Joseph Franklin - Chairman of the Board Martin Bloch - President and Chief Executive Officer Steve Bernstein - Corporate Controller.

Sam Rebotsky - SER Asset Management K.C. Hamann - NS Advisors Brett Rice - Janney Montgomery Scott Andrew Jones - North Star Partners David Starkey - Morgan Stanley.

Greetings and welcome to the Frequency Electronics Third Quarter Fiscal Year 2016 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] 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, General Joe Franklin, Chairman of the Board. Thank you, Mr. Franklin. You may begin..

Thank you very much, Jim, and thank you all for calling in. Welcome to our third quarter call results. I am joining Martin Bloch. And Martin will go through the details. Turn it over to you, Martin..

Tim, am I on?.

Yes Mr. Bloch, you’re on..

Okay. Good afternoon, everybody. This is Martin Bloch. I have with me Steve Bernstein, who is Corporate Controller; and Richard Styli [ph], who is CPA Advisor for the company. Alan Miller will not be with us. He is enjoying a well-deserved vacation in - holiday in Africa - in South Africa.

I will have Steve give us a rundown on the financials and then I’ll give you the usually color on Frequency Electronics. Steve, please proceed..

Thank you, Martin. Q3 satellite payload revenues again represent approximately 60% of consolidated revenue similar to that in the last two fiscal years.

As previously discussed during the Q2 conference call, due to delays in new contract awards most of which are sole-source to Frequency Electronics, satellite payload revenues are lower by about 2.5 million for the quarter and 8.2 million for the first nine months of fiscal ‘16 compared to the prior year. U.S.

Government/DOD non-space revenues decreased quarter-over-quarter and accounted for approximately 20% of consolidated revenues. This decrease in revenues is reflected primarily in the FEI outcome subsidiary.

On a year-to-date basis compared to last year, FEI-Zyfer where we provide solutions for secure communications on GPS dependent systems recorded higher revenue. Network and other commercial product sales represented approximately 20% of consolidated revenues.

Although fiscal ‘16 consolidated revenues will not reach the record high levels achieved in fiscal ‘15 based on the current anticipated schedule of satellite payload and other U.S Government/DOD program awards further significant revenue declines are not expected going forward.

Gross margin was 4.7 million compared to 5.9 million last year resulting in a gross margin rate up 35% in Q3 of fiscal ‘16 compared to 32.1% last year. Despite lower sales, the gross margin rate increased due to favorable contract mix and the impact of cost reduction activities previously discussed during the Q2 conference call.

SG&A expenses were 3.2 million or 23% of consolidated revenues as compared to last year’s 3.6 million or 20% of consolidated revenues. This level of SG&A spend is in line with our targets and we expect it to remain at a similar level in Q4.

Internal R&D spending in Q3 was 1.3 million or approximately 10% of consolidated revenues compared to last year’s 1.3 million or approximately 7% of consolidated revenues. For the nine months of fiscal ‘16, R&D spending increased 430,000 compared to prior year.

For fiscal ‘16 as a whole, we expect R&D spending to be in line with the prior year and less than 10% of consolidated revenues. We’ve recorded a 272,000 operating profit in Q3 compared to 1 million last year.

Other income which generally consist of investment income, interest expense and other income and expenses that it’s an income of 30,000 in Q3 as compared to 81,000 last year. This yields a pretax income of 302,000 in Q3 compared to 1.1 million in the prior period. For the quarter, the provision for income taxes is 20,000 or 6.6% of pretax income.

This low effective tax rate is attributable to the reinstatement of the R&D tax credit by Congress during the quarter. Our year-to-date effective tax rate is 45%. Q3 net income is 282,000 or $0.03 per diluted share compared to net income of 878,000 or $0.10 per diluted share for Q3 of fiscal ‘15.

For Q3, we generated 4.9 million of cash from operations primarily from the collection of receivables. As a result, we generated 2 million of cash from operations in the first nine months of fiscal ‘16 and expect to generate positive operating cash flow for the full fiscal year.

Our backlog at the end of January 2016 was 22 million compared to 23 million at the end of the second quarter. We expect significant contract awards to occur before the end of fiscal ‘16 and a positive book-to-bill for the fiscal year. We look forward to your questions later. For now, I’ll turn it back to you, Martin..

Thank you, Steve. As you can see, this was a year that we had lower revenues and they are primarily caused by the facts that we have stated in our press release.

There was significant delay in government satellite programs which are sole-source to Frequency as well as DOD hardware which were also source for Frequency which we see it now pass to them being placed in a very near future of this.

During that time, we weren’t sitting ideally and preying, we’d instituted some significant forward productivity by automation and by automatic test equipment and we’re able to demonstrate to our customers that we have achieved the throughput capacity that is necessary to support their program.

During the slowdown on satellites both on military and commercial are due primarily to replanning by the satellite buyers on what they really need in this coming and this coming years to provide the service that they need.

On this we had other small competitive issues with our customers where they decided to keep more working in-house rather than to give it out to us. However to overcome this, we have invested in streamlining our product line to be a lot more competitive so we can take advantage in the future.

We have made significant progress in the design and development of our secure communication equipments that’s a primarily a joint venture between FEI and FEI-Zyfer and provided initial test instruments and we expect significant increase in revenue from those product. It’s an expanding market and is for us to take advantage of it.

We have also submitted a large number of proposals which are outstanding. I would estimate someplace between $150 million and $200 million that includes our regular product lines as well as the up-down converters.

Another significant achievement that was done is that we have been able to increase our production throughput on the L-Band up-down converters that we are making for Iridium and we are now shipping to the schedule that they need which is good for frequency and good for our customer.

I am very hopeful having a significant increase in backlog before the end of this year. And we’re looking forward to a profitable fiscal 2017 with increased revenue as well as increased backlog. I’d like to turn this over now to questions and answers.

With I’d appreciate since Alan is goofing off in Africa, if you have specific accounting questions, please call in and either I or Steve will answer you. And the number is 516-794-4500, extension 5000 which is you have in the press release. I’d like to turn it over now to questions and answers..

[Operator Instruction] Our first question comes from the line of Sam Rebotsky of SER Asset Management. Please proceed with your question..

Hello, Sam..

Hi. We got a different time Martin, huh? We’re changing..

Well, we’re not changing on, this is by necessity, I wanted Joe Franklin to be available and he will stay plus a fact that we have paying customers that are coming in at 3 o’clock, so I decided that it would appropriate to still hold the conference on the same day..

Well that’s wonderful. Now tell me, as far as firm contracts, firm commitments, we spoke of 35 million or 23 million to 35 million, what kind of firm contracts do we have that’s not include - yeah..

The totally funded contract that we have as of today is approximately 22 million. And as we have stated in our report, we do have - we are in the process of negotiating additional contracts and approximately 30 plus million which are sole-source which we expect to conclude very shortly..

When we spoke on last conference call, I thought there was 23 million to 35 million or 35 million and you had - also expecting to get 5 million to 8 million from the export, import, did that come through and what is the - how does it feel from last quarter?.

Okay. Well, many of the contracts that we talked last time got delayed and they haven’t been placed yet. The contract from the export, import, we are just starting to get funding on it, it’s still in limbo and we expect the full big booking on it to be within the next four to five weeks.

But outside of that, significant government satellite contracts got just pushed from November - October-November and we now expect them to be placed before the end of April..

Okay. I guess you say two to four months and hopefully something happens that sort of you to put a press release with the significant contract..

Yes, we will do that Sam and I believe that the delays are behind us because the launch schedules for those government satellites is very critical and for them to meet their hardware that we have to deliver, I don’t think they can delay at any longer.

And the programs are totally funded that just been one delay after another to the point of ridicules..

Okay. Now you speak to -.

I also felt those..

Okay.

You speak proposals of 150 million to 200 million, what were the proposals at the end of the last conference calls?.

About a 100..

Okay. So you are making more -.

They have increased significantly because of a new satellite programs that provide us our planning tells that ship that’s going on and they provide us really reconfiguring of what they need to provide in the future which is part of the delay in the commercial satellite there.

They want to provide more bandwidth and more coverage and all of a sudden they are reconfiguring the satellite. The only good part about it is that it will require more hardware on these satellites and that should give us more opportunities..

And you mentioned that there more work is going in-house and some of the large corporations and you were talking to merger partners and various type of joint ventures, do we need to do something quicker to sort of deal with this work that’s going in-house to get bigger sooner?.

We are proceeding on all of those fronts of mergers and/or acquisitions and that’s important. But we need to breakout the work from in-house is A, is to be more cost effective; and B, for our customers to get some more work so they are not so desperate to feed their own rice ball..

Okay. Now as far as the April quarter, do we expect similar sales, because last time we spoke of 16 million the previous quarter, we got it down, but we got a profit.

I am trying to understand the profitability in the fourth quarter, I mean we speak of being profitable for the year but we expect to be profitable in the fourth quarter et cetera?.

The answer is yes, we expect to be profitable in the fourth quarter. As you can see that we weren’t sitting on ideally during that time, we have trimmed expenses, at the same time we did not sacrifice the research and development effort in product and to optimize our productivity to be able to demonstrate throughput.

So - and at the same time, we’ve able to improve our margins and improve our cash flow. And I expect the same in the next quarter..

Alright Martin, good luck. Maybe I’ll get back in. Hopefully there is somebody else with questions..

Okay, Sam..

Our next question comes from the line of K.C. Hamann of NS Advisors. Please proceed with your question..

Hi guys. And Martin this is you. I wanted to know, on the second quarter earnings release, you guys recorded of saying you expect an upturn with significant additional bookings by the quarter ending this April and you talked about having robust pipeline. It sounds like some of that’s gone into the 150 to 200 you are talking about now.

But can you comment it all and the timing to give us something to hang or add on to Q kind of revenue you’d be doing in the future?.

Well, we expect significant booking in this quarter to materialize. We have like I said about 30 plus million that is sole-sourced are just spending in contract negotiations. And I hope to do my best to see if we can book them in this quarter..

Okay, so the significant additional bookings that you outlined in the second quarter release, did that - the activity you’ve seen is that met your expectations or do that come in below your expectation?.

The activity is like exceeds my expectation. We have been brisk and I am telling you we moved up the conference call because we have to get two major proposals out today. The activity is brisk that decision time on placing them is something that we don’t have a control.

We see enormous opportunity both in military and commercial satellite, as well as I want to emphasis that our development on this secure communication equipment has also great opportunities and we are focusing very hard to get this equipment into the field and demonstrate their capabilities..

Okay.

And I knew you guys don’t historically provide guidance, but would you be willing to comment it all, I get on the next call about just to quantify some of the opportunities so it makes it easier for us to understand what it look like?.

It’s a deal. I’ll work on it very hard, I promise..

Okay. Alright, thank you very much, Martin..

Thank you for calling..

[Operator Instructions] Our next question comes from the line of Brett Rice of Janney Montgomery Scott. Please proceed with your question..

Yes, thank you. In the past -.

Can you speak up please? We can hardly hear you..

Yeah, Martin, can you hear me?.

Yes, I can hear you now. Thank you..

Great, great, and hi General Franklin..

Hi..

In the past, you spoke about missing some potential business because some of the potential customers were uncomfortable with your ability to fill orders and there was some hiring you had to do to fill out capacity, is that all in place and that’s not a concern going forward?.

You hit and they will write on the head on this.

That was a major focus during that year and in additional to trimming some of the personal, we actually edit key personal to increase our throughput but primarily we improved our automation and our automatic test equipment and we have demonstrated to our customers that we have the capacity to take on additional work and to produce on time.

There is one other enormous type of press that has developed in the industry, the service provides wait until the last moment to place a satellite and then they want to launch it in 20 months. That has significantly applied pressure on us to be able to design and supply the hardware what usually used to be 23 to 36 months and 12 to 14 months.

And we have done a lot in order to standardize, improve our inventory along lead parts and improve our automatic testing method to be able to respond to that demand..

Okay.

Now the delays in the government satellite programs, does that have anything to do with the sequester which the military labors under, does that - is that what is causing to delay?.

No, no, I wish I could give you a better answer. There is really no reason for it. The programs are totally funded and they are critically needed and they have not been. There just been delayed and I would be a lot leisure if I knew the reasons..

Well, when you ask them, what feedback do you get back from the people from the government in response to why there is a delay?.

Because they have to replan on how to do it, they have to put additional features on those satellites, so therefore they might have to make minor changes on our hardware. And I think a very fundamental on this and they just as you know complicated programs takes longer, that’s -.

Right, right.

Now this maybe an accounting question, but - did I hear you say that our effective tax rate is 45%, I mean Bernie Sanders hasn’t been elected yet, have he?.

Say that again..

I mean did I hear -.

Bernie has not been elected yet..

I that’s a high tax rate, isn’t it?.

Steve, can you put some color on why 45% is expected for the year?.

Because the main reason is because the losses in the far end affiliates is not allowable for here on our reporting, so it’s the way it calculates..

Okay. Alright, thank you..

But don’t vote for Bernie..

Okay. Thank you for answering my questions..

You are very welcome..

Our next question comes from the line of [indiscernible]. Please proceed with your question..

Good afternoon, gentlemen.

I was wondering if you could talk a little bit further about your plans for the given facility, you’ve been losing money there for quite some time and I know you spoke about doing something with it, I was wondering if you could just give us an update on that?.

That’s a good question. Matter of fact, I am just packing my suitcase, I am going out there with Al Mancini [ph] on the 29 for total review and to see what we can do. It’s an issue that we have to resolve and I hope to be in a much better position to assess that situation within the next couple of weeks.

I’ll tell you the issue, they have enormous potential but it’s all gets delayed. As an example of that they are prototype, the electric bonnet out to the French and so the French were doing to install it and with large quantity and so far instead of 1,000s we are getting 100s.

When it comes to the communication equipment, we have prototyped a large system for the electric and power companies in China to use the U.S. 5G. And they talk about large numbers but they have always pushed a little bit further. So I want to get some clarity and by the next quarter, we’ll have a solution..

Is there any way to consolidate that operation into your other two facilities?.

No, that’s part of the problem and you are up, you cannot move. You got to make it profitable or get rid of it..

Okay, great. Great, I appreciated the insight..

Okay, you’re welcome..

Our next question comes from the line of Andrew Jones of North Star Partners. Please proceed with your question..

The comments were made about revenues on a quarterly basis and I just wanted to get some clarification. I think the comment was that you didn’t expect revenues to decline further and I was wondering if that was on a sequential basis or year-over-year basis that you expected there to not be declined from..

The sequential basis..

Okay.

So the sequential - from the 13.5 million that we did in the third quarter, because last year in the fourth quarter, you did 19 million so you are not talking about being anywhere near 19 million in the fourth quarter, is that right?.

That’s correct. I don’t think the contract. For this, we would have to have a release this week on these major contracts which I don’t think is going to happen..

So if it’s flat for the year that would put us to about 62 million-63 million in revenue?.

Yeah, some place in that range..

And then you said that in 2017 you thought you’d see increase revenue and backlog but you didn’t say anything about earnings.

I was just wondering if there is anything about the business you expect to sign that would be lower margins or if the revenue grow should the earnings grow also?.

As a matter of fact, earnings will grow with the increase in revenue since we are operating at much higher efficiency with more automation and automatic test equipment. So I expect that the increase in revenue and better margins..

Okay.

The second question I had was just in looking at the share ownership, I noticed that the ESOP looks like bought a fair bit of stock in the last quarter, could you tell us what the plans and the guidelines are there, how much stock they could buy or what kind of drives that?.

The ESOP didn’t buy any stock this date. The ESOP and 41K plan which is owned by the FEI employees are about 10 plus percent but they have not bought any FEI’s stock. No, I don’t think by our rules can they buy..

Okay. I much be looking at a bad data source and I’ll check that..

We are different company..

I think it’s the same company but I’ll check..

Okay, please. Let me know if I am wrong. Go ahead..

Our next question comes from the line of Dave Starkey of Morgan Stanley. Please proceed with your question..

Hi Dave..

Hey, how you doing Martin?.

Good..

Hey Joe, hey Alan, how you doing?.

Good. Thanks..

Well, Alan is in Africa..

He is on an elephant somewhere. Okay..

Hopefully he is not being getting by lions..

Right.

Just a couple of quick question, I had some clients who want me to ask you, have you in the past quarter either directions spoken about any kind of M&A with any other companies?.

Yes..

Okay.

And can you elaborate at all?.

No, we cannot elaborate. I am not allowed to elaborate at this stage of the game..

Okay, no problem.

And you have said I know in previous conference call that the gallium you would decide sort by the end of this fiscal year, so that –?.

Gallium, gallium..

Gallium, I am sorry, yes, that’s the purpose of your 29th trip..

Yes..

To kind of get an idea on that, okay.

Okay and can you just give me a couple of quick balance sheet items in terms of cash on the books at the end of the latest quarter and approximate book value?.

Yeah, go head Steve.

The cash is about 18 million?.

No, is 18.8 million..

18.8 million in cash.

And what else that you want to know?.

Just approximate book value..

Cash and marketable securities..

Cash and marketable securities..

I am sorry, 17.8 is cash and marketable securities, 18 million..

Approximately 18 million..

Okay. And the other thing was I am assuming now you know you are expecting potentially some pretty healthy contract of the next really almost few weeks to month or two based on what you are saying.

Will you be able to make some announcements in the majority of those cases, so we get a little bit more news flow from you, we haven’t really seen anything last few months..

Yeah, we expect - we will be able - this is part of the thing that I cleared with our customers, will be able to make announcement. We will not be able to tell who is the customer and what is the hardware, but we’ll be able to announce the award. They gave us that permission..

Okay, great, and you’d spend a lot of time the last few years upgrading your technologies, you are able to bid on a lot more per satellite and is that developmental program pretty much behind you now, so you do have the complete offerings now?.

Well, we have a lot of complete offerings, but it’s a dynamic situation, you’ll always have new requirements for satellites which you have to upgrade your offering but we now have gone from $100,000 quotes off later to the most complex box which we offered was 6 million.

So we have enormously and some of that new contracts that are very complex boxes that have a lot of electronic and microwave wrapped in one box and that’s proceeding very well. It’s a living process. You always have to upgrade this in order to be able to get more percentage of the payload..

Would you say that these new products are significant part of the added contract bidding that’s occurring or do you just have more customers that you are going after?.

No, it’s significant, it’s - the number of customers above the same, above half a dozen satellite customers both military and commercial on this. It’s more to the same customers..

And can you detail anything related to specifics, maybe related to space or particular customer that you might be trying to work with right now?.

We are working with everybody. Matter is always been is we are supplier to all in a competitor to none, although they don’t totally believe it since we want some of the work that they are doing in-house..

Okay, okay. Alright, well thank you, guys for your time and good luck..

Thank you for your questions..

There are no further questions in audio portion of the conference. I will now like to turn the conference back over to management for closing remarks..

Okay, Joe, since you are older than me, you’ll get down..

Thank you, Martin and all of you for tuning in. I must say that your questions are great help to us and I urge you to keep doing that, because it helps us to focus on where we are going. Martin has got it all down and so it’s good to have everybody and we will announce in when we are ready to give our fourth quarter.

And hopefully as we said, things are moving in the right direction..

Okay, I would to add my thanks to all of the employees at FEI that are working hard, doing this time to increase efficiency and demonstrate throughput and to our loyal customers. And I am confident that we’ll not disappoint you. Thank you all for listening in and have a good time. Bye..

This concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time..