Frequency Electronics, Inc.

Greetings, and welcome to the Frequency Electronics third quarter fiscal year 2022 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 obligations to update these statements for revisions or changes after the date of this conference call. It is now my pleasure to introduce your host, Santon Sloan, President and CEO.

Thank you. Welcome, everybody. I'm glad that you could join us today. Before I turn this over to Steve to take us through financial details, let me offer a few thoughts. Third quarter was challenging, particularly in our Zephyr operation, due to delays in bookings and the reduced revenue that resulted from that. We haven't seen any competitive losses there, just delays, so we anticipate these bookings will still come in. We're taking advantage of the lull in production to transition manufacturing from California to a New York facility, which will have the compound effect of significantly reducing costs at Zephyr and reducing manufacturing overhead costs for the Zephyr products that will be manufactured in New York. This will result in benefits over the long run. In the New York operation, we were hit with a severe round of COVID-related employee absences, which affected the quarter's revenue and operating income. Despite the challenges, we saw an increase in revenue for the quarter compared to the first two quarters, as well as compared to Q3 of fiscal year 21. Bookings for the fiscal year are solid, running well ahead of where we thought we'd be for the year, and up about 30% from this point last year for the New York operation, and up about 21% overall for the company. Backlog is now up to $41.6 million, and the overall book-to-bill ratio for the quarter was a healthy 1.27 for the company, but an even better 1.4 in the core New York operations. As usual, we generated cash from operations, $4 million for the year so far, and cash and marketable securities currently stand at $22.2 million, up $2.1 million from year-end fiscal year 21. We also remain debt-free. On the technical front, our digital rubidium atomic clock for the GPS3F program is progressing extremely well through its qualification testing, and we have in production additional units one of which will be used for long-term testing on the ground by the government, and one which is planned to fly on a GPS-3 satellite to validate its operation in space. Our pulsed optically pumped rubidium atomic clock is progressing well in its design phase also. Laboratory testing has indicated its performance will be outstanding, ultimately enabling better holdover times and helping mitigate GPS jamming and spoofing. The Mercury ion clock development is also underway. In addition to these two Office of Naval Research funded projects, we are pursuing a variety of new technology opportunities with various government agencies for not only advanced atomic clocks, but also some new technologies unrelated to clocks as part of our effort to grow top and bottom line. While I can't go into the details here, These are exciting opportunities, and I look forward to sharing more about these as things progress. With that, let me ask Steve to cover financial details for you, and after that, we will take some questions. Steve?

Thank you, Stan, and good afternoon. For the nine months added to January 31st, 2022, consolidated revenue was $38.1 million compared to $38.6 million for the same period of the prior fiscal year. The components on revenue are as follows. Revenue from commercial and U.S. government satellite programs was approximately $20.9 million, or 62% of consolidated revenue, compared to $20.1 million, or 52%, in 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 FAA New York segments. Revenues from non-space U.S. government and DOD customers, which are recorded both in the FEI New York and FEI's diaper segments, were $14.9 million compared to $16.3 million in the same period of the prior fiscal year and accounted for approximately 39% of consolidated revenue compared to 42% for the prior fiscal year. Other commercial and industrial revenues were $2.4 million compared to $2.2 million in the same period in the prior fiscal year, intersegment revenues are eliminated in consolidation. When the nine months ended January 31st, 2022, gross margin and gross margin rate decreased as compared to the same period in fiscal year 21. The decrease in gross margin and gross margin rate was due to an increased engineering costs on development phase programs that experienced particularly complex technical challenges as well as cost impacts on several programs resulting from supply chain issues. Lack of availability of parts and material and or quality problems with traditional vendors resulted in the need to redesign certain electronic units to replace unavailable parts with different parts that were available in order to maintain contract delivery schedules. In several cases, re-procurement of circuit boards and other mechanical parts was necessitated by quality issues in the supply chain, further contributing to increased costs. The nine months ended January 31st, 2022 and 21, selling and administrative expenses were approximately 25% of consolidated revenue. The slight decrease in SG&A expense is mainly due to the decrease in professional fees. We expect this trend to continue as expenses normalize. R&D expense for the nine months ended January 31st, 22 and 21 increased to $3.9 million from $3.5 million, an increase of $400,000, and we're approximately 10% and 9% of consolidated revenue. R&D increases in the nine months added January 31, 2022, were due to higher levels of internal R&D associated with investments the company is making in new technology developments related to atomic box and low-noise oscillators that are intended to produce long-term increases in revenue and position the company to compete in the marketplace with next-generation products. The company plans to continue to invest in R&D to keep its products at the state of the art. For the nine months ended January 31st, 22, the company recorded an operating loss of $2.1 million compared to an operating loss of $1.1 million in the prior year. The factors cited above in gross margin discussion are applicable to operating income as well. Operating losses for the nine-month period ending January 31st, 22 resulted from lower revenue and lower gross margins. During both periods, the company experienced increased supply chain and other costs. The majority of the operating laws were experienced in Q1 as a result of higher professional fees associated with litigation that has since been settled. Other income consisted primarily of investment income derived from the company's holdings of marketable securities. Earnings on these securities may vary based on fluctuating interest rates, dividend payout levels, and the timing of purchases, sales, redemptions, and maturities of securities. In the nine months added January 31st, 22, investment income included $123,000 dividend from Morion compared to 105,000 dividend from Morion in the same period in fiscal 21. This yields a pre-tax loss of approximately $1.8 million compared to a $700,000 pre-tax loss for the prior fiscal year. For the nine months ended January 31st, 22, the company recorded a tax provision of $3,000 compared to 37,000 for the prior fiscal year. Consolidated net loss for the nine months at January 31st, 22 was 1.8 million or 20 cents per share compared to 700,000 net loss or 8 cents per share in the previous fiscal year. Our fully funded backlog at the end of January 22 was approximately 42 million, up 2 million from the previous fiscal year ended April 30th, 21. The company's balance sheet continues to reflect a strong working capital position of approximately $40 million at January 1, 2022, and a current ratio of approximately 4.8 to 1. Additionally, the company is debt-free. The company believes 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.