Frequency Electronics, Inc.

Greetings and welcome to the Frequency Electronics third quarter fiscal year 2020 earnings release conference call. At this time, our participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. Any statements made by the company during this conference call regarding the future constitute forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements inherently involve uncertainties that hold cause actual results to differ materially from the forward-looking statements. Factors that will cause or contribute to such differences are included in the company's press releases and are further 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 the conference call. It is now my pleasure to introduce your host, Benton Sloan, President and CEO. Please proceed, sir.

Thank you, operator. Welcome, everyone. Thank you for joining us today. Let me start off with a few comments about operations. Third quarter financials were impacted principally by two issues. Firstly, by the termination of a problem program that has been the source of persistent technical and financial issues. Cleaning up this problem has been a focus for some months and I'm glad to now put it behind us. That said, I have also instituted some best practices which I have taken from my experience in a couple of well-run aerospace companies to ensure we avoid this sort of problem in the future. Revenue decreases, the second issue for the quarter, resulted in large part from slippages in U.S. government funding to prime contractors on space programs where we are a potential supplier of frequency generation or conversion systems. On several of these programs, the prime contractors have been awarded the contracts, but they either were not fully funded or there have been extended negotiations regarding the technical baselines, resulting in delays of subcontract awards to us, which of course impact the timing of our revenue. On some of these programs, FEI is in a very strong position as a supplier of choice, and it's simply a matter of timing. I would add that the total value of new business opportunities we are pursuing continues to grow and is currently around $660 million. That is the strongest leading indicator of future revenue and profit growth. We have invested significant resources in R&D and infrastructure to position the company to win more than our fair share of these opportunities and deliver products. And I'm confident that we will do both. Overall, I sense a renewed spirit at FEI and a growing optimism about the future. I can certainly assure you that's how I feel. I should also comment on the coronavirus issue, which I know is on everyone's mind these days. And to give you some comfort, we have taken appropriate precautions here including canceling business travel, screening or restricting visitors, and arranging for employees who may have been exposed to work from home. We're also in discussions with our supply chain to ensure there are no disruptions in the flow of parts and materials. Remember as well that we've not had any involvement with operations outside the U.S., like China or Belgium, for more than a year. So at the moment, we do not foresee any impact to our operations. Now let me turn things over to Steve Bernstein to take us through financial details for the quarter, and we'll come back with questions after that.

Thank you, Stan, and good afternoon. For the nine and three months ending January 31, 2020, consolidated revenue was $31.3 million and $9.6 million compared to $36.3 million and $13.2 million for the prior fiscal year. The components of revenue for the nine-month period are as follows. Revenues from commercial and U.S. government satellite programs was $14.7 million compared to $17.3 million for the same period of the prior fiscal year and accounted for approximately 47% of consolidated revenue compared to 48% for the same period of the prior fiscal year. Revenue on satellite payload contracts are recognized primarily under the percentage of completion method and are recorded only in the FEI New York segment. Revenues from non-space U.S. government and DOD customers which are recorded in both the FEI New York and FEI Zephyr segments are $12.7 million compared to $17.1 million in the prior fiscal year and accounted for approximately 41% of consolidated revenue compared to 47% for the prior fiscal year. Other commercial and industrial revenues were $3.9 million compared to $2 million in the prior fiscal year. Intersegment revenues are eliminated in consolidation. Third quarter revenue was impacted by the conclusion of a program that has been the source of consistent technical and cost issues. Following a mutual agreement with the end customer, this program was terminated, incurring a reduction to revenue of approximately $725,000 during this quarter. For the nine and three months periods ending January 31, 2020, gross margin was $5.9 million and 3.1 million compared to 3.1 million and 4.1 million for the same periods of the previous fiscal year. Gross margin rate decreased to 18.9% and 30.3% as compared to 34.1 and 31.1% for the same periods in fiscal 2019. The gross margin and gross margin rate decreased as compared to the same periods in fiscal 2019 principally due to the program described above as well as charges detailed in the previous quarters. Despite the current quarter charge, the gross margin rate for the three month period ending January 31st, 2020 remained relatively comparable to the gross margin rate for the three months period ending January 31st, 2019. For the nine and three months period ending January 31st, 2020, selling and general administrative expenses increased compared to the same period in fiscal 2019 For the nine months ending January 31, 2020 and 2019, SG&A expenses were approximately 26% and 22% respectively of consolidated revenues. For the three months ended January 31, 2020 and 2019, SG&A expenses were approximately 35% and 20% respectively of consolidated revenues. The large increase in both percentage and dollar amount during the three-month period ending January 31, 2020 was due to increases in depreciation, insurance expense, professional fees, and payroll-related expenses. Research and development expenditures represent investments intended to keep the company's products at the leading edge of time and frequency technology and enhance future competitiveness. The R&D rate for the nine months ended January 31, 2020 was 15% of sales compared to 14% of sales for the same period of the previous fiscal year. The R&D rate for the three months ended January 31, 2020 was 10% of sales as compared to 14% of sales for the same period of the previous fiscal year. For the nine and three months ended January 31, 2020, the company recorded operating losses of 7.3 million and 1.6 million compared to $540,000 and $394,000 for the prior fiscal year. Other income consists primarily of investment income derived from the company's holdings of marketable securities. Through the nine-month period ending January 31st, 2020, other income include a dividend of $250,000 from Morion compared to $105,000 in the prior fiscal year. Other income expense in fiscal 2019 also included certain miscellaneous income and the proceeds of an insurance policy. This yields a pre-tax loss for the 9 months and 3 months period ending January 31, 2020 of approximately $7 million and $1.6 million compared to a pre-tax loss of approximately $168,000 and $261,000 for the prior year. For the nine months ending January 31, 2020, the company recorded a tax provision of $48,000 compared to $38,000 for the same period of fiscal 2019. For the nine months ended January 31, 2020, consolidated net loss was $7.1 million or $0.78 per diluted share compared to $168,000 or $0.02 per diluted share for the same period of the previous fiscal year. For the three months ended January 31, 2020 consolidated net loss was $1.6 million or $0.17 per diluted share compared to $321,000 or $0.04 per diluted share for the same period of the previous fiscal year. Our fully funded backlog at the end of January 2020 was approximately $36 million down approximately $4 million from the previous quarter. However, subsequent to quarter end, the company received over $3.5 million in additional funding on two existing programs. The company's balance sheet continues to reflect a strong working capital position of approximately $40 million at January 31, 2020, debt-free, and a current ratio of over 6.1 to 1. The company believes that its liquidity is adequate to meet operation and investing needs for the next 12 months and the foreseeable future. I will turn the call back to Stan, and we look forward to your questions later.