Frequency Electronics, Inc.

Greetings and welcome to the Frequency Electronics Q3 fiscal 23 earnings release conference call. At this time, all participants are in a listen-only mode. There will be an opportunity to ask questions on today's call after the presentation. Please press star 1 on your telephone keypad at any time to enter the Q&A queue. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. Any statement 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 could cause actual results to differ materially from the forward-looking statements. Factors that would cause or contribute such differences are included in the company's press release 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 turn the floor over to your host, Thomas McClelland, President and Chief Executive Officer.

Thank you. With the Q3 results, we began to see the impact of the cost-cutting efforts and management reorganization which has taken place over the last seven months. Revenue and gross margin have increased substantially quarter over quarter, and the company is reporting an operating profit for the third quarter, not only for the consolidated company, but also for each segment individually. Many factors contributed to this, but I think importantly, We initiated an effort to recognize and promote talent within our existing workforce. To this end, and with encouragement from our board of directors, we have established a broad-based equity incentive program that rewards individuals who meet key performance metrics and aligns employee performance with both customer satisfaction and shareholder interests. We see a market of improvement in the overall morale of our workforce and have a sense that everyone is pulling together to achieve a common goal. FEI's backlog remains strong at quarter end, substantiating our confidence in the growth of our primary markets. Both commercial and government satellite businesses continue to show signs of sustained double-digit growth going forward. At this time, we anticipate the imminent award of several significant contracts. Although we still are experiencing supply chain issues and the effects of inflation, we do see a definite easing of these problems. Continued vigilance is required to navigate the changing economic and geopolitical environment, but we're nonetheless confident that we're progressing in a positive direction and look forward to more improvement in results. The company is committed to moving towards sustained profitability and cash generation going forward. I appreciate the Board of Directors' support in naming me permanent president and CEO, and I believe the Board has taken meaningful steps to enhance the company's value for its shareholders, customers, and employees, and that our best days are ahead. We have truly unique technical and manufacturing capabilities, which are particularly well-suited to the needs of the U.S. government and our other customers in the years ahead. At this point, I'd like to turn things over to our CFO, Steve Bernstein, who will fill you in on some details.

Steve Bernstein Thank you, Tom, and good afternoon. Before I go through the financial results, it's important to mention that even though we are not presenting FY23Q2, the company has made significant improvements from FY23Q2 compared to FY23Q3. Sales increased 1.6 million, or 18.6%. Gross margin went from 3.9% to 32.6%. and operating profit loss went from a loss of $2.28 million to income of $325,000. These are substantial improvements, and we continue to strive to make changes to keep this trend continuing. The three months ended January 31, 23. Consolidated revenue was $10.6 million compared to $12.2 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 approximately $5 million, or 47%, compared to $7.5 million, or 62%, in 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 FDI 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, were $5 million compared to $4.3 million in the same period of the prior fiscal year and accounted for approximately 47 percent of consolidated revenue compared to 35 percent for the prior fiscal year. Other commercial and industrial revenue were approximately $650,000 compared to approximately $400,000 in the prior fiscal year. The decrease in revenue for the three months ended January 31st, 23 was mainly due to the timing of the various production phases for products in the satellite market. For the three months ended January 31st, 23, gross margin and gross margin rate increased as compared to the same period in fiscal year 22. The increase in gross margin and gross margin rate was due to higher engineering costs associated with programs in the development phase in the prior year period versus the production phase during the current year period. For the three months ended January 31st, 23 and 22, SG&A expenses were approximately 22% and 23% respectively of consolidated revenues. The decrease in SG&A expense for the three months ending January 31st, 23 as compared to prior year period was largely due to decrease in payroll and associated costs related to the previously announced workforce reduction. The company continues to monitor expenses looking for additional cost-effective reductions going forward. R&D expense for the three months ended January 31, 23 decreased to approximately $780,000 from $1.1 million for the three months ending January 31, 22, a decrease of approximately $345,000 and we're approximately 7% and 9%, respectively, of consolidated revenue. R&D decreased for the three months ending January 31, 23, are related to resolution of fiscal year 22 technical challenges to projects that are now in production phase. The company plans to continue to invest in R&D in the future to keep its products at the state of the art. For the three months ending January 31st, 23, the company recorded operating income of approximately $325,000 compared to an operating loss of approximately $720,000 in the prior year. Operating income increased due to a combination of increase in sales over the three months ending October 31st, 22, increased gross margin, and effects of the changes management has instituted. Other income consists primarily in investment activity derived from the company's holding of marketable securities. During the three months ending January 31st, 23, the company liquidated its holdings, and as a result, there was a loss recognized. This yields a pre-tax loss of approximately $313,000 compared to an approximately $734,000 pre-tax loss for the prior fiscal year. It is important to mention, as a result of the liquidation of the company's holdings and marketable securities, and the associated loss, the pre-tax loss would have been pre-tax income. For the three months ending January 31st, 23, the company recorded a tax provision of $3,000 compared to $1,000 for the same period of the prior fiscal year. Consolidated net loss for the three months ending January 31st, 23 was approximately $316,000 or 3 cents per share compared to an approximate $735,000 net loss or 8 cents per share in the previous fiscal year. Our fully funded backlog at the end of January 23 was approximately $54 million compared to $40 million for the previous fiscal year ending April 30, 2022. In addition, this is the second consecutive quarter in which backlog is greater than $50 million, levels the company hasn't seen in years. While some of this will turn into revenue and thus come out of backlog this year, We expect additional significant contracts awards to be added to backlog in the coming quarters. The company's balance sheet continues to reflect the strong working capital position of approximately 20 million at January 31st, 23, and a current ratio of approximately 1.7 to 1. Additionally, the company's debt rate. The company believes that its liquidity is adequate to meet its operating investing needs for the next 12 months and in the foreseeable future. I will turn the call back to Tom, and we look forward to your questions.