Frequency Electronics, Inc.

Greetings and welcome to the Frequency Electronics Third Quarter Fiscal 25 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.

Good afternoon, everyone. The third quarter of our fiscal year was another excellent financial quarter for the company. For both the quarter and the year to date, revenue, gross margin, and operating income have grown substantially. the results reflect continued solid growth in our core businesses, which show every indication of continuing, with our backlog still at a historically high level. In fact, this was the highest revenue quarter for FEI in 10 years. The increase relative to recent quarters, which have also shown an uptrend as compared to recent years, is partially due to the progress made on deliveries related to a specific program, as well as conversion of our historically high backlog into revenue in this quarter. That specific program is expected to contribute additionally over the next few quarters as we deliver additional units and we anticipate similar successor programs. While we do not expect every near-term quarter to look exactly like this, especially given some of the uncertainty in Washington, we do believe that we have demonstrated meaningful revenue and profitability improvement over the past few years and that our increasing strategic importance in the industry and exposure to larger addressable markets such as proliferated satellites and quantum sensing, sets us up to continue to deliver higher levels of revenue and profitability in the future. Any given quarter can show variability, but we believe our upward trajectory will continue, and based on anticipated future wins, may do so at a faster pace in the medium term than what we have recently experienced. In other words, While the market focuses on near-term industry clouds, we see a future that is bright and actually getting brighter. I've discussed in the past the changes occurring in the space industry, in particular the proliferated satellite concept where lower cost, faster delivery, and higher volume are paramount. Some of our current satellite programs have challenged FEI to demonstrate the ability to deliver space hardware in less than half the time that would historically have been required. We have in turn attempted to inspire our workforce to meet these challenges. As it turns out, there's a good chance that over the next few months we'll not only meet, but beat some of these expectations. But what has truly impressed me is the level of engagement and dedication to meeting these goals that's exhibited by our employees on a daily basis. In all honesty, I'm more proud of this than the financial results because I believe it's so important to our continued success. Success breeds success and an engaged and motivated workforce. not only allows us to meet our customers' expectation, but also creates an environment which allows us to attract the most talented and capable scientists and engineers, fueling our growth and future success. We've established an environment where our people share in our success as a company, and we'll work hard to continue this going forward. Our financial trajectory is buoyed by the talent, dedication, and motivation of our workforce, and this magnifies our confidence in the financial growth we're projecting. I'll now turn things over to our CFO, Steve Bernstein, who will fill you in on the financial details. Steve?

Thank you, Tom, and good afternoon. For the nine months ended January 31st, 2025, consolidated revenue was $49.8 million compared to $39.7 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 $28.8 million or 58% compared to $16.3 million or 41 percent 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 reported 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 19.5 million compared to 21.1 million in the same period of the prior fiscal year and accounted for approximately 39% of consolidated revenue compared to 53% for the prior fiscal year. Other commercial industrial revenues were $1.5 million and $2.3 million for the nine months ending January 31st, 2025 and 2024 respectively. The significant increase in revenue for the period was primarily related to an increase in U.S. government customer sales for satellite programs. For the nine months ending January 31, 2025, gross margin and gross margin rate increased as compared to the same period in fiscal year 2024. This is partially due to a large space program that completed major milestones during the nine months ended January 31, 2025, as well as other legacy programs performing well. For the nine months ending January 31st, 2025 and 2024, SG&A expenses were approximately 19 percent of consolidated revenues in each period. The increase in SG&A expenses during the nine months ending January 31st, 2025 was mainly related to an increase in payroll-related expenses, including stock compensation, incentive approvals based on company performance, costs from the realignment of employees from overhead to SG&A, and the costs related to Frequency Electronics' first quantum summit in October 2024. The company believes the costs related to SG&A will remain fairly constant throughout the remainder of the fiscal year 2025. R&D expense for the nine months ending January 31st, 2025 increased to $4.5 million from $2.3 million, an increase of $2.2 million, and were approximately 9 percent and 6 percent, respectively, of consolidated revenue. The change in R&D expenditures for the nine months ending January 31st, 2025, as compared to prior year periods, was primarily due to a focus on advances and modernization of products. The company plans to continue to invest in R&D in the future to keep its products at the state of the art. However, we expect the actual quarterly spend to vary. For the nine months ending January 2025, the company recorded an operating income of $8.5 million compared to an operating income of $2.5 million in the prior year. The increases partially due to a large space program that completed major milestones in its production during the nine months ending January 31st, 2025, as discussed above. However, the increase also is the result of successful efforts of the company to complete complex programs and to work more efficiently in bidding, building, and testing our products. The company believes the improved operating income results for the first nine months of the fiscal year are a tangible outcome of these efforts. The company seeks to continue to implement changes to further improve its performance. Other income can be derived from reclaiming of metals, refunds, interest on deferred trust assets, or sale of fixed assets. Interest expense is related to the deferred compensation payments made to retired employees. This yields pre-tax income of approximately $8.9 million compared to $3 million for the prior fiscal year. As for the tax provision, the company weighed all available positive and negative evidence in its more likely than not Q3 2025 deferred tax asset realization assessment. Frequency no longer has cumulative losses in recent years and has earnings in the Three and nine months ended January 31st, 2025. The company is utilizing its operating loss category forwards and is reducing its net deferred tax asset. For the nine months ending January 31st, 2025, the company recorded an income tax benefit of $11.6 million, which includes a discrete tax benefit of $11.9 million. The calculation of the overall income tax provision consists of a discrete tax benefit for the release of the valuation allowance offset by current U.S. federal and state income taxes. For the nine months ending January 31, 2024, the company recorded an income tax provision of $19,000. Consolidated net income for the nine months ending January 31, 2025 was $20.5 million, or $2.18 per share compared to $3 million or $0.32 per share in the previous fiscal year. Our fully funded backlog at the end of January 2025 was approximately $73 million compared to approximately $78 million for the previous fiscal year end to April 30, 2024. The company's balance sheet continues to reflect a strong working capital position of approximately $27 million at January 31, 2025. and a current ratio of approximately 2.2 to 1. Cash went down by approximately 12.8 million since year end. Of this decrease, the dividend paid in Q2 accounted for approximately 9.6 million. The additional $3.2 million decrease was related to timing of billings and revenue. Contract liabilities went down 7.4 million quarter over quarter and $6.4 million since year end. Contract liabilities are generated as part of the 606 accounting when the billings are in excess of revenue taken on specific programs. We expect that cash will fluctuate quarter to quarter. However, we expect it to trend higher over time. 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.