FEIM Net Income Halves Amid Rising Costs, Flat Revenue

Ticker: FEIM · Form: 10-Q · Filed: Dec 15, 2025 · CIK: 39020

Sentiment: bearish

Topics: Earnings Decline, Cost of Revenue Increase, Gross Margin Compression, Operating Income Drop, Cash Flow Decrease, Shareholder Equity Growth, Inventory Increase

Related Tickers: FEIM

TL;DR

**FEIM's profit plunge is a red flag; rising costs are eating into margins, making it a risky bet.**

AI Summary

FREQUENCY ELECTRONICS INC (FEIM) reported a significant decline in net income for the six months ended October 31, 2025, falling to $2.435 million from $5.084 million in the prior year, a 52.1% decrease. Basic and diluted EPS also dropped from $0.53 to $0.25. Revenues remained relatively flat at $30.939 million for the six-month period, compared to $30.898 million in 2024. However, cost of revenues increased substantially by 16.5% to $19.321 million, impacting gross margin, which decreased by 18.8% to $11.618 million. Selling and administrative expenses rose by 15.6% to $7.207 million, and research and development expenses decreased by 24.9% to $2.332 million. The company's cash and cash equivalents and restricted cash decreased by $1.709 million to $4.376 million, primarily due to a $958,000 purchase of treasury stock and $1.389 million in fixed asset purchases. Contract assets decreased from $17.914 million to $15.501 million, while inventories increased from $23.487 million to $24.682 million.

Why It Matters

This filing reveals a concerning trend for FEIM investors: net income has been cut in half despite stable revenues, primarily due to increased costs of revenue and selling expenses. This indicates eroding profitability and operational inefficiencies, which could pressure the stock price. For employees, the flat revenue combined with higher costs might signal a need for cost-cutting measures in the future. Customers may not see immediate impacts, but sustained financial pressure could affect future product development or service quality. In the competitive landscape, FEIM's declining profitability could make it less attractive compared to more efficient peers, potentially impacting its market position in precision time and frequency control products.

Risk Assessment

Risk Level: high — The risk level is high due to a 52.1% decrease in net income from $5.084 million to $2.435 million for the six months ended October 31, 2025, despite flat revenues. This significant decline in profitability, coupled with a 16.5% increase in cost of revenues to $19.321 million and a 15.6% rise in selling and administrative expenses to $7.207 million, indicates severe margin compression and operational challenges.

Analyst Insight

Investors should consider a cautious approach or further investigation into FEIM's cost structure and operational efficiency. The significant drop in net income and rising costs suggest underlying issues that could continue to depress earnings. Monitor future filings for signs of cost control improvements or revenue growth initiatives.

Financial Highlights

revenue
$30.939M
net Income
$2.435M
eps
$0.25
gross Margin
37.56%
cash Position
$4.376M
revenue Growth
0.01%

Key Numbers

Key Players & Entities

FAQ

Why did FREQUENCY ELECTRONICS INC's net income decrease significantly in Q2 2026?

FREQUENCY ELECTRONICS INC's net income decreased by 52.1% to $2.435 million for the six months ended October 31, 2025, primarily due to a 16.5% increase in cost of revenues to $19.321 million and a 15.6% rise in selling and administrative expenses to $7.207 million, despite revenues remaining flat at $30.939 million.

What were the key revenue and cost trends for FEIM in the latest 10-Q filing?

For the six months ended October 31, 2025, FEIM's revenues were $30.939 million, nearly flat compared to $30.898 million in the prior year. However, cost of revenues increased by 16.5% to $19.321 million, leading to an 18.8% decrease in gross margin to $11.618 million. Selling and administrative expenses also rose by 15.6% to $7.207 million.

How did FEIM's cash position change during the six months ended October 31, 2025?

FEIM's cash and cash equivalents and restricted cash decreased by $1.709 million, from $6.085 million at the beginning of the period to $4.376 million at October 31, 2025. This was largely influenced by $1.389 million in fixed asset purchases and $958,000 spent on treasury stock.

What is the outlook for FEIM's profitability given the Q2 2026 results?

The Q2 2026 results indicate a challenging outlook for FEIM's profitability, with net income more than halving and gross margin significantly compressed. The company faces pressure from rising costs of revenues and increased selling and administrative expenses, suggesting that maintaining or improving profitability will require effective cost management strategies.

What are the primary business segments of FREQUENCY ELECTRONICS INC?

FREQUENCY ELECTRONICS INC operates under two reportable segments: FEI-NY, which focuses on precision time and frequency control products for communication satellites, terrestrial telecommunication stations, and the U.S. military; and FEI-Zyfer, which incorporates GPS technologies into systems for secure communications and locator applications, also providing sales and support for wireline telecommunications products.

Did FEIM issue any dividends in the period covered by the 10-Q?

No cash dividends were paid during the six months ended October 31, 2025. However, in the prior year, on July 22, 2024, the Board of Directors declared a special cash dividend of $1.00 per share, totaling approximately $9.6 million, which was paid on August 29, 2024.

How much did FEIM spend on research and development in the latest period?

For the six months ended October 31, 2025, FREQUENCY ELECTRONICS INC spent $2.332 million on research and development expenses. This represents a 24.9% decrease compared to $3.101 million spent in the same period of 2024.

What is the weighted average discount rate for FEIM's operating leases?

As of October 31, 2025, the weighted average discount rate for FREQUENCY ELECTRONICS INC's operating leases was 7.08%. This is an increase from 6.38% as of October 31, 2024.

What is the current number of outstanding shares for FREQUENCY ELECTRONICS INC?

As of December 10, 2025, the number of shares outstanding of FREQUENCY ELECTRONICS INC's Common Stock, par value $1.00 per share, was 9,777,647. This compares to 9,773 shares outstanding at October 31, 2025.

What are the main risks highlighted in FEIM's 10-Q filing?

While the filing mentions 'Item 1A – Risk Factors' on page 23, the provided text does not detail specific risks. However, the financial performance itself, with a 52.1% drop in net income and significant increases in cost of revenues and selling expenses, indicates operational and financial risks related to profitability and cost control.

Risk Factors

Industry Context

Frequency Electronics operates in the highly specialized markets of advanced frequency control and timing solutions, primarily serving defense, aerospace, and telecommunications sectors. These markets demand high reliability, precision, and often custom-engineered products. The industry is characterized by long product development cycles, stringent qualification processes, and significant R&D investment requirements.

Regulatory Implications

As a supplier to government and defense contractors, FEIM is subject to various regulations, including export controls (ITAR, EAR) and cybersecurity standards. Compliance is critical to maintaining business relationships and avoiding penalties. Changes in government spending priorities or defense budgets can also significantly impact demand for its products.

What Investors Should Do

  1. Monitor the trend in Cost of Revenues: The 16.5% increase is a key driver of the net income decline. Investors should look for explanations and mitigation strategies in future filings.
  2. Analyze R&D Spending: The 24.9% decrease in R&D expenses, while potentially boosting short-term profitability, could impact long-term competitiveness. Assess if this is a strategic shift or a temporary measure.
  3. Evaluate Working Capital Efficiency: The decrease in cash and increase in inventory, coupled with a decrease in contract assets, suggests potential cash conversion cycle challenges that need close observation.
  4. Scrutinize SG&A Expenses: The 15.6% increase in Selling and Administrative expenses, while revenues are flat, warrants understanding the drivers behind this rise and its impact on operating leverage.

Glossary

Contract Assets
Represents the company's unconditional right to consideration for work completed or services provided to a customer, for which the payment is not yet due. It arises when the company has performed its obligations under a contract but has not yet billed the customer. (A decrease from $17.914 million to $15.501 million suggests a potential slowdown in billing or project completion relative to revenue recognition.)
Treasury Stock
Represents shares of the company's own stock that it has repurchased from the open market. These shares are held by the company and can be reissued later. (A purchase of $958K in treasury stock, up from $162K in the prior year, indicates the company is using cash to buy back its own shares, reducing outstanding shares but also cash reserves.)
Cost of Revenues
The direct costs attributable to the production or purchase of the goods sold by a company. This includes materials, direct labor, and manufacturing overhead. (An increase of 16.5% to $19.321 million, while revenues remained flat, significantly eroded gross margins.)
Gross Margin
The difference between revenue and cost of goods sold, expressed as a percentage of revenue. It indicates the profitability of a company's core business operations before considering operating expenses. (A decrease of 18.8% to $11.618 million highlights the negative impact of rising costs on profitability.)

Year-Over-Year Comparison

Compared to the prior year's six-month period, Frequency Electronics Inc. has experienced a significant 52.1% drop in net income, falling to $2.435 million from $5.084 million, with EPS halving from $0.53 to $0.25. While revenues remained virtually flat at $30.939 million, the cost of revenues surged by 16.5%, severely compressing the gross margin by 18.8%. Operating expenses also rose, with Selling and Administrative costs up 15.6%, although R&D saw a notable decrease of 24.9%. The company's cash position has weakened, and it has increased its investment in treasury stock and fixed assets.

Filing Stats: 4,661 words · 19 min read · ~16 pages · Grade level 14.8 · Accepted 2025-12-15 16:19:20

Key Financial Figures

Filing Documents

Financial Information

Part I. Financial Information:

- Financial Statements

Item 1 - Financial Statements: 3 Condensed Consolidated Balance Sheets – October 31, 2025 (unaudited) and April 30, 2025 3 Condensed Consolidated Statements of Operations – Three and Six Months Ended October 31, 2025 and 2024 (unaudited) 4 Condensed Consolidated Statements of Cash Flows Six Months ended October 31, 2025 and 2024 (unaudited) 5 Condensed Consolidated Statements of Changes in Stockholders' Equity – Three and Six Months Ended October 31, 2025 and 2024 (unaudited) 6-7 Notes to Condensed Consolidated Financial Statements (unaudited) 8-15

- Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 16-22

- Quantitative and Qualitative Disclosures About Market Risk

Item 3 - Quantitative and Qualitative Disclosures About Market Risk 22

- Controls and Procedures

Item 4 - Controls and Procedures 22

Other Information

Part II. Other Information:

– Risk Factors

Item 1A – Risk Factors 23

– Unregistered Sales of Equity Securities and Use of Proceeds

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds 23

– Other Information

Item 5 – Other Information 24

- Exhibits

Item 6 - Exhibits 24

Signatures

Signatures 25 Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands, except par value) October 31, April 30, 2025 2025 (UNAUDITED) ASSETS: Current assets: Cash and cash equivalents $ 2,992 $ 4,720 Accounts receivable, net of allowances of $ 102 at October 31, 2025 and $ 110 at April 30, 2025 6,069 5,914 Contract assets 15,501 17,914 Inventories 24,682 23,487 Prepaid income taxes 226 - Prepaid expenses and other 1,449 1,071 Total current assets 50,919 53,106 Property, plant, and equipment, net 6,601 6,188 Deferred taxes 12,153 12,045 Goodwill 617 617 Cash surrender value of life insurance and assets held in trust 11,404 10,882 Right-of-use assets – operating leases 8,302 8,659 Restricted cash 1,384 1,365 Other assets 875 875 Total assets $ 92,255 $ 93,737 LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Accounts payable – trade $ 1,420 $ 1,359 Accrued liabilities 5,022 5,899 Loss provision accrual 46 460 Income taxes payable - 103 Operating lease liability - current portion 2,083 2,027 Contract liabilities 11,095 13,607 Total current liabilities 19,666 23,455 Deferred compensation 7,819 7,933 Operating lease liability – non-current portion 6,315 6,729 Total liabilities 33,800 38,117 Stockholders' equity: Preferred stock - $ 1.00 par value; authorized 600 shares, no shares issued - - Common stock - $ 1.00 par value; authorized 20,000 shares, 9,818 shares issued and 9,773 shares outstanding at October 31, 2025; 9,717 shares issued and 9,704 shares outstanding at April 30, 2025 9,818 9,717 Additional paid-in capital 43,732 42,475 Retained earnings 6,094 3,659 Common stock reacquired and held in treasury - at cost ( 45 shares at October 31, 2025 and 13 shares at April 30, 2025) ( 1,189 ) ( 231

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