All right, good afternoon. Our next presenting company, glad to have back Richardson Electronics to the Southwest IDEAS Conference. Trades on the Nasdaq under the symbol RELL. Here today to handle the presentation part is Wendy Diddell, the company's Chief Operating Officer. With her here to help on the Q&A side is Edward Richardson, the company's CEO. Wendy?
Thank you.
Okay, good afternoon, everybody. Who's new to the Richardson story? Okay, sorry for those people who aren't. I recognize some of you, you're going to hear some information that you've heard a number of times before, but we'll try to make this as succinct as possible. Thank you both, those existing shareholders, those we've met with, as well as potential new shareholders. Richardson Electronics, this is our facility. We're located outside of Chicago, Illinois. We're out in the cornfield. It's about 45 miles west. It is cold, but we always invite you to come visit us. Just make sure you come in May through October, November timeframe. You'll be good. The focus point for Richardson Electronics and what I'm going to spend a lot of time talking about today are engineered solutions. We started the company back in 1947.
Not we, I wasn't here in 1947, but the company was started in 1947. It has grown to an international company. We're almost 80 years old now, so we'll be celebrating our 80th anniversary in 2027. The picture you're seeing there, we have about a facility that's 250,000 sq ft, and it's on about 120 acres of land, of which we own all of that. People ask us all the time, you know, how are you set for growth? You can see here that within our facility, we have plenty of room to expand our business. Should we need to, it would be very easy for us to expand. You'll see why that's important as I get into the presentation. We are ISO 9001 certified. We're also ISO 13485, which is the medical certification. Today, the slide says we have 430 employees.
We're more about 450 employees. About 200 and so are located in this facility. The rest are located throughout the world. Historically, we have served more than 20,000 end customers. On any given year, we probably serve between 5,000 and 10,000 of those. A lot of our business we'll talk about is MRO or repeat, which is nice because once you are in with these customers, it tends to be an annual or biannual renewal. We'll talk about that. I already mentioned we're outside of Chicago in LaFox. Globally, we have more than 60 locations. Some of those are home offices, so do not worry. We're not heavily invested in rent and other kinds of expenses like that. As a matter of fact, we've minimized that significantly over the last number of years.
We have 24 legal entities, which is important for us because, as I mentioned, we serve more than 20,000 end user customers. We are the importer of records. We can get product from any one of our facilities. We have three shipping locations. We can get product anywhere to anybody within two to three days. That is important in our business because, again, a lot of our business is aftermarket. If you're running a piece of equipment and it uses a power grid tube and that tube fails, your equipment is lying down. You need to get that replacement in just as quickly as possible. We have invested heavily in our infrastructure, like I said, to make it a global company. We are able to move product around. We have customers. We conduct business in multiple currencies.
We have IT systems that are designed specifically for that. We can see on any given customer, any given country, any given day, what it is we've quoted. That allows us to be very nimble and very flexible in both quoting our customers, moving inventory around, knowing where we can get it from, and how quickly we can get it to them. Today, we have three business units. For those of you who know the story, you might recall back in January, we had four. The fourth one that you do not see on the chart here was Richardson Healthcare. I'll come back to that in a minute. The three business units that we have today, the first one is the Power & Microwave Technology Group. That is our largest business unit.
That contains our legacy core business, which we refer to as EDG or the Electron Device Group. Those are the power grid tubes. It is also where we recognize our revenue for the semiconductor wafer fab market. Those are our two areas of our business that are really good parts of the business. We consider ourselves exclusive in the products that we make and sell. It is a profitable kind of cash cow. At least the EDG portion of our business definitely constitutes being a cash cow and driving profits for the future. The other part of PMT is a newer part of our business called PMG or the Power & Microwave Group. That business was started in 2015. That part of the business is component distribution. We work with technology partners like Qorvo and MACOM in that part of the business.
That part of the business is important because it often drives what we consider to be engineered solutions. It is also where we started the Green Energy Solutions Group. The Green Energy Solutions Group is our second business unit. You can think of that as either green energy or alternative energy. We are making components and solutions that go primarily into wind applications and EV rail applications. Now, some of you are probably sitting there thinking, "Oh, well, goodness, look at the current administration. What is that doing to your business?" In the Green Energy Solutions Group on the wind side, we do not serve any market that is offshore. We have zero exposure to offshore wind. In inshore wind, onshore wind, we serve primarily today a retrofit market. These are wind turbines that are already built.
Our flagship product in this group is a module that goes into the nose cone of windmills, primarily for GE. It replaces lead-acid batteries. Lead-acid batteries, as you know, over the years have become a non-green type solution. Our modules are form fit and function replacement. You can literally go up to the nose cone, you pull out the lead-acid batteries, you drop in the Richardson module. The lead-acid batteries fail every six months to two years, depending on the environment that they're run in. The modules that we provide last up to 10 years. There is a compelling financial interest in that the turbines have their uptime as much greater. You are not experiencing times when they're not generating power or losing money that way. You are not sending people up into the towers as frequently. There are some tremendous financial advantages.
That was the cornerstone of the green energy business. Since then, the product line has expanded to include other turbine manufacturers and other products, which I'll talk about in a little bit in the next couple of slides. The third part of our business is Canvas. Canvas is our display business. In Canvas, we make displays primarily for medical OEMs. We've been in the business for a long time. The majority of our customers are blue chip medical companies like Varian, Siemens, Philips, Karl Storz, Medtronic. Very high-profile names. As the name implies, what we make are custom displays. Typically in that market, we're looking at annual volumes between 1,000 and 5,000 pieces. They are one-to-one specific for a customer. We do not bring an off-the-shelf display to market and try to sell that to many.
Again, our engineers work very closely with the customer to define the requirements and provide them an exacting solution. Once you get into those customers, you're typically there for five to seven years minimum. That's primarily because there's a lot of approvals that are required to get that equipment, that medical equipment to market. Our portion of that piece of equipment, it may be endoscopy, it may be guided surgery. The display is typically a smaller part of that equipment. The last thing they want to do is have to go recertify. Those are our three business units today. Where we're focused, this is what everybody was like, "Well, where are you going with the company?" Because we've been around, as I said, for almost 80 years now. Really our focus is on the green energy solutions or alternative energy solutions part of our business.
That business, as I've already mentioned, was really an offshoot. You will find this is true of every business that Richardson Electronics has been in. It was an offshoot of the Power & Microwave Group. We were brought into that business because of the level of engineering expertise that we have. A former supplier who had gotten sold to our friend Elon no longer made products for a specific market. They were brought to us and said, "Hey, can you make a solution?" That was the birth of the ULTRA3000. that is where that came from. Our strategy is we start with our core business, and then we migrate and move up the food chain into engineered solutions.
Our definition of engineered solutions, again, is we're exclusive, we bring engineering value, and it's not easy for somebody else to come in and replace what we do. On the ULTRA3000, for example, we have five patents today on that product. A lot of the patents are around the software that allow our unit to drop in and communicate with the GE turbine. It would be very difficult for somebody else to make a product that competes with us that would not trip over our patents. That is where we're going as a company, moving out of what you would consider core distribution. If you knew Richardson from many, many, many, many years ago, you may still think that, up into, again, engineered solutions where we develop and solve a problem for our customer.
A lot of times it includes products that we distribute or components that we distribute, which is a good thing. We're able to capitalize on technology that we know well and capitalize on the expertise and relationships with the suppliers and technology partners that we have. This kind of just shows you what I was talking about. You look at our list of technology partners, and that was phase one. We moved into the modules, which is phase two. Now where we're headed with the company is taking that one step further, and we're looking at the energy storage solutions. I've talked a lot about this already, so I'm not going to go into a lot more detail on the wind turbine opportunity other than to tell you, people say, "Well, again, what about the administration?
How much market share do you have? We still today have a very small market share. When I show you our revenue, I'll talk a little bit about where that can go. You can see from this slide that the opportunity is over nearly $500 million. That is just for the number of turbines that are out there and the parts that we provide that we can capture. It is a very large market opportunity. The competition is almost non-existent in terms of the areas that we compete in. This is an area that you'll hear us talk a lot about. If you listen in on our calls, a lot of our existing investors ask us how we're doing in the wind market. This is a big piece of that.
What's not listed here is we just got our first orders in from a large OEM, wind turbine OEM in India. We've been talking about that for a couple of years. We are pleased to announce that we did get in our initial orders. We'll start shipping that. Now not only do we service all of the GE wind turbines, so any of the brands that are GE turbine-based, we have a module that supports them. Now we also are branching into other manufacturers. This is talking again about the energy storage solutions.
I don't think any of you have picked up a newspaper or who reads newspapers anymore or looked on your phone and have not heard about energy storage and the fact that we simply, as a nation, I mean, throughout the world, don't have enough electricity today to meet the demands that are coming, especially with AI and other types of really big energy hogs, all these data centers that are going in and these distribution warehouses that are going in. What the energy storage allows you to do is just that. You get energy, you get either from you can get it from ComEd, from your regular energy sources. You can get it from solar. You can get it from wind. You collect and save that energy when you're not using it.
You have the choice during a time when maybe the energy rates go up, you can pull from your own energy storage or you can sell it back. For example, we are putting our own system in in the Fox. It's not in. It'll be in after the first of the calendar year. In that case, we will get rebates from the state of Illinois that cover the cost of that box that you see there. We will store energy and sell it back to ComEd, for which we will get a premium.
Our focus in this area with this product is not to try and compete against the big boys who are selling to the Amazons and those types of companies, but instead focus on that commercial industrial area that includes companies like Richardson Electronics and offer them a solution that allows them to, again, save money, capitalize on the need for more electricity. There is a lot more to follow on that. We have really just started approaching the market. We have several programs that, if everything goes according to plan, we should book between now and the year end. Then a list of ones that will follow in calendar 2026 and beyond. Huge market opportunity, $25 billion market. Makes the other part where we talked about $500 million seem very small in comparison. Very big market. We are excited and we are really investing.
People say, "Well, where are you investing your money?" It's in alternative energy and it's in the energy storage solutions. Here's just a list of some of the other applications and products that we're working on. We're not a one-trick pony. We did start with the ULTRA3000, the module for GE, but we've expanded around that same technology. One good example, we bring people into the LaFox factory. They have an opportunity to see that we're fully vertically integrated. Everything from concept to design to data units, we have our own machine shop. We have all of the ability to keep everything in-house. We do source components, but we make everything and design everything in-house. Metra, who in Chicago is one of the local carriers, came in and took a tour of the facility and they saw what we did. We do our thing.
Where's your pain point? Where are you really struggling? We've got these lights that are in all of our trains and they use lead-acid batteries. Those batteries are dying all the time. The lights are going out and we're constantly having to change those batteries. With them, we developed a lead-acid battery or a replacement for lead-acid batteries. That is now in its probably second or third round of testing and we'll be rolling out first to Metra and then again, there's no exclusive. We can sell it to other companies. That's an example of where somebody sees what our capabilities are. We ask them, "What's your pain point?" and we develop an engineered solution. We have a full team in LaFox and then throughout the world of engineers. They're mechanical, they're industrial, and electrical.
We have become an extension of our customers' engineering and product development departments. Here is just a list of some of our key customers. Maybe you know them. Big names, RWE, Invenergy, GE, Metra. These are just a few of them that jump out. Our objective is to continue to find opportunities. Maybe we solve a problem for them and then we take that product and we sell it to a host of others. Our fiscal year, for those of you who are new, I should have mentioned this at the beginning of the year. Our fiscal year is June 1 through May 31st. It is a little bit different than most people's fiscal year. Right now we are just finishing up Q2, finish after Thanksgiving, Q2 of FY 2026. In general for 2026, what do we expect?
Everybody asks us about what are the impacts of tariffs and the current administration. I have talked about some of the challenges, opportunities on the technology side, which again, for us right now, it has not hurt our wind business whatsoever, or actually our whole Green Energy Solutions business should be up considerably in FY 2026. Tariffs have not caused us problems. Again, we are able to move our product around. We do not have to bring product in the U.S. We have a warehouse in Amsterdam. We have a warehouse in China. We have satellites in Brazil and other locations. With that, we are not really exposed to the degree that a lot of companies are. People say, "Well, what has been the impact?" On us, again, we are able to either pass it through or we do not get hit with it whatsoever.
The impact would certainly be at the end user level and the impact that tariffs would have on general demand. That's something that's outside of our control. As I mentioned here, less than 5% of what we purchase actually comes from China, for example. An area where we were exposed to the highest potential tariffs, that is an area where we've minimized over the number of years our exposure in that market. Longer term, even with some of the current administration's policies, it actually opens up more doors for us. We've talked about wind turbines, another area is the Made in America program. We have a factory in LaFox, which I've shown you the pictures of. Right now we're running one shift and we have the capability to expand that. Our gross margin profile is currently somewhat exposed to an underabsorption in that factory.
We launched a program for the Made in America campaign. We hired people to work with both our existing customers, our existing suppliers, and also go out locally and in the area and find additional kinds of companies that need to move their manufacturing to the United States in order to hit certain goals and incentives. We currently have several programs that we're in kind of the final stages of quoting. We just started this program a couple of months ago now. Where I see kind of the strength right now is around PCBs and board stuffing. We have the potential to do that. We have the potential to do more. It looks like we're going to win two or three of those between now and probably the end of our second or third quarter.
That will help us not only top line, maybe incremental revenue that we do not enjoy today, but it will help take up some of that underabsorption, which negatively impacts our gross margin. We are excited about that opportunity. I have mentioned the steady increase of the wind turbine modules. Again, we started out with GE and the U.S. focused. We have expanded that to Nordex, Senvion, SSB, Suzlon, and those sales are now coming not only from the U.S., but throughout the world. We have a very small market share, and so there is a tremendous amount of upside in that particular market. On the EV rail side, which we have not talked about, that is another segment of our green energy solutions business. EV rail, we work very closely with a couple of large players in the locomotive business.
One of our newest products, which just started shipping in Q2, we've been talking about it for a while, is what's called a Start Saver. It replaces lead-acid batteries in diesel locomotives. This is a nice opportunity. The company that we're playing with is Wabtec. They're very, very strong on the product. They're anxiously rolling it out both to their customers, but they're also selling it to other train companies. They themselves are a very proponent of selling accessories to other companies. That one, again, is just starting to show in the revenue stream. Upside there as well. The other piece of the business that we really haven't touched on to a great deal, but those of you who know us well, we love our semiconductor wafer fab equipment market.
We actually make sub-assemblies for some of the largest companies that make semiconductor wafer fab equipment. Everybody knows that with AI and some other factors that that market, again, is on the upswing. It's very cyclical. Richardson Electronics, through its history, has rode that wave up and down. We're now on the upside. Fiscal year 2023 was the height of the last upside, 2024, 2025, we're in the trough, and now we're back up again. From all indications, that business will continue to grow through calendar year 2026. As a result, we will grow along with that business. We've been in that business just for what year? Since 2006. Since 2006, we sold to Novellus. Novellus was subsequently acquired by Lam Research, and they are now one of our very key and favorite customers. Let me look at the financials with you real quick here. All right.
In the first quarter, which again was June, July, August, our sales were up about 2% year- over- year, quarter- over- quarter. As I mentioned, we sold our healthcare business in January of 2025. We still were and are going to be dealing with some competitive just comps. We're dealing with year-over-year comps where we had some business last year that we don't have this year. If you factor that in, if you take that out of our business, our overall business was actually up almost 7% quarter- over- quarter in Q1. Our goal is to drive increases on an annual basis in the double digits. Obviously, 7% may not excite everybody, but our goal is to have much better growth than that and we're pushing towards that. Consolidated gross margin was 31% in the first quarter.
You're seeing some margin improvement. That margin improvement comes from product mix, but it really comes from our focus on two things, I think. One is engineered solutions, which again, are items that we design and manufacture or have manufactured to our specifications. Those carry higher margins. The more that we can, again, push through our factory, the better that gross margin is going to be. The third component of improvement as we go forward is in the healthcare business. The healthcare business, we started in 2015. It was a very challenging business for us. Obviously, it did not materialize the way we wanted it to, which is why we sold the majority of it at the beginning of this calendar year. We still have a supply agreement that we are dealing with that we have to supply certain CT tubes that we manufacture.
Part of that we will be finished manufacturing in January, February timeframe, after which a lot of that will roll to the bottom line. Meaning today we are still losing money on healthcare. When we finish up that manufacturing between now and the end of our fiscal year, it will be very positive to our bottom line. That is something that if I were in your shoes, that is what I would be looking for. Pay attention to that. Net income for the first quarter was $1.9 million versus about a little over $500,000 last year. We were definitely moving in the right direction. As I have already mentioned, the focus is not only on gross margin and revenue improvement. What we have not talked about is inventory. If you know the Richardson story, you know our inventory for a while was creeping up.
A lot of that is associated with one of our critical suppliers on the EDG tube side of our business. That company is stopping manufacturing at the end of this calendar year. We have been over the past several years acquiring inventory specifically of that particular line in order to meet demand for the next three to five years, during which time we own the majority of the technology. We will be moving that to either other locations or deciding that we have sufficient inventory and we can retire that particular line. Because of that, our inventory grew significantly. That is not a great thing. We get that, but it really caused us to take a step back and look at all of our suppliers and all of our product lines and our purchasing.
When you take that one vendor out, what you will notice is that our inventory has been decreasing and our turns are improving. Inventory, particularly of that product line, again, will stop growing at the end of the first quarter in calendar year 2026, after which it will become a source of cash. All right. Speaking of cash, balance sheet-wise, we have zero debt. We have about $30 million-$35 million of cash on the books. We have a line of credit should we need it. We have not needed it, and our goal is not to need it. We have been generating operating cash flow. Without the healthcare business, again, once we finish that up, that will become even more of a, the company will become even more profitable and generate more cash.
We're, again, knock on wood, looking forward to the end of making those particular tubes. We do pay a cash dividend. If that's important to you, we're a good stock to take a look at. We're very tight on SG&A and on capital expenditures. Last year was a particularly low year for us in capital expenditures. FY 2026 will be a little bit higher. There are some IT systems that, unfortunately, fortunately, we have to upgrade because Microsoft is not going to support them any longer. We're making some investment in the IT systems. We've also made investments in the PCB lines that we have because not only will it allow us to capture new business, it allows us to improve our cost profile on the ULTRA3000 modules as well as protect our supply chain.
We might see a little bit of increase in FY 2026 on the CapEx side, but we're watching that closely. We continue to invest where it makes sense in working capital to support the growth initiatives. The primary area, again, is in the green energy alternative solutions part of our business. Okay. With that, we can turn it over to questions if anybody has any. I know that's a lot to digest, and we always tell people if you're new to the story, please don't hesitate to reach out. I'm Wendy D at rell.com. Ed is Ed at rell.com. We're probably two of the most approachable people you'll find in terms of dealing with our investors and potential investors. We love to talk. Let us know.
Thanks, Wendy. Obviously, she knows the business extremely well. Wendy's been with us since 2003, and she's Chief Operating Officer.
She does all the work, and I take all the credit. With that, we open it up to questions.
Okay. I know I'm good, but not that good. I think I probably confused the heck out of everybody, and you do not even know what to ask at this point. Yeah.
You made an interesting comment about the extra use of the manufacturing space being less of a drag on margin. How does it match up to your average margin? Right? You are going to be adding revenue, and are you taking the side that says any kind of margin that is less of a drag is less bad? Just the way you phrased that made it seem like it is not as attractive a margin as your normal business, but better than not having anything to add.
Okay.
Can you just clarify that?
I can take that.
Sure.
Okay. My point in talking about that is, again, today we have the difference between product margin and gross margin includes under absorption. If you're overabsorbed, it's positive. If it's underabsorbed, it's negative. It's been underabsorbed. Sort of any business is good business. Now, saying that, we would look at everything carefully. The 3% margin is probably not going to make our cut, right? Our overall company gross margin is around 30%. Ideally, it would be at that 30% or better. The answer is not as clear, but my point is we have our targets, and we will work around those, but there might be some that are 25% that make sense for us to make.
Thank you.
You're welcome. Sorry for the confusion there.
Yes.
Talk about engineered solutions a good bit.
Are your customers coming to you with problems and then you're developing these solutions, or does the reverse happen as well?
No, we have about 20,000 customers worldwide. We have always made a policy out of what we call engineered solutions. No matter what a customer wants, if they come to us and say, "We want this particular module," or "We have this problem," we attempt with our 75 RF engineers. We try to solve those problems for us. A lot of times they're dead ends. When they have turned out well for us, like the wind turbine, for example, we have made very large profits. It is something we do. Some of it is not profitable, and some of it has turned out to be very profitable, and that is part of the business.
It does work both ways.
Ideally, the more we put ourselves out there and become known as a solution provider and solving people's problems, the more people that end up coming to us. You will see some of that in the EV rail space. We started out by selling a large company components, IGBTs, and a couple of other lines that we distribute. Through those conversations I have mentioned, our salespeople are trained engineers. They are asking constantly, "What are your other problems?" That is how that relationship started. They came to us and said, "You know what? We need to make this in America.
We want you to help us with one of our plants in the U.S. The more we can get out there and the more we can show people what we're capable of, I think the more there will be people coming to us saying, "Hey, can you solve this for us?"
$35 million in cash is no death. Who can do the cash?
Invest in the boons.
Right now, it is spread out. Everybody asks us this question. It is spread out amongst the legal entities. There's a certain percentage, a significant percentage within the U.S., but the rest of it is in our legal entities in foreign countries. We have repatriated as much of that cash as we can, and we continue to do that, but a lot of it has to stay there. So it's not accessible to us.
You can borrow against it and play that shell game, but for the most part, we deal with the U.S. cash. At any given time, that cash is in constant motion. As we have excess cash, right now we're investing in the energy storage solutions, for example, that part of green energy. We're open to M&A, but it's most likely going to be engineering, smaller engineering companies. We're not actively out saying, "Hey, we want to look at you and you and you," but as opportunities are identified either through us or other people that we know, we'll take a look at that. That is what we're earmarking it for, is our growth strategy. To avoid having to dip into that.
Yes.
I'm going to look more detailed at what you do with Lam.
With Lam? Was that your?
That is what we've been considering other space again.
Right.
Lam has always been a very large customer. Years ago, we sold Novellus. That's where we started in that business in 2006. Novellus was sold to Lam, and we were making a lot of microwave devices for them. Those devices are used both in etch and also, what's the other technology? In deposition. In deposition. We have continued with those products. We make a microwave device. It's about $30,000. It looks like a 36 in stainless steel ring, and it has wave guides in it and microwave sound state products. We sell that type of product and about 100 other devices to Lam, and they have been one of our largest customers. We also sell to Tokyo Electron, to MKS. We sell some to Applied, but Applied is the largest competitor to Lam, so we favor Lam's business.
That is a very important part of our business.