5G, which are sold in the United States
market.
|
The
FEI-NY segment also includes the operations of the Company’s wholly-owned
subsidiary, FEI-Asia. FEI-Asia functions primarily as a manufacturing
facility for the FEI-NY segment.
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.
8 of
20
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
The table
below presents information about reported segments with reconciliation of
segment amounts to consolidated amounts as reported in the statement of
operations or the balance sheet for each of the periods (in
thousands):
|
Six months
|
Three months
|
|||||||||||||||
|
Periods ended October 31,
|
||||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Revenues:
|
||||||||||||||||
|
FEI-NY
|
$ | 15,168 | $ | 14,014 | $ | 7,527 | $ | 6,949 | ||||||||
|
Gillam-FEI
|
5,203 | 4,975 | 2,230 | 2,501 | ||||||||||||
|
FEI-Zyfer
|
5,657 | 6,828 | 3,160 | 2,579 | ||||||||||||
|
less
intersegment revenues
|
(1,376 | ) | (1,981 | ) | (389 | ) | (634 | ) | ||||||||
|
Consolidated
revenues
|
$ | 24,652 | $ | 23,836 | $ | 12,528 | $ | 11,395 | ||||||||
|
Operating
profit (loss):
|
||||||||||||||||
|
FEI-NY
|
$ | 1,465 | $ | 624 | $ | 565 | $ | 538 | ||||||||
|
Gillam-FEI
|
40 | (5 | ) | (76 | ) | 14 | ||||||||||
|
FEI-Zyfer
|
290 | 485 | 451 | (171 | ) | |||||||||||
|
Corporate
|
(194 | ) | (203 | ) | (128 | ) | (139 | ) | ||||||||
|
Consolidated
operating profit
|
$ | 1,601 | $ | 901 | $ | 812 | $ | 242 | ||||||||
|
October 31, 2010
|
April 30, 2010
|
|||||||
|
Identifiable
assets:
|
||||||||
|
FEI-NY
(approximately $3.6 million in China)
|
$ | 35,854 | $ | 35,462 | ||||
|
Gillam-FEI
(all in Belgium or France)
|
21,345 | 19,594 | ||||||
|
FEI-Zyfer
|
7,741 | 7,413 | ||||||
|
less
intersegment balances
|
(13,365 | ) | (14,655 | ) | ||||
|
Corporate
|
32,925 | 33,606 | ||||||
|
Consolidated
identifiable assets
|
$ | 84,500 | $ | 81,420 | ||||
NOTE G –
RELATED PARTY TRANSACTIONS
The
Company has equity interests in two strategically important companies: Elcom
Technologies, Inc. (“Elcom”) and Morion Inc. (“Morion”), accounted for on the
equity and cost basis, respectively. During the six and three month
periods ended October 31, 2010 and 2009, the Company acquired technical services
from Elcom, purchased crystal oscillator products from Morion and sold certain
of its products to both companies. The Company also receives interest
from Elcom under two notes receivable. The table below summarizes
these transactions:
|
Six months
|
Three months
|
|||||||||||||||
|
Periods ended October 31,
|
||||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Purchases
from:
|
||||||||||||||||
|
Elcom
|
$ | 314 | $ | 6 | $ | 279 | $ | - | ||||||||
|
Morion
|
37 | 212 | 20 | 16 | ||||||||||||
|
Sales
to:
|
||||||||||||||||
|
Elcom
|
$ | 133 | $ | 1 | $ | 75 | $ | 1 | ||||||||
|
Morion
|
200 | 32 | 72 | 11 | ||||||||||||
|
Interest
on Elcom notes receivable
|
$ | 47 | $ | 24 | $ | 22 | $ | 12 | ||||||||
9 of
20
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
The
Company measures the current market value of Elcom based on comparisons to
comparable companies as well as Elcom’s forecasts of future financial
results. For the year ended April 30, 2010, in addition to its equity
share in the income or loss of Elcom during the year, the Company determined
that its investment was impaired and recorded impairment charges in the amount
$550,000 for fiscal year 2010, of which $200,000 was recorded during the six and
three months ended October 31, 2009. No impairment charges were
recorded during the six and three months ended October 31, 2010.
NOTE H –
FAIR VALUE OF FINANCIAL INSTRUMENTS
The cost,
gross unrealized gains, gross unrealized losses and fair market value of
available-for-sale securities at October 31, 2010 and April 30, 2010 are as
follows (in thousands):
|
October 31, 2010
|
||||||||||||||||
|
Gross
|
Gross
|
Fair
|
||||||||||||||
|
Unrealized
|
Unrealized
|
Market
|
||||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
|
Fixed
income debt securities
|
$ | 10,566 | $ | 354 | $ | (24 | ) | $ | 10,896 | |||||||
|
Equity
securities
|
450 | 231 | - | 681 | ||||||||||||
| $ | 11,016 | $ | 585 | $ | (24 | ) | $ | 11,577 | ||||||||
|
April 30, 2010
|
||||||||||||||||
|
Gross
|
Gross
|
Fair
|
||||||||||||||
|
Unrealized
|
Unrealized
|
Market
|
||||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
|
Fixed
income debt securities
|
$ | 9,606 | $ | 261 | $ | (90 | ) | $ | 9,777 | |||||||
|
Equity
securities
|
450 | 191 | - | 641 | ||||||||||||
| $ | 10,056 | $ | 452 | $ | (90 | ) | $ | 10,418 | ||||||||
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
|
|||||||||||||||||||
|
October 31, 2010
|
||||||||||||||||||||||||
|
Fixed
income debt securities
|
$ | 1,515 | $ | (4 | ) | $ | 980 | $ | (20 | ) | $ | 2,495 | $ | (24 | ) | |||||||||
|
Equity
securities
|
- | - | - | - | - | - | ||||||||||||||||||
| $ | 1,515 | $ | (4 | ) | $ | 980 | $ | (20 | ) | $ | 2,495 | $ | (24 | ) | ||||||||||
|
April 30, 2010
|
||||||||||||||||||||||||
|
Fixed
income debt securities
|
$ | - | $ | - | $ | 3,438 | $ | (90 | ) | $ | 3,438 | $ | (90 | ) | ||||||||||
|
Equity
securities
|
- | - | - | - | - | - | ||||||||||||||||||
| $ | - | $ | - | $ | 3,438 | $ | (90 | ) | $ | 3,438 | $ | (90 | ) | |||||||||||
The
Company regularly reviews its investment portfolio to identify and evaluate
investments that have indications of possible impairment. The Company
does not believe that its investments in marketable securities with unrealized
losses at October 31, 2010 are other-than-temporary due to market volatility of
the security’s fair value, analysts’ expectations and the Company’s ability to
hold the securities for a period of time sufficient to allow for any anticipated
recoveries in market value.
During
the six months ended October 31, 2010, the Company redeemed an
available-for-sale security in the amount of $1,500,000 and realized a loss of
$27,800 on the transaction which is included in the determination of net income
for the period. During the six and three months ended October 31,
2009, the Company did not sell or redeem any available-for-sale
securities. Accordingly, there were no realized gains or losses
included in the determination of net income for that period.
10 of
20
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
Maturities
of fixed income debt securities,
which include corporate and government agency debt securities classified as
available-for-sale at October 31, 2010 are as follows, at cost (in
thousands):
|
Current
|
$ | 1,000 | ||
|
Due
after one year through five years
|
7,066 | |||
|
Due
after five years through ten years
|
2,500 | |||
| $ | 10,566 |
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 whereby fair value has been determined from quoted market
prices.
NOTE I -
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June
2009, the FASB issued standards which modified how a company determines when an
entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. These standards clarify
that the determination of whether a company is required to consolidate an entity
is based on, among other things, an entity’s purpose and design and a company’s
ability to direct the activities of the entity that most significantly impact
the entity’s economic performance. These standards require an ongoing
reassessment of whether a company is the primary beneficiary of a variable
interest entity. These standards also require additional disclosures
about a company’s involvement in variable interest entities and any significant
changes in risk exposure due to that involvement. These standards are
effective for fiscal years beginning after November 15, 2009 and were effective
for the Company on May 1, 2010. The adoption of these standards did
not have a material impact on the financial condition, results of operations,
cash flows and disclosures of the Company.
NOTE J –
INCOME TAXES
The
Company has established a valuation allowance against all the deferred tax
assets of its domestic and foreign subsidiaries. Because of the full
valuation allowance, the provision for income taxes consists solely of taxes
currently due to taxing authorities in the United States. Any tax
provision or benefit realized from temporary tax differences is offset by
increases or decreases in the valuation allowance thus creating a difference
from a normally expected effective tax rate. For the six and three
months ended October 31, 2010, the deferred tax asset valuation allowance
increased by approximately $100,000 to $8.2 million. In future
periods, the valuation allowance may be reduced if the Company’s current
positive earnings are sufficient to offset past losses for purposes of
predicting future utilization of deferred tax assets.
11 of
20
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
NOTE K –
TREASURY STOCK TRANSACTIONS
During
the six month period ended October 31, 2010, the Company made a contribution of
38,582 shares of its
common stock held in treasury to the Company’s profit sharing plan and trust
under section 401(k) of the Internal Revenue Code. Such contribution
is in accordance with the Company’s discretionary match of employee voluntary
contributions to this plan.
*********************
Management’s Discussion and
Analysis of Financial Condition and Results of Operations
“Safe Harbor” Statement under the
Private Securities Litigation Reform Act of 1995:
The
statements in this quarterly report on Form 10-Q regarding future earnings and
operations and other statements relating to the future constitute
"forward-looking" statements pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The words
"believe," "may," "will," "could," "should," "would," "anticipate," "estimate,"
"expect," "project," "intend," "objective," "seek," "strive," "might," "likely
result," "build," "grow," "plan," "goal," "expand," "position," or similar
words, or the negatives of these words, or similar terminology, identify
forward-looking statements. These statements are based on assumptions
that the Company believes are reasonable, but are subject to a wide range of
risks and uncertainties, and a number of factors could cause the Company's
actual results to differ materially from those expressed in the forward-looking
statements referred to above. Factors that would cause or contribute
to such differences include, but are not limited to, continued acceptance of the
Company's products in the marketplace, competitive factors, new products and
technological changes, product prices and raw material costs, dependence upon
third-party vendors, competitive developments, changes in manufacturing and
transportation costs, changes in contractual terms, the availability of capital,
and other risks detailed in the Company's periodic report filings with the
Securities and Exchange Commission. Readers are cautioned not to
place undue reliance on these forward-looking statements, which relate only to
events as of the date on which the statements are made and which reflect
management's analysis, judgments, belief, or expectation only as of such
date. By making these forward-looking statements, the Company
undertakes no obligation to update these statements for revisions or changes
after the date of this report.
Critical
Accounting Policies and Estimates
The
Company’s significant accounting policies are described in Note 1 to the
consolidated financial statements included in the Company’s April 30, 2010
Annual Report to Stockholders. The Company believes its most critical
accounting policies to be the recognition of revenue and costs on production
contracts and the valuation of inventory. Each of these areas
requires the Company to make use of reasoned estimates including estimating the
cost to complete a contract, the realizable value of its inventory or the market
value of its products. Changes in estimates can have a material
impact on the Company’s financial position and results of
operations.
Revenue
Recognition
Revenues
under larger, long-term contracts which generally require billings based on
achievement of milestones rather than delivery of product, are reported in
operating results using the percentage of completion method. On
fixed-price contracts, which are typical for commercial and U.S. Government
satellite programs and other long-term U.S. Government projects, and which
require initial design and development of the product, revenue is recognized on
the cost-to-cost method. Under this method, revenue is recorded based
upon the ratio that incurred costs bear to total estimated contract costs with
related cost of sales recorded as the costs are incurred. Each month
management reviews estimated contract costs through a process of aggregating
actual costs incurred and updating estimated costs to completion based upon the
current available information and status of the contract. The effect
of any change in the estimated gross margin percentage for a contract is
reflected in revenues in the period in which the change is
known. Provisions for anticipated losses on contracts are made in the
period in which they become determinable.
12 of
20
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
On
production-type orders, revenue is recorded as units are delivered with the
related cost of sales recognized on each shipment based upon a percentage of
estimated final program costs. Changes in job performance may result
in revisions to costs and income and are recognized in the period in which
revisions are determined to be required. Provisions for anticipated
losses on contracts are made in the period in which they become
determinable.
For
customer orders in the Company’s Gillam-FEI and FEI-Zyfer segments or smaller
contracts or orders in the FEI-NY segment, sales of products and services to
customers are reported in operating results based upon (i) shipment of the
product or (ii) performance of the services pursuant to terms of the customer
order. When payment is contingent upon customer acceptance of the
installed system, revenue is deferred until such acceptance is received and
installation completed.
Costs and
Expenses
Contract
costs include all direct material, direct labor costs, manufacturing overhead
and other direct costs related to contract performance. Selling,
general and administrative costs are charged to expense as
incurred.
Inventory
In
accordance with industry practice, inventoried costs contain amounts relating to
contracts and programs with long production cycles, a portion of which will not
be realized within one year. Inventory write downs are established
for slow-moving and obsolete items and are based upon management’s experience
and expectations for future business. Any changes arising from
revised expectations are reflected in cost of sales in the period the revision
is made.
Marketable
Securities
Marketable
securities consist of investments in common stocks, corporate debt securities
and debt securities of U.S. government agencies which trade on public markets
with current prices readily available (Level 1 securities in the fair value
hierarchy). 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 market value of these investments may temporarily decline
due to economic conditions, but the Company’s own financial strength enables it
to wait for such securities to recover their value or to mature such that any
interim unrealized losses are deemed to be temporary. The Company
recognizes gains or losses when securities are sold using the specific
identification method.
13 of
20
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
RESULTS
OF OPERATIONS
The table
below sets forth for the respective periods of fiscal years 2011 and 2010 the
percentage of consolidated revenues represented by certain items in the
Company’s consolidated statements of operations:
|
Six months
|
Three months
|
|||||||||||||||
|
Periods ended October 31,
|
||||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Revenues
|
||||||||||||||||
|
FEI-NY
|
61.5 | % | 58.8 | % | 60.1 | % | 61.0 | % | ||||||||
|
Gillam-FEI
|
21.1 | 20.9 | 17.8 | 21.9 | ||||||||||||
|
FEI-Zyfer
|
22.9 | 28.6 | 25.2 | 22.6 | ||||||||||||
|
Less
intersegment revenues
|
(5.5 | ) | (8.3 | ) | (3.1 | ) | (5.5 | ) | ||||||||
|
|
100.0 | 100.0 | 100.0 | 100.0 | ||||||||||||
|
Cost
of revenues
|
61.3 | 63.5 | 61.6 | 61.4 | ||||||||||||
|
Gross
Margin
|
38.7 | 36.5 | 38.4 | 38.6 | ||||||||||||
|
Selling
and administrative expenses
|
22.5 | 22.4 | 22.1 | 24.4 | ||||||||||||
|
Research
and development expenses
|
9.7 | 10.3 | 9.8 | 12.1 | ||||||||||||
|
Operating
Profit
|
6.5 | 3.8 | 6.5 | 2.1 | ||||||||||||
|
Other
income (expense), net
|
0.2 | (1.6 | ) | (0.1 | ) | (3.2 | ) | |||||||||
|
Pretax
Income (Loss)
|
6.7 | 2.2 | 6.4 | (1.1 | ) | |||||||||||
|
Provision
for income taxes
|
3.3 | - | 3.8 | - | ||||||||||||
|
Net
Income (Loss)
|
3.4 | % | 2.2 | % | 2.6 | % | (1.1 | )% | ||||||||
(Note:
All dollar amounts in following tables are in thousands, except Revenues which
are in millions)
|
Revenues
|
(in
millions)
|
|||||||||||||||||||||||||||||||
|
Six months
|
Three months
|
|||||||||||||||||||||||||||||||
|
Periods
ended October 31,
|
||||||||||||||||||||||||||||||||
|
Segment
|
2010
|
2009
|
Change
|
2010
|
2009
|
Change
|
||||||||||||||||||||||||||
|
FEI-NY
|
$ | 15.2 | $ | 14.0 | $ | 1.2 | 8 | % | $ | 7.5 | $ | 6.9 | $ | 0.6 | 8 | % | ||||||||||||||||
|
Gillam-FEI
|
5.2 | 5.0 | 0.2 | 5 | % | 2.2 | 2.5 | (0.3 | ) | (11 | )% | |||||||||||||||||||||
|
FEI-Zyfer
|
5.6 | 6.8 | (1.2 | ) | (17 | )% | 3.2 | 2.6 | 0.6 | 22 | % | |||||||||||||||||||||
|
Intersegment
revenues
|
(1.4 | ) | (2.0 | ) | 0.6 | (0.4 | ) | (0.6 | ) | 0.2 | ||||||||||||||||||||||
| $ | 24.6 | $ | 23.8 | $ | 0.8 | 3 | % | $ | 12.5 | $ | 11.4 | $ | 1.1 | 10 | % | |||||||||||||||||
The
increase in revenues for the six and three month periods ended October 31, 2010
compared to the same periods of fiscal year 2010, was the result of increases in
revenues from both U.S. Government/DOD satellite and non-satellite programs
partially offset by continuing declines in revenue from wireless infrastructure
products recorded in the FEI-NY and FEI-Zyfer segments. Revenues from
wireline telecommunications products which are sold by both Gillam-FEI and
FEI-Zyfer, were relatively flat in fiscal year 2011 compared to the same periods
of fiscal year 2010. Revenues from satellite payload programs which
are recorded in the FEI-NY segment, account for one-third of the Company’s
revenues with U.S. Government space programs increasing over 15%
year-over-year. These increases were partially offset by continued
low levels of activity in commercial satellite space
programs. Revenues from U.S. Government/DOD non-space programs, which
are recorded in the FEI-NY and FEI-Zyfer segments, also increased over 15%
year-over-year and accounted for approximately 30% of consolidated revenue in
the fiscal year 2011 periods compared to approximately 25% in the fiscal year
2010 periods. During the remainder of fiscal year 2011, the Company
expects to book additional new satellite payload business for both U.S.
Government and commercial applications and to realize increased revenues from
that market area. Similarly, the Company expects to realize continued
sales growth in U.S. Government/DOD non-space programs and from wireline
telecommunication infrastructure products.
14 of
20
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Gross
margin
|
Six months
|
Three months
|
|||||||||||||||||||||||||||||||
|
Periods ended October 31,
|
||||||||||||||||||||||||||||||||
|
2010
|
2009
|
Change
|
2010
|
2009
|
Change
|
|||||||||||||||||||||||||||
| $ | 9,550 | $ | 8,695 | $ | 855 | 10 | % | $ | 4,804 | $ | 4,394 | $ | 410 | 9 | % | |||||||||||||||||
|
GM
Rate
|
38.7 | % | 36.5 | % | 38.4 | % | 38.6 | % | ||||||||||||||||||||||||
The
improvement in gross margins and gross margin rates for the six and three months
ended October 31, 2010 compared to the same period a year ago reflect the
benefits of the efficiency improvements which were implemented in the prior year
and the different mix of programs on which the Company is working in the fiscal
year 2011 periods. Of the Company’s three segments, the FEI-NY
segment experienced the greatest gross margin rate improvement. The
gross margin rate recorded in the fiscal year 2011 period approaches the
Company’s targeted rate. The Company anticipates that its gross
margin rates for the remainder of fiscal year 2011 will be comparable to the
current periods and will show an improvement over the prior fiscal
year.
Selling and administrative
expenses
|
Six months
|
Three months
|
||||||||||||||||||||||||||||||
|
Periods ended October 31,
|
|||||||||||||||||||||||||||||||
|
2010
|
2009
|
Change
|
2010
|
2009
|
Change
|
||||||||||||||||||||||||||
| $ | 5,560 | $ | 5,340 | $ | 220 | 4 | % | $ | 2,765 | $ | 2,773 | $ | (8 | ) | (0 | )% | |||||||||||||||
For the
six and three months ended October 31, 2010, selling and administrative expenses
were 23% and 22%, respectively, of consolidated revenues. This is
compared to 22% and 24%, respectively, for the same periods of fiscal year
2010. Although the Company’s target for such expenses is not to
exceed 20% of revenues, since many of the costs are relatively fixed, revenues
at the current level result in a higher ratio of expenses to
revenues. The increase in expenses for the six months ended October
31, 2010 compared to the same period of fiscal year 2010 is due primarily to
increased deferred and incentive compensation expenses resulting from greater
profitability and partially offset by a decrease in professional fee
expenses. In subsequent quarters of fiscal year 2011, the Company
expects selling and administrative expenses to be incurred at approximately the
same rate in both dollars and as a percentage of revenues.
Research and development
expense
|
Six months
|
Three months
|
||||||||||||||||||||||||||||||
|
Periods ended October 31,
|
|||||||||||||||||||||||||||||||
|
2010
|
2009
|
Change
|
2010
|
2009
|
Change
|
||||||||||||||||||||||||||
| $ | 2,389 | $ | 2,454 | $ | (65 | ) | (3 | )% | $ | 1,227 | $ | 1,379 | $ | (152 | ) | (11 | )% | ||||||||||||||
Research
and development expenditures represent investments intended to keep the
Company’s products at the leading edge of time and frequency technology and
enhance competitiveness for future revenues. Research and development
spending for the six and three-month periods ended October 31, 2010 was 10% of
revenues, respectively, compared to 10% and 12% of revenues for the same periods
of fiscal year 2010, respectively. R&D spending in fiscal year
2011 continued the development of new satellite payload products, including new
C and Ku band beacon/telemetry transceivers, a new family of frequency
generators and converters, and new product introductions and improvements in the
technology of the Company’s GPS-based wireless products and wireline
synchronization equipment. In addition, the Company continues to
conduct development activities on customer-funded programs the cost of which
appears in cost of revenues, thus reducing the level of internal research and
development spending. The Company will continue to devote significant
resources to develop new products, enhance existing products and implement
efficient manufacturing processes. For the remainder of fiscal year
2011, the Company anticipates that internal research and development spending
will be approximately 10% of revenues. Internally generated cash and
cash reserves are adequate to fund these development efforts.
15 of
20
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Operating
Profit
|
Six months
|
Three months
|
||||||||||||||||||||||||||||||
|
Periods ended October 31,
|
|||||||||||||||||||||||||||||||
|
2010
|
2009
|
Change
|
2010
|
2009
|
Change
|
||||||||||||||||||||||||||
| $ | 1,601 | $ | 901 | $ | 700 | 78 | % | $ | 812 | $ | 242 | $ | 570 | 236 | % | ||||||||||||||||
Improved
gross margins in the fiscal year 2011 periods enabled the Company to record
increased operating profits for the six and three-month periods ended October
31, 2010, compared to the same periods of fiscal year 2010. The
Company anticipates that at the current level of business and having implemented
certain cost saving measures, that it can sustain operating profits at this
level. As the Company gains additional business through increased
bookings on its current product lines and expands its product offerings through
research and development efforts, operating profit is expected to further
improve. The Company anticipates that it will generate an operating
profit for the full fiscal year 2011.
Other income
(expense)
|
Six months
|
Three months
|
|||||||||||||||||||||||||||||||
|
Periods ended October 31,
|
||||||||||||||||||||||||||||||||
|
2010
|
2009
|
Change
|
2010
|
2009
|
Change
|
|||||||||||||||||||||||||||
|
Investment
income
|
$ | 179 | $ | 253 | $ | (74 | ) | (29 | )% | $ | 99 | $ | 125 | $ | ( 26 | ) | (21 | )% | ||||||||||||||
|
Equity
income (loss)
|
28 | (195 | ) | 223 | 114 | % | (1 | ) | (145 | ) | 144 | 99 | % | |||||||||||||||||||
|
Impairment
charge
|
- | (200 | ) | 200 |
NM
|
- | (200 | ) | 200 |
NM
|
||||||||||||||||||||||
|
Interest
expense
|
(64 | ) | (78 | ) | 14 | 18 | % | (29 | ) | (34 | ) | 5 | 15 | % | ||||||||||||||||||
|
Other
expense, net
|
(89 | ) | (156 | ) | 67 | 43 | % | (83 | ) | (117 | ) | 34 | 29 | % | ||||||||||||||||||
| $ | 54 | $ | (376 | ) | $ | 430 | 114 | % | $ | ( 14 | ) | $ | ( 371 | ) | $ | 357 | 96 | % | ||||||||||||||
Investment
income is derived primarily from the Company’s holdings of marketable
securities. Earnings on these securities may vary based on
fluctuating interest rate levels and the timing of purchases or sales of
securities. During the six months ended October 31, 2010, the Company
redeemed a marketable security which resulted in a realized loss of
approximately $28,000. No gains or losses on marketable securities
were recorded during the same periods of fiscal year 2010.
Equity
income (loss) in the fiscal year 2011 and 2010 periods represent the Company’s
share of the quarterly income or loss recorded by Elcom Technologies in which
the Company owns a 25% interest. In addition, during the three month
period ended October 31, 2009, the Company measured the current market value of
Elcom based on comparisons to comparable companies as well as Elcom’s forecasts
of future financial results and determined that its investment was
impaired. Consequently, the Company recorded an impairment charge in
the amount of $200,000 in addition to its equity share in Elcom’s quarterly
results.
The
decrease in interest expense for the six and three months ended October 31, 2010
compared to the same periods of fiscal year 2010 is due to lower levels of
credit and lease obligations in the fiscal year 2011 periods.
Other
expenses in the fiscal year 2011 periods consisted primarily of charges on
certain financial instruments and foreign currency exchange losses at the
Company’s overseas subsidiaries. In the same six and three-month
periods ended October 31, 2009 the Company also recorded certain royalty
expenses which have not been incurred during fiscal year 2011
to-date.
Income Tax
Provision
|
Six months
|
Three months
|
||||||||||||||||||||||||
|
Periods ended October 31,
|
|||||||||||||||||||||||||
|
2010
|
2009
|
Change
|
2010
|
2009
|
Change
|
||||||||||||||||||||
| $ | 820 | - | $ | 820 |
NM
|
$ | 470 | - | $ | 470 |
NM
|
||||||||||||||
The
Company has established a valuation allowance against all the deferred tax
assets of its domestic and foreign subsidiaries. Because of the full
valuation allowance, the provision for income taxes consists solely of taxes
currently due to taxing authorities in the United States. Any tax
provision or benefit realized from temporary tax differences is offset by
increases or decreases in the valuation allowance
thus creating a difference from a normally expected effective tax
rate. For the six and three months ended October 31, 2010, the
deferred tax asset valuation allowance increased by approximately $100,000 to
$8.2 million. In future periods, the valuation allowance may be
reduced if the Company’s current positive earnings are sufficient to offset past
losses for purposes of predicting future utilization of deferred tax
assets.
16 of
20
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
In the
first half of fiscal year 2010, the Company expected to carryforward a portion
of the tax loss incurred in the previous fiscal year. Consequently,
the Company did not expect to incur any current tax expense even though it
recorded pretax income for both financial reporting and tax
purposes. Subsequent to the end of the Company’s second quarter, in
November 2009, Congress changed the tax code enabling companies to carry back
tax losses up to five years rather than two years. Consequently, the
Company’s U.S. corporate tax return, filed in January 2010, claimed full benefit
for the loss incurred in fiscal year 2009 and received a tax refund during
fiscal year 2010. In the second half of fiscal year 2010, the Company
recorded an additional tax benefit due to the change in tax law but also
recorded a tax provision on that year’s earnings since the prior year tax loss
had been fully utilized.
The
Company is subject to taxation in several countries as well as the states of New
York and California. The statutory federal rates are 34% in the
United States and Belgium. The effective rate is impacted by the
income or loss of certain of the Company’s European and Asian subsidiaries which
are currently not taxed. In addition, the Company utilizes the
availability of research and development tax credits in the United States to
lower its tax rate. As of April 30, 2010, the Company’s European
subsidiaries had available net operating loss carryforwards of approximately
$1.3 million, which will offset future taxable income. The domestic
U.S. tax loss carryforward for state income tax purposes is approximately $8.4
million in New York and $2.3 million in California.
Net Income
(Loss)
|
Six months
|
Three months
|
|||||||||||||||||||||||||||
|
Periods ended October 31,
|
||||||||||||||||||||||||||||
|
2010
|
2009
|
Change
|
2010
|
2009
|
Change
|
|||||||||||||||||||||||
| $ | 835 | $ | 525 | $ | 310 | 59 | % | $ | 328 | $ | (129 | ) | $ | 457 |
NM
|
|||||||||||||
Net
income for the six and three months ended October 31, 2010 increased over the
same periods of fiscal year 2010 as a result of improved gross margins and
operating profits. In addition, as discussed above, in the fiscal
year 2010 periods, the Company recorded a $200,000 non-cash impairment charge
against its investment in Elcom. Such charges have not been incurred
in fiscal year 2011 to date. The Company expects to realize improved
gross and operating margins throughout fiscal year 2011 and anticipates that it
will report a profit for the full year. However, comparisons of net
income to the prior year will be inconsistent due to the change in tax law as
discussed above.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company’s balance sheet continues to reflect a strong working capital position
of $56 million at October 31, 2010, compared to $53 million at April 30,
2010. Included in working capital at October 31, 2010 is $19.0
million of cash, cash equivalents and marketable securities. The
Company’s current ratio at October 31, 2010 is 8.2 to 1.
For the
six months ended October 31, 2010, the Company used cash in operating activities
in the amount of $1.8 million compared to $2.7 million provided by operations in
the comparable fiscal year 2010 period. The primary uses of cash in
the fiscal year 2011 period were increased inventory and accounts receivable and
payments of estimated income taxes. During the six months ended
October 31, 2010 and 2009, the Company incurred $2.0 million and $2.5 million,
respectively, of non-cash charges to earnings and non-operating income or loss,
such as depreciation and amortization and accruals for employee benefit
programs. For the balance of fiscal year 2011, the Company expects to
generate positive cash flow from operating activities as it sells the inventory,
collects the related receivables and bills and collects its unbilled
revenue.
Net cash
used in investing activities for the six months ended October 31, 2010, was $1.7
million compared to a use of cash of $280,000 for the same period of
fiscal year 2010. In the fiscal year 2011 period, the Company
redeemed a marketable security in the amount of $1.5 million and invested in
additional marketable securities for $2.5 million. In both fiscal
years, the Company acquired property, plant and equipment in the amount of
$694,000 and $280,000, respectively. The Company may continue to
acquire or sell marketable securities as dictated by its investment strategies
as well as by the cash requirements for its development
activities. Property, plant and equipment purchases for all of fiscal
year 2011 are expected to be less than $1.0 million. Internally
generated cash is adequate to acquire this level of property, plant and
equipment.
17 of
20
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Net cash
used in financing activities for the six months ended October 31, 2010, was
$120,000 compared to $1.2 million used during the comparable fiscal year 2010
period. In both fiscal years, financing activity consisted of
payments against the Company’s capital lease obligation. In the six
months ended October 31, 2009, the Company also paid down its line of credit
with a financial institution.
The
Company has been authorized by its Board of Directors to repurchase up to $5
million worth of shares of its common stock for treasury whenever appropriate
opportunities arise but it has neither a formal repurchase plan nor commitments
to purchase additional shares in the future. As of October 31, 2010,
the Company has repurchased approximately $4 million of its common stock out of
the $5 million authorization.
The
Company will continue to expend resources to develop and improve products for
space applications, guidance and targeting systems, and communication systems
which management believes will result in future growth and continued
profitability. During fiscal year 2011, the Company intends to make a
substantial investment of capital and technical resources to develop and acquire
new products to meet the needs of the U.S. Government, commercial space and
telecommunications infrastructure marketplaces and to invest in more efficient
product designs and manufacturing procedures. Where possible, the
Company will secure partial customer funding for such development efforts but is
targeting to spend its own funds at a rate of approximately 10% of revenues to
achieve its development goals. Internally generated cash will be
adequate to fund these development efforts. The Company may also
pursue acquisitions to expand its range of products and may use internally
generated cash and external funding in connection with such
acquisitions.
As of
October 31, 2010, the Company's consolidated backlog amounted to approximately
$31 million. Approximately 75% of this backlog is expected to be
realized in the next twelve months. Included in the backlog at
October 31, 2010 is approximately $5.5 million under cost-plus-fee contracts
which the Company believes represent firm commitments from its customers for
which the Company has not received full funding to date. The Company
excludes from backlog any contracts or awards for which it has not received
authorization to proceed.
The
Company believes that its liquidity is adequate to meet its operating and
investment needs through at least April 30, 2011.
Off-Balance Sheet
Arrangements
The
Company does not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on the Company’s financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors.
Item 3.
Quantitative and Qualitative
Disclosures About Market Risk
Not applicable.
18 of
20
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Item
4.
Controls and
Procedures
Disclosure Controls and
Procedures. The Company’s management, with the participation of the
Company’s chief executive officer and chief financial officer, has evaluated the
effectiveness of the Company’s disclosure controls and procedures (as such term
is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the “Exchange Act”)) as of the end of the period
covered by this report. There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of the controls
and procedures. Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving their control
objectives. Based on their evaluation, the Company’s chief executive
officer and chief financial officer have concluded that, as of October 31, 2010,
the Company’s disclosure controls and procedures were not effective for the
reasons discussed below, to ensure that information relating to the Company,
including its consolidated subsidiaries, required to be included in its reports
that it filed or submitted under the Exchange Act are recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
Management’s Report on
Internal Control over Financial Reporting
Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. The Company’s internal control system is
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Because of
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As
disclosed in its Form 10-K for the year ended April 30, 2010, the Company has
identified several material weaknesses in its internal control over financial
reporting. While the Company did not conduct a full assessment of the
effectiveness of internal controls over financial reporting at October 31, 2010,
for the second quarter of fiscal year 2010, there were no substantial changes
made to the Company’s internal control over financial reporting since
management’s assessment of April 30, 2010, and therefore the weaknesses
previously identified by management continued to exist at October 31,
2010. Please refer to the Company’s Annual Report on Form 10-K for
the year ended April 30, 2010 for a more detailed discussion of the weaknesses
previously identified by management.
Changes in Internal Control
Over Financial Reporting. There were no changes in the Company’s internal
control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the quarter ended October 31, 2010 to
which this report relates that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
PART
II
ITEM 6 -
Exhibits
|
31.1
-
|
Certification
by the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2
-
|
Certification
by the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32.1
-
|
Certification
by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2
-
|
Certification
by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
19 of
20
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934 the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
FREQUENCY
ELECTRONICS, INC.
|
||
|
(Registrant)
|
||
|
Date:
December 15, 2010
|
BY
|
/s/ Alan Miller
|
|
Alan
Miller
|
||
|
Chief
Financial Officer
|
||
|
and
Treasurer
|
||
20 of
20
Exhibit
31.1
CERTIFICATION
PURSUANT TO
SECTION
302 OF
THE
SARBANES-OXLEY ACT OF 2002
I, Martin
B. Bloch, certify that:
1. I
have reviewed this quarterly report on Form 10-Q of Frequency Electronics,
Inc.;
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial
reporting.
|
/s/ Martin Bloch
|
December
15, 2010
|
|
|
Martin
B. Bloch
|
||
|
Chief
Executive Officer
|
Exhibit
31.2
CERTIFICATION
PURSUANT TO
SECTION
302 OF
THE
SARBANES-OXLEY ACT OF 2002
I, Alan
L. Miller, certify that
1. I
have reviewed this quarterly report on Form 10-Q of Frequency Electronics,
Inc.;
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial
reporting.
|
/s/ Alan Miller
|
December
15, 2010
|
|
|
Alan
L. Miller
|
||
|
Chief
Financial Officer
|
Exhibit
32.1
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350
ADOPTED
PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
Certification of
CEO
In
connection with the Quarterly Report of Frequency Electronics, Inc. (the
“Company”) on Form 10-Q for the period ended October 31, 2010 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Martin
B. Bloch, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that to my knowledge:
|
|
(1)
|
The
Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934;
and
|
|
(2)
|
The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
|
|
/s/ Martin Bloch
|
December
15, 2010
|
|
|
Martin
B. Bloch
|
||
|
Chief
Executive Officer
|
A signed
original of this written statement required by Section 906, or other document
authenticating, acknowledging, or otherwise adopting the signature that appears
in typed form within the electronic version of this written statement required
by Section 906, has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff
upon request.
This
certification accompanies this Report on Form 10-Q pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by
such Act, be deemed filed by the Company for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Such certification will not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933, as amended, or the
Exchange Act, except to the extent that the Company specifically incorporates it
by reference.
Exhibit
32.2
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350
ADOPTED
PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
Certification of
CFO
In
connection with the Quarterly Report of Frequency Electronics, Inc. (the
“Company”) on Form 10-Q for the period ended October 31, 2010 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Alan L.
Miller, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that to my knowledge:
|
(1)
|
The
Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934;
and
|
|
(2)
|
The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
|
|
/s/ Alan Miller
|
December
15, 2010
|
|
|
Alan
L. Miller
|
||
|
Chief
Financial Officer
|
A signed
original of this written statement required by Section 906, or other document
authenticating, acknowledging, or otherwise adopting the signature that appears
in typed form within the electronic version of this written statement required
by Section 906, has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff
upon request.
This
certification accompanies this Report on Form 10-Q pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by
such Act, be deemed filed by the Company for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Such certification will not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933, as amended, or the
Exchange Act, except to the extent that the Company specifically incorporates it
by reference.