Quarterly Report for Quarter Ending October 31, 2025 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995:

The statements in this Quarterly Report on Form 10-Q ("Form 10-Q") regarding future earnings and operations and other statements relating to the future constitute "forward-looking" statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that would cause or contribute to such differences include but are not limited to, our inability to integrate operations and personnel, actions by significant customers or competitors, general domestic and international economic conditions, reliance on key customers, including the U.S government, continued acceptance of the Company's products in the marketplace, competitive factors, new products and technological changes, product prices and raw material costs, dependence upon third-party vendors, other supply chain related issues, increasing costs for materials, operating related expenses, competitive developments, changes in manufacturing and transportation costs, the availability of capital, the outcome of any litigation and arbitration proceedings, and failure to maintain an effective system of internal controls over financial reporting. The factors listed above are not exhaustive. Other sections of this Form 10-Q and in Part I, Item 1A (Risk Factors) of the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2025 (the "Form 10-K") include additional factors that could materially and adversely impact the Company's business, financial condition and results of operations. Moreover, the Company operates in a very competitive and rapidly changing environment. New factors emerge from time to time and it is not possible for management to predict the impact of all these factors on the Company's business, financial condition or results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this Form 10-Q and any other public statement made by the Company or its management may turn out to be incorrect. The Company expressly disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Critical Accounting Policies and Estimates

The Company believes its most critical accounting policies to be the recognition of revenue and costs on production contracts and the valuation of inventory. Both of these areas require the Company to make use of reasonable estimates including estimating the cost to complete a contract, the realizable value of its inventory and the market value of its products. Changes in estimates can have a material impact on the Company's financial position and results of operations. The Company's significant accounting policies did not change during the three and six months ended October 31, 2025.

Revenue Recognition

Revenues are reported in operating results predominantly over time using the cost-to-cost method. Under this method, 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. Each month management reviews estimated contract costs through a process of aggregating actual costs incurred and estimating additional costs to completion based upon the current available information regarding labor, outside services, materials, overhead costs, and status of the contract. The effect of any change in the estimated gross margin rate ("GM Rate") for a contract is reflected in revenues in the period in which the change is known. Provisions for the full amount of anticipated losses on contracts are made in the period in which they become determinable.

Significant judgment is used in evaluating the financial information for certain contracts to determine an appropriate budget and estimated cost. The Company evaluates this information continuously and bases its judgments on historical experience, design specifications, and expected costs for material and labor.

Inventories

In accordance with industry practice, inventoried costs contain amounts relating to contracts and programs with long production cycles, a portion of which will not be realized within one year. Inventory write downs are established for slow-moving materials based on percentage of usage over a ten-year period, obsolete items on a gradual basis over five years with no usage and costs incurred on programs for which production-level orders cannot be determined as probable. Such write-downs are based upon management's experience and estimates for future business. Any changes arising from revised estimates are reflected in cost of revenues in the period the revision is made.

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

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Income Taxes

We are subject to income taxes in the U.S. and significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets that are not more likely than not to be realized. We monitor the realizability of our deferred tax assets taking into account all relevant factors at each reporting period. In completing our assessment of realizability of our deferred tax assets, we consider our history of income (loss) measured at pre-tax income (loss) adjusted for permanent book-tax differences on a jurisdictional basis, volatility in actual earnings, excess tax benefits related to stock-based compensation in recent prior years and impacts of the timing of reversal of existing temporary differences. We also rely on our assessment of the Company's projected future results of business operations, including uncertainty in future operating results relative to historical results, volatility in the market price of our common stock and its performance over time, variable macroeconomic conditions impacting our ability to forecast future taxable income, and changes in business that may affect the existence and magnitude of future taxable income. Our valuation allowance assessment is based on our best estimate of future results considering all available information.

Our provision for or benefit from income taxes for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.

RESULTS OF OPERATIONS

The table below sets forth for the three and six months ended October 31, 2025 and 2024, respectively, the percentage of consolidated revenues represented by certain items in the Company's condensed consolidated statements of operations or notes to the condensed consolidated financial statements:

		Three months								Six months
		Periods ended October 31,
		2025				2024				2025				2024
Revenues
FEI-NY			63.0	%			72.8	%			68.3	%			72.8	%
FEI-Zyfer			41.3				28.8				34.9				28.6
Less intersegment revenues			(4.3	)			(1.6	)			(3.2	)			(1.4	)
			100.0				100.0				100.0				100.0
Cost of revenues			61.8				51.8				62.5				53.7
Gross margin			38.2				48.2				37.5				46.3
Selling and administrative expenses			21.2				21.4				23.3				20.2
Research and development expenses			7.0				10.2				7.5				10.0
Operating income			10.0				16.6				6.7				16.1
Other income, net			0.3				1.1				0.8				1.2
(Benefit) provision for income taxes			(0.2	)			0.9				(0.4	)			0.9
Net income			10.5	%			16.8	%			7.9	%			16.4	%

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

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Revenues

		Three months																Six months
		Periods ended October 31,
		(in thousands)
Segment		2025				2024				Change								2025				2024				Change
FEI-NY		$	10,794			$	11,518			$	(724	)			(6.3	)%		$	21,148			$	22,494			$	(1,346	)			(6.0	)%
FEI-Zyfer			7,065				4,559				2,506				55.0				10,783				8,831				1,952				22.1
Intersegment revenues			(732	)			(257	)			(475	)			184.8				(992	)			(427	)			(565	)			132.3
		$	17,127			$	15,820			$	1,307				8.3	%		$	30,939			$	30,898			$	41				0.1	%

For the three months ended October 31, 2025, revenues from commercial and U.S. Government communication satellite programs accounted for approximately 27% of consolidated revenues compared to approximately 59% of consolidated revenues during this same period in the prior fiscal year. Revenues are recognized primarily over time under the percentage-of-completion ("POC") method. Revenues from the satellite market are recorded in the FEI-NY segment. Revenues from non-space U.S. Government/Department of Defense ("DOD") customers, which are recorded in both the FEI-NY and FEI-Zyfer segments, accounted for approximately 70% of consolidated revenues for the three months ended October, 31, 2025 compared to approximately 37% of consolidated revenue during the same period in the prior fiscal year. Other commercial and industrial revenues for the three months ended October 31, 2025 accounted for approximately 3% of consolidated revenue compared to 4% in the same period of the prior fiscal year.

The revenue for the three months ended October, 31, 2025 was higher than revenues in the prior period due to an increase in non-space DOD products, in the FEI-Zyfer segment. This increase was in both shipment-based products as well as products accounted for under the POC method.

For the six months ended October 31, 2025, revenues from commercial and U.S. Government communication satellite programs accounted for approximately 36% of consolidated revenues compared to approximately 57% of consolidated revenues during this same period in the prior fiscal year. Revenues from non-space U.S. Government/DOD customers accounted for approximately 61% of consolidated revenues for the six months ended October, 31, 2025 compared to approximately 39% of consolidated revenue during the same period in the prior fiscal year. Other commercial and industrial revenues for the six months ended October 31, 2025 accounted for approximately 3% of consolidated revenue compared to 4% in the same period of the prior fiscal year. The slight increase in revenue for this six month period, compared to the same period in the previous fiscal year, was attributable to the FEI-Zyfer segment and the increased demand for non-space DOD products.

Gross Margin

		Three months																Six months
		Periods ended October 31,
		(in thousands)
		2025				2024				Change								2025				2024				Change
		$	6,536			$	7,619			$	(1,083	)			(14.2	)%		$	11,618			$	14,318			$	(2,700	)			(18.9	)%
Gross margin rate			38.2	%			48.2	%											37.5	%			46.3	%

For the three months and six months ended October 31, 2025, both gross margin ("GM") and GM Rate decreased compared to the same periods in the prior fiscal year. The decrease in GM and GM 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 ("NRE") effort during the three and six months ended October 31, 2025.

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

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Selling, General, and Administrative Expenses

Three months																Six months
Periods ended October 31,
(in thousands)
2025				2024				Change								2025				2024				Change
$	3,623			$	3,388			$	235				6.9	%		$	7,207			$	6,234			$	973				15.6	%

For the three months ended October 31, 2025 and 2024, selling, general, and administrative ("SG&A") expenses were approximately 21% of consolidated revenues in both periods. For the six months ended October 31, 2025 and 2024, SG&A expenses were approximately 23% and 20%, respectively, of consolidated revenues. The increase in SG&A expenses during the three months ended October 31, 2025 was due to fluctuations in the various expense accounts that make up SG&A. For the six months ended October 31, 2025 an increase in payroll related expenses, including stock-based compensation, and investments in the future growth of the Company, including expansion into Colorado and Quantum sensing, resulted in increased SG&A expenses. These increased SG&A expenses are expected to continue through the remainder of fiscal year 2026.

Research and Development Expenses

Three months																Six months
Periods ended October 31,
(in thousands)
2025				2024				Change								2025				2024				Change
$	1,199			$	1,613			$	(414	)			(25.7	)%		$	2,332			$	3,101			$	(769	)			(24.8	)%

Research and Development ("R&D") expenditures represent investments intended to keep the Company's products at the leading edge of time and frequency technology and enhance future competitiveness. Fluctuations 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.

Operating Income

Three months																Six months
Periods ended October 31,
(in thousands)
2025				2024				Change								2025				2024				Change
$	1,714			$	2,618			$	(904	)			(34.5	)%		$	2,079			$	4,983			$	(2,904	)			(58.3	)%

For the three and six months ended October 31, 2025, operating income decreased due to lower gross margin and increased SG&A as described above.

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

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Other Income (Expense), net

		Three months																Six months
		Periods ended October 31,
		(in thousands)
		2025				2024				Change								2025				2024				Change
Investment income, net		$	153			$	203			$	(50	)			(24.6	)%		$	371			$	427			$	(56	)			(13.1	)%
Interest expense			(22	)			(27	)			5				(18.5	)			(46	)			(53	)			7				(13.2	)
Other expense, net			(75	)			(1	)			(74	)			NM				(77	)			(1	)			(76	)			NM
		$	56			$	175			$	(119	)			(68.0	)%		$	248			$	373			$	(125	)			(33.5	)%

Other income (expense), net is derived from various sources. The other income (expense), net can come from reclaiming of metal, refunds, interest on deferred trust assets, or the sale of a fixed asset. Interest expense is related to the deferred compensation payments made to retired employees. The majority of the approximately $0.2 million and $0.4 million of investment income for the three and six months ended October 31, 2025, respectively, was from interest income and unrealized gains on assets held in the Frequency Electronics, Inc. Deferred Compensation Trust.

(Benefit) Provision for Income Tax

Three months																Six months
Periods ended October 31,
(in thousands)
2025				2024				Change								2025				2024				Change
$	(31	)		$	139			$	(170	)			(122.3	)%		$	(108	)		$	272			$	(380	)			(139.7	)%

		Three months								Six months
		Periods ended October 31,
		2025				2024				2025				2024
Effective tax rate on pre-tax book income:			(1.7	)%			5.0	%			(4.6	)%			5.1	%

On July 4, 2025, President Trump signed the OBBBA into law. In accordance with U.S. GAAP, the Company accounted for the tax effects of changes in tax law in the period of enactment during the first quarter of fiscal year 2026. The OBBBA made changes to the U.S. tax code, including, but not limited to: (1) allowing taxpayers to fully deduct domestic research expenditures for tax years beginning after December 31, 2024, (2) provides a catch-up relief provision for taxpayers to accelerate deductions for unamortized domestic research expenditures, (3) a permanent provision for 100% bonus depreciation deductions for most tangible personal property with a recovery period of 20 years or less, acquired and placed in service after January 19, 2025, and (4) for tax years beginning after December 31, 2024, restores Adjusted Taxable Income by adding back amortization and depreciation to calculate the limitation on interest deductions (effectively returning to EBITDA).

The estimated annual effective tax rate for the fiscal year ending April 30, 2026 is 21.69%. This calculation reflects an estimated income tax expense based on our current fiscal year annual pretax income forecast which includes non-deductible expenses, estimated research and development credits, and state income taxes. The estimate of the annual effective tax rate is based on evaluations of possible future events and may be subject to revision in future reporting periods.

For the three months ending October 31, 2025, the Company recorded an income tax benefit of $30,644 which includes a discrete income tax benefit of $418,766. The discrete income tax benefit is primarily due to stock compensation windfall deductions and a remeasurement of the net deferred tax asset due to a new state filing. The calculation of the overall income tax provision consists of current U.S. federal and state income taxes. For the three months ending October 31, 2024, the Company recorded an income tax provision of $138,592 which included a discrete tax income benefit of $9,577.

For the six months ended October 31, 2025, the Company recorded an income tax benefit of $107,915 which includes a discrete tax benefit of $612,685. The discrete income tax benefit is primarily due to stock compensation windfall deductions and a remeasurement of the net deferred tax asset due to a new state filing. The calculation of the overall income tax provision consists of current U.S. federal and state income taxes. For the six months ended October 31, 2024, the Company recorded an income tax provision of $271,522 which includes a discrete tax benefit of $4,222.

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

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The effective tax rate for the three months ended October 31, 2025 was an income tax benefit of 1.73% on pretax income of $1.8 million compared to an income tax provision of 4.96% on pretax income of $2.8 million in the comparable prior fiscal year period. The effective tax rate for the three months ended October 31, 2025 differs from the U.S. federal statutory rate of 21% primarily due to non-deductible expenses, state income taxes, R&D credits and discrete items.

The effective tax rate for the six months ended October 31, 2025 was an income tax benefit of 4.64% on pretax income of $2.3 million compared to an income tax provision of 5.07% on pretax income of $5.4 million in the comparable prior fiscal year period. The effective tax rate for the six months ended October 31, 2025 differs from the U.S. federal statutory rate of 21% primarily due to non-deductible expenses, state income taxes, R&D credits and discrete items.

LIQUIDITY AND CAPITAL RESOURCES

The Company's consolidated balance sheets continue to reflect a strong working capital position of approximately $31.3 million at October 31, 2025 and approximately $29.7 million at April 30, 2025. Included in working capital at October 31, 2025 and April 30, 2025 was $3.0 million and $4.7 million, respectively, of cash and cash equivalents. The Company's current ratio was 2.6 to 1 at October 31, 2025 compared to 2.3 to 1 as of April 30, 2025.

Net cash provided by operating activities for the six months ended October 31, 2025 and 2024 was approximately $0.6 million and $2.4 million, respectively. The decrease in net cash provided by operating activities in the first six months of fiscal 2026 as compared to the prior fiscal year period was primarily due to timing of billings and cash collections and a decrease in net income. For the six months ended October 31, 2025 and 2024, the Company incurred approximately $2.7 million and $2.5 million, respectively, of non-cash operating expenses including amortization of ROU assets, depreciation and amortization, inventory net realizable value adjustments, deferred compensation, and accruals for employee benefit programs.

Net cash used in investing activities for the six months ended October 31, 2025 and 2024 was approximately $1.4 million and $0.8 million, respectively, all relating to purchases of capital expenditures.

Net cash used in financing activities for the six months ended October 31, 2025 was $1.0 million, all related to purchase of treasury stock. Net cash used in financing activities for the six months ended October 31, 2024 was $9.7 million, of which $9.6 million was related to the payout of a special cash dividend of $1.00 per share of common stock paid on August 29, 2024.

In March 2005, the Company's Board of Directors authorized the repurchase of up to $5.0 million worth of shares of the Company's common stock. On September 9, 2025, the Company's Board of Directors approved a new share repurchase authorization in the amount of $20.0 million. Under this new share repurchase authorization, the Company's shares of common stock may be purchased on a discretionary basis from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions or other means. This repurchase program may be suspended or discontinued at any time without notice. The new share repurchase authorization replaced the Company's existing share repurchase authorization under which approximately $0.6 million remained. This new share repurchase authorization does not have an expiration date.

During the three months ended October 31, 2025, the Company acquired 10,219 shares at a weighted average share price of $36.72 per share. The Company acquired these shares to satisfy tax withholding requirements upon the vesting of previously granted RSU awards. As of October 31, 2025, the Company had repurchased approximately $0.4 million of its common stock out of the $20.0 million authorized under the new share repurchase authorization. During the three months ended October 31, 2024, the Company repurchased 7,893 shares of outstanding common stock at $12.62 per share, respectively.

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

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The Company will continue to expend resources for R&D to develop, improve and acquire products for space applications, guidance and targeting systems, and communication systems that management believes will result in future growth and profitability. The Company anticipates securing additional customer funding for a portion of its R&D activities and will allocate internal funds depending on market conditions and identification of new opportunities. The Company expects internally generated cash will be adequate to fund these R&D efforts. The Company may also pursue acquisitions to expand its range of products and may use internally generated cash and external funding in connection with such acquisitions.

As of October 31, 2025, the Company's consolidated funded backlog was approximately $82 million compared to approximately $70 million at April 30, 2025. Approximately 69% of the backlog, as of October 31, 2025, is expected to be realized in the next twelve months. The Company excludes from backlog any contracts or awards for which it has not received authorization to proceed. On fixed price contracts, the Company excludes any unfunded portion. Over time, as partially funded contracts become fully funded, the Company will add the additional funding to its backlog. The backlog is subject to change for various reasons, including possible cancellation of orders, change orders, terms of the contracts and other factors beyond the Company's control. Accordingly, the backlog is not necessarily indicative of future revenues or profits (losses) which may be realized when the results of such contracts are reported.

The Company believes that its liquidity is adequate to meet its short-term operating and investment needs through at least December 12, 2026 and its long-term operation and investment needs for the foreseeable future thereafter.

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.