FREQUENCY ELECTRONICS INC

Frequency Electronics, Inc. is a world leader in precision time and frequency generation technology, incorporated into commercial and U.S. Government satellites, C4ISR, and Electronic Warfare systems. The company's principal end markets are time and frequency generation and distribution systems for satellite payloads and terrestrial secure command control and communications systems. For the satellite market, it is estimated that there are over 14,000 U.S. satellites with varying remaining useful lives operating in Geostationary, Medium and Low Earth Orbits, and the number of operational satellites with emphasis on high-throughput is expected to continue to grow over the next ten years as demand for higher bandwidths and improved anti-jam-anti-spoofing increases. The U.S. Government is expected to contract options for additional GPS III satellites, and the company believes it is well positioned to compete for the onboard clock ensemble with its high-precision digital Rubidium atomic frequency standard. For the terrestrial secure command control and communications systems market, the company's products support multiple C4ISR and EW applications for the U.S. Government on land, sea and air-borne platforms. Recently identified threats to the communication capabilities of U.S. Government facilities through jamming or spoofing GPS signals may be mitigated by the company's technologies, and similar types of threats to the public and enterprise networks have been identified by the U.S. Department of Homeland Security.

The company experiences competition in all areas of its business, and many of its competitors are larger, have greater financial resources, and have larger R&D and marketing staffs. The company competes primarily on the basis of the accuracy, performance and reliability of its products, the ability of its products to function under severe conditions such as in space or in other extremely hostile environments, and the company's track record of prompt and responsive contract performance and technical competence. The company has unique and broad capabilities which include quartz and rubidium-based timing references and specialized RF microwave technology. With respect to very high precision products, the company encounters fewer competitors than it does for lower precision products for which there are a significant number of suppliers. The company's principal competition for space products is the in-house capability of its major customers such as Boeing, Northrop Grumman and Lockheed Martin, as well as a number of other firms capable of providing high-reliability microwave frequency generators. With respect to non-space products, the company competes with larger domestic companies such as Microchip Technology Incorporated and Mercury Systems, Inc.

The company generates revenue through the design, development, and manufacture of precision time and frequency control products and components for microwave integrated circuit applications. The company's sales on U.S. Government programs for both space and non-space applications are generally made under fixed price or cost-plus contracts either directly with U.S. Government agencies or indirectly through subcontracts intended for U.S. Government end-use. For fixed-price contracts, the price paid to the company is not subject to adjustment by reason of costs incurred by the company in the performance of the contract, except for costs incurred due to contract changes ordered by the customer, and these contracts are negotiated on terms under which the company bears the risk of cost overruns and derives the benefit from cost savings. Cost-plus contracts reimburse the company for the actual costs incurred in performance of the contract requirements. Revenues for most contracts are reported in operating results over time using the cost-to-cost method, under which revenue is recorded based upon the ratio that incurred costs bear to total estimated contract costs with related cost of revenues recorded as the costs are incurred. The company also derives revenue through contracts or purchase orders for goods and services that are not significantly customized, and revenue is recorded at a point in time when passage-of-title occurs as reflected by either shipment of the product or performance of the services.

The FEI-NY segment, which includes the parent company FEI and operates out of the company's Long Island, New York headquarters facility, manufactures precision time and frequency products and, more recently, quantum sensing products, principally marketed to the commercial and U.S. Government satellite markets, to other U.S. Department of War customers and to wireless communications network providers. Quantum sensors include magnetic sensors (magnetometers) and Rydberg sensors (compact receiving antennae), which utilize the same basic physics phenomena as atomic clocks. FEI-NY provides precision time, frequency generation and synchronization products and subsystems that are found on-board satellites, in ground-based communication systems and imbedded in mobile platforms operated by the U.S. military. Revenues from satellite payloads, both for commercial and U.S. Government applications, have become FEI-NY's largest business area. The company manufactures the master timing systems (quartz, rubidium) and other significant timing and frequency generation products for navigation, communication and intelligence collection satellites, and many of the company's other space assemblies are used onboard spacecraft for command, control and power distribution. Efficient and reliable DC-DC power converters are also manufactured for the company's own assemblies and as stand-alone products for space applications. Commercial satellite programs that utilize the company's space-qualified products include Iridium NEXT Constellation, Intelsat EPIC, O3B, WAAS, MexSat, MSV, ICO, TerreStar, EchoStar, Inmarsat and others. The company previously manufactured the master clock for the Trident missile, the basic timing system for the Voyager I and Voyager II deep space exploratory missions and the quartz timing system for the Space Shuttle. Until April 30, 2026, FEI-Elcom addressed RF microwave modules and subsystems up to 60 GHz including fast switching, ultra-low phase noise synthesizers, up-down converters, receivers, tuners, ceramic resonance oscillators and dielectric resonance oscillators. During fiscal years 2026 and 2025, approximately 72% and 76%, respectively, of the company's consolidated revenues were from products sold by the FEI-NY segment.

The FEI-Zyfer segment, which operates out of California, designs and manufactures products that incorporate GPS technologies and high-precision clocks designed and manufactured at FEI. FEI-Zyfer's products make use of both in-the-clear civil and crypto-secured military signals for GPS, and are integrated into radar systems, airborne SIGINT/COMINT platforms, information networks, test equipment, military command and control terminals, and satellite ground stations. FEI-Zyfer's products are an important extension of FEI's core product line, specifically in secure PNT for C5ISR. Recently identified threats to the communication capabilities of U.S. Government and to the public and enterprise networks through jamming, multi-path or spoofing GPS signals may be mitigated by FEI-Zyfer's technologies and products. More than 95% of FEI-Zyfer's revenues are derived from sales where the end user is the U.S. Government. In fiscal years 2026 and 2025, sales for the FEI-Zyfer segment were 34% and 27%, respectively, of the company's consolidated revenues. The sum of annual sales percentages exceeds 100% due to intersegment sales. Consolidated revenues include sales to end-users in countries located outside of the U.S., primarily in Europe and Asia, and during fiscal years 2026 and 2025, foreign sales comprised 9% and 6%, respectively, of the company's consolidated revenues.

During the fourth quarter of fiscal 2026, the company approved a plan to exit its FEI-Elcom business, and effective as of April 30, 2026, FEI-Elcom was converted into a Delaware limited liability company with its ongoing business operations transferred to the FEI-NY segment. As a result of the restructuring, the company recognized approximately $3.8 million ¹ of inventory write offs included in cost of revenues, approximately $0.4 million ² of SG&A expense related to severance and legal costs, and approximately $0.4 million ³ of other expense for derecognition of goodwill. On September 9, 2025, the company's Board of Directors approved a new share repurchase authorization in the amount of $20.0 million ⁴, which replaced the prior share repurchase authorization under which approximately $0.6 million ⁵ remained. During fiscal year 2026, the company purchased treasury stock for $1.6 million ⁶. On June 12, 2026, the company entered into a senior, secured revolving credit facility with JPMorgan Chase Bank, N.A. providing for a three-year revolving credit facility of $10.0 million ⁷, of which up to $5.0 million ⁸ is available for the issuance of letters of credit, with a commitment fee of 0.35% ⁹ per annum on the daily amount of the undrawn portion, maturing on June 12, 2029. The company also opened a new facility in Boulder, Colorado, signing a lease for a period of 62 months beginning August 1, 2025 and expiring September 30, 2030, with an average annual rent of approximately $71,100 ¹⁰.

For the fiscal year ended April 30, 2026, total revenues were $63.227 million ¹¹, a decrease of approximately $6.6 million ¹², or 9% ¹³, compared to $69.811 million ¹⁴ in the prior fiscal year. The company recorded a net loss of $0.903 million ¹⁵ compared to net income of $23.686 million ¹⁶ in the prior year. Diluted loss per share was $0.09 ¹⁷ versus diluted earnings per share of $2.46 ¹⁸ in the prior year. Gross profit decreased to $18.396 million ¹⁹ from $30.097 million ²⁰, and the gross profit percentage declined to 29.1% ²¹ from 43.1% ²². The company recorded an operating loss of $3.001 million ²³ compared to operating income of $11.732 million ²⁴ in the prior fiscal year. The company invested significantly in the business during fiscal 2026, including hiring engineering talent in advance of expected growth, a business process improvement investment, and the restructuring of FEI-Elcom, which included a $3.8 million inventory write-down that flowed through cost of revenues. Net cash provided by operations was $1.3 million ²⁵ in fiscal year 2026 compared to net cash used in operations of $1.4 million ²⁶ in fiscal year 2025.

The company expects to continue to generate substantial revenues from deployment of new and replacement satellites and other U.S. Government/DOW applications including sales of ruggedized subsystems for mobile U.S. military platforms. The company anticipates that adequate funds will be provided by the U.S. Government to ensure that the programs are completed, though the company's experience indicates that programs and/or product sales can be delayed or canceled due to variations associated with periodic U.S. Government appropriations cycles and shifting priorities. The company expects that the DOW will require more secure communication capabilities, more assets in space and greater bandwidth, and it is likely that the DOW will move to adopt smaller and less expensive satellites for LEO applications, which the company anticipates will necessitate the adaptation of the company's products or development of new products to better suit this type of satellite architecture. The company believes it is well positioned to compete for the onboard clock ensemble for additional GPS III satellites with its high-precision digital Rubidium atomic frequency standard.

The company has made a strategic decision to focus on satellite payloads, C4ISR and EW market segments because the company believes these business areas represent significant opportunities for revenue growth. The company is pursuing core product opportunities for planned satellite constellations that will operate in Low- or Medium-Earth Orbits. The company believes that the quantum sensor market, including magnetic sensors (magnetometers) and Rydberg sensors, represents a new growing market which utilizes the underlying technology behind atomic clocks and is a natural arena for FEI to compete in. The company is starting to sell into much larger addressable markets: alternative position, navigation and timing (ALT-PNT) solutions; quantum sensing, including magnetometers; space defense and exploration; and proliferated satellite programs. The company believes that by restructuring FEI-Elcom, it is making the right long-term decision to better align its capital and growth potential as it focuses on these larger addressable markets.

The company expects to demonstrate operating leverage on its SG&A expenses as revenue increases going forward. The company expects future R&D investment to be in line with, or even potentially above, historical spending, but the company expects to demonstrate operating leverage on its R&D expenses as revenue increases. The company believes that internally generated cash and cash reserves are adequate to fund its future R&D activity. The company expects to demonstrate significant operating leverage as revenue increases.

The company opened a new facility in Boulder, Colorado, which it believes will be a key contributor to the future growth of the company. The company's facility located in Mitchel Field, Long Island, New York, is leased through September 30, 2029, with a gradually increasing annual rent from $1,046,810 in 2019 to $1,276,056 in 2029. The Garden Grove, California facility lease was extended an additional 62 months beginning February 1, 2025 and expiring March 30, 2030, with an average annual rent over the period of approximately $672,000. The company currently employs 242 employees (232 full-time and 10 part-time), 99% based in the U.S., with no employees represented by labor unions. The company develops its workforce using a broad-based recruiting process to select talented individuals and by offering competitive compensation and benefits.

During fiscal years 2026 and 2025, the company expended $6.1 million ²⁷ on R&D activity in both years. Net cash used in investing activities for the fiscal year ended April 30, 2026 was $2.9 million ²⁸ compared to $1.8 million ²⁹ used in investing activities for the fiscal year ended April 30, 2025, all relating to purchases of capital expenditures. On September 9, 2025, the company's Board of Directors approved a new share repurchase authorization in the amount of $20.0 million , under which shares may be purchased on a discretionary basis from time to time, subject to general business and market conditions, other investment opportunities, and compliance with the covenants under the Credit Agreement. No dividends were declared or paid during fiscal year 2026, and any future determinations as to the declaration of dividends will be made at the discretion of the Board of Directors and will depend on earnings, operating and financial conditions, capital requirements, Credit Agreement restrictions, and other factors deemed relevant. The Credit Agreement currently restricts the company's ability to declare and pay dividends if certain total leverage and minimum fixed charge coverage covenants are not met.

The company faces risks from changes in U.S. Government priorities or delays or reductions in spending, as approximately 91% ³⁰ and 94% ³¹ of sales in fiscal year 2026 and fiscal year 2025, respectively, were derived from U.S. Government programs. The company depends heavily on a small number of larger customers, and during fiscal year 2026, Lockheed Martin Corporation, L3Harris Technologies, Inc., and The Boeing Company each accounted for more than 10% of the company's consolidated revenues. The company's products are technologically complex, and any defect in design, materials or workmanship could result in system failure, and all satellites cannot be recovered from orbit to repair failed sub-systems, therefore failure of a company product incorporated into a satellite may result in the complete loss of the satellite. The company is dependent on numerous suppliers for various parts, materials, test services, facility operations and infrastructure, and is reliant on suppliers who are space-qualified, limiting the ability to procure certain key materials from other vendors. The company's average employee tenure is approximately 11 years and the median age is approximately 53, and given the median age, the company anticipates that a number of its key personnel will retire in the coming years.

The company relies heavily on U.S. Government programs, from which it derived approximately 91% and 94% of its sales in fiscal year 2026 and fiscal year 2025, respectively, and changes in U.S. Government priorities or delays or reductions in spending could have a material adverse effect. The company depends heavily on a small number of larger customers, and during fiscal year 2026, Lockheed Martin, L3Harris, and Boeing each accounted for more than 10% of consolidated revenues, and the loss of one or more of these customers could have a material adverse effect. In fiscal year 2026, 95% ³² of the company's sales were derived from fixed-price contracts, which inherently tend to have more financial risk than cost-type contracts, including as a result of inflationary pressures, labor shortages, and increased labor rates. The company's products are technologically complex and any defect could result in system failure, and all satellites cannot be recovered from orbit to repair failed sub-systems, therefore failure of a company product incorporated into a satellite may result in the complete loss of the satellite. The company is dependent on numerous suppliers for various parts and materials, and is reliant on suppliers who are space-qualified, limiting the ability to procure certain key materials from other vendors, and when these key suppliers experience quality issues, their products may have to be rejected, causing delays in the company's ability to complete projects on schedule and at projected costs.

Management's message emphasizes that fiscal 2026 was a critically important year for the future of the company, describing it as a year of digestion from a revenue standpoint as the company pulled forward some revenue into fiscal 2025. Management states that by shutting down the FEI-Elcom manufacturing business, the company sacrificed some near-term revenue in the fourth quarter but believes it is the right long-term decision to better align its capital and growth potential as it focuses on much larger addressable markets: alternative position, navigation and timing (ALT-PNT) solutions; quantum sensing, including magnetometers; space defense and exploration; and proliferated satellite programs. Management notes that the company invested significantly in the business during fiscal 2026 to better prepare for anticipated strong growth ahead, with the majority of this investment focused on hiring engineering talent in advance of the large ramp-up in production and revenue that is expected, based in part on the historically high existing backlog. Management states that going forward, the company expects to demonstrate operating leverage on its SG&A expenses as revenue increases, and expects to demonstrate significant operating leverage as revenue increases. Management believes that the charges associated with the FEI-Elcom restructuring are substantially complete as of April 30, 2026. Management also states that the company believes that internally generated cash and cash reserves are adequate to fund its future R&D activity.