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 July 31, 2005
OR
[ ] 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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12 b-2). Yes No X
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of Registrant's Common Stock, par value $1.00
as of September 9, 2005 - 8,526,600
Page 1 of 20
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets -
July 31, 2005 and April 30, 2005 3-4
Condensed Consolidated Statements of Operations
Three Months Ended July 31, 2005 and 2004 5
Condensed Consolidated Statements of Cash Flows
Three Months Ended July 31, 2005 and 2004 6
Notes to Condensed Consolidated Financial Statements 7-10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-14
Item 3- Quantitative and Qualitative Disclosures about Market Risk 14-15
Item 4- Controls and Procedures 15
Part II. Other Information:
Items 1 through 5 are omitted because they are not applicable
Item 6 - Exhibits 15
Signatures 16
Exhibits 17-20
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Condensed Consolidated Balance Sheets
July 31, April 30,
2005 2005
---- ----
(UNAUDITED) (NOTE A)
(In thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 3,689 $ 6,701
Marketable securities 20,449 23,532
Accounts receivable, net of allowance for
doubtful accounts of $172 13,385 12,728
Inventories 23,708 22,948
Deferred income taxes 2,569 2,269
Prepaid expenses and other 1,721 1,362
-------- --------
Total current assets 65,521 69,540
Property, plant and equipment, at cost,
less accumulated depreciation and
amortization 6,708 6,770
Deferred income taxes 2,594 2,644
Cash surrender value of life insurance 5,958 5,838
Goodwill and other Intangible assets, net 572 591
Other assets 3,125 2,991
-------- --------
Total assets $ 84,478 $ 88,374
======== ========
See accompanying notes to condensed consolidated
financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Condensed Consolidated Balance Sheets (Continued)
July 31, April 30,
2005 2005
---- ----
(UNAUDITED) (NOTE A)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable - trade $ 2,253 $ 1,896
Accrued liabilities and other 3,260 3,912
Income taxes payable 511 3,184
Dividend payable - 852
-------- --------
Total current liabilities 6,024 9,844
Deferred compensation 7,883 7,812
Deferred gain and other liabilities 1,424 1,525
-------- -------
Total liabilities 15,331 19,181
-------- --------
Stockholders' equity:
Preferred stock - $1.00 par value - -
Common stock - $1.00 par value 9,164 9,164
Additional paid-in capital 45,372 45,289
Retained earnings 13,582 12,440
-------- --------
68,118 66,893
Common stock reacquired and held in treasury
-at cost, 638,340 shares at July 31, 2005
and 646,709 shares at April 30, 2005 (2,576) (2,601)
Accumulated other comprehensive income 3,605 4,901
-------- --------
Total stockholders' equity 69,147 69,193
-------- --------
Total liabilities and stockholders' equity $ 84,478 $ 88,374
======== ========
See accompanying notes to condensed consolidated
financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three Months Ended July 31,
(Unaudited)
2005 2004(a)
---- -------
(In thousands except per share data)
Net Sales $11,057 $17,683
Cost of sales 6,960 11,905
------- -------
Gross Margin 4,097 5,778
Selling and administrative expenses 2,544 3,293
Research and development expense 1,442 1,236
------- -------
Operating profit 111 1,249
Other income (expense):
Investment income 1,325 415
Equity in Morion (a) 144 54
Interest expense (28) (78)
Other income, net 69 58
------- -------
Income before minority interest and
provision for income taxes 1,621 1,698
Minority interest in income of
consolidated subsidiary - 19
------- -------
Income before provision for income taxes 1,621 1,679
Provision for income taxes 479 648
------- -------
Net income $ 1,142 $ 1,031
======= =======
Net earnings per common share
Basic $ 0.13 $ 0.12
======= =======
Diluted $ 0.13 $ 0.12
======= =======
Average shares outstanding
Basic 8,520,020 8,434,618
========= =========
Diluted 8,657,340 8,646,358
========= =========
(a) Prior period amounts have been restated to reflect the Company's
equity income from its investment in Morion, Inc.
See accompanying notes to condensed consolidated
financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Three Months Ended July 31,
(Unaudited)
2005 2004(a)
---- ------
(In thousands)
Cash flows from operating activities:
Net income $ 1,142 $ 1,031
Non-cash charges to earnings (561) 533
Net changes in other assets and liabilities (5,315) 389
------- -------
Net cash (used in) provided by operating activities (4,734) 1,953
------- -------
Cash flows from investing activities:
Proceeds from sale of marketable securities 6,256 500
Purchase of marketable securities (2,879) (2,240)
Other - net (520) (257)
------- -------
Net cash provided by (used in) investing activities 2,857 (1,997)
------- -------
Cash flows from financing activities:
Payment of cash dividend (852) (843)
Payment on long-term obligations - (1,442)
Other - net - 60
------- -------
Net cash (used in) provided by financing activities (852) (2,225)
------- -------
Net decrease in cash and cash equivalents
before effect of exchange rate changes (2,729) (2,269)
Effect of exchange rate changes
on cash and cash equivalents (283) (8)
------- -------
Net decrease in cash (3,012) (2,277)
Cash at beginning of period 6,701 5,699
------- -------
Cash at end of period $ 3,689 $ 3,422
======= =======
(a) Prior period amounts have been restated to reflect the Company's
equity income from its investment in Morion, Inc.
See accompanying notes to condensed consolidated
financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE A - CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management of 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, 2005 and the results of its operations and cash flows for the three
months ended July 31, 2005 and 2004. The April 30, 2005 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. It is suggested that these condensed consolidated financial statements
be read in conjunction with the financial statements and notes thereto included
in the Company's April 30, 2005 Annual Report to Stockholders. The results of
operations for such interim periods are not necessarily indicative of the
operating results for the full year.
NOTE B - EARNINGS PER SHARE
Reconciliation of the weighted average shares outstanding for basic and
diluted Earnings Per Share are as follows:
Periods ended July 31,
Three months
2005 2004
---- ----
Basic EPS Shares outstanding
(weighted average) 8,520,020 8,434,618
Effect of Dilutive Securities 137,320 211,740
--------- ---------
Diluted EPS Shares outstanding 8,657,340 8,646,358
========= =========
Options to purchase 570,550 and 231,750 shares of common stock were
outstanding during the three months ended July 31, 2005 and 2004, respectively,
but were not included in the computation of diluted earnings per share. Since
the exercise price of these options was greater than the average market price of
the Company's common shares during the periods, their inclusion in the
computation would have been antidilutive. Consequently, these options are
excluded from the computation of earnings per share.
NOTE C - ACCOUNTS RECEIVABLE
Accounts receivable at July 31 and April 30, 2005 include costs and
estimated earnings in excess of billings on uncompleted contracts accounted for
on the percentage of completion basis of approximately $3,334,000 and
$4,138,000, respectively. Such amounts represent revenue recognized on long-term
contracts that had not been billed at the balance sheet dates. Such amounts are
billed pursuant to contract terms.
NOTE D - INVENTORIES
Inventories, which are reported net of reserves of $4,252,000 and
$4,289,000 at July 31 and April 30, 2005, respectively, consist of the
following:
July 31, 2005 April 30, 2005
------------- --------------
(In thousands)
Raw materials and Component parts $10,646 $10,353
Work in progress and Finished goods 13,062 12,595
------- -------
$23,708 $22,948
======= =======
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE E - -COMPREHENSIVE INCOME
For the three months ended July 31, 2005 total comprehensive loss was
($154,000) and for the three months ended July 31, 2004, total comprehensive
income was $1,980,000. Comprehensive income is composed of net income or loss
for the period plus the impact of foreign currency translation adjustments and
the change in the valuation allowance on marketable securities.
NOTE F - SEGMENT INFORMATION
The Company operates under four reportable segments:
(1) Commercial Communications - consists principally of time and frequency
control products used in two principal markets- commercial
communication satellites and terrestrial cellular telephone or other
ground-based telecommunication stations.
(2) U.S. Government - consists of time and frequency control products used
for national defense or space-related programs.
(3) Gillam-FEI - the Company's Belgian subsidiary primarily sells wireline
synchronization and network monitoring systems.
(4) FEI-Zyfer - the products of the Company's subsidiary incorporate
Global Positioning System (GPS) technologies into systems and
subsystems for secure communications, both government and commercial,
and other locator applications.
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):
Three months ended July 31,
2005 2004
---- ----
Net sales:
Commercial Communications $ 4,969 $11,313
U.S. Government 1,887 1,741
Gillam-FEI 2,215 2,740
FEI-Zyfer 2,445 2,034
less intercompany sales (459) (145)
------- -------
Consolidated Sales $11,057 $17,683
======= =======
Operating profit (loss):
Commercial Communications $ 434 $ 1,964
U.S. Government (500) (80)
Gillam-FEI (66) (497)
FEI-Zyfer 333 (38)
Corporate (90) (100)
------ -------
Consolidated Operating Profit $ 111 $ 1,249
====== =======
July 31, 2005 April 30, 2005
Identifiable assets:
Commercial Communications $27,783 $26,261
U.S. Government 5,746 6,245
Gillam-FEI 14,123 13,877
FEI-Zyfer 5,717 4,796
less intercompany balances (10,663) (9,892)
Corporate 41,772 47,087
------- -------
Consolidated Identifiable Assets $84,478 $88,374
======= =======
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE G - EQUITY-BASED COMPENSATION
The Company applies the disclosure-only provisions of FAS 123, "Accounting
for Stock-Based Compensation," as amended by FAS 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," and continues to measure
compensation cost in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Historically, this has not resulted
in compensation cost upon the grant of options under a qualified stock option
plan. However, in accordance with FAS 123, as amended by FAS 148, the Company
provides pro forma disclosures of net earnings (loss) and earnings (loss) per
share as if the fair value method had been applied beginning in fiscal 1996.
The following table illustrates the effect on the Company's consolidated
statements of operations had compensation cost for stock option awards under the
plans been determined based on the fair value at the grant dates consistent with
the provisions of FAS 123 as amended by FAS 148:
Three months ended July 31
2005 2004
---- ----
(In thousands except per share data)
Net Income, as reported $1,142 $1,031
Cost of stock options, net of tax (93) (195)
------ ------
Net Income - pro forma $1,049 $ 836
====== ======
Earnings per share, as reported:
Basic $ 0.13 $ 0.12
====== ======
Diluted $ 0.13 $ 0.11
====== ======
Earnings per share- pro forma
Basic $ 0.12 $ 0.10
====== ======
Diluted $ 0.12 $ 0.10
====== ======
The weighted average fair value of each option has been estimated on the
date of grant using the Black-Scholes options pricing model with the following
weighted average assumptions used for grants in fiscal years 2006 and 2005:
dividend yield of 1.83%; expected volatility of 59%; risk free interest rate of
3.9%; and expected lives of six and one-half years.
NOTE H - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued Statement No. 151 "Inventory Costs."
("FAS 151") This statement amends Accounting Research Bulletin No. 43, Chapter
4, "Inventory Pricing" and removes the "so abnormal" criterion that under
certain circumstances could have led to the capitalization of these items. FAS
151 requires that idle facility expense, excess spoilage, double freight and
re-handling costs be recognized as current-period charges regardless of whether
they meet the criterion of "so abnormal." FAS 151 also requires that allocation
of fixed production overhead expenses to the costs of conversion be based on the
normal capacity of the production facilities. The provisions of this statement
are effective for fiscal years beginning after June 15, 2005; i.e., fiscal year
2007 for the Company. The adoption of FAS 151 is not expected to have a material
impact on the Company's financial position or results of operations.
In December 2004, the FASB issued Statement No. 123(R), "Stock-Based
Payment" ("FAS 123(R)"). FAS 123(R) supercedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and amends FAS No. 95, "Statement of Cash
Flows." Generally, the approach in FAS 123(R) is similar to the approach
described in FAS 123. FAS 123(R) establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
FAS 123(R) requires that the fair value of such equity instruments be recognized
as an expense in the historical financial statements as services are performed.
Prior to FAS 123(R), only certain pro forma disclosures of fair value were
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
required. The provisions of this statement are effective for fiscal years
beginning after June 15, 2005; i.e., fiscal year 2007 for the Company. The
adoption of FAS 123(R) will have an impact on the Company's financial position
and results of operations similar to the pro forma disclosure in the
Equity-based Compensation disclosure in Note G.
In December 2004, the FASB issued Statement No. 153, "Exchange of
Non-monetary Assets", ("FAS 153") an amendment of Accounting Principles Board
Opinion No. 29 ("APB 29"), which differed from the International Accounting
Standards Board's ("IASB") method of accounting for exchanges of similar
productive assets. FAS 153 replaces the exception from fair value measurement in
APB 29, with a general exception from fair value measurement for exchanges of
non-monetary assets that do not have commercial substance. The statement is to
be applied prospectively and is effective for non-monetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005; i.e., August 1, 2005
for the Company. The adoption of FAS 153 is not expected to have a material
impact on the Company's financial position or result of operations.
In May 2005, the FASB issued Statement No. 154, "Accounting Changes and
Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No.
3." ("FAS 154") This Statement requires retrospective application to prior
period financial statements of a voluntary change in accounting principle unless
it is impracticable and is effective for fiscal years beginning after December
15, 2005. Previously, most voluntary changes in accounting principle were
recognized by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. The Company will comply with
the provisions of FAS 154 although the impact of such adoption is not
determinable at this time.
Item 2
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 10Q 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. Forward-looking statements
inherently involve risks and uncertainties that could cause actual results to
differ materially from the forward-looking statements. 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. 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, 2005
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, generally defined as orders in
excess of $100,000, are reported in operating results using the percentage of
completion method. For U.S. Government and other fixed-price contracts that
require initial design and development of the product, revenue is recognized on
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
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. 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.
On production-type contracts, revenue is recorded as units are delivered
with the related cost of sales recognized on each shipment based upon a
percentage of estimated final contract 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 contracts in the Company's Gillam-FEI and FEI-Zyfer segments, smaller
contracts or orders in the other business segments and sales of products and
services to customers are reported in operating results based upon shipment of
the product or performance of the services pursuant to contractual terms. 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, 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 reserves are established
for slow-moving and obsolete items and are based upon management's experience
and expectations for future business. Any changes in reserves arising from
revised expectations are reflected in cost of sales in the period the revision
is made.
RESULTS OF OPERATIONS
The table below sets forth for the respective periods of fiscal years 2006
and 2005 the percentage of consolidated net sales represented by certain items
in the Company's consolidated statements of operations:
Three months ended July 31,
2005 2004
---- ----
Net Sales (exclusive of intercompany sales)
Commercial Communications 40.8% 63.2%
U.S. Government 17.1 9.8
Gillam-FEI 20.0 15.5
FEI-Zyfer 22.1 11.5
----- -----
100.0 100.0
Cost of Sales 63.0 67.3
----- -----
Gross Margin 37.0 32.7
Selling and administrative expenses 23.0 18.6
Research and development expenses 13.0 7.0
----- -----
Operating Profit 1.0 7.1
Other income, net & Minority interest 13.6 2.4
----- -----
Pretax Income 14.6 9.5
Provision for income taxes 4.3 3.7
----- -----
Net Income 10.3% 5.8%
===== =====
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
For the three months ended July 31, 2005, the operating profit of $111,000
decreased by $1.1 million from the operating profit of $1.2 million for the same
period ended July 31, 2004. The decline in operating profits is principally the
result of the 37% decrease in revenues which was offset by improved gross margin
and lower selling and administrative expenses, as discussed below. Net income
for the first quarter of fiscal year 2006 was $1.1 million, an increase of
$111,000 over net income of $1.0 million reported in the same period of fiscal
year 2005. During the fiscal year 2006 period the Company realized a gain of $1
million on the sale of certain marketable securities that were obtained upon the
conversion of its REIT units for the common stock of Reckson Associates Realty
Corp. ("REIT stock") (Refer to Item 2 of the Company's fiscal year 2005 Form
10-K as filed with the Securities and Exchange Commission.)
Net sales for the three months ended July 31, 2005, decreased by $6.6
million (37%) from the same period of fiscal year 2005. On a segment by segment
basis, the comparison of revenues for the fiscal quarter ended July 31, 2005 to
the first quarter of fiscal year 2005 were as follows: Commercial Communications
revenues decreased by $6.3 million (56%); US Government revenues increased by
$146,000 (8%); Gillam-FEI revenues decreased by $525,000 (19%); and FEI-Zyfer
revenues increased by $411,000 (20%). The Commercial Communications revenues
reflect reduced capital spending in the wireless infrastructure industry as
end-users continued to delay deployment of next-generation cellular base
stations. US Government segment revenues were up modestly as the Company
continued work on several developmental, pre-production programs under US
Government contracts. Gillam-FEI revenues reflect the decline in
telecommunications infrastructure spending in Europe. Revenues for the FEI-Zyfer
segment reflect continued improved performance for this subsidiary. The Company
expects revenues to improve over the balance of the fiscal year as a result of
additional new bookings, principally in the commercial satellite and U.S.
Government industries, as well as increased capital spending for
telecommunication infrastructures.
Gross margin rates for the three months ended July 31, 2005, improved to
37.1% from 32.7% in the same period of fiscal year 2005. The improvement is
attributable to product mix, with the Gillam-FEI segment in particular,
realizing a higher margin on certain of its network monitoring programs. Gross
margin rates are lower than the Company's target of 40% because the lower sales
volume is insufficient to absorb all of the fixed overhead costs. With an
increase in sales, the Company expects to realize improving gross margin rates
in future periods.
Selling and administrative costs for the three months ended July 31, 2005,
decreased by $749,000 (23%) over the same period of fiscal year 2005. Most of
the decrease is attributable to decreased personnel costs both in terms of
reduced headcount as well as smaller accruals for incentive compensation plans
due to lower profits. Additional decreases were experienced in selling and
marketing expenses, including lower sales commissions as a result of decreased
sales and lower European-area marketing costs as the Company consolidated its
efforts into its Gillam-FEI subsidiary. The ratio of selling and administrative
costs to net sales for the first quarter of fiscal year 2006 was 23% which is
greater than the Company's target ratio of under 20% of revenues. The higher
than targeted cost ratio is primarily due to the revenue level in the fiscal
year 2006 quarter. In the comparable fiscal year 2005 period, the ratio of
selling and administrative costs to revenues was 19%. In future quarters of
fiscal year 2006, as revenues increase from the current level, the Company
expects to achieve its targeted ratio of costs to net sales.
Research and development spending in the three months ended July 31, 2005
increased by $206,000 (17%) over the comparable period ended July 31, 2004. In
the prior year fiscal quarter, the lower level of spending reflected the fact
that certain developmental resources were applied to funded research contracts
rather than internal research and development efforts, the costs of which are
borne by the Company. The costs of those resources assigned to funded programs
were reflected in cost of sales rather than in research and development expense.
With the completion of certain of the developmental programs during the latter
portion of fiscal year 2005, those resources are now being applied to internal
programs. During fiscal year 2006, the Company will make additional investments
in developing manufacturing process improvements for its new US5G wireline
synchronization product; improving and miniaturizing rubidium atomic clocks,
developing new GPS-based synchronization products and further enhancing the
capabilities of its line of crystal oscillators. The Company targets research
and development spending at approximately 10% of sales, but the rate of spending
can increase or decrease from quarter to quarter as new projects are identified
and others are concluded. The Company will continue to devote significant
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
resources to develop new products, enhance existing products and implement
efficient manufacturing processes. Where possible, the Company attempts to
obtain development contracts from its customers. For programs without such
funding, internally generated cash and cash reserves are adequate to fund these
development efforts.
Net nonoperating income and expense increased by $1.1 million (236%) in the
three month period ended July 31, 2005 compared to the same period of fiscal
year 2005. Investment income increased by $910,000 (219%) during the first
quarter of fiscal year 2006 compared to the same period of fiscal year 2005. The
increase is due to the realized gain of approximately $1.0 million recorded on
the sale of a portion of the shares of REIT stock which were obtained during
fiscal year 2005 upon the conversion of certain REIT units related to the
Company's fiscal year 1998 sale and leaseback of its headquarters building.
Also included in nonoperating income is equity income in Morion, Inc.
During the second quarter of fiscal year 2005, the Company increased its
ownership interest in Morion to 36% of Morion's outstanding shares. Accordingly,
the Company changed its method of accounting from the cost to the equity method
and restated prior year financial statements to reflect the appropriate
accounting method. The restated equity income from Morion for the first quarter
of fiscal year 2005 is $54,000 as compared to $144,000 for the quarter ended
July 31, 2005. The increase of $90,000 (167%) is primarily the result of the
Company's increased ownership interest from 19% at July 31, 2004 to 36% as of
July 31, 2005.
For the three month period ended July 31, 2005, interest expense decreased
by $50,000 (64%) compared to the same period of fiscal year 2005. This decrease
resulted from the repayment of the Company's line of credit by the end of fiscal
year 2005 as well as the conversion of its REIT units to REIT stock the impact
of which is explained in the next paragraph.
Under the provisions of sale and leaseback accounting, until the REIT units
were converted, the Company's lease was accounted for as a financing.
Accordingly, a portion of its prior year annual rent payments were considered
interest expense. For fiscal year 2006, the Company will no longer recognize
interest expense but the entire lease payment will be charged to rent expense.
In addition, under the caption "Other, net" the Company will recognize the
remaining deferred gain from the sale and leaseback transaction. For the quarter
ended July 31, 2005, the amount of deferred gain recognized was $88,000. In the
year-ago period, Other, net consisted primarily of a governmental grant received
by the Company's French subsidiary. Other income and expense items included
under this caption are nonrecurring and generally are not significant to pretax
earnings.
The Company is subject to taxation in several countries as well as the
states of New York and California. The statutory federal rates vary from 34% in
the United States to 35% in Europe. 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.
The Company's European subsidiaries have available net operating loss
carryforwards of approximately $2.4 million to offset future taxable income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet continues to reflect a strong working capital
position of $59 million at July 31, 2005, which is comparable to working capital
at April 30, 2005. Included in working capital at July 31, 2005 is $24.1 million
of cash, cash equivalents and marketable securities. The Company's current ratio
at July 31, 2005 is 10.9 to 1.
For the three months ended July 31, 2005, the Company used $4.7 million in
cash from operating activities compared to $1.9 million provided by operations
in the comparable fiscal year 2005 period. This significant decrease in cash
flows is due primarily to the payment of income taxes related to the investment
gains realized in the prior fiscal year as well as increases in the value of the
Company's accounts receivable and inventory. For the full fiscal year 2006, the
Company expects to generate positive cash flow from operating activities.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Net cash provided by investing activities for the three months ended July
31, 2005, was $2.9 million compared to a use of cash of $2.0 million for the
same period of fiscal year 2005. The principal source of cash was the sale or
redemption of certain marketable securities aggregating $3.4 million, net of
purchases of other marketable securities. The redemption of marketable
securities was primarily to pay the corporate income taxes mentioned above. The
Company also acquired capital equipment for approximately $520,000. 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. Requirements for additional capital equipment are expected to be
less than $2.0 million during fiscal year 2006. Internally generated cash will
be adequate to acquire this capital equipment.
Net cash used in financing activities for the three months ended July 31,
2005, was $852,000 compared to cash used in financing activities in the amount
of $2.2 million during the comparable fiscal year 2005 period. Included in both
fiscal periods is payment of the Company's semiannual dividend in the amount of
$852,000 and $843,000, respectively. During the fiscal year 2005 quarter, the
Company repaid $1.4 million of certain debt obligations.
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. During the quarter
ended July 31, 2005, the Company did not acquire any shares of its stock under
this authorization.
The Company will continue to expend resources to develop and improve
products for wireless and wireline communication systems which management
believes will result in future growth and continued profitability. During fiscal
year 2006, the Company intends to make a substantial investment of capital and
technical resources to develop new products to meet the needs of the U.S.
Government, commercial space and commercial communications 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.
At July 31, 2005, the Company's backlog amounted to approximately $31
million similar to the backlog at April 30, 2005. Of this backlog, approximately
80% is realizable in the next twelve months.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
- ------------------
The Company is exposed to market risk related to changes in interest rates
and market values of securities. The Company's investments in fixed income and
equity securities were $16.9 million and $3.5 million, respectively, at July 31,
2005. The investments are carried at fair value with changes in unrealized gains
and losses recorded as adjustments to stockholders' equity. The fair value of
investments in marketable securities is generally based on quoted market prices.
Typically, the fair market value of investments in fixed interest rate debt
securities will increase as interest rates fall and decrease as interest rates
rise. Based on the Company's overall interest rate exposure at July 31, 2005, a
10% change in market interest rates would not have a material effect on the fair
value of the Company's fixed income securities or results of operations.
Foreign Currency Risk
- ---------------------
The Company is subject to foreign currency translation risk. The Company
does not have any near-term intentions to repatriate invested cash in any of its
foreign-based subsidiaries. For this reason, the Company does not intend to
initiate any exchange rate hedging strategies which could be used to mitigate
the effects of foreign currency fluctuations. The effects of foreign currency
rate fluctuations will be recorded in the equity section of the balance sheet as
a component of other comprehensive income. As of July 31, 2005, the amount
related to foreign currency exchange rates is a $3,115,000 unrealized gain.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
The results of operations of foreign subsidiaries, when translated into US
dollars, will reflect the average rates of exchange for the periods presented.
As a result, similar results of operations measured in local currencies can vary
significantly upon translation into US dollars if exchange rates fluctuate
significantly from one period to the next.
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. Based on such evaluation, the
Company's chief executive officer and chief financial officer have concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act.
Internal Control Over Financial Reporting. There have not been any 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
period 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
ITEMS 1 through 5 are omitted because they are not applicable.
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.
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: September 14, 2005 BY /s/ Alan Miller
---------------------------
Alan Miller
Chief Financial Officer
and Controller
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
Certification of CEO
I, Martin B. Bloch, Chief Executive Officer, 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(s) 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)) 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) 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;
(c) 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 September 14, 2005
--------------------------
Martin B. Bloch
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
Certification of CFO
I, Alan L. Miller, Chief Financial Officer, 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(s) 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)) 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) 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;
(c) 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 L. Miller September 14, 2005
---------------------------
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 July 31, 2005 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 September 14, 2005
------------------------------
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 July 31, 2005 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 L. Miller September 14, 2005
--------------------------
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.