Good day, and thank you for standing by. Welcome to the Richardson Electronics third quarter fiscal year 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded, and if you require any further assistance, please press star zero. I would now like to hand the conference over to the speaker today, Ed Richardson, Chairman and CEO. Please go ahead.
Good morning, and welcome to Richardson Electronics conference call for the third quarter of fiscal year 2022. Joining me today are Robert Ben, Chief Financial Officer, Wendy Diddell, Chief Operating Officer and General Manager for Richardson Healthcare, Greg Peloquin, General Manager of our Power and Microwave Technologies Group, and Jens Ruppert, General Manager of Canvys. As a reminder, this call is being recorded and will be available for playback. I would also like to remind you that we'll be making forward-looking statements. They're based on current expectations and involve risks and uncertainties. Therefore, our actual results could be materially different. Please refer to our press release and SEC filings for an explanation of our risk factors. Our third quarter set another quarterly sales record since we sold RFPD in 2011.
It was also our 7th consecutive quarter of sequential revenue growth, which is remarkable when you consider the number of holidays that are in our third quarter. In fact, all three business units performed better than Q3 last year, and we overcame the unprecedented absences due to COVID-19 cases, particularly throughout the month of January. Net sales for the third quarter of fiscal 2022 were $55.3 million, 22.3% higher than last year's third quarter. Gross margin declined due to a higher percentage of lower margin sales, higher freight costs, and cost increases for raw material and components. Despite these challenges, third quarter operating income was $3.6 million, or 6.6% of revenue, which is a significant increase from $315,000 or 0.7% of revenue for the same period last year.
Backlog at the end of the quarter was $175.6 million, up 19.5% over the second quarter. Each of our three business units had higher backlog driven by strong bookings growth. Within PMT, our largest business unit, backlog increased across numerous product lines, most notably in power management, semiconductor, wafer fab, and magnetrons. These products are used in many new applications, including alternative energy, 5G, and manufacturing diamonds, hydrogen and building products. I'm pleased with the performance and I'm confident this will lead to continued growth. Considering Russia's recent aggressive actions against Ukraine, we stopped all shipments to Russia. Historically, we've shipped less than $1 million to Russia each year. We also have customers in Ukraine which represent less than $1 million in revenue per year, primarily in healthcare.
We extend our heartfelt support to our friends, families and customers in the Ukraine and wish for a very swift end to this unjust war. I'll now turn the call over to Bob Ben, Chief Financial Officer, to review our third quarter financial performance in more detail. Greg, Wendy and Jens will provide more detail on our third quarter performance as well as our new programs.
Thank you, Ed, and good morning. I will review our financial results for our third quarter and first nine months of fiscal year 2022, followed by a review of our cash position. Net sales for the third quarter of fiscal 2022 increased to $55.3 million, up 22.3% compared to net sales of $45.2 million in the prior year's third quarter due to higher net sales across all three business units. PMT sales increased by $8.8 million or 25% from last year's third quarter, driven by strong growth from our new Power and Microwave Technologies partners for various applications including power management and 5G infrastructure, as well as increasing shipments of our patented ULTRA3000. In addition, sales for several electron tube product lines, including semiconductor wafer fabrication, increased from the third quarter of fiscal 2021.
Canvys sales increased by $1.1 million or 15% due to the strong customer demand in North America and Europe. Richardson Healthcare sales increased $0.2 million or 7.4% year-over-year due to an increase in part sales and an increase in demand for the ALTA 750 tubes. In addition to higher revenues, total company backlog increased to its highest level since the sale of RFPD of $175.6 million in the third quarter of fiscal 2022 from $146.9 million at the end of the second quarter of fiscal 2022 and $98.7 million at the end of the third quarter of fiscal 2021.
Backlog increased in all three business units when compared to both third quarter last year and our most recent second quarter. Gross margin for the third quarter was 31.8% of net sales compared to 34.9% of net sales in last year's third quarter. PMT's margin decreased to 32.2% from 34.9% due to a higher mix of lower margin PMG sales, partially offset by increased shipments of wind turbine modules. Canvys gross margin decreased to 32.2% from 35.2% because of higher global freight costs. Healthcare's gross margin was 25.1% in the third quarter of fiscal 2022 compared to 33.0% in the prior year's third quarter due to an increase in component scrap expense and rising freight costs.
Operating expenses were $13.9 million for the third quarter of fiscal 2022 compared to $15.5 million in the third quarter of fiscal 2021. The decrease in operating expenses resulted from the non-recurrence of a $1.6 million legal settlement in the third quarter of fiscal 2021. In addition, lower legal fees were offset by higher employee compensation expenses. The company reported operating income of $3.6 million or 6.6% of net sales for the third quarter of fiscal 2022 versus operating income of $0.3 million or 0.7% of net sales reported in the third quarter of last year.
Other expenses for the third quarter of fiscal 2022, including interest income and foreign exchange, were $0.1 million compared to other expenses of less than $0.1 million in the third quarter of fiscal 2021. The income tax provision of $0.6 million for the quarter reflected a provision for foreign income taxes and the offset of a U.S. tax provision against the valuation allowance. In addition, state income taxes for Illinois increased due to the suspension of net operating loss carry forwards until the end of fiscal 2023. Net income was $2.9 million or 5.2% of net sales for the third quarter of fiscal 2022 as compared to a net income of $0.2 million or 0.5% of net sales in the third quarter of fiscal 2021.
Earnings per common share on a diluted basis in the third quarter of fiscal 2022 were $0.21 compared to $0.02 per common share on a diluted basis in the prior year's third quarter. Now turning to a review of the results for the first nine months of fiscal year 2022. Net sales for the first nine months of fiscal year 2022 were $163 million, an increase of 28.9% from $126.5 million in the first nine months of fiscal year 2021. Net sales increased by $30.4 million or 30.8% for PMT, $5.2 million or 25.6% for Canvys, and $0.9 million or 12.2% for Richardson Healthcare.
Gross margin decreased to 31.6% from 33.6%, primarily reflecting product mix in PMT and higher global freight costs in Canvys, partially offset by improved manufacturing efficiencies for Healthcare. Operating expenses were $40.6 million for the first nine months of the fiscal year, which represented a decrease of $1.3 million from the first nine months of the last fiscal year. The decrease was due to the non-recurrence of a $1.6 million legal settlement in the first nine months of fiscal 2021 and lower legal fees, partially offset by higher employee compensation expenses.
Operating income for the first nine months of fiscal year 2022 was $11 million or 6.7% of net sales as compared to an operating income of $0.6 million or 0.4% of net sales for the first nine months of fiscal year 2021. Other expenses for the first nine months of fiscal 2022, including interest income and foreign exchange, were less than $0.1 million as compared to other expenses of $0.5 million for the first nine months of fiscal 2021. The income tax provision of $1.3 million reflected a provision for foreign income tax and the offset of U.S. tax provision against the valuation allowance. In addition, state income taxes for Illinois increased.
The company reported net income of $9.6 million or 5.9% of net sales for the first nine months of fiscal year 2022 versus a net loss of $0.2 million for the first nine months of fiscal year 2021. Earnings per common share on a diluted basis in the first nine months of fiscal 2022 were $0.71 compared to a net loss of $0.02 per common share on a diluted basis in the prior year's first nine months. Turning to a review of our cash position. Cash and investments at the end of the third quarter of fiscal 2022 were $39.1 million compared to $39.7 million at the end of the second quarter of fiscal 2022 and $47.4 million at the end of the third quarter of fiscal 2021.
The company continues to invest in working capital to support its growth initiatives. Accounts receivable increased to $31.6 million at the end of the third quarter of fiscal 2022. However, days outstanding were 39 at the end of the third quarter compared to 40 days at the end of the second quarter. In addition, inventory grew to $73.7 million from $70.7 million at the end of the second quarter of fiscal 2022, primarily due to increases in components and work in process for our manufacturing business.
Capital expenditures were $0.6 million in the third quarter of fiscal 2022, the same as in the third quarter of fiscal year 2021. Approximately $0.2 million related to investments in our healthcare business, $0.2 million was for our manufacturing business, $0.1 million was for IT system, and $0.1 million was for other projects. We paid $0.8 million in cash dividends in the third quarter of fiscal 2022. In addition, based on our current financial position, our board of directors declared a regular quarterly cash dividend of $0.06 per common share, which will be paid in the fourth quarter of fiscal 2022. Finally, during the third quarter of fiscal 2022, we repatriated $0.5 million to the U.S. from Japan, bringing our total year-to-date repatriations to $1.5 million.
Our U.S. domiciled cash and cash equivalents balance totaled $24.8 million as of February 26, 2022. Now, I will turn the call over to Greg, who will discuss the results for our Power and Microwave Technologies Group.
Thank you, Bob. Good morning, everyone. Sales for the Power and Microwave Technologies Group, or PMT, in the third quarter of fiscal year 2022 grew 25% to $44 million versus $35.2 million in Q3 last year. In addition to strong sales quarter, PMT achieved an excellent book-to-bill of 1.47. Our sales growth and strong bookings confirm another solid quarter to what is shaping up to be an excellent FY 2022. Our gross margin decreased in the quarter to 32.2% versus 34.9% in the prior year, which was mainly due to some product mix as well as increased freight, component, and labor costs. Both business units and PMT supported the strong growth in bookings and billings in Q3.
Our Electron Device Group, or EDG, had an extremely robust quarter in bookings as we continue to take market share from our competition and continue to find new applications for our legacy tube products, specifically magnetrons, used in development of synthetic diamonds and other green solutions. In addition, we continue to experience outstanding growth in our Power and Microwave Group, or PMG. Over the years, we have added a growing line of new products and technology partners targeting RF and power management applications. This includes 5G infrastructure programs as well as programs dedicated to the consistently growing power management and energy storage applications that support numerous green initiatives. With respect to 5G wireless and power management, revenues increased by high double digits again in Q3 with a very strong book-to-bill. Power management saw growth in applications for wind energy, electric vehicles, and energy storage.
Recently introduced products, such as our patented ULTRA3000 Pitch Energy Module used in wind turbines, continue to gain traction with increased sales and bookings in the quarter. We are producing the ULTRA3000 with remarkable results in the field and millions of accumulated hours of operation. During the third quarter, we received our second patent for the Pitch Energy system for wind turbines. This extends our leadership position by further supporting our innovative Ultra module technology. We also saw an increase in bookings with key customers such as Enel, Invenergy, RWE and numerous other owner-operators of GE wind turbines. Our ULTRAGEN 3000 design for generators and cellular base stations in critical facilities has had good success in alpha product trials. In the quarter, we received our first beta site order with T-Mobile.
We also booked our first multi-million-dollar order for our power management module used in electric vehicles, in this case, electric locomotives. This order will start shipping in Q2 of FY 2023. Again, this product will also be manufactured, tested, and supported from LaFox, Illinois. As I've mentioned, we continue to add new products to our portfolio and are on schedule to introduce new products that support green energy applications in the first half of FY 2023. Our microwave component business continues to benefit from the positive trends associated with 5G, microwave communications, and SatCom applications. These applications are utilized as people continue to work from multiple locations, sending and receiving large amounts of data. Our entire team has done an excellent job identifying niche technology partners who collaborate with us globally. We continue to invest in and focus our resources to support these growth markets.
These resources include design engineers, field engineers, and manufacturing capabilities. We also added several small niche technology partners who fill technology gaps in our portfolio. This strategy has been highly successful, and we will continue to use it to develop new engineered solution products as well as increase our customer base, revenue, and profits by capitalizing on our existing demand creation infrastructure. We are excited to see that over the years, in these past three quarters, our legacy PMT business has had a strong return to both bookings and billings. The third quarter of FY 2022 continued to prove that the demand for all of our products and services did not go away with the pandemic, and we're even more excited about the trends in bookings that will support strong revenue in the coming quarter.
We continue to receive support from our key technology partners such as Qorvo, MACOM, Anokiwave , LS Materials, AMOGREENTECH, and Fuji Electric, and key tube manufacturers in the industry such as CPI, Thales, NJR, and Photonis. They've all worked with us to manage our customer requirements. Our growing in-house engineering and manufacturing teams did a great job supporting increased demand for our products and new product designs. The team also supported product designs for key growth markets, including green energy applications such as the ULTRA3000, ULTRAGEN 3000, and lithium-based power management module for our electric locomotives. I'm pleased with the progress we are making. We will continue to identify, develop, and introduce products using numerous technologies for green energy power management applications. However, we remain challenged by longer semiconductor component lead times and overall supply chain. This affects our component business and engineered solution products.
We are aggressively investing in inventory that should position us well and fill the pipeline to ensure we can meet our customers' needs while we collaborate closely with our customers and suppliers. I cannot stress enough the value of Richardson Electronics' model to our customers and suppliers. Our unparalleled R&D capability and global go-to-market strategy are unique to the power and RF and microwave industries. We have developed a powerful business model, including legacy products and new technology partners that fit well with our engineered solution capabilities. Through our steadfast and creative focus on customers, we will continue to excel by taking advantage of opportunities when they arise. Our backlog has never been stronger, and the execution of our strategy has never been better. There's no question our customers and technology partners need Richardson's products and support more than ever.
With that, I'll turn it over to Wendy Diddell in Richardson Healthcare.
Thanks, Greg, and good morning, everyone. Sales for the healthcare group increased in Q3 to a quarterly record of $3.13 million. This was 7.4% higher than Q3 of FY 2021. We sold a record number of tubes during the third quarter, led by increased tube sales in China. Sales of parts exceeded prior year levels. While equipment sales also exceeded prior year levels, they remain constrained due to ongoing lack of used systems available for purchase and resale. Gross margin in the third quarter was 25.1% versus 33% in Q3 last year. Our gross margin was negatively impacted by higher than anticipated scrap rates in the quarter relating to the use of reclaimed parts, as well as rising freight costs.
However, gross margin improved slightly over the most recent second quarter as we again increased the number of tubes produced and continued to address new component quality from our suppliers. The most significant roadblock to higher sales and margin continues to be the breadth of our CT tube product offering. Our next tube launch is the ALTA 750G, the second tube in the Canon series that works on newer Canon Toshiba CT scanners. We have one ALTA 750G tube in beta. The second is scheduled for install next week. We anticipate a full rollout after 30 days of acceptable performance. Sales growth will be gradual as we get the ALTA 750G into the market and Canon CT scanners come off OEM service contracts. We continue to make good progress on the Siemens repaired tube program.
This is a series of four tubes, including the Straton Z, MX, MXP, and MXP-46. The Siemens install base is considerably larger than Canon, and there are no third-party replacement options for these types. We are on track to release the Siemens types in calendar year 2022 and 2023, with revenue starting slowly in fiscal year 2023. We are also evaluating other tube types for future development, but not at the expense of our Siemens program. Our number one priority is to shorten the time it takes for healthcare to provide positive operating contribution to the company. Bringing more tubes to market will improve sales and margin and help us accomplish this goal. I will now turn the call over to Jens Ruppert to discuss the results for Canvys.
Thanks, Wendy, and good morning, everyone. Canvys engineers, manufactures, and sells custom displays to original equipment manufacturers in the industrial and medical markets throughout the world. Canvys delivered an excellent performance with sales of $8.1 million for the third quarter of fiscal 2022. Strong customer demand on a global basis drove the 15.0% increase in sales over the same period last year. Gross margin as a percentage of net sales was 32.2% during the third quarter of fiscal 2022, down from 35.2% during the third quarter of fiscal 2021. The decrease in gross margin was related to an increased freight cost impacting many customers across the global supply chain. Extended lead times on several key components also remain an issue.
However, our close relationship with customers and partners overseas enables us to procure long lead time components, which has helped us achieve a new record backlog of $52.4 million this quarter. Canvys' backlog increased 19.4% from this year's second quarter and is up 66.3% on a year-over-year basis. As you can see, momentum in our business has strengthened. We are optimistic that the high demand for custom monitors, touch screens, and all-in-one systems will continue for the foreseeable future. During the quarter, we received several new orders from both existing and first-time medical OEM customers. Some of these applications include cell analyzers, cryolipolysis, corneal cross-linking, eye examination, dental treatment centers, laser ablation, robotic-assisted surgery, medical device control, and fully integrated operating rooms, surgical navigation, patient monitoring, surgery video documentation, diagnostic imaging, and ophthalmology.
In the non-medical space, our products are used in a variety of commercial and industrial applications. This includes CT scanners for inspecting luggage at airports, human machine interface or HMI for high speed, high precision milling machines, product dispensers for retail applications, and teleprompting products. We are pleased with our team's performance. The new record backlog positions us for future growth. From the variety of customers and applications, as well as the value of orders from existing and new customers, it is clear we offer our global customers outstanding products and local service. While our sales organization stays focused on new opportunities, I continue to retune, adjust our business strategy to improve the operating performance of the division. Maximizing cash flow is an ongoing priority.
We continue to work closely with our partners to help us reduce inventory while being able to meet the demands of our customers, particularly with the challenges brought on by the industry-wide supply chain delays. I will now turn the call back over to Ed.
Thanks, Jens, and congratulations on the entire Canvys team for another excellent year. We're very pleased with the company's performance in the third quarter, particularly given the challenges we face in the very fluid business environment. Our backlog is growing, and we're working around the clock to increase production and meet our customers' demand. We will continue managing supply chain issues as well as higher freight costs, particularly with rising fuel costs. We're also focused on rewarding our team members for helping the company grow. Fortunately, the amount of lost time due to COVID-19 pandemic has decreased substantially. Overall, activities across all our global markets are robust and business remains strong. We're investing in equipment and expanding our manufacturing areas to take advantage of new opportunities.
This expansion will support growth for our alternative energy solutions as well as our legacy products, such as magnetrons for diamond manufacturing and marine applications. We're hiring additional engineers and production technicians as quickly as we can find them. We're cross-training employees to improve flexibility of our workforce and using overtime to meet customers' requirements. The team has really stepped up when we need them the most. We're reviewing every sale, every opportunity, and every new hire to ensure we're using our cash wisely. As we celebrate our 75th anniversary on May 24, 2022, it's an exciting time for the company. At this point, we'll be happy to answer a few questions.
At this time, as a reminder to ask a question, you will need to press star one on your telephone, and to withdraw your question, just press the pound key. Once again, that's star one for questions. Please stand by while we compile the Q&A roster. And our first question will come from the line. From Wellington Shields, your line is open.
Thank you. Ed, Wendy and the group, congratulations on what is a great quarter. There is, however,
Thanks, Howard.
You're very welcome. There is, however, an elephant in the room, and the elephant is margins. We all appreciate because it's affecting everybody that across the board in terms of freight and, cost of goods sold. At what point in time can pricing come back where you create, significantly better margins than you have in this quarter?
Well, I think it'll be pretty much linear. You know, we've been caught in some areas. For instance, in Canvys, most of our product comes in from Taiwan or Japan or Korea. We do the value-added either in Germany or in Boston. We've had to absorb the freight costs for some period of time. Now Jens has done a good job talking with our customers, and they understand the additional freight costs, and we're able to pass some of it along. In one quarter alone, we had $150,000 additional freight cost. I'm not sure, Jens, what was it in this last quarter? Can you remember?
Actually, I don't remember the exact number, but I think for the first nine months it's more than $900,000.
Wow. Yeah. It's amazing. Anyway, we're well aware of those costs, and we've had a lot of increases in raw materials, things like oxygen-free copper and ceramics and things of that nature. We're working hard to increase the prices and pass that along. I think, probably this time next year it'll be back to normal, and we'll be linear between now and then.
All right. Thank you. ULTRA3000, give me some thoughts, please, on fiscal 2023 in terms of revenues.
Well, Howard, as you know, we started the year with about $10 million-$11 million in backlog. We continue to add new customers. We've booked a number of multimillion-dollar orders. These rollouts are very similar to any rollout. We've a lot of experience with 3G, 4G, and 5G rollouts. It's time. They're testing the product. We have a number of large customers that are doing beta site testing and, across the board historically, with the results we had with these phase ones, we fully expect us to continue at a run rate. I believe I mentioned this group to be $45 million in one to three years, you know, and we're definitely at that run rate.
Could you repeat that? Because there was static on my line. What is your run rate potentially for 2023?
Well, our three-year run rate right now, we looked at this group and based on the sales, our bookings will be much higher than that.
Right.
We're at a run rate to do over the next two years about $45 million.
Okay. Thank you. Battery storage, energy, cell towers, beta testing. You expect to see some revenues this fiscal year upcoming?
Just small beta site revenues. That program's also going very, very well. It's the ULTRAGEN 3000. We have beta site testing going with T-Mobile in Phoenix. They placed a second order for 15 more towers with 0 failures. It's running perfectly. I don't think we'll see any large revenues or bookings till probably Q1, Q2 of FY 2023, Howard. We're very, very happy with the speed that this thing's been rolled out and the design itself, and that product is also will be patented.
Can you give us some sense of what your thoughts are for Q1? I mean, is it $2 million, $5 million? Any sense at all? We're not holding you to it. It's just a-
Howard, it's really hard to say. I mean, if you just do math, the number of towers that they have, but you know, these companies are very conservative when they put a new technology because it isn't a new technology to generators. So from a bookings point of view, Howard, I would think in the first half of the year, you know, $3 million-$4 million in bookings. How much of that will actually ship? I don't know, Howard, I can't give you an answer on that.
No, fair enough. Let's go to another subject in terms of ultracapacitors and locomotives. You've accomplished. You had an order for two. That order has been completed. Is that a correct statement?
No, Howard, it's not an ultracapacitor. You know, we're not in the EV, we're not in the wind turbine market, we're not in the electric locomotive market. We're in the power management. We've been working with Progress Rail and Caterpillar for a while in developing a module. In this case, it's a module with our partner, AmoGreentech. It's a lithium-based module. We have just completed that design. We have booked the first multi-million dollar order for a number of electric locomotives. They continue to gain market share in terms of outfitting these locomotives. We expect that to be also a $6 million-$7 million opportunity in FY 2023. We won't start building that till June.
No, no, fair enough.
You're seeing that.
My understanding is about.
Can I just add, Howard?
Yeah.
I just wanna add to that. In these opportunities, you know, all these opportunities that we're, and these new products are driven by components. The greatest thing about this is we have weekly calls with their engineering teams, and this is Caterpillar. There's so many opportunities that are gonna come out of this. Electric locomotives, yes. We are their lead partner for the powering system of that. You look at, you know, smart agriculture, they're making as much of their products green.
When you got a agreement with technology partners in the 5G world that are world leaders, and in the power management side, the leaders in that type of technology, and an ever-growing design team, I'm more excited about the relationships and the opportunities that have come out of it as I am with these individual opportunities, which by the way, as you've seen, are multi-million dollar opportunities.
My understanding, there are about 400-some-odd thousand locomotives just in the United States. Does that sound about right to you?
I don't know about that. I mean, they're diesel. There's not that many electric locomotives, but
Well, they're diesel I'm talking about. That's what you Yeah.
Yeah. You know, they mentioned they have 60,000 diesel locomotives globally. This was Progress Rail that they outfit. I don't know what the total is, but those are big numbers. We'll take half of it.
I appreciate that. Last question. Last quarter, you mentioned other products in the portfolio, sometime first half of 2023. Can you expand on that?
Yeah. There's, you know, in listening to the customers and what issues they're having, there's other products that, you know, fit our niche. You know, we really go after products that we have a niche or we add value. One of these products which we introduce in Q1, we might announce it before that, but we'll be doing beta site testing in Q1, also goes in the wind turbine. We have a number of other products that'll go into, critical facilities for power management. The one product that we're going to introduce in Q1 is a larger opportunity than the ULTRA3000 itself.
That's all I have. Thank you again.
Thank you, Howard.
Congratulations on a good quarter.
Thank you.
Ed, Wendy, thank you. All of you. Thank you. Bye.
Thank you.
Our next question will come from the line of Ross Taylor from ARS Investment Partners. You may begin.
Thank you, and also congratulations on what's really shaping up to be a great year. Howard addressed some of my issues, but to kind of recap, what you're looking at is the operating margin of the business should be recovering incrementally to kind of historic levels over the next three, four quarters as you're able to pass the cost increases for components and freight on to your customers at this point?
Yes, that's correct.
Okay. Looking at that, I listened to you guys talk, and you're in a number of really hot button areas. You're providing some really exciting technology. Do you see anything about the outlook for your business that should slow your growth over the next couple of years?
Not really. When you look at a $175 million backlog that's grown from a $140-some million in the last quarter, and at the same time, you know, the sales have grown as well, you can understand that the next year or two are pretty much guaranteed. We don't see anything that will slow us down right now. I mean, there's no question that we're on the verge of a third world war and things of that nature that we have no control of. You know, we do very little business in that area, so that doesn't have too much impact. Certainly, there are things like that that could impact this that we don't control.
Mm-hmm. All things equal, I'm listening to you talk about the new products, new product opportunities and the like, and it really sounds like you're on a ramp business. Your margins, while they've been softer than historic, you expect them to be recovering. We look at this in a market that trades at 17-18x earnings. Why do you think it is that your shares get so little respect? I mean, we're looking at a stock that, as I said, you're in every area it seems like you wanna be in, and if you cash adjust your share price, you're trading at 9x earnings, which is, you know, basically almost like you're going broke.
What do you think the market is missing or what do you need to do to get the market to wake up to the opportunity that's sitting in this company?
Well, we don't understand it either because, you know, we just mentioned that next year will be our seventy-fifth anniversary, and I hate to admit it, but I've been involved for 60 years. I would say that this is the most exciting time in my career. We look at the business like a table with six legs, and five of them are on fire right now, and we just can't produce all the products that we have orders for. Healthcare is coming along. We think by 2024 that we can start to show a profit in Healthcare and that will add a great deal to the bottom line.
I guess, you know, we sold RFPD in 2011 and took the company from being $700 million in sales and 1,000 employees and losing a ton of money down to a company that was $140 million. We kept the international infrastructure, which was important to the two businesses, with 24 foreign subsidiaries and 60 offices all over the world. It took us a long time to add enough products to fully absorb that infrastructure. When we got to $160 million, we broke even. Last year, we were at $177 million and showed a small profit. Now this year will be $215 million, possibly $220 million, and show a very nice profit.
I think investors that are aware of the company for a long time are saying, "This old guy isn't gonna get it right ever." It's starting to get there now, and I think that in the years to come, the company will be very profitable.
Well, just to be blunt, even if you don't get it right, quite honestly, the business executes well enough and the value is there that, you know, this is, to me, probably the greatest value I see in the equity market today because you're making money and you're gonna make more. It seems like the wind turbine business could generate a substantial portion of what the company generated in revenues all of last year in a year or two. Would that be a wrong assumption?
No, we think so. That's the most exciting business we're in right now, the green energy business. Not only the wind turbines, but the electric locomotives and the cell business. Just the opportunity is amazing. Fortunately, the patents that we have. We're in early. Understand that lots of people understand the opportunity in green energy, and there are lots of people working on that market, but we seem to be well ahead of a lot of the competition.
Talk about your cash, and you've obviously been investing some of that cash in working capital and the like, but you're also generating cash as a business as you roll forward, should be generating it. It's not hard to envision next year you should earn well over $1 a share in earnings. I think it looks like this year you should probably earn, you know, 90+ cents a share in earnings if you just can keep the same earnings power on what I would expect would be higher revenues in your fourth quarter. What do you do with that cash? Is that part of the problem that the market sits here and looks at, you know, what's effectively a quarter plus of your market capitalization sitting in cash?
Well-
doesn't see it?
Yeah, at the moment, we're just funding the growth of the business. You know, it's first of all, we have 24 foreign subsidiaries, and as Bob mentioned, only about $25 million of the cash is in the United States where we can use it, and we have to carry about half a million dollars in each of the foreign subsidiaries to keep them within their legal requirements. We can use that cash. We can move it around, borrow it from subsidiary to subsidiary, and fortunately, we don't have that problem right now. As you saw, the inventory was up very substantially. We have enough ultracapacitors in the building to build every order and every order that we are projecting. We did that for a reason.
We haven't been able to ship as fast as we wanted to because there's been a shortage on integrated circuits, which we're now getting in stock.
you know, it's basically funding the receivables and the inventory that's required for the growth that we're seeing. We should be-
And this-
You know, this year we'll use a little cash, and it looks like next year we'll go cash flow positive.
Yeah. What you're saying is this 20%+ top-line growth is actually component-constrained growth. As components become more available, that growth should accelerate.
Yeah, it's certainly true. Look at the backlog, you know?
Yeah.
The $175 million-plus backlog.
Yeah.
You know, those orders are set up, particularly in EDG, where we're making magnetrons. If we could build them, we could ship every one of them today. It's just we can't build the product fast enough.
Okay. Well, you guys are doing a great job operating it. I think we need to think about, you know, getting some coverage and getting people to actually care about the business, because the opportunity is clearly there. You're one of the most attractive. As I said, on a valuation basis, it's hard to find something in this market that comes anywhere close to a 20%+ top line grower trading at a single digit cash adjusted multiple. It's just. Yeah.
Well, we appreciate your confidence, and we absolutely agree with you.
Well, let's hope.
Yeah.
Let's hope we both prosper in the next year.
All right.
Okay.
Thank you very much.
Thank you, gentlemen.
Our next question will come from the line of Tim O'Connell from Chain of Lakes Investments. You may begin.
Hi, good morning, and congratulations on the great quarter.
Hi, Tim. Thank you.
Hi. You know, some of my questions have already been answered, but I was hoping for a little more color on the locomotive business. The way I look at it, you know, that the revenue number per locomotive, how many there are in this world, your relationship with Progress, and, you know, the revenue number per locomotive. You know, this appears to be a much larger opportunity than the wind turbine business. You know, my questions are, what kind of market share do you think you can get there? How quickly do you see these manufacturers adopting battery power? And kinda what's the plan to go after this market, whether it's just with Progress or any other manufacturers? Thanks.
Right now we have 100% market share with Progress Rail, Caterpillar, and there's really two leaders in this market. It's Progress Rail and GE Transportation. Our partnership is with Progress Rail. It's at a design level, and there'll be other products. Our content continues to grow as they ask us to design other parts of the system other than just the module. In this case, not just the module. Right now, our content's about $1 million a locomotive, and that growth is really dependent on how much market share Progress Rail grabs. We expect this to be, you know, in terms of bookings, as they roll out these electric vehicles.
I think if you look online, you can see companies like Union Pacific, Long Island Rail Road placing orders, and they mention Progress Rail, so you can kinda get some numbers of what that's expected. Yeah, we're very excited about it. It's really dependent on how much market share Progress Rail gets, and we believe they're gonna get a majority of it. I'll just add to that again, 'cause I'm on these weekly calls, the opportunity in other products within Caterpillar also, yes, that overall makes us bigger than the ULTRAGEN 3000. The ULTRAGEN 3000 business is gonna generate other opportunities from these same owner-operators, and we are talking to people like Siemens and GE, who are the manufacturers.
There's another product that we'll introduce in Q1 that is causing them a lot of pain due to the lead-acid batteries that will more than double the opportunity, if you wanna call it the windmill ultracapacitor business.
Okay, thanks. Good color, and I just think this is such a great area for you guys to be in, an undiscovered green energy company here with Richardson.
Well, you know, the interesting part of it is we booked the first large order. One of the things, we used every aspect of Richardson's 75 years. The reason we beat our competition is these products are sent to 15-20 different sites, in this case, all throughout North America. Our distribution business, which has been around for 75 years, can do that with their eyes closed. Our competition couldn't do that. On the locomotive side, they're mandating U.S.-based railroads that it has to be manufactured and tested and supported from the U.S. That just was perfect for us. We're here in LaFox, Illinois, and we have niche capabilities.
We've over the years these high-powered tubes that we make and thermal dissipation that they've been working with for years. We have just world-class knowledgeable engineers of ultracapacitor technology, and we're very selective. Yeah, I could come up with 15 other green products, but we have a real niche. Again, it's big money. It's $10 million-$20 million. It's still niche for us, and we just have found after 15 years of ultracapacitor experience that we have the ability to address these somewhat niche applications better than some of these larger companies. You're right. If you put it all together, it is absolutely a home run.
Great. I'm looking forward to seeing you guys' success.
Thank you.
Thank you very much.
Our next question on the conference line of Khadir Richie from Richie Capital Group. You may begin.
Hi. Good morning.
Morning.
Thank you so much for taking my call. Yeah, congrats on your performance. In reference to Ross Taylor's comment, you know, our team is new to Richardson, and we're continuing to learn about the business over time, so perhaps others are taking notice as well.
We hope so.
It seems that you're delivering, you know, quite a bit of momentum in the business, and we noted the significant growth in your backlog that continues to build. Can you possibly characterize this growth a bit? You know, what part of that growth could be related to the global supply chain, and could there possibly be some over-ordering or pulling future quarters forward versus, you know, a real increase in demand that can be repeated? Can you discuss that?
Well, a very large share of our backlog is for products that we manufacture, and on a lot of those products, we're either sole source or very nearly sole source. There are other companies that can make the product, but it would require the customer to redesign the equipment to use their product. We don't see over-ordering. That type of thing normally happens in the commodity semiconductor business, and I'll let Greg comment on that. A very large portion of our backlog is for products that we manufacture where we are sole source or nearly so.
Got it. Thank you. You mentioned that it was mentioned earlier in the call that you're you know, aggressively ordering inventory you know, so you can meet your future demand. Can you discuss how you're thinking about acquiring inventory, how has your strategy really changed in the current environment?
Well, in most cases, for instance, in the integrated circuit used in the ultracapacitor, the delivery's been 48 weeks. For the most part, fortunately, with Greg's relationship with the people in the semiconductor industry, he's been able to get the product and, I don't know, Greg, what have we got delivery on 15, 17,000 units so far?
Yes. The semiconductor industry is my background, but you know, Richardson's always been very aggressive on inventory. When we started seeing these orders and we talked, 'cause you know, there's a part of our business that's quite large that is components. They're made by Qorvo, MACOM, Fuji, all these, tier one semiconductor. We talk to them daily, and they give us insight of what's going on. If we see a hiccup coming, we're very aggressive about getting the inventory. Even though we are frustrated that we aren't getting as much as we want, I really think Richardson has done a better job than our competitors, and we've actually gained market share because of our aggressive ordering and just our communication. It's still a.
You know, the RF and wireless and power world is a very niche, incestuous market. You know, I've been doing this 35 years, and most of the people on my staff are doing the same. We have contacts. We talk all the time. We communicate information. I just think we've done a good job of getting in our orders and, you know, communicating with our suppliers to get ahead of the game. I think we've done a better job than our competitors, and I think that is part of the reason we're gaining market share.
You might have Jens comment on Canvys. $50 million of the backlog plus is with Canvys, and Jens is a display engineer, been in the business a long time, and he has frame contracts with these medical OEMs, where he's bringing in LPDs or ordering them out, 12 months in advance to make sure the customers have the product. Jens, you wanna comment on that?
Yeah. I think you addressed it very well. I mean, we have customers that place orders for a long time out, basically two to three years even. Sometimes we are still struggling to get components. However, due to those long-term contracts and relationships we have, you know, we have I call it secret sources where we can still get the material almost on time, you know, for everything we need. It's a great relationship we have with our suppliers, so I'm not very disturbed, you know, or pessimistic about the future. I'm looking forward, you know, to serve the customers, you know, with the products they need on time.
Okay. Great. Thank you. Just one last quick question. Can you discuss any challenges that you've had on the workforce management front in regards to you know finding you know the engineering talent and managing you know kind of rising salaries and how you're navigating that front?
Sure. Wendy, you wanna comment on that? You've been in the front on that one.
I'll start. Just to keep it in perspective, one of the data points I find particularly interesting and illustrative to answer your question. Since the beginning of the calendar year, in LaFox Manufacturing alone, we've hired 37 people. We are using a combination of all the traditional sources to find people. We've increased our finder's fee to our employees for bringing in people. We've hired a recruiting specialist to add to our HR team to specifically go out and proactively find candidates for positions. In the engineering area, we've had a really strong intern program over the past number of years, and we've been fortunate to be able to bring in a lot of those engineers as full-time employees as they graduate.
Greg Peloquin and Greg Kinnie have done a great job of also finding additional engineers to join our team. On that front, it's a continual recruiting effort. We're hiring again more people than we've hired in a long time. It's not always easy and not surprisingly, right? I mean, we have the same challenge every other company. We're fighting for employees. We have raised our minimum salaries, our minimum hourly rates to be able to attract more people. That has added obviously to our cost pressure, but it's more important for us. I mean, we've got people right now working six and seven days a week, every single week in order to meet the demand. You know, we are taking care of them, we're giving back to them and acting responsibly in terms of our compensation program.
That referral bonus goes to any investor that refers someone to us.
Yes. Yes.
Just wanna make sure you all know.
trust me, we've got investors.
Yeah
that are sending us, you know, resumes and people they know.
Yeah.
We went to a conference last week.
It applies to anyone and everyone, so.
Yeah.
So.
It's good. We can always use more.
All right.
It's a continual effort.
All right. That's great to hear. Thank you. That's all my questions. Thank you, and congrats again.
Thank you.
Thanks very much.
Thank you.
Our next question comes from the line of Walter Schenker from MAZ Partners. You may begin.
Hi, Walter.
Good morning.
Hi, Walter.
Hi, Ed. Hi, Wendy. Well, I thought no one was gonna ask Wendy a question, but you just got one. In looking at the medical market, one of the things you learned, and therefore we learned, after you entered the market was that a significant number of potential customers were under maintenance contracts, and therefore, until those rolled over, there really wasn't much of an opportunity for you. Over time, the opportunity should grow as you pick off some of these people over time. In looking at the year-over-year, and I look at one quarter, is that not happening to the degree you hoped, and therefore you really need a broader line, or can we see some more significant growth as people come off maintenance contracts and theoretically are open to save some money if they go to you instead of their prior contractor?
I think with the launch of the G, the second tube in the Canon family, that will open up the door for more people to take their systems off the OEM contract. Right now, we only have the D, as you know, and that covers a certain range of Canon CT scanners. The G expands that range, and so people would be more open-minded to using a third-party service organization, because they don't run the risk of having some of their equipment still have to be covered by the OEM. That's going to help, I think, increase the sales of the D and the G. That answers part of your question. Certainly expanding our product range is absolutely critical, Walter, as we've been discussing.
Having the Siemens range of tubes, and again, there's 4 in that series, that market is much, much larger than the Canon market. The installed base is much larger. Siemens, I think, is the number one player in CT scanning market. That, again, will add more volume. I think that, you know, success begets success. The more tubes you get out there, whether it's a Canon tube or it's a Siemens tube, the more people will come to you and look to you for additional purchases. It's really a combination of getting that G out there, which will help us get more Canon equipment off a contract, and then the volume will be incrementally driven by the Siemens program. Does that answer your question?
It does. Just, I guess it's still too small. Initially, maybe somewhat surprisingly, despite you being very small, there's some pricing adjustments by the dominant player in the industry, once you entered and tried to underprice them. At this point, pricing, and I realize it's only on one product, is reasonably stable? To me, they-
Yes, it's reasonably stable. Yes. We don't see anything crazy.
Okay
over time.
We won't know how Siemens is gonna react until you're in the market.
That's correct. We, again, optimistically, perhaps we don't see them having the same knee-jerk reaction. I mean, as we've discussed, we think there's been a lot of money left on the table, but I think we collectively feel that Siemens will be less likely to have that kind of cost reduction.
Okay. My final very quick comment, which is not gonna get a response, so I'm doing it 'cause I can smile and say it. It's to Ed.
Uh-uh.
I couldn't get you to buy back. Many people couldn't get you to buy back stock when it was half the current price in the more recent periods. As you go into a positive cash flow and maybe significant positive cash flow going forward in 2023 and 2024 fiscal years, and Russ laid out how cheap the stock is, which we all agree, I as one shareholder would very much appreciate if you revisited buying back stock. Again, you're only small premium to book. You've got a lot of it. You have a lot of cash. You're at a very low multiple. I couldn't push you before, but maybe in 2023 and 2024, there's hope that the company will at least consider it if the stock continues to be so undervalued. That's just a statement.
Right.
Thank you.
Well, we did buy $65 million worth of stock back after we sold RFPD.
Yeah.
At the time, we ended up paying a price somewhere between $8-$9, and I thought it was a fortune when the stock went to $4 or $5. It looks pretty good today, so you never know. Never say never.
Okay. Thanks, Ed.
Thanks, Walt.
Our next question will come from the line of Eric Landry from BMO Capital. You may begin.
Morning, Eric.
Good morning.
Hi. How are you?
How are you?
Hey, Eric.
Good morning.
Good. Great quarter. I'm so happy for everybody there. What a difference three or four years make. I remember back in some of the comments in 2018 and whatnot. This is so much nicer. Anyways.
We agree. You, you've only been with us about, what, eight or nine years, Eric? Something like that. Maybe more.
It's been a while. It's worth it. Anyways. I suspect, like you guys, I'm a little surprised at the stock price today. A lot like what Howard said, I think a lot of it has to do with the margin degradation. Perhaps you could comment on how much, I think it's 310 basis points of the decline is due to an increase in shipping and your inability thus far to raise prices commensurate with your cost increase. Do you have any kind of an estimate as to how much of-
Yeah. Wendy did a fairly decent analysis of it. I'll let her.
Actually, Bob did that.
Okay.
Bob hasn't gotten to speak yet today, so we'll let Bob answer that.
Oh, all right. Okay.
One thing to keep in mind on the margin is, you know, we're in a lot of different businesses, and the mix of sales, whether it's product mix or customer mix, always affects us differently every quarter. I think that's important to keep in mind. You know, my analysis shows that that's over half of the change, the three point change in the quarter. Yes, certainly, component prices and labor costs are affecting us. I certainly don't wanna give you the impression they're not. You know, I show that about a point roughly, and then the rest would be other things. You know, we talked about the additional scrap in the healthcare business, you know, and freight as well, that we've talked about.
Does that give you a rough idea, Eric? Does that answer your question?
Yeah. A little bit more than half you expect to be able to get back through price increases, correct?
Yes.
Yeah.
Okay. Yeah, I just want to make sure that you're not transitioning into a lower margin business through all this growth.
No.
I think that's-
Not at all. Not at all.
Yep. All right.
It's just we've gotten caught in between with logistics costs and higher raw materials costs, higher labor costs. You know, everything's going up, and we haven't been able to react fast enough.
Right.
If I can add a little bit, Eric. Eric, one more thing. Last quarter, our margin was 32.7% compared to 31-
Mm-hmm
0.8% this quarter. Still a drop, but not nearly as much. I might add, last year's third quarter, 34.9% was our highest point all year last year.
Right
... you know, I think it's important to keep that in mind as well.
Gotcha. Thank you. Wendy, of the 37 you've hired in the last 3+ months, what percentage is that of the people that you need?
If I understand the question, we need 100% of them. Oh, you mean what, how many more do we need?
Yeah.
Yeah. I think we have. I'm going off of memory here and approving recs. I think we probably have 5-10 additional recs open, most of them in production. On the engineering side, that is more, at this point, opportunistic. Healthcare, I think we're full. In Greg's area and supporting the ULTRA3000, I think we constantly have an open mind. Maybe, you know, we could take up to another 5 engineers if you have people you wanna send us.
Okay. I don't, unfortunately. I was thinking maybe I could drive down there one or two days a week and help.
We have all volunteered to do the same thing. We're like, "Look, I can build an ULTRA 3000. I can, you know, I can get out there and like.
Eric, we do have a second shift on the production of the ULTRA3 000, and it pays time and a half.
I don't know that I'm.
I don't know if it's good for you or not.
Yeah. I don't know that I'm qualified to build ULTRA3000, but I could probably sweep the floor. That would probably be-
We'll just test your product twice.
Can you put a director set together, Eric?
There you go. Perfect.
Yeah, Bob, no problem. You can build the ultracapacitor.
There you go. Sounds good. I'll put my app in.
All right.
I just wanna real quick, I know this is getting long here. I just wanna address the magnetrons. The way I see it, this is probably somewhere around maybe your second or third largest opportunity right now. Is that anywhere near accurate?
We just looked at the total backlog, Wendy. What is it on the magnetron? It's incredible.
Yeah. $13 million, $14 million.
Yeah. $13 million-$14 million is the backlog right now in the magnetron business. You know, that's almost double what it was a year ago.
What do the growth prospects look like? I mean, it's probably nowhere near the ULTRA3000, but I assume it's material.
We could sell every one we can make right now. You know, it's some of these new technologies, like synthetic diamond thing is just going crazy. Now they're using magnetrons also. They take tires, and they take the carbon out of it, and they make tile, so roof tiles, floor tiles. Big company in India has placed over 1,000 magnetrons with this, called Carbon Craft, and they make both synthetic diamonds and tile. The applications for hydrogen is just, you know, a fuel of the future.
Right.
There are just so many applications now for microwave where, you know, semiconductors just won't handle the brute power and the high frequency at the same time.
Right. Do you have any type of a patent on your magnetron or any type of a sort of a competitive barrier so that someone can't come in and?
Well, lots of people have tried to make the YJ1600, and people like Thales and English Electric, and they've all failed. It's you know, it's a technology that is a lot of black magic. No, there are no patents on power grid tubes that I know of any longer. They've all expired. Once you can learn to build them and other people don't know how to build them, you're pretty much in a sole source position.
That's what you feel like you are with this thing.
That's correct.
Let's just, I mean, this is a dumb question, but someone who makes the magnetrons for our everyday microwaves, they could enter this market?
Yeah, they do. You know, Panasonic makes one, and so does LG. It's a different magnetron, and the only way you can use it is to build a new piece of equipment and build a power supply and all the accessories to utilize that magnetron. There are people that do that. You know, there, if you look at companies like Muegge and SAIREM that build generators, they buy from those people, and they customize their equipment to use their product. At the same time, both those companies have been after us. They wanna buy all the production that we can make of our magnetron. We have something that they can't get.
How long have they been trying?
Oh, it's perpetual, and we sell to them. You know, it's as long as we can build them, we'll sell to anybody.
Okay. Great. Thanks. Last thing, because I know we're getting long here. Greg, the locomotive product, is this similar to the cell tower product, where it's used as a starter, or are these actual completely 100% battery-powered locomotives?
Yeah, 100% battery-powered locomotives. The module, it doesn't use ultracapacitors. It uses lithium iron phosphate batteries. It's about the size of two car batteries together. In a standard locomotive for the power levels that these are going into, there's about 160 per train, but it runs the entire train. Now, also I wanna add, Eric, that the first ones that are coming out are like for short distances. For example, you know, taking the train to Chicago. These aren't long haul. Those are coming, and that's some other designs we're working on with Progress Rail and Caterpillar.
You ought to tell him that the beta, the original design that we're gonna make weighs 10,000 pounds.
Yeah.
Whoo.
That's another good thing. We've got a big cement loading dock out there that. Yeah, it's interesting. You know, this is how, you know, this whole thing works. You talk to them about a component, and then you build a module, and then they keep adding more to it. "Can you build this?" I mean, eventually, could we build the entire system here in LaFox? Yes. Right now, the main one is the battery module that, you know, goes in the locomotive, and they're in parallel circuit together, and they run the complete train. Then obviously, just like an electric car, it's brake regeneration. Right now they're used in, you know, like shipyards to move things around and then for commuter trains going from here to Chicago.
The big market, obviously more power, more of these batteries, as we get the long haul, you know, sending parts across the country. Again, we are a design partner for Progress Rail, and as they gain market share, we'll continue to gain market share.
Well, okay. That's it for me. I appreciate it. You guys, you're really kicking ass there, so great job. Thank you.
Thanks.
Thanks, Eric.
Yep.
Our next question will come from Mike Hughes from SGF Capital. You may begin.
Good morning. Thanks for taking my questions.
Good morning, Mike.
How are you, Ed?
Good.
Good. Good to hear. Just to follow up on the locomotive business, and maybe I missed this, but is it safe to assume the gross margins on that business will be kind of in line with the company-wide average, kind of 30%-35%? Is that fair?
Yes. It'll be accretive. All the products, the ULTRAGEN 3000, ULTRA3000, and then the lithium ion EV locomotive, are accretive to the overall corporate margin of 35%+.
Okay, great. You said the content per locomotive, and this was your content, was $1 million. Is that correct?
Right around $1 million. I think, yeah, right near our current cost is about $1 million a locomotive.
Okay. Okay, good. The backlog is really impressive, but I assume everything that's in the backlog is price protected. Just number one, if you could confirm that. Number two, this is probably the highest rate of inflation you've seen since, you know, the 1970s. Is there anything you can do on a go-forward basis to protect yourself from, you know, booking something now and it's not gonna ship for a year from now where raw materials might be higher? Can you just address that issue?
Well, we have a policy, you know, that when we quote it, the quote's only good for 30 days. If we take a firm order and we guarantee them a price over a period of a year, then it's on us. We also normally have a currency fluctuation clause in each order as well, so that we're quoting in the U.S. dollar, even though the customer may be in India or China or Europe, somewhere else. We try to protect ourselves as much as we can, but obviously, we're getting caught now and we think that we can correct that, sort of on a linear basis over the next year.
Okay. Then on the last call, Ed, you indicated that you thought you could grow 15%-20% the top line next year. Is that still the case? Is that still your thinking?
Yeah, absolutely. You know, with a $175 million backlog, and we'll end the year probably somewhere between $215 million and $220 million, you know, it probably. We can look at $250 million next year or something like that. Maybe a little more.
Okay. If you kinda did the midpoint for this year, let's say 218, and you grew at a 15% rate, that would translate into $250 million, which is just shy of $63 million a quarter. At what point do you step up to that higher level of revenue and is the gating factor just the integrated circuit shortages? You're $55 million now. When does it go to $63 on average?
It'll be linear. Yeah, it will be linear.
Okay.
Normally, our fourth quarter is our best quarter, you know, and it's amazing. When usually the third quarter is really low because of the Christmas holiday and the Chinese New Year and that kind of thing. If you look at it, the third quarter revenue-wise was quite good as well. The fourth quarter is usually our highest quarter.
Okay.
Normally.
And then-
Our summer quarter or the holiday quarter is the lowest, but that hasn't happened either. It's just continued to grow on a linear basis.
Okay. Just on the SG&A line, it was $13.1 million in the prior quarter, and it was $13.9 million this quarter. What were the drivers behind that? Is the $13.9 million, maybe $14 million a quarter, a good number on a go-forward basis?
Bob, do you wanna come in on that?
Sure. Yes, Mike. To answer your question versus second versus third quarter, you know, we continue to accrue our employee incentive expense. We have merit increases that happen throughout the year versus the previous quarters and year. So most of that increase was in the employee compensation expenses. You know, quarter to quarter, we have different factors that impact this. Going forward, on the $14 million, yes, I expect it to be closer to that in the fourth quarter and beyond. Next year, you know, to get that growth, we're gonna have to make some investments, whether it's in SG&A or we talked earlier about working capital and capital expenditures, so I don't want anybody to think we can achieve this growth without making some of those investments.
$14 million is a good number with some growth next year going forward.
Okay. Just on the magnetron business, Ed, I think Ed or someone else on the management team on the last call indicated, you know, there's a generator sale that's $75,000-$100,000, and then there's the tubes that are $7,000, and there's some question of kind of how much share you get in the generator space. Just any updated thoughts on that?
Yeah. This is pretty much in the hydrogen area where they're taking methane gas and converting it into acetylene and hydrogen, and they do that with a 100 kW generator. The tube that goes into that generator is about $7,000. By the way, our competition just raised their price to almost $11,000 for those magnetrons. It'll be interesting to see what happens there. $7,000 or $8,000 has been in the area where we've been in the past. The generator is depending upon what bells and whistles are on it. It's a $100,000 generator. Quite often we get the tube business. We have lots of competition in the generator business. The three companies that are startups that we're aware of in the U.S. wanted to buy 100 generators each.
It gives you an idea, you know, what the potential could be. You know, other than some beta orders, we don't have any mass production orders on those, but it just gives you some idea what the hydrogen business is gonna be in the future or could be.
Okay. Just the semicap equipment end market, what type of growth are you looking for into next fiscal year for that business line?
Well, Lam's our largest customer there, and we pretty much followed their guidelines. What are they telling us now, Wendy? We do those vendor meetings?
Yeah. You know, kinda low double digits, 10%-15% is what we're expecting. They have their own supply chain challenges that I think are limiting their growth.
Would that translate into like a $27-$28 million number for that business?
Yes. About right.
Yeah, that's a good number.
Yeah.
Okay. Just last question for you. On the inventory, I understand why it's been building up over the last few quarters. Just from a day standpoint, do you think that's stabilized now, or will you need to continue to kinda build up ahead of revenue?
No, I think it'll continue. You know, we try, and it's one of the reasons why we maintain so much cash. Part of the reason why we're successful is we can supply products that other people can't, and that comes from buying inventory well in advance, particularly what Jens is talking about, where he's buying LCDs a year in advance. It guarantees big OEMs that they're gonna have the display that runs their $3 million piece of equipment.
Okay. There's obviously a cost to having higher working capital. Have you thought about, or maybe you've already done this, just building that into your price and just having that discussion with the customers that your cost of doing business 'cause your working capital requirements have gone up, it is higher, and it really needs to be reflected in kinda, you know, you're delivering a lot of value to your customers, and it hasn't, it's not reflected at this point.
Right. No, we certainly try to do that. Unfortunately, when you're working with these frame contracts that are a year out, you get caught like we have, you know, on short term, but we'll recover from that and we'll be able to increase our prices as we go along.
Okay. I appreciate your time. Thank you.
Thank you.
Our next question will come from the line of Mike Schellinger from MicroCapClub. You may begin.
Yes. Regarding
Hi.
Hello. Regarding converting
Hi, Mike.
Backlog to sales, can you characterize what, you know, percentage of that challenge is supply chain versus personnel?
Yeah. No.
Like 50/50.
Yeah. No, no. It's not personnel. For instance, on the magnetrons, you know, in a normal year on the YJ-1600, we build 800 a year. We went from building 800 last year to we have orders for over 5,000 right now. What we've had to do is to build new test sets. We've had to add ovens. We had to add vacuum pumps, all kinds of jigs, dyes, tooling and fixtures. Delivery on that, a lot of it we build in-house, but what we have to buy, some of them, as long as six months. That's the kind of thing that we've run into. We've geared up now where we can build two or three hundred a month, and we're going to gear up to build 400 a month.
To get the equipment to do that is what the delivery time has been.
Okay. Thank you very much.
Sure. Thank you.
Our next question will come from the line of David Schneider as a private investor. Your line is open.
Hi. Can you hear me okay?
Yeah.
We can hear you, David.
Just a quick question. Earlier, person on the call couldn't figure out why the stock was where it is now. It's just my opinion, and then I'll ask questions. I just think people nowadays will like the stock more at $17 than $11.62. It's just human nature. The fact that it's $11.62 now, to me, doesn't bother me at all. Now back to the questions. I did notice. I think you did go over this. I just need a little clarification. I do monitor inventories, and so the sequential increase in inventory seems to have grown faster than the increase in revenues.
I'm thinking that maybe to sell finished products, there's a few maybe bits and pieces that you're waiting for delivery on so you can ship things out and book it as your revenues. Can you maybe just explain that?
That happens a lot, particularly in Greg's business, where the customer, they want a complement of five different semiconductors and
Ship complete.
Yeah, ship complete and you know, we only have three of them or four of them in stock, so we're holding the inventory until we get the 5th one to ship the kit, if you will, and that happens.
Okay.
Same thing happens when we're building equipment for Lam. If we're short some kind of a capacitor and we've got all the other components for a piece of equipment, we might have $1,000 worth of raw material waiting for a $3 capacitor.
As far as flipping over to the overall company being free cash flow positive, would a big part of that being just that backlog inventories turning, you know, turning that into cash? Or what other factors would be going on?
Well, that has a lot to do with it. Obviously, the more money we make, you know, then we cross the line. It looks like we'll be cash flow positive next year. That's sort of our, you know, our forecast.
Yeah.
Bob, you've done a what? A four, five year cash flow?
Yeah. We certainly expect the cash flow to improve, certainly as sales continues to grow at 15%-20% a year. Yeah, next year will be a transition year. You know, hopefully, we'll get to cash flow neutral. If not, we'll be close. After that, yeah, our forecast is to generate significant amounts of cash. I think we talked about that earlier with some other people on the call.
Okay, that's great. Your tax rate was 17% in the quarter you released yesterday. I know the state of Illinois, you know, they suspended the use of some carryforwards there. For the next fiscal year that starts, I guess, what? June first. What do you think your overall tax rate is gonna be?
Yeah. I'm forecasting 27% effective tax rate for fiscal 2023. That includes, I think I've mentioned this before on other calls, but we do anticipate we'll be using all of our federal NOLs by the end of this fiscal year. We have to factor in federal tax next year. I would assume, or I'm using a 27% rate going forward. Once Illinois we can use the Illinois NOLs again after fiscal 2023, I expect that to go down as we can utilize those in fiscal 2024 and beyond. For those years, fiscal 2024 and beyond, I'm using 23% as my estimated effective tax rate.
Okay. Well, that's good. How big is the Illinois carryforward?
It's over $40 million. Significant.
Oh. Okay. All right. Yeah, I'll probably email some other questions. Yeah, I'm happy that fundamentally you're doing well, and that's the most important thing.
Thank you very much.
Thank you. I'm not showing any further questions. I'll just turn the call back over to the speakers for any closing remarks.
Okay. Well, thank you for your interest and your investment in the company, Richardson Electronics. We're optimistic about our future, obviously, and hope you are as well. If you'd like to discuss our results, you know we're a very flat organization, call us anytime. Happy to talk to you. Or better yet, come and see us. It's easier to show you what we do than tell you about it. We look forward to discussing our fourth quarter and full year performance with you in July. Thank you very much.
This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a good day.