Frequency Electronics, Inc.

Greetings and welcome to the Frequency Electronics first quarter fiscal year 2021 earnings release conference call. At this time, all 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 constitutes forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements inherently involve uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that would 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 this conference call. It is now my pleasure to introduce your host, Mr. Stanton Sloan, President and CEO.

Thank you. Hello, everyone. Thank you for joining us today to discuss first quarter 21 results. Steve will cover financial details with you in a minute, but let me first give you my perspectives on the quarter. I'll start by stating that I'm pleased with the direction I am seeing in the business. Our teams have been working hard both to pursue new business and work our way through some difficult technical challenges on previous programs. We're starting to see the results from these efforts. FDI has a long history of providing products that go into space, and as the U.S. increases its focus there, FEI is well positioned to service that market. Building electronics that have to operate reliably and effectively in that environment is very difficult. FEI has the benefit of over 50 years of experience with our systems operating in space, and that is a knowledge base that we leverage to ensure better, more reliable products. That's an invaluable FEI asset and one which fosters customer confidence in us, as is reflected by the increasing number of awards for precision time and frequency products for satellite applications. I believe we will see continuing growth in this arena as space becomes an increasingly more important domain to the U.S. military, and that bodes very well for FEI. Not wanting to slight our terrestrial market, I'm also pleased with recent awards for precision oscillators that will go into various U.S. military airborne platforms, one of which we announced this afternoon. We at FEI are proud that our electronics can be found in some of the most important tactical and strategic military assets of the United States and its allies. As we complete a couple of the programs that have been nagging us, I expect that our overall financial performance will continue to improve. We, of course, continue to focus on internal operational improvements and cost reductions. One example is our continuing rollout of a new ERP system that is helping us streamline our manufacturing and program management processes. While this quarter showed a net operating loss on a non-GAAP pro forma basis, taking into account extraordinary legal and insurance expenses and the accounting associated with the problem programs I mentioned above, we would be profitable. I see that as a significant improvement. Now let me turn it over to Steve to take you through the financial details. Steve?

Thank you, Stan, and good afternoon. For the three months ended July 31, 2020, consolidated revenue was $13 million, up 3% compared to $12.6 million for the same period of the prior fiscal year. The components of revenue are as follows. Revenue from commercial and U.S. government satellite programs was $6.7 million compared to $3.9 million for the same period of the prior fiscal year and accounted for approximately 51% of consolidated revenues compared to 31% for the same period of the prior fiscal year. Revenues 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 worth $5.3 million compared to $6.7 million in the same period of the prior fiscal year and accounted for approximately 41% of consolidated revenue compared to 54% for the prior fiscal year. Other commercial industrial revenues were $1 million compared to 1.9 in the prior fiscal year. Intersegment revenues are eliminated in consolidation. With the three-month period ending July 31, 2020, the gross margin and gross margin rate both increased marginally over the same period in fiscal 2020. The increase is primarily due to product mix. There were higher engineering costs on several programs in both periods, but as these programs are completed, we expect margins to increase. For the three months ended July 31st, 2020 and 2019, selling and administrative costs were approximately 25% and 20% respectively of consolidated revenue. The increase is due to additional insurance costs and professional fees relating to litigation for which we expect to receive a partial reimbursement through the company's insurance. R&D expense for the three months ending July 31, 2020 and 2019 decreased to $1.2 million from $2.3 million, a decrease of $1.1 million and were 9% and 18% of consolidated revenue. The decrease is due to previous R&D efforts that have ended and turned into production. However, the company plans to continue to invest in R&D. The three months ended July 31, 2020. The company recorded an operating loss of $337,000 compared to $780,000 in the prior year. The operating loss reflects improved in revenue, gross margin, and gross margin rate. Other income consists primarily investments income derived from the company's holdings of marketable securities. The prior year investment income included a dividend received from Morion of $125,000. This yields a pre-tax loss of approximately $253,000 compared to a pre-tax loss of approximately $570,000 for the previous year. For the three months ending July 31, 2020, the company recorded a tax provision of $9,000 compared to $19,000 for the same period of fiscal 2020. Consolidated net loss for the three months ending July 31, 2020 was $262,000 or $0.03 per diluted share compared to $591,000 or $0.07 per diluted share in the previous year. Our fully funded backlog at the end of July 2020 was approximately $38 million, up approximately $2 million from the previous year end, April 30, 2020. The company's balance sheet continues to reflect a strong working capital position of approximately $39 million at July 31, 2020, and a current ratio of approximately 4.6 to 1. The company believes that its liquidity is adequate to meet its operating 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.