TEL-INSTRUMENT ELECTRONICS CORP. You should read the following discussion and analysis of our financial condition and results of our operations together with our financial statements and the notes thereto appearing elsewhere in this Annual Report. This discussion contains forward-looking statements reflecting our current expectations, whose actual outcomes involve risks and uncertainties. Actual results and the timing of events may differ materially from those stated in or implied by these forward-looking statements due to a number of factors, including those discussed in the section relating to Forward-Looking Statements below and elsewhere in this Annual Report. Please see the notes to our Financial Statements for information about our Critical Accounting Policies and Recently Issued Accounting Pronouncements.
Forward Looking Statements
A number of the statements made by the Company in this report may be regarded as "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1965.
Forward-looking statements include, among others, statements concerning the Company's outlook, pricing trends and forces within the industry, the completion dates of projects, expected sales growth, cost reduction strategies and their results, long-term goals of the Company and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.
All predictions as to future results contain a measure of uncertainty and
accordingly, actual results could differ materially. Among the factors that
could cause a difference are changes in the general economy; changes in demand
for the Company's products or in the costs and availability of its raw
materials; the actions of competitors; the success of our customers,
technological change; changes in employee relations; government regulations;
litigation, including its inherent uncertainty; difficulties in plant operations
and materials transportation; environmental matters; and other unforeseen
circumstances, including the current COVID-19 pandemic. A number of these
factors are discussed in the Company's filings with the
General
Management's discussion and analysis of results of operations and financial
condition is intended to assist the reader in the understanding and assessment
of significant changes and trends related to the results of operations and
financial position of the Company . This discussion and analysis should be read
in conjunction with the consolidated financial statements and accompanying
financial notes, and with the Critical Accounting Policies noted below. The
Company's fiscal year begins on
Overview
Fiscal year 2022 operations continued to be affected by the ongoing outbreak of COVID-19 and its variants. While the business is still strong, the Company has been impacted by the pandemic in its commercial business and delays in orders from some of its military customers. The pandemic has also impacted its supply chain and labor force with disruptions to both the delivery of critical inventory components and personnel shortages due to COVID quarantines, which have hampered our ability to ship units under normal lead times. Although the Company has been negatively impacted by the pandemic, there was an increase in sales during fiscal 2022.
The Company reported net income of
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Overview (continued)
The Company continues to pursue in the domestic and international market for
our Mode 5 test sets with good results. We continue to receive volume orders
from
The Company is also actively looking at expanding out of its current core
avionics market area. TIC is working with Lockheed Martin (LMCO) on a new MADL
test set. TIC was awarded this contract after winning a
The main focus area for the Company is moving into the secure communications
testing with our new DSR/OMNI test set. The world's first "All-in-One" Avionics
Test Set utilizes true software-designed radio technology that enables it to
test all common avionics functions in one 4.5 pound test set. The SDR/OMNI has
very wide frequency to accommodate new commercial and military waveforms in an
industry leading 4.5-pound package. This is half the weight of competitive test
sets. It utilizes the latest touch screen technology and has the capability to
replace all TIC commercial test sets and military flight-line test sets with one
handheld product. he
The Aeroflex litigation (see Note 19 to the consolidated financial statements) did not result in a favorable outcome for the Company, despite our belief that we committed no wrongdoing.
The jury found no misappropriation of Aeroflex trade secrets, but it did rule
that the Company tortiously interfered with a prospective business opportunity
and awarded damages. The jury also ruled that Tel tortiously interfered with
Aeroflex's non-disclosure agreements with two former Aeroflex employees. The
jury also found that the former Aeroflex employees breached their non-disclosure
agreements with Aeroflex. The Court conducted further hearings on the Company's
post-trial motions which sought to reduce the damages award of
As reflected in the accompanying consolidated balance sheet as of
The Company is very optimistic about the prospects of its appeal for a judgment
as a matter of law. The Company was hoping for a decision from the court this
calendar year, but this timing will likely be delayed due to the three month
COVID-19 related shutdown of the
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Overview (continued)
On
The Company believes it has sufficient cash on hand and expected cash flow from operations for the next twelve months due to the increase in business and the opportunities that exist for the next few years.
Results of Operations 2022 Compared to 2021
Sales
For the year ended
Gross Margin
Gross margin increased
Operating Expenses
Selling, general and administrative expenses, along with litigation expense,
decreased
Engineering, research, and development expenses increased
Income from Operations
As a result of the above, the Company recorded income from operations in the
amount of
Other Income
For the year ended
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Income before Income Taxes
As a result of the above, the Company recorded income before taxes of
Income Taxes
For the year ended
The differences between income taxes expected at the
Net Income
As a result of the above, the Company recorded net income of
Liquidity and Capital Resources
On
On
As discussed in Note 19 of the consolidated financial statements, the Company
has recorded total damages of
The Company is very optimistic about the prospects of its appeal for a judgment
as a matter of law. The Company was hoping for a decision from the court this
calendar year, but this timing has been delayed due to the COVID-19 related
shutdown of the
On
On
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Liquidity and Capital Resources (continued)
On
Based on the foregoing, we believe that our expected cash flows from operations, line of credit in place and current cash balances will be sufficient to operate in the normal course of business for next 12 months from the issuance date of these financial statements, including any payments for settlement of the Aeroflex litigation.
The Company continues to monitor the impact of the COVID-19 outbreak on its
supply chain, manufacturing and distribution operations, customers, and
employees, as well as the
During the year ended
Cash provided (used in) operating activities. For the year ended
Cash (used in) investing activities. For the year ended
Cash (used in) provided by financing activities. For the year ended
Currently, the Company has no material future capital expenditure requirements.
There was no significant impact on the Company's operations as a result of
inflation for the year ended
Critical Accounting Policies
In preparing the consolidated financial statements and accounting for the underlying transactions and balances, the Company applies its accounting policies as disclosed in Note 2 of our Notes to Consolidated Financial Statements. The Company's accounting policies that require a higher degree of judgment and complexity used in the preparation of these consolidated financial statements include:
Revenue recognition - The Company accounts for revenue recognition in accordance
with the
The Company generates revenue from designing, manufacturing, and selling avionic tests and measurement solutions for the global commercial air transport, general aviation, and government/military aerospace and defense markets. The Company also offers calibration and repair services for a wide range of airborne navigation and communication equipment.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Critical Accounting Policies (continued)
The Company recognizes revenue when the customer obtains control of promised goods or services, in an amount that reflects the consideration which is expected to be received in exchange for those goods or services. The Company recognizes revenue following the five-step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Nature of goods and services
The following is a description of the products and services from which the Company generates revenue, as well as the nature, timing of satisfaction of performance obligations, and significant payment terms for each.
Test Units/Sets
The Company develops, and manufactures unit sets to test navigation and communication equipment, such as ramp testers and bench testers for radios installed in aircraft. The Company recognizes revenue when the customer obtains control of the Company's product based on the contractual shipping terms of the contract, which is usually at the time of shipment. Revenue on products is presented gross because the Company is primarily responsible for fulfilling the promise to provide the product, is responsible to ensure that the product is produced in accordance with the related supply agreement and bears the risk of loss while the inventory is in-transit. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products to the customer.
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines stand-alone selling prices based on the price at which the performance obligation is sold separately. If the stand-alone selling price is not observable through past transactions, the Company estimates the standalone selling price considering available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
When determining the transaction price of a contract, an adjustment is made if
payment from the customer occurs either significantly before or significantly
after performance, resulting in a significant financing component. Applying the
practical expedient in paragraph 606-10-32-18, the Company does not assess
whether a significant financing component exists if the period between when the
Company performs its obligations under the contract and when the customer pays
is one year or less. None of the Company's contracts contained a significant
financing component as of
Replacement Parts
The Company offers replacement parts for test equipment, ramp testers, and bench testers. Similar to the sale of test units, the control of the product transfers at a point of time and therefore, revenue is recognized at the point in time when the obligation to the customer has been fulfilled.
Extended Warranties
The extended warranties sold by the Company provide a level of assurance beyond
the coverage for defects that existed at the time of a sale or against certain
types of covered damage with coverage terms generally ranging from 5 to 7 years.
Amounts received for warranties are recorded as deferred revenue and recognized
as revenue ratably over the respective term of the agreements. As of
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Critical Accounting Policies (continued)
The following table provides a summary of the changes in deferred revenues
related to extended warranties for the year ended
Deferred revenues related to extended warranties on
54,479
Revenue recognized for the year ended March 31, 2022 (75,791 )
Deferred revenues related to extended warranties on
Other Deferred Revenues
The Company sometimes receives payments in advance of shipment. These amounts
are classified as other deferred revenues. For the year ended
Repair and Calibration Services
The Company offers repair and calibration services for units that are returned for annual calibrations and/or for repairs after the warranty period has expired. The Company repairs and calibrates a wide range of airborne navigation and communication equipment. Revenue is recognized at the time the repaired or calibrated unit is shipped back to the customer, as it is at this time that the work is completed.
Other
The majority of the Company's revenues are from contracts with the
Payment terms and conditions vary by contract, although terms generally include a requirement of payment within a range from 30 to 60 days, or in certain cases, up-front deposits. In circumstances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that the Company's contracts generally do not include a significant financing component. Payments received prior to the delivery of units or services performed are recorded as deferred revenues. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from sales. The Company applied the practical expedient to account for shipping and handling activities as fulfillment cost rather than as a separate performance obligation. Shipping and handling costs charged to customers are classified as sales, and the shipping and handling costs incurred are included in cost of sales.
All sales are denominated in
will be required for the Company to conform to ASC 606.
Disaggregation of revenue
In the following tables, revenue is disaggregated by revenue category.
For the Year Ended
March 31, 2022
Commercial Government
Sales Distribution
Test Units $ 409,594 $ 10,307,842
$ 409,594 $ 10,307,842
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Critical Accounting Policies (continued)
The remainder of our revenues for the year ended
For the Year Ended
March 31, 2021
Commercial GovernmentSales Distribution Test Units$ 325,195 $ 9,858,537 $ 325,195 $ 9,858,537
The remainder of our revenues for the year ended
In the following table, revenue is disaggregated by geography.
For the Year For the Year
Ended Ended
March 31, 2022 March 31, 2021
Geography
United States $ 8,175,301 $ 5,511,516
International 4,757,489 6,071,004
Total $ 12,932,790 $ 11,582,520 Inventory reserves - inventory reserves or write-downs are estimated for excess, slow-moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value. These estimates are based on current assessments about future demands, market conditions and related management initiatives. If market conditions and actual demands are less favorable than those projected by management, additional inventory write-downs may be required. While such write-downs have historically been within our expectation and the provision established, the Company cannot guarantee that it will continue to receive positive results.
Warranty reserves - warranty reserves are based upon historical rates and
specific items that are identifiable and can be estimated at time of sale. While
warranty costs have historically been within the Company's expectations and the
provisions established, future warranty costs could be in excess of the
Company's warranty reserves. A significant increase in these costs could
adversely affect the Company's operating results for the period and the periods
these additional costs materialize. Warranty reserves are adjusted from time to
time when actual warranty claim experience differs from estimates. For the year
ended
Accounts receivable - the Company performs ongoing credit evaluations of its
customers and adjusts credit limits based on customer payment and current credit
worthiness, as determined by review of their current credit information. The
Company continuously monitors credits and payments from its customers and
maintains provision for estimated credit losses based on its historical
experience and any specific customer issues that have been identified. While
such credit losses have historically been within our expectation and the
provision established, the Company cannot guarantee that it will continue to
receive positive results. For the years ended
22
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Critical Accounting Policies (continued)
Income taxes - deferred tax assets arise from a variety of sources, the most
significant being a) tax losses that can be carried forward to be utilized
against profits in future years; b) expenses recognized in the books but
disallowed in the tax return until the associated cash flow occurs; and c)
valuation changes of assets which need to be tax effected for book purposes but
are deductible only when the valuation change is realized. Deferred tax assets
and liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using enacted tax rates
and laws that are expected to be in effect when such differences are expected to
reverse. The measurement of deferred tax assets is reduced, if necessary, by a
valuation allowance for any tax benefit which is not more likely than not to be
realized. In assessing the need for a valuation allowance, future taxable income
is estimated, considering the realization of tax loss carryforwards. Valuation
allowances related to deferred tax assets can also be affected by changes to tax
laws, changes to statutory tax rates and future taxable income levels. In the
event it was determined that the Company would not be able to realize all or a
portion of its deferred tax assets in the future, the Company would reduce such
amounts through a charge to income in the period in which that determination is
made. Conversely, if it were determined that it would be able to realize the
deferred tax assets in the future in excess of the net carrying amounts, TIC
would decrease the recorded valuation allowance through an increase to income in
the period in which that determination is made. In its evaluation of a valuation
allowance, the Company considers existing contracts and backlog, and the
probability that options under these contract awards will be exercised as well
as sales of existing products. The Company prepares profit projections based on
the revenue and expenses forecast to determine that such revenues will produce
sufficient taxable income to realize the deferred tax assets. The Company
determined they will be able to realize the majority of its deferred tax assets
as a result of its current projections on
Off Balance Sheet Arrangements
The Company is not party to any off-balance sheet arrangements that may affect its financial position or its results of operations.
New Accounting Pronouncements
In
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Critical Accounting Policies (continued)
No other recently issued accounting pronouncements had or are expected to have a material impact on the Company's consolidated financial statements.
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