Frequency Electronics, Inc.

Greetings and welcome to the Frequency Electronics Fiscal Year End 23 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. 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 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, Thomas McClelland, President and Chief Executive Officer.

Thank you and welcome everyone. Today it's almost exactly one year since I inherited the role of CEO and President of Frequency Electronics and I find myself reflecting on what has transpired during the last year. It's certainly been a challenge but overall it has been a very positive experience and I look forward to a continuation of that experience over the next couple of years. There will be more challenges, but I feel confident that the company is on a solid path to continued success and growth. I'd like to start with some non-financial observations, which I think are ultimately very important for the financial health of the company. Over the past year, we've made a number of changes designed to make the company stronger in the long run. In early September of last year, we had a major layoff and restructuring at our Long Island facility. And before the end of calendar year 2022, we relocated the Zephyr manufacturing capability, which had been moved to Long Island back to their original location in California alongside their engineering team. These moves were understandably traumatic and also costly in the short run. The layoff was costly in terms of workforce morale, and the Zephyr move was costly in dollars and cents. But both of these moves have made us stronger and are now showing positive benefits. Simultaneously, while all of this was going on, we've made a conscientious effort to harness our strength in science and engineering and, in fact, to bolster it in such a way that we can remain competitive well into the future. Over the last year, we've begun to work collaboratively with several of our major customers to develop new approaches, old problems, which have the potential to improve performance and lower cost in the position, navigation, and timing arena. Similarly, we've reinvigorated our internal R&D program to target quantum technology and products which address the move to smaller, lower-cost satellite systems. Our Zephyr division has made a dramatic comeback. In fiscal year 2022, Zephyr suffered an operating loss of over $2 million, whereas in fiscal year 2023, which ended April 30th, Zephyr still had a small overall operating loss of about $160,000. But much more importantly, in the second half of the year, Zephyr made an operating profit of just over $1 million. This, in spite of the costs associated with the cross-country move of manufacturing. John Jahan, Xifer's president, and his team deserve a lot of credit for making this happen much faster than was originally anticipated. Furthermore, Xifer has been awarded several major contracts during fiscal year 2023, which will significantly contribute to the bottom line during fiscal year 2024 and beyond. And several new contracts are expected in the near future. Meanwhile, in New York, FDI has regrouped, is smaller after the layoffs, but is coming back strong. Some costly engineering development efforts are finally coming to completion successfully. New contracts are in and proceeding profitably. and several large satellite program contracts are anticipated over the next six months. Importantly, after enduring some pretty traumatic changes over the last year, I believe our workforce morale is high. There's a spirit of success in the air, and I feel we're all working together, not only in New York but the entire company, to do what's necessary to make things happen. I believe the whole at FEI is greater than the sum of the parts, and that's a powerful force. So okay for the financial portrait. In the fourth quarter of fiscal 2023, we continued to see the results of the cost-cutting efforts and management reorganization, which has taken place over the last year. Revenue and gross margin have increased substantially for the six-month period ended April 30, 2023, compared to the six-month period ended October 31, 2023, as well as in comparison to the same period in fiscal year 2022. And the company is reporting an operating profit for the second half of the fiscal year. FDI's backlog at year end is at a decade high, and several historically large satellite programs are anticipated during the next six months, 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. Continued vigilance is required to navigate the challenging economic and geopolitical environment But we're nonetheless confident that we are progressing in a positive direction, and we look forward to continued improvement results. The company is committed to moving towards sustained profitability and cash generation going forward. Further, we remain debt-free with a very strong balance sheet to fund future growth opportunities. Thank you, and I'd like to turn things over now to Steve Bernstein, our Chief Financial Officer.

Thank you, Tom, and good afternoon. Before I move on to the financial results, it is important to mention that I will be comparing Q4 fiscal 23 versus Q4 fiscal 22 results. Our press release has the full fiscal year results and some of the key metrics. I would also like to mention the improvement in results for the second half of the fiscal 23 compared to the first half of fiscal 23. Revenue increased from $17.2 million during the first half of fiscal 23 to $23.6 million during the second half of fiscal 23. Gross profit percentage went from 2% in the first half of fiscal 23 to 31.8% in the second half of fiscal 23. and operating income loss went from an operating loss of 5.4 million in the first half of fiscal 23 to an operating income of 717,000 in the second half of fiscal 23. Additionally, this is the second quarter in a row that the company is operating income. It is evident by the vast improvement in our results from comparing the second half of fiscal 23 to the first half of fiscal 23 that the company is heading in the right direction and the changes that have been previously announced are contributing to this improvement. For the three months ended April 30, 23, consolidated revenue was $13 million compared to $10.2 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 $5.1 million, or 39% of consolidated revenue, compared to 5.2 million or 51% of consolidated revenue 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 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 were 7.3 million compared to $4.7 million in the same period of the prior fiscal year and accounted approximately for 56% consolidated revenue compared to 46% for the prior fiscal year. Other commercial and industrial revenue was approximately $563,000 compared to approximately $249,000 in the prior fiscal year. The increase in revenue for the three months ending April 30, 2023 was mainly due to the increase in revenue at FBI Zephyr. For the three months ended April 30th, 23, gross margin went down and gross margin rate increased as compared to the same period of fiscal year 22. The company is encouraged by the fact that the gross profit percentage for the third and fourth quarter of fiscal year 23 were both over 30% and the company anticipates this trend will continue in fiscal 24. For the three months ended April 30th, 23 and 22, SG&A expenses were approximately 23% and 20%, respectively, of consolidated revenues. The increase in SG&A expense for the three months ending April 30, 2023, as compared to prior year, was largely due to reversals in fiscal 22. Full-year SG&A expenses decreased over $2 million. The company continues to monitor expenses, looking for additional cost-effective ways going forward. R&D expense for the three months ending April 30th, 23 decreased to approximately 658,000 from 1.1 million for the three months ending April 30th, 22, a decrease of approximately 450,000 and was approximately 6% and 11% respectively of consolidated revenue. R&D decrease for the three months ending April 30th, 23 due to decline, dedicated R&D resources are working on two externally funded developmental programs which would not show up in R&D. 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 April 30th, 23, the company recorded operating income of approximately 390,000 compared to an operating loss of approximately 5.9 million in the prior year. Operating income increased due to a combination of an increase in sales over the three months ending April 30th, 22, increased gross margin, and effects of changes management has instituted. For Q4 fiscal 23, other income consisted primarily of interest expense and miscellaneous income since all marketable securities were sold this year. During the three months ending April 30th, 22, the company took a $795,000 impairment charge related to the company's investment in Morion. This yields a pre-tax income of approximately $313,000 compared to an approximately $6.8 million pre-tax loss for the three months ending April 30, 2022. For the three months ending April 30, 2023, the company recorded a tax provision of $68,000 compared to a $3,000 tax benefit for the same period of the prior fiscal year. Consolidated net income for the three months ending April 30th, 23 was approximately $246,000 or 3 cents per share compared to an approximately $6.8 million loss or 74 cents per share for the same period of the previous fiscal year. Our fully funded backlog at the end of April 23 was approximately $56 million compared to $40 million for the previous fiscal year ended April 30th, 22. In addition, this is the third consecutive quarter in which backlog is greater than $50 million levels the company has not seen in over 10 years. While some of this will turn into revenue and thus come out of backlog this year, we expect additional significant contract 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 $21 million at April 30, 2023, and a current ratio of approximately 1.8 to 1. Additionally, the company is debt-free. The company believes that its liquidity is adequate to meet its operating investing needs for the next 12 months and the foreseeable future. I will turn the call back to Tom, and we look forward to your questions later.