Frequency Electronics, Inc.

Please continue to hold. Your conference will begin momentarily. Please continue to hold. Your conference will begin in one moment. Thank you. Thank you. Greetings, and welcome to the Frequency Electronics third quarter fiscal 2026 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 statement. 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 and thanks for joining Frequency Electronics third quarter fiscal year 2026 earnings call. With me today is our CFO, Steve Bernstein. On our second quarter fiscal 2026 earnings call in December, I discussed our vision for how we see the growth in our company developing in the coming years. Specifically, I told you that the exciting growth prospects we have in large and growing end markets, which are larger than our historical addressable markets, will come in addition to continuing strength and growth in our ongoing businesses in space and defense. These new markets, such as quantum sensing, proliferated satellites, and alternative position navigation and timing programs, are built upon our industry-leading capabilities in our core space and defense programs. I also told you on that December call that we anticipate multiple awards in the coming months, some of which are as large or larger than the biggest ones we have historically announced. Today, we're very pleased to report significant progress on all of these fronts. In a separate press release that came out at the same time as our earnings report after the close of market today, we announced that we awarded two contracts valued at approximately $45 million. One of these contracts is in the domain of FDI's traditional space satellite programs, and one is part of the new proliferated satellite paradigm. Customer confidentiality prevents us from discussing these with greater specifics at this time, but there are two important points to consider. First, of course, is that these contracts reflect our ability to continue to win meaningful contracts in our traditional space business, while also winning significant business in our next generation markets at the same time. In other words, while our business is never perfectly linear, we are definitely not projecting a dislocation in which the traditional business wanes while the new business replaces it. Rather, they'll both grow and pave the way for us to become a substantially larger company. Second, we're already actively working on additional contracts of similar magnitude in both our traditional and new business lines and anticipate additional awards in this calendar year. On the December call, I also told you that while backlog in any given quarter can fluctuate given newly funded awards and what is converted into revenue in a given quarter, based on what we're seeing coming down the road, we believe it is reasonable that we could see backlog north of $100 million in the not too distant future. Our January quarter end backlog was at a new record for FEI. And of course, this backlog amount was prior to the award of the contracts announced today. This new business announced today will start to enter backlog in this current fiscal fourth quarter which should help us make further progress towards the $100 million mark in the near future. Now, that $100 million level, by the way, is not meant to but a level we're currently building towards. Adding more awards like the ones we announced today could push us well past that over time. Steve will provide more financial details a little bit later. But I would make a few financial comments here. For the third fiscal quarter, we reported revenue of $16.9 million, essentially the same as the second fiscal quarter. This revenue number is down year over year because of the particularly strong execution we exhibited in fiscal 2025, which allowed the company to produce revenue on certain programs in fiscal 2025 that we had originally expected to produce over a much more extended period of time well into fiscal 2026, essentially pulling forward some revenue as we've discussed in the previous calls. Nonetheless, this was still the fourth highest quarter of revenue in the past 10 years. with the only three higher quarters having occurred within the past four quarters. As we said on the December call, though our business does not proceed in a perfectly professional fashion, we have established a new higher base and we anticipate building upon that base now and in the years to come. Before I turn things over to Steve, I would like to make a few comments on the current state of the world and how it relates to FEI's business. Obviously, most immediately, our country is now at war. As we've discussed on previous calls, we're involved in numerous defense programs including Golden Dome, Patriot Missile System, B-2 Bomber, and Terminal High Altitude Area Defense missile system, the THAAD system, as well as other multi-domain defense systems. Missile systems and interceptors have been in the news quite a bit over the past two weeks, and I would like to remind you of remarks we've made previously on our calls. Our exposure on major missile programs is principally in the missile batteries, which are ground-based units used to detect, track, and intercept incoming threats, generally by firing missiles at those threats. As the government increases the deployment of these batteries, our business will expand along with that, and we've already seen that in the current quarter. Further, The early days of this war, as well as the action earlier this year in Venezuela, have shown an increased reliance on traditional jet fighters and naval fleets, as opposed to next generation defense technologies. Similar to our discussion earlier on our space positioning in the traditional and emerging markets, We believe this military deployment is a good example of how there remain strong opportunities in our traditional defense business, even as we are engineering products for next generation modalities. We expect defense to continue to be a meaningful and growing business for FEI for many years. Meanwhile, in the Ukraine-Russia war and in the Strait of Hormuz, GPS jamming has become ubiquitous, creating dead zones that threaten civilian aircraft, telecom, and financial systems, shipping firms, and NATO allies. The need for alternative position navigation and timing systems, ALT-PNT, including the use of quantum sensing and magnetometers, is paramount, and we expect to be a part of that solution set in the years to come. In fact, in this current fiscal year, we've already won some new business in both magnetometers and other quantum sensing, including business one out of our new Colorado facility. We expect a lot more alt P&T business in the years to follow. Our technology is used in systems and programs that play critical roles in keeping our country and our military safe. We're very proud of this work, and it creates an additional sense of mission for our team. I would like to thank our employees, our customers, and our shareholders, all of whom we serve by carrying out this important work. Lastly, We will be participating in two investor conferences in the fiscal fourth quarter, and we look forward to meeting with a number of you at the Craig Hallam New Space Conference on March 25th and the Morgan Stanley Golden Dome and National Security Innovation Summit on June 15th. And now I'll turn the call over to Steve to provide some more financial details. And I look forward to taking your questions during the Q&A and hearing Steve's remarks. Steve?

Thank you, Tom, and good afternoon. For the three months ended January 31st, 2026, consolidated revenue was $16.9 million compared to $18.9 million for the same period of the prior fiscal year and substantially similar to the second quarter of this fiscal year, as Tom mentioned earlier and which we have described on the past several calls. The components of revenue are as follows. Revenue from commercial and U.S. government satellite programs was approximately 4.2 million, or 25 percent, compared to 11.2 million, or 59 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 recorded only in the FEI New York segment. Revenues from non-space U.S. government and Department of Defense customers which are recorded in both the FEI New York and FEI Zephyr segments were $12.5 million compared to $7.4 million in the same period of the prior fiscal year and accounted for approximately 74% of consolidated revenue compared to 39% for the prior fiscal year. Other commercial and industrial revenues were approximately $180,000 compared to approximately $367,000 in the prior fiscal year. The revenue for the three months ending January 31, 26 were lower than the revenues in the prior period, partly as a result of certain space programs in the FEI New York segment during the prior fiscal year that were being expedited during the period due to very aggressive schedules. In addition, several new space bookings anticipated for the three months ending January 31, 26 are now anticipated in the fourth quarter of fiscal 26. For the three months and nine months ending January 31st, 26, both gross margin and gross margin rate decreased compared to the same period in the prior fiscal year. The decrease in gross margin and gross margin rate were attributable to a change in the mix of high margin production satellite programs in the prior year periods versus lower margin programs with significant non-recurring engineering efforts during the three months ending January 31st, 26. Going forward, the mix of programs will vary in any given quarter, but in general, we expect our gross margin to move up over time, particularly as we add more business with higher rate of unit production and follow-on business from successful programs. For the three months ending January 31st, 26 and 25, selling, general, and administrative expenses increased by approximately $213,000 and were approximately 21 percent of consolidated revenue, up from 18 percent in the prior year. The increase in SG&A expenses during the three months ending January 31, 2026 was due to fluctuations in various expense accounts that make up SG&A. R&D expense for the three months ending January 31, 2026 increased to approximately $1.8 million from $1.4 million for the three months ending January 31st, 25, an increase of approximately $327,000, and we're approximately 10% and 8% respectively of consolidated revenue. Fluctuation in R&D expenditures will occur in some periods due to current operational needs supporting ongoing programs. The company plans to continue to invest in R&D in the future to keep its products at the state of the art. In total, operating expenses increased approximately $540,000, but this includes approximately $500,000 of non-recurring expenses, so we anticipate showing more operating leverage going forward as additional revenue should expand at a much faster rate than expenses. For the three months ended January 31st, 26, the company reported operating income of approximately $1.3 million compared to an operating income of approximately 3.5 million in the prior fiscal year. Operating income decreased due to lower revenue, lower gross margin, and increased SG&A described earlier. Other income expense net is derived from various sources. The majority of the approximately 0.2 million of investment income for the three months ending January 31st, 26, was from interest income and unrealized gain on assets held in the Frequency Electronics Deferred Compensation Trust. This yields a pre-tax income of approximately $1.4 million for the three months ending January 31, 26, compared to an approximately $3.6 million pre-tax income for the three months ended January 31, 25. For the three months ending January 31, 26, the company recorded an income tax benefit of approximately $127,000, which includes a discrete tax benefit of approximately $568,000. The discrete income tax benefit is primarily due to stock compensation windfall deductions. For the three months ended January 31, 25, the company recorded an income tax benefit $11.8 million, which included a discrete income tax benefit of 11.9 million, the discrete income tax benefit in the comparable period is primarily due to the release of the valuation allowance. Consolidated net income for the three months ended October 30th, sorry, January 31st, 25 was approximately 1.6 million or 16 cents per share compared to approximately 15.4 million or $1.60 per share for the same period of the previous fiscal year. Our fully funded backlog at the end of January 26 was approximately $83 million, a new all-time high for FEI, as compared to approximately $70 million for the previous fiscal year ended April 30, 25. The company's balance sheet continues to reflect a strong working capital position of approximately $32 million at January 31, 26, and a current ratio of approximately 2.6 to 1. The amount of cash reported as of the quarter end January 31st should represent a low point going forward, which is a combination of investments made by the company, purchases of stock, and collections coming in early in the fiscal fourth quarter that were in just the third quarter. Specifically, we have already collected over $11 million of cash since February 1st, 2026. and we expect that to continue building through the quarter. Additionally, the company is debt-free, and 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 shortly.