Business Overview and History

Frequency Electronics, Inc. (NASDAQ:FEIM) is a pioneering force in the design, development, and manufacture of high-precision timing, frequency generation, and RF control products. With over 60 years of industry experience, the company has established itself as a global leader in delivering critical solutions for space and terrestrial applications.

Frequency Electronics was founded in 1961 in Mitchel Field, New York, with a focus on delivering precision frequency control products to the U.S. government and commercial markets. The company was incorporated in Delaware in the same year. In its early years, Frequency Electronics focused on developing high-quality quartz crystals and oscillators for the space and defense industries, quickly establishing a reputation for producing some of the most precise and reliable timing products on the market. This allowed the company to secure contracts with major aerospace and defense customers, including NASA and the U.S. Department of Defense.

Over the decades, the company has expanded its expertise and product portfolio, becoming a trusted partner for a diverse range of industries, including aerospace, defense, telecommunications, and scientific research. In the 1970s and 1980s, Frequency Electronics made advancements in rubidium and cesium atomic clock technologies, further strengthening its position in the precision timing market. The company also diversified into commercial telecommunications applications during this period, developing frequency generation and synchronization products for the burgeoning cellular industry.

The company's core competencies lie in the development of highly specialized quartz oscillators, synthesizers, and receivers, which are essential components in mission-critical systems such as satellite communications, navigation, and timing. Frequency Electronics' products are renowned for their unparalleled accuracy, stability, and reliability, making them indispensable in applications where precision is paramount.

In the early 2000s, Frequency Electronics faced challenges as the telecommunications market experienced a downturn. The company had to navigate this period by refocusing its efforts on the aerospace and defense sectors, where demand for its products remained strong. This required Frequency Electronics to make difficult decisions, including restructuring its operations and workforce. However, the company was able to weather the storm and emerge as a leaner, more focused organization.

Financial Performance and Ratios

Frequency Electronics' financial performance has been marked by a steady upward trajectory in recent years. For the fiscal year ended April 30, 2024, the company reported revenues of $55.27 million, a significant increase from the $40.78 million reported in the previous fiscal year. This robust revenue growth was accompanied by a substantial improvement in operating income, which reached $5.02 million, compared to an operating loss of $4.67 million in the prior fiscal year.

The company's gross profit margin for the fiscal year 2024 stood at 33.6%, reflecting an increase from the 19.3% reported in the previous year. This margin expansion can be attributed to the company's successful execution of complex programs and improved operational efficiency.

Financials

Frequency Electronics' current ratio, a measure of its liquidity, stood at 1.89 as of April 30, 2024, indicating a strong ability to meet its short-term obligations. The company's debt-to-equity ratio, a metric that evaluates its financial leverage, was a conservative 0.16, suggesting a healthy balance sheet and low reliance on debt financing.

For the most recent fiscal year ended April 30, 2024, Frequency Electronics reported annual revenue of $55.27 million, annual net income of $5.59 million, annual operating cash flow of $8.71 million, and annual free cash flow of $7.22 million.

In the most recent quarter, ended October 31, 2024, Frequency Electronics reported quarterly revenue of $15.82 million, a 16.5% increase compared to the same period in the previous fiscal year. Operating income for the quarter reached $2.62 million, a substantial improvement from the $0.94 million recorded in the prior-year quarter. The company's quarterly net income was $2.65 million, or $0.28 per diluted share, compared to $797,000, or $0.08 per diluted share, in the same period of the prior fiscal year.

For the six months ended October 31, 2024, FEIM reported consolidated revenue of $30.9 million, compared to $26 million for the same period in the prior fiscal year. This represents substantial growth in revenue. Gross margin and gross margin rate also increased compared to the same period in the prior fiscal year. The gross margin rate was particularly attributable to a large space program that completed a major production milestone.

Operating income for the six months ended October 31, 2024 was $5 million, compared to $3 million in the prior year. This increase was partially due to the large space program milestone as well as the company's efforts to complete complex programs more efficiently. Consolidated net income for the six months ended October 31, 2024 was $5.1 million or $0.53 per share, compared to $2.8 million or $0.30 per share in the previous fiscal year.

Liquidity

As of October 31, 2024, Frequency Electronics had $9.70 million in cash and cash equivalents. The company's current ratio was 1.80 and its quick ratio was 0.93, indicating adequate liquidity to meet short-term obligations. The company is currently debt-free and believes its liquidity is adequate to meet its operating and investing needs for the next 12 months and the foreseeable future.

The company's backlog, a key indicator of future business, reached a record high of $81 million as of October 31, 2024, compared to $78 million at the end of the previous fiscal year. This robust backlog provides visibility into the company's growth potential and reflects its strong position in the markets it serves.

Diversified Revenue Streams and Market Exposure

Frequency Electronics' revenue streams are diversified across several key market segments. For the fiscal year 2024, the company's revenue was distributed as follows:

• Commercial and U.S. Government communication satellite programs: 57%

• Non-space U.S. Government and Department of Defense (DOD) customers: 39%
• Other commercial and industrial revenue: 4%

This diversification helps to mitigate the company's exposure to any single market or customer, enhancing its resilience and long-term sustainability.

The company operates through two reportable segments based on the geographic locations of its subsidiaries:

1. FEI-NY Segment: This segment operates out of New York and focuses on precision time and frequency control products for communication satellites, terrestrial cellular networks, and U.S. military applications. 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 in this segment, compared to 34% in the same period of the prior fiscal year. This significant increase was related to an increase of approximately $3.8 million in sales to U.S. Government space customers. Revenues from non-space U.S. Government Department of Defense (DOD) customers accounted for approximately 37% of consolidated revenues for the same period.

2. FEI-Zyfer Segment: Operating out of California, this segment incorporates Global Positioning System (GPS) technologies into systems and subsystems for secure communications and other locator applications. For the three months ended October 31, 2024, revenues from the FEI-Zyfer segment accounted for 28.8% of consolidated revenues, compared to 35% in the same period of the prior fiscal year. The decrease was primarily due to a shift in product mix towards higher revenues from the satellite programs in the FEI-NY segment.

Quantum Sensor Summit and Emerging Opportunities

In October 2024, Frequency Electronics hosted its first Quantum Sensor Summit, a technical conference that brought together experts from around the world to share insights and expectations regarding the rapidly developing field of quantum technology. This event not only highlighted the company's expertise in this emerging domain but also underscored its proactive approach to identifying and capitalizing on new growth opportunities.

The company's efforts in the quantum sensor market, coupled with its established presence in the satellite and defense sectors, position Frequency Electronics well to leverage its technical capabilities and diversify its revenue streams in the years to come.

Navigating Challenges and Mitigating Risks

Like any industry leader, Frequency Electronics has faced its share of challenges over the years. In the fiscal year 2023, the company reported a net loss of $5.5 million, primarily due to technical issues that impacted its ability to execute certain complex programs. However, the company has since resolved these challenges and demonstrated its resilience, as evidenced by its strong performance in the subsequent fiscal year.

Additionally, the company is mindful of the potential risks associated with government contracts, including funding uncertainties and shifting priorities. To mitigate these risks, Frequency Electronics maintains a diversified customer base and continuously invests in research and development to ensure its products remain at the forefront of technological advancements.

Future Outlook and Growth Strategies

As Frequency Electronics looks to the future, the company remains focused on capitalizing on the growing demand for its precision timing and frequency control solutions. The proliferation of small satellite technology presents a particularly promising opportunity, as the company leverages its expertise to develop smaller, more cost-effective products that cater to this emerging market.

Furthermore, the company's strategic investment in quantum sensor technology positions it to capitalize on the growing importance of this field in various applications, including navigation, communication, and scientific research. With a strong backlog, a diversified revenue base, and a commitment to innovation, Frequency Electronics is well-equipped to navigate the evolving market landscape and drive sustainable long-term growth.

The company plans to continue investing approximately 10% of revenue in R&D going forward, up from around 6% in the prior fiscal year, in order to develop products targeted at the proliferated small satellite market. This increased investment demonstrates Frequency Electronics' commitment to staying at the forefront of technological advancements in its industry.

Frequency Electronics expects SG&A expenses to have an annual run rate of approximately $3 million per quarter, with about 25% being non-cash expenses. This provides clarity on the company's expected operational costs moving forward.

Conclusion

Frequency Electronics' rich history, technical expertise, and proven track record of delivering mission-critical solutions have established the company as a leader in the precision timing and frequency control industry. As the company continues to adapt to the changing market dynamics, its focus on innovation, diversification, and operational excellence position it for continued success in the years to come. With a strong financial performance, robust backlog, and strategic investments in R&D, Frequency Electronics is well-positioned to capitalize on emerging opportunities in the satellite and quantum technology markets, driving long-term growth and value for its stakeholders.