Good day, and thank you for standing by, and welcome to the Richardson Electronics Conference Call for the Third Quarter of Fiscal Year twenty twenty one. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I will now hand the conference over to your speaker today, Ed Richardson.
Good morning, and welcome to Richardson Electronics Conference Call for the Third Quarter of Fiscal Year twenty twenty one. Joining me today are Robert Ben, Chief Financial Officer Wendy Dedell, 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 Canvas. We're still calling in from remote locations. As a reminder, this call is being recorded and will be available for audio playback. I'd 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. Given the ongoing impact of COVID throughout the world, we're very pleased with our results for the third quarter of fiscal year twenty twenty one. Our sales in the quarter were 18.3% above our third quarter last year at the start of the pandemic.
After posting operating income of $852,000 last quarter, which was our best operating quarter since the first quarter of FY 'nineteen, we finished the third quarter of fiscal twenty twenty one with operating income of $1,900,000 This excludes the onetime payment to settle our dispute with Varex. We chose to settle the case to avoid further legal costs and distraction. The ongoing strength in the semiconductor wafer fab market and continued growth in both our healthcare and power and microwave groups contributed to increased profit. Sales of our power grid tube lines also improved during the quarter as customers resumed operations. Canvas continues to improve its profitability as well in spite of customer push outs caused by the pandemic.
Unfortunately, we're not out of the woods yet. While COVID vaccines are rolling out globally, many countries are still under lockdown, including Germany, France and Brazil. Our first concern is the safety of our employees, our suppliers and our customers. I again say thank you to the entire Richardson team for following our guidelines by staying healthy and keeping the business running without disruption. Our continued success would not be possible without everyone working together.
I'll now turn the call over to Bob Ben, who will provide a detailed recap of our third quarter and year to date performance. Then Greg, Wendy and Jens will discuss individual business unit performance, our successes and our opportunities for future growth.
Thank you, Ed, and good morning. I will review our financial results for our third quarter and first nine months of fiscal year twenty twenty one, followed by a review of our cash position. In addition, please note that I will be discussing non GAAP financial measures. I refer you to our third quarter fiscal year twenty twenty one press release for a reconciliation of non GAAP items to the comparable GAAP measures. Net sales for the third quarter of fiscal twenty twenty one increased to $45,200,000 or 18.3% compared to net sales of $38,200,000 in the prior year's third quarter, primarily due to higher net sales for Richardson Healthcare and PMT, partially offset by lower net sales for Canvas.
Richardson Healthcare sales increased $900,000 or 41.7%, primarily due to an increase in demand for the ALTA750 IIs, reflecting the highest quantity sold in any quarter. In addition, pre owned CT scanner sales increased in Latin America. PMT sales increased by $6,200,000 or 21.6% from last year's third quarter because of higher sales of semiconductor wafer fab equipment specialty products as well as power conversion in RF and microwave components. Power grid tube sales continued to be negatively impacted by the pandemic. However, sales of certain product lines increased from the third quarter of fiscal twenty twenty.
Canvas sales decreased by $100,000 or 1.7 percent due to temporary decreased customer demand in Europe related to COVID-nineteen, partially offset by an increase in North American sales. No customers were lost. Gross margin for the quarter was 34.9% of
net sales compared to 33.1% of net sales in last year's third quarter.
PMT margin increased to 34.9% from 32.8% due to a favorable product mix. Canvas margin as a percent of net sales increased to 35.2% from 32.8% also because of its product mix. Healthcare margin as a percent of net sales was 33% in the third quarter of fiscal twenty twenty one compared to 38.3% in the prior year's third quarter, primarily due to a smaller percentage of replacement part sales. Operating expenses were 15,500,000.0 and non GAAP operating expenses were $13,900,000 for the third quarter of fiscal twenty twenty one compared to $12,700,000 in the third quarter of fiscal twenty twenty. The increase included a one time cost of 1,600,000 for a legal settlement with Verix Imaging Corporation.
Richardson did not admit liability, but wanted to move forward selling its ALTA750 tubes and avoid further legal expenses. The increase in non GAAP operating expenses resulted from a $300,000 increase in legal fees and from our normal employee compensation expenses including incentives and annual merit increases. These increases were partially offset by lower travel expenses. Throughout the pandemic, the company decided to support its employees through regular merit increases and incentive plans and by avoiding layoffs or furloughs. As a result, the company reported an operating income of $300,000 and non GAAP operating income of $1,900,000 for the third quarter of fiscal twenty twenty one as compared to an operating income of $11,000 in the third quarter of last year.
Other expense for the third quarter of fiscal twenty twenty one, including interest income and foreign exchange, was less than 100,000.0 compared to other income of $100,000 in the third quarter of fiscal twenty twenty. The income tax provision of $100,000 for the quarter reflected a provision for foreign income taxes, which was lower than in the prior year's third quarter and the offset of a U. S. Tax provision against the valuation allowance. We had a net income of $200,000 and non GAAP net income of 1,800,000 for the third quarter of fiscal twenty twenty one as compared to a net loss of $100,000 in the third quarter of fiscal twenty twenty.
Earnings per common share on a diluted basis in the third quarter of fiscal twenty twenty one was $02 and non GAAP earnings per common share on a diluted basis was $0.14 Turning to a review of the results of the first nine months of fiscal year twenty twenty one. Net sales for the first nine months of fiscal year twenty twenty one were $126,500,000 an increase of 6.7% from the first nine months of fiscal year twenty twenty net sales of $118,500,000 Net sales increased by $9,300,000 or 10.4 percent for PMT and $500,000 or 7.3% for Richardson Healthcare, but decreased by $1,800,000 or 8.2% for Canvas. Gross margin increased to 33.6% from 32.3%, primarily reflecting favorable product mix in PMT and Canvas as well as improved manufacturing performance for PMT. Operating expenses were $41,900,000 and non GAAP operating expenses were $40,300,000 for the first nine months of the fiscal year. Non GAAP operating expenses increased $1,600,000 from the first nine months of the last fiscal year due to higher employee compensation expense and legal fees, partially offset by lower travel and consulting expenses.
Operating income for the first nine months of fiscal year twenty twenty one was $600,000 and non GAAP operating income was $2,200,000 as compared to an operating loss of $400,000 for the first nine months of fiscal year twenty twenty. Other expense for the first nine months of fiscal twenty twenty one, including interest income and foreign exchange, was $500,000 as compared to other income of $200,000 for the first nine months of fiscal twenty twenty. The income tax provision of $200,000 primarily reflected a provision for foreign income taxes, which was lower than the prior year's first nine months and the offset of U. S. Tax benefit against the valuation allowance.
We had a net loss of $200,000 and a non GAAP net income of $1,400,000 for the first nine months of fiscal year twenty twenty one compared to a net loss of $600,000 in the first nine months of fiscal year twenty twenty. Non GAAP earnings per common share on a diluted basis in the first nine months of fiscal twenty twenty one was $0.11 We continue to closely manage our cash position. Cash and investments at the end of the third quarter of fiscal twenty twenty one were 47,400,000.0 compared to $46,000,000 at the end of the second quarter of fiscal twenty twenty one and forty three point nine million dollars at the end of the third quarter of fiscal twenty twenty. Capital expenditures were $600,000 in the third quarter of fiscal twenty twenty one compared to $400,000 in the third quarter of fiscal twenty twenty. Approximately 300,000 related to our healthcare business, 200,000.0 was for our IT system and $100,000 was for other projects.
On a year to date basis, capital expenditures totaled $1,800,000 as compared to $1,200,000 in the first nine months of fiscal twenty twenty. Free cash flow was $2,200,000 for the third quarter of fiscal twenty twenty one and $2,000,000 on a year to date basis. We paid $800,000 in dividends in the third quarter of fiscal twenty twenty one. In addition, based on our current financial position, our Board of Directors declared a quarterly dividend of $06 per common share, which will be paid in the fourth quarter of fiscal twenty twenty one. Lastly, during the third quarter of fiscal twenty twenty one, we repatriated $700,000 to The U.
S. From foreign locations. Our U. S. Cash and investments totaled $30,100,000 as of 02/27/2021.
Now I will turn the
call over to Greg, who
will discuss the results for our Power and Microwave Technologies Group.
Thank you, Bob, and good morning, everyone. The Power and Microwave Technologies Group, or PMT, sales in the third quarter of fiscal year twenty twenty one grew 21.6% to $35,200,000 versus $28,900,000 in Q3 last year. In addition to an excellent sales quarter, PMT achieved a book to bill of 1.59. This incredible sales growth and strong bookings numbers has put us in a great position for a strong Q4. Our gross margin increased in the quarter to 34.9% versus 32.8% in the prior year.
Gross margin improved from new designs and growth of engineered solutions. Our engineered solutions products supporting the semiconductor wafer fab market had another record quarter in terms of revenue. We also continue to have excellent growth in our PMG or Power Microwave Group. This growth was led by our growing line of new technology partners supporting RF and wireless applications like five gs infrastructure and power management applications. Also supporting the growth in the quarter was our legacy tube business, which sales exceeded the prior year.
We saw an extremely positive booking trend in PMG. Our book to bill in the quarter was very strong and drove the overall book to bill of 1.59 for PMT. This was achieved by continued growth in the power management and wireless communications market. Regarding the bookings, on the power management side, we saw growth in applications such as wind energy, solar, EV and energy storage. In RF and microwave applications, in five gs microwave communications and SATCOM led the growth.
With respect to five gs wireless and power management sales, revenues increased double digits again in Q3. As the need continues to grow for people to work from home, the city, the country and even their car, they must be able to send and receive large amounts of data from many of those locations quickly. The team has done an excellent job identifying next technology partners who collaborate with us globally. We continue to invest and focus on resources to support these growth markets. We have added numerous small niche suppliers who fill technology gaps.
And in Q3, we added Isha Haya and Single Microwave and also new products from current key technology partners, which will be key to our customers working at five gs, microwave and power management applications. This strategy has been highly successful and will continue this as we add new products, customers and revenue and profits using our same demand creation infrastructure. Our electron device group increased sales that was driven by semiconductor wafer fab customers. Our legacy tube business is also coming back. However, even with the strong quarter results, I believe COVID-nineteen is still having a slowdown effect on our business.
I continue to use the word slowdown, because we have proven again in Q3, the demand for our products and services did not go away with the pandemic. In fact, we are even more excited about the bookings trends in this quarter. We continue to look extensively at how to do things differently to achieve success. We developed several unique strategies support our global customers' designs and products, while working with the restrictions on travel and face to face meetings. As mentioned, these strategies include adding new technology partners, where we have technology gaps from our current markets.
We are also increased communication through customer and supplier focused webinars and major web upgrades. Richardson's go to market strategy has allowed us to grow multiple business opportunities during the pandemic through creative processes and communication procedures. We are committed not only to bounce back, but to bounce forward coming out of this pandemic. The Q3 results show excellent progress in this strategy. This quarter, we continue to receive support from our key partners such as Qorvo, MACOM, Anokiwave, United SIC, LSMtron and Fuji Semiconductor.
And key tube suppliers in the industry such as CPI, Callus, NGRC and Photonics have all worked to help us manage customer requirements. Our in house engineering and manufacturing teams did a great job supporting increased demand from our global semiconductor wafer fab customers. This team also introduced new products for new designs for key growth markets such as the Ultra 3,000, which has patent pending technology for the wind turbine market. Headwinds going into Q4 and into FY twenty twenty two is long semiconductor component lead times. This affects our component business and engineered solutions products.
As these lead times continue to extend, we will have to be very aggressive on inventory and fill the pipeline to make sure we can meet our customers' needs. Looking at results during the coming out of this pandemic, I cannot stress enough the value of Bridges Electronics' model to our customers and suppliers. Our unparalleled capability and global go to market strategy are unique to the power and RF microwave industries. We have developed a powerful business model for legacy products and new technology partners to go with our engineered solutions capabilities. Through our steadfast and creative focus on customers, we will survive this pandemic by taking advantage of opportunities when they arise.
The demand for our products has not gone away. Our customers and technology partners need Richardson's products and support more than ever. And with that, I'll turn it over to Wendy Deddell in Richardson Healthcare.
Thanks, Greg, and good morning, everyone. I am pleased to announce that the Healthcare Group had sequential growth in total revenue and in the number of Altitude sold again in the third quarter. In our last call, we reported higher Altitude sales than any prior quarter. We achieved this again
in
Q3. Total sales in the quarter were $2,900,000 a 41.7% increase over sales in the same period last year. Sales of parts, equipment and tubes all increased over prior year's third quarter. Gross margin improved to 33% from 25.6% in Q2. Margin was down versus 38.3% in the third quarter of FY twenty twenty.
We continue to have some supply chain challenges related to COVID, primarily slower deliveries on key components. This limited the number of tubes we made in the quarter. While we were able to meet customer demand, we still have additional production capacity. We've added resources to support the growth and we are in good shape as we get ready to launch the G and the Siemens repair programs later this year. Pre owned CT scanners continue to be in short supply as hospitals face financial challenges and hold on to their equipment longer.
We believe supply will be constrained until the pandemic is under control and financial performance in the healthcare industry improves. While this will limit our system sales for the near future, we believe this creates more opportunities for higher margin replacement tubes and parts. We are prepared to meet this demand. As far as new developments, we launched our tube deloading program in China late in the third quarter. We are just beginning to feel its positive impact on revenues.
We are optimistic that this will be a good growth market for us. New tube development remains on schedule with the ULTA750 gs launching later this summer. Siemens repaired tubes will follow later in the fall and into calendar year 2022. We continue to add experienced engineers to round out our capabilities and speed up development time. In FY 2022, we will have a broader range of tubes to offer to our customers.
As we expand our list of medical certifications, this will also expand our geographic footprint into countries such as Canada. I will now turn the call over to Jens Ruppert to discuss the results for Canvas.
Thanks, Wendy, and good morning, everyone.
Canvas, which includes the engineering, manufacturing and sale of custom displays to original equipment manufacturers in the industrial and medical markets delivered a good performance with sales of $7,100,000 during the third quarter of fiscal twenty twenty one, an increase over last quarter, but a small decrease of 1.7% over the same period last year. Customer demand for equipment decreased temporarily due to the coronavirus and the resulting business impact on the OEMs globally. Some areas such as Germany and France are still on lockdown due to the increased cases. Gross margin as a percentage of net sales was 35.2% during the third quarter of fiscal twenty twenty one, up from 32.8% during the third quarter of fiscal twenty twenty. The increased gross margin was related to a favorable product mix.
Our healthy backlog, along with a number of projects that are currently in the engineering stage, position us well for continued growth, assuming no long term impact from COVID-nineteen. We continue dealing with extended lead times that likely won't recover until the end of this calendar year. Some key components such as LCDs have standard lead times of up to thirty weeks now. We at Canvas are fully committed to easing any burden on our customers, and we are working closely with the manufacturers, keeping the impact to a minimum. We continue compensating for the lack of face to face customer visits and trade shows during the pandemic by focusing on our online awareness.
We are adding application stories on our newly designed website and regularly issuing newsletters that feature unique products where we see good potential for new business. We are confident that our online strategy will result in new leads and business growth. During the quarter, we received several new orders from both existing and first time medical OEM customers. Some of these applications include cryolipolysis systems that break down fat cells by cooling of body fat, cataract and refractive surgery systems, laser systems for therapeutic and refractive applications of cutting edge corneal surgery lithotripsy systems, where pulsed laser is used to break down stones in the kidney and gallbladder robotic assisted surgical platforms to improve precision and accuracy in knee surgery microsurgery systems where our displays are mounted on surgical microscopes patient monitoring systems and radiotherapy systems, where highly customized displays are embedded in a remote console to control ceiling mounted cameras that monitor patients during radiation treatment. In the nonmedical space, we received orders for various display products.
Our products are used as electronic rearview mirrors on subways and trams as human machine interface for high speed, high precision milling machines at the teleprompter and talent systems for well known news stations. Products include displays and all in ones, monitors with an integrated PC. 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 customers outstanding product and service. While our sales organization stays focused on new opportunities, I will continue to review and adjust our business strategy to improve the operating performance of the division. Maximizing cash flow is an ongoing priority.
We will continue to work with our partners to help reduce inventory while being able to meet the demands of our customers, particularly during the pandemic and the challenges it brings to our supply chain. I will now turn the call back over to Ed.
Thanks Jens. You and your team continue to produce excellent work in the face of adversity. Over the last several years, you added many new high profile medical and industrial customers. That effort is helping the display division weather the short term decline in equipment purchases. Through careful component selection and inventory purchases, you've met our customer demand while managing company assets.
There are many reasons to be optimistic about Richardson Electronics' future. We're seeing our growth initiatives improve revenue, profitability and cash flow. New developments within our engineering and manufacturing groups will help deliver sequential growth. This includes new CT tube replacement options as well as products that support five gs and alternative energy. While COVID continues and the long term effects remain unknown, we will continue to challenge our teams to produce more products and sources of supply to improve our operating performance.
Our business model is complex, but the variety gives us an opportunity to balance the highs and lows of the separate businesses. We'll continue to carefully manage expenses and maximize cash flow. Lessons we learned during COVID will become part of our new life such as using Teams for meetings instead of travel and providing our employees with flexibility in their work locations. We want to make sure we have funds available to support our growth initiatives and improve our financial returns. At this point, we'll be happy to answer a few questions.
Thank you. We have a question from the line of Eric Landry with BMO Capital. Please go ahead.
Good morning. Good morning, Eric.
Hi. Greg, I'd I'd like to talk about the, Ultra 3,000 for a second, if if I could here. So Sure. Have you any idea what the installed base on these mills is of the batteries that this product, aims to replace? Yeah.
We have the numbers of the number of GE and and Siemens wind turbines that are in North America and Europe, and that is the market we're going after. How about the size of that? I mean, general description of how big that market is and how penetrated you are currently? Well, the number of wind turbines at our top and that's who we're working with today, our top four owner operators is about 5,000 I'm sorry, 6,000 turbines in North America. Okay.
And I mean, just generally, I mean, you feel you're maybe 5%, ten % penetrated? And what's sort of the potential for this market? Yeah. It's that's the total number. The time that this replaces acid batteries is about two years.
So obviously, you're not
going to do them all in the
same year. But we hope to get 10% to 15% of that market. We feel we have a product that does that. The results so far from the beta sites I mentioned on the last call are very successful, zero failures. And we had one of the largest owner operators in North America placed a production order in Q3.
Okay. So right now, the business is rather nascent, I'm assuming. I mean, is there any chance that it it could become, I don't know, rival ring, you know, maybe your, semiconductor fab business in mid cycle or something like that? I'm just trying to get my arms around what kind of size this new business could grow to. Yeah.
It'll be equal to it if that based on the opportunity because this will generate a portfolio of products. The stuff we do for the wafer fab market is build to print for the most part right now. And so we can expand this product into Europe. So I think the total market is larger, but it will be equal to that a little bit higher than the current semiconductor business that we do. Okay, great.
And on the semiconductor business, I think last we talked, Ed mentioned that your customers were telling you everything looks fine through calendar twenty twenty one, if I remember correctly. Is that still the case?
Yes. We just had a conference call yesterday with our largest customer in the semi fab space. And they told us on that call that they're currently producing $4,000,000,000 a quarter. And they anticipate in not anticipate, but their plan is to go to $6,000,000,000 a quarter in the next calendar year. And if that happened, our business would increase 50%.
So and we're right now running at the highest level of business with that customer and combined with some smaller ones that we've ever had. So unfortunately, we're off there. I won't use the right adjective, but we used to be on their bad list because we couldn't produce product fast enough. And we have a new manufacturing manager over the last few years and
he has his folks flat trained
and we're delivering the product on time and to their requirements. So we're really pleased with the business. Unfortunately, it can go up and down like a roller coaster, But right now, everything says it's going up.
Congratulations on graduating from that list. If I heard you correctly there, Ed, you indicated that your largest customer is indicating 2022 is going to be a booming year as well. Did I hear that correctly?
Yes. They're saying they're going to go $4,000,000,000 a quarter to $6,000,000,000 a quarter in production.
That's great to hear. Ed and Wendy, so I'm assuming that the settlement covers the g as well as the d. Right? So there will be no issues with IP on either of those tubes.
Well, the, the patents on the g are expiring, So quite honestly, they could come back after us on the patents on the G if we were to violate them, but we don't intend to. We have workarounds on the patents, and we told them they wouldn't take the G to market until the patent expires, and that's, I think, it's actually in April.
It's actually tomorrow?
Tomorrow, it expires. So we'll be going to market with a G in probably the first quarter of our next fiscal year.
And Eric, just to be clear, the G version does not use either of the patents that are expiring that were on the D.
Okay. Good.
Okay.
Looking at the Siemens tubes, what is the IP environment Is it similar to what it was like with Canon, or is it a different environment altogether?
Well, Siemens is probably the largest supplier of CT scanners in the world. And so there, the market is probably 10 times the size of the Canon market. And the other side of that, at this point, there isn't any alternative supplier for those tubes. We're really optimistic about the opportunity to sell the they're actually repaired tubes. It's a much different tube than the the cannon tube, but we've added some Siemens engineers who have a lot of experience.
Really confident that market by the end of the calendar year.
Okay. So when when you say repaired, I'm assuming that's not repaired like changing the oil and and sending it back out like like some of the smaller shops do with the, the can of tubes. Correct?
No.
No. No. Not at all. I mean, it's there are things, like replacing the bearings and the target and things of that nature that we have the capability to do.
And no one else is doing this right now?
No. They're not. Great.
Thanks for taking my call. I'll get back in line if I have anything else. Thank you.
Thank you, Eric.
Thanks, Eric.
All right. And I would like to turn the call back to Ed Richardson for his final remarks.
Okay. Thank you, Carmen, and thanks to all of you for joining us and your ongoing interest in Richardson Electronics. We look forward to discussing our fourth quarter and full year performance with you in July. In the interim, we wish you continued good health and success. And if you have further questions, please feel free to call us.
Thank you very much.
Thank you. And this concludes today's conference call. Thank you for participating, and you may now disconnect.