FREQUENCY ELECTRONICS INC

Previous wording

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. 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, our inability to integrate operations and personnel, actions by significant customers or competitors, general domestic and international economic conditions, reliance on key customers, including the U.S government, 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, the availability of capital, and the outcome of any litigation and arbitration proceedings. The factors listed above are not exhaustive. Other sections of this Form 10-Q and in Part I, Item 1A (Risk Factors) of the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2024 (the “Form 10-K”) include additional factors that could materially and adversely impact the Company’s business, financial condition and results of operations. Moreover, the Company operates in a very competitive and rapidly changing environment. New factors emerge from time to time and it is not possible for management to predict the impact of all these factors on the Company’s business, financial condition or results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this Form 10-Q and any other public statement made by the Company or its management may turn out to be incorrect. The Company expressly disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Current wording

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. 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, our inability to integrate operations and personnel, actions by significant customers or competitors, general domestic and international economic conditions, reliance on key customers, including the U.S government, 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, other supply chain related issues, increasing costs for materials, operating related expenses, competitive developments, changes in manufacturing and transportation costs, the availability of capital, the outcome of any litigation and arbitration proceedings, and failure to maintain an effective system of internal controls over financial reporting.. The factors listed above are not exhaustive. Other sections of this Form 10-Q and in Part I, Item 1A (Risk Factors) of the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2024 (the “Form 10-K”) include additional factors that could materially and adversely impact the Company’s business, financial condition and results of operations. Moreover, the Company operates in a very competitive and rapidly changing environment. New factors emerge from time to time and it is not possible for management to predict the impact of all these factors on the Company’s business, financial condition or results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this Form 10-Q and any other public statement made by the Company or its management may turn out to be incorrect. The Company expressly disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Previous wording

The Company believes its most critical accounting policies to be the recognition of revenue and costs on production contracts and the valuation of inventory. Both of these areas require the Company to make use of reasonable estimates including estimating the cost to complete a contract, the realizable value of its inventory and the market value of its products. Changes in estimates can have a material impact on the Company’s financial position and results of operations. The Company’s significant accounting policies did not change during the three months ended July 31, 2024.

Current wording

The Company believes its most critical accounting policies to be the recognition of revenue and costs on production contracts and the valuation of inventory. Both of these areas require the Company to make use of reasonable estimates including estimating the cost to complete a contract, the realizable value of its inventory and the market value of its products. Changes in estimates can have a material impact on the Company’s financial position and results of operations. The Company’s significant accounting policies did not change during the three and six months ended October 31, 2024.

Previous wording

The table below sets forth for the three months ended July 31, 2024 and 2023, respectively, the percentage of consolidated revenues represented by certain items in the Company’s condensed consolidated statements of operations or notes to the condensed consolidated financial statements:

Current wording

The table below sets forth for the three and six months ended October 31, 2024 and 2023, respectively, the percentage of consolidated revenues represented by certain items in the Company’s condensed consolidated statements of operations or notes to the condensed consolidated financial statements:

Previous wording

For the three months ended July 31, 2024, revenues from commercial and U.S. Government communication satellite programs accounted for approximately 55% of consolidated revenues compared to approximately 39% of consolidated revenues during this same period in the prior fiscal year. Revenues are recognized primarily over time under the percentage-of-completion (“POC”) method. Revenues from the satellite market are recorded in the FEI-NY segment. Revenues from non-space U.S. Government/Department of Defense (“DOD”) customers, which are recorded in both the FEI-NY and FEI-Zyfer segments, accounted for approximately 42% of consolidated revenues for the three months ended July, 31, 2024 compared to approximately 55% of consolidated revenue during the same period in the prior fiscal year. Other commercial and industrial revenues for the three months ended July 31, 2024 accounted for approximately 3% of consolidated revenue compared to 5% in the same period of the prior fiscal year. The significant increase in revenue for this quarter, compared to the same quarter in the previous fiscal year, was reflected in both segments and primarily related to an increase of approximately $3.4 million in sales from space U.S. Government customers, partially offset by a decrease of approximately $0.5 million in sales from non-space U.S. government customers.

Current wording

For the three months ended October 31, 2024, revenues from commercial and U.S. Government communication satellite programs accounted for approximately 59% of consolidated revenues compared to approximately 34% of consolidated revenues during this same period in the prior fiscal year. Revenues are recognized primarily over time under the percentage-of-completion (“POC”) method. Revenues from the satellite market are recorded in the FEI-NY segment. Revenues from non-space U.S. Government/Department of Defense (“DOD”) customers, which are recorded in both the FEI-NY and FEI-Zyfer segments, accounted for approximately 37% of consolidated revenues for the three months ended October, 31, 2024 compared to approximately 60% of consolidated revenue during the same period in the prior fiscal year. Other commercial and industrial revenues for the three months ended October 31, 2024 accounted for approximately 4% of consolidated revenue compared to 5% in the same period of the prior fiscal year. The significant increase in revenue for this quarter, compared to the same quarter in the previous fiscal year, was reflected in the FEI-NY segment and was related an increase of approximately $3.8 million in sales to U.S. Government space customers.

Previous wording

Selling, general, and administrative (“SG&A”) expenses were approximately 19% of consolidated revenues for both the three months ended July 31, 2024 and 2023. The increase in SG&A expense during the three months ended July 31, 2024 was related to an increase in payroll related expenses.

Current wording

For the three months ended October 31, 2024 and 2023, selling, general, and administrative (“SG&A”) expenses were approximately 21% and 19%, respectively, of consolidated revenues. For the six months ended October 31, 2024 and 2023, SG&A expenses were approximately 20% and 19%, respectively, of consolidated revenues. The increase in SG&A expense during the three and six months ended October 31, 2024, was mainly related to an increase in payroll related expenses, costs from the re-alignment of employees from overhead to SG&A, and costs related to Frequency Electronics’ first Quantum Summit in October 2024. The Company believes the costs related to SG&A will remain fairly consistent throughout the remainder of fiscal year 2025.

Previous wording

Research and Development (“R&D”) expenditures represent investments intended to keep the Company’s products at the leading edge of time and frequency technology and enhance future competitiveness. The change in R&D expenditures for the three months ended July 31, 2024, as compared to the prior year quarter, was primarily due to a focus on advances and modernization of products. The Company plans to continue to invest in R&D in the future to keep its products at the state of the art, however we expect the actual quarterly spend to vary.

Current wording

Research and Development (“R&D”) expenditures represent investments intended to keep the Company’s products at the leading edge of time and frequency technology and enhance future competitiveness. The change in R&D expenditures for the three and six months ended October 31, 2024, as compared to the prior year periods, was primarily due to a focus on advances and modernization of products. The Company plans to continue to invest in R&D in the future to keep its products at the state of the art, however we expect the actual quarterly spend to vary.

Previous wording

For the three months ended July 31, 2024, operating income increased due to higher revenue and GM percentage, partially offset by higher R&D expenses.

Current wording

For the three and six months ended October 31, 2024, operating income increased due to higher revenue and GM percentage, partially offset by higher R&D expenses. The increase is partially due to a large space program that completed a major milestone in its production during the three months ended October 31, 2024, as discussed above, however, the increase is also the result of the successful efforts of the Company to complete complex programs and to work more efficiently in bidding, building and testing our products. The Company believes the improved operating income results for the first half of this fiscal year are a tangible outcome of these efforts. The Company seeks to continue to implement changes to further improve its performance.

Previous wording

Other income (expense), net is derived from various sources. The income can come from reclaiming of metal, refunds, interest on deferred trust assets, or the sale of a fixed asset. Interest expense is related to the deferred compensation payments made to retired employees. The majority of the approximately $0.2 million of investment income for the three months ended July 31, 2024 was from unrealized gains on assets held in the Frequency Electronics, Inc. Deferred Compensation Trust .

Current wording

Other income (expense), net is derived from various sources. The income can come from reclaiming of metal, refunds, interest on deferred trust assets, or the sale of a fixed asset. Interest expense is related to the deferred compensation payments made to retired employees. The majority of the approximately $0.2 million and $0.4 million of investment income for the three and six months ended October 31, 2024, respectively, was from unrealized gains on assets held in the Frequency Electronics, Inc. Deferred Compensation Trust.

Previous wording

The estimated annual effective tax rate for the fiscal year ending April 30, 2025 is 4.98%. This calculation reflects estimated income tax expense based on our current year annual pretax income forecast which is offset by the estimated change in the current year valuation allowance. The Company maintains a full valuation allowance against its deferred tax assets. It is reasonably possible the existing valuation allowance will be reduced within the next 12 months.

Current wording

The estimated annual effective tax rate for the fiscal year ending April 30, 2025 is 5.15%. This calculation reflects estimated income tax expense based on our current year annual pretax income forecast which is offset by the estimated change in the current year valuation allowance. The Company maintains a full valuation allowance against its deferred tax assets. It is reasonably possible the existing valuation allowance will be reduced within the next 12 months.

Previous wording

For the three months ended July 31, 2024, the Company recorded an income tax provision of $132,930 which includes a discrete tax income expense of $5,355. The calculation of the overall income tax provision consists of current U.S. federal and state income taxes. For the three months ended July 31, 2023, the Company recorded an income tax provision of $6,894.

Current wording

For the three months ended October 31, 2024, the Company recorded an income tax provision of $138,592 which includes a discrete tax income benefit of $9,577. The calculation of the overall income tax provision consists of current U.S. federal and state income taxes. For the three months ended October 31, 2023, the Company recorded an income tax provision of $6,000.

Previous wording

The effective tax rate for the three months ended July 31, 2024 was an income tax provision of 5.19% on pretax income of $2.6 million compared to an income tax provision of .3% on pretax income of $2.0 million in the comparable prior fiscal year period. The effective tax rate for the three months ended July 31, 2024 differs from the U.S. federal statutory rate of 21% primarily due to the valuation allowance, permanent differences, a change in the uncertain tax position liability and state income taxes.

Current wording

The effective tax rate for the three months ended October 31, 2024 was an income tax provision of 4.96% on pretax income of $2.8 million compared to an income tax provision of .7% on pretax income of $0.8 million in the comparable prior fiscal year period. The effective tax rate for the three months ended October 31, 2024 differs from the U.S. federal statutory rate of 21% primarily due to the valuation allowance, permanent differences, a change in the uncertain tax position liability and state income taxes.

Previous wording

The Company’s consolidated balance sheets continue to reflect a strong working capital position of approximately $20.5 million at July 31, 2024 and $27.3 million at April 30, 2024. Included in working capital at July 31, 2024 and April 30, 2024 was $16.2 million and $18.3 million, respectively, of cash and cash equivalents. The Company’s current ratio was 1.5 to 1 at July 31, 2024 compared to 1.9 to 1 as of April 30, 2024.

Current wording

The Company’s consolidated balance sheets continue to reflect a strong working capital position of approximately $23.4 million at October 31, 2024 and $27.3 million at April 30, 2024. Included in working capital at October 31, 2024 and April 30, 2024 was $9.7 million and $18.3 million, respectively, of cash and cash equivalents. The Company’s current ratio was 1.8 to 1 at October 31, 2024 compared to 1.9 to 1 as of April 30, 2024.

Previous wording

Net cash used in operating activities for the three months ended July 31, 2024 and 2023 was approximately $1.5 million and $2.8 million, respectively. The decrease in net cash used in operating activities in the first three months of fiscal 2025 as compared to the prior fiscal year period was mainly due to increase in inventories partially offset by increased operating income. For the three months ended July 31, 2024 and 2023, the Company incurred approximately $1.3 million and $1.5 million, respectively, of non-cash operating expenses including amortization of ROU assets, depreciation and amortization, inventory net realizable value adjustments, deferred compensation, and accruals for employee benefit programs.

Current wording

Net cash provided by operating activities for the six months ended October 31, 2024 was approximately $2.4 million and net cash used in operating activities for the six months ended October 31, 2023 was $2.9 million. The increase in net cash provided by operating activities in the first six months of fiscal 2025 as compared to the prior fiscal year period was mainly due to an increase in operating income partially offset by increases in inventories levels. For the six months ended October 31, 2024 and 2023, the Company incurred approximately $2.5 million and $2.2 million, respectively, of non-cash operating expenses including amortization of ROU assets, depreciation and amortization, inventory net realizable value adjustments, deferred compensation, and accruals for employee benefit programs.

Previous wording

Net cash used in investing activities for the three months ended July 31, 2024 was approximately $0.3 million compared to net cash provided by investing activities of approximately $0.2 million for the three months ended July 31, 2023. The Company acquired property, plant, and equipment in the amount of approximately $0.3 million and $0.2 million for the three month periods ended July 31, 2024 and 2023, respectively.

Current wording

Net cash used in investing activities for the six months ended October 31, 2024 and 2023 was approximately $0.8 million and $0.4 million, respectively. The Company acquired property, plant, and equipment in the amount of approximately $0.8 million and $0.4 million for the six month periods ended October 31, 2024 and 2023, respectively.

Previous wording

There were no financing activities for the three months ended July 31, 2024 or the three months ended July 31, 2023.

Current wording

Net cash used in financing activities for the six months ended October 31, 2024 was $9.7 million, of which $9.6 million was related to a dividend payout special cash dividend of $1.00 per share of common stock paid on August 29, 2024. There were no financing activities for the six months ended October 31, 2023.

Previous wording

The Company has been authorized by its Board of Directors to repurchase up to $5.0 million worth of shares of its common stock when appropriate opportunities arise. On July 31, 2024, the Company repurchased 4,569 shares of outstanding common stock at $13.60 per share. As of July 31, 2024, the Company has repurchased approximately $4.0 million of its common stock out of the $5 million authorization, the majority of which has since been reissued. For the three months ended July 31, 2023, there were no repurchases of shares.

Current wording

The Company has been authorized by its Board of Directors to repurchase up to $5.0 million worth of shares of its common stock when appropriate opportunities arise. During the six months ended October 31, 2024, the Company repurchased 4,569 shares and 7,893 shares of outstanding common stock at $13.60 per share and $12.62 per share, respectively. As of October 31, 2024, the Company has repurchased approximately $3.6 million of its common stock out of the $5 million authorization, the majority of which has since been reissued. For the six months ended October 31, 2023, there were no repurchases of shares.

Previous wording

As of July 31, 2024, the Company’s consolidated funded backlog was approximately $70 million compared to approximately $78 million at April 30, 2024. Approximately 65% of the backlog, as of July 31, 2024, is expected to be realized in the next twelve months. The Company excludes from backlog any contracts or awards for which it has not received authorization to proceed. On fixed price contracts, the Company excludes any unfunded portion. Over time, as partially funded contracts become fully funded, the Company will add the additional funding to its backlog. The backlog is subject to change for various reasons, including possible cancellation of orders, change orders, terms of the contracts and other factors beyond the Company’s control. Accordingly, the backlog is not necessarily indicative of future revenues or profits (losses) which may be realized when the results of such contracts are reported.

Current wording

As of October 31, 2024, the Company’s consolidated funded backlog was approximately $81 million compared to approximately $78 million at April 30, 2024. Approximately 65% of the backlog, as of October 31, 2024, is expected to be realized in the next twelve months. The Company excludes from backlog any contracts or awards for which it has not received authorization to proceed. On fixed price contracts, the Company excludes any unfunded portion. Over time, as partially funded contracts become fully funded, the Company will add the additional funding to its backlog. The backlog is subject to change for various reasons, including possible cancellation of orders, change orders, terms of the contracts and other factors beyond the Company’s control. Accordingly, the backlog is not necessarily indicative of future revenues or profits (losses) which may be realized when the results of such contracts are reported.