Good morning, ladies and gentlemen. Welcome to Richardson Electronics third quarter of fiscal year 2023 conference call. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you'll need to press star one one on your telephone. You will then hear an automatic message advising your hand is raised. As a reminder, today's call may be recorded. I would now like to turn the conference over to Mr. Ed Richardson, Chief Executive Officer. Please go ahead, sir.
Welcome to Richardson Electronics conference call for the third quarter of fiscal year 2023. 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 & Microwave Technologies group, and our newest business unit, Green Energy Solutions, and Jens Ruppert, General Manager of Canvys. As a reminder, this call is being recorded and will be available for playback. I would 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. We're extremely pleased with the continued strong financial performance in the third quarter. This is the 10th consecutive quarter where we've had year-over-year growth.
I'm very proud of the entire organization this quarter for shipping more than $70 million in product. The backlog in our Green Energy Solutions increased over the last quarter. We're more confident than ever that this business unit will become a significant and growing percentage of our overall revenue. Certainly, the economy is not without its challenges. Continued inflation, rising interest rates, ongoing supply chain issues, and new legislation have the potential to impact our business. To date, this impact has been minimal, mainly because of our diversity in engineered solutions. Alternative energy continues to be a global focus, driving demand for our wind energy solutions. Our partnerships with our electric locomotive customers and suppliers are solid. Acceptance of synthetic diamonds throughout the world is increasing demand for our magnetrons, and our core businesses perform well with both EDG and Canvys having another strong quarter.
Today, more than 60% of our revenue comes from products we manufacture or have manufactured exclusively for us. ultracapacitor and lithium iron phosphate battery modules, magnetrons, and many other tubes and related products are manufactured by us in LaFox, Illinois. Displays are manufactured in our display hubs in Marlborough, Massachusetts, and Donaueschingen, Germany. Our manufacturing employees are cross-trained and can be moved to different areas to meet the needs of our business units and ongoing growth. We have many products in development that will further allow us to continue this growth and adapting to changing market conditions. Greg, Wendy, and Jens will provide more details in the quarter on these key growth initiatives. First, Bob Benn, our Chief Financial Officer, will review our third quarter financial performance in more detail.
Thank you, Ed, and good morning. I will review our financial results for our third quarter and first nine months of fiscal year 2023, followed by a review of our cash position. Net sales for the third quarter of fiscal 2023 increased 27.2% to $70.4 million, compared to net sales of $55.3 million in the prior year's third quarter, due to higher net sales in our Power & Microwave Technologies, or PMT, Green Energy Solutions, or GES, and Canvys business units, partially offset by lower sales in our Healthcare business unit. PMT sales increased by $8.5 million, or 22% from last year's third quarter, driven by growth from manufactured products for our semiconductor wafer fabrication equipment customers and distributed products for RF and microwave applications.
Net sales for GES increased $5.8 million or 103% from last year's third quarter. GES combines our key technology partners and engineered solutions capabilities to design and manufacture products for the fast-growing green energy market and power management applications. Canvys sales increased by $1.5 million or 19% due to strong customer demand in North America. Richardson Healthcare sales decreased $0.7 million or 23.9% due to a decrease in parts sales as well as CT tubes sold in China, partially offset by an increase in equipment sales. Total company backlog of $175.1 million in the third quarter of fiscal 2023 almost mirrored that of $175.6 million at the end of the third quarter of fiscal 2022.
Gross margin for the third quarter was 31.8% in net sales, the same as in last year's third quarter. PMT's margin increased to 32.9% from 31.8%, primarily due to product mix. Healthcare's gross margin was 39.8% in the third quarter of fiscal 2023, compared to 25.1% in the prior year's third quarter, due to improved manufacturing absorption and decreased components scrap expense. GES margin decreased in the third quarter of fiscal 2023 to 25.7% from 34.6% in the prior year's third quarter, primarily due to product mix.
Canvys gross margin decreased slightly in the third quarter of fiscal 2023 to 32.0% from 32.2% in the prior year's third quarter because of product mix and foreign exchange effects. Operating expenses were $14.8 million in the third quarter of fiscal 2023, compared to $13.9 million in the third quarter of fiscal 2022. The increase in operating expenses resulted from higher employee compensation, including incentive expense from significantly higher operating income and higher travel costs. However, operating expenses as a percentage of net sales decreased to 21.0% during the third quarter of fiscal 2023, compared to 25.2% during the third quarter of fiscal 2022.
The company reported operating income of $7.6 million, or 10.8% of net sales for the third quarter of fiscal 2023 versus operating income of $3.6 million, or 6.6% of net sales in the third quarter of last year. Other income for the third quarter of fiscal 2023, including interest income and foreign exchange, was $0.4 million, compared to other expense of $0.1 million in the third quarter of fiscal 2022. Income tax expense was $1.7 million for the third quarter of fiscal 2023, or a 20.7% effective tax rate versus $0.6 million in the prior year's third quarter due to the use of federal NOLs in fiscal 2022.
Net income was $6.3 million, or 9.0% of net sales for the third quarter of fiscal 2023, as compared to a net income of $2.9 million, or 5.2% of net sales in the third quarter of fiscal 2022. Earnings per common share on a diluted basis in the third quarter of fiscal 2023 were $0.44, compared to $0.21 per common share on a diluted basis in the prior year's third quarter. Turning to a review of the results for the first nine months of fiscal year 2023. Net sales for the first nine months of fiscal year 2023 were $203.8 million, an increase of 25.1% from $163.0 million in the first nine months of fiscal year 2022.
Net sales increased by $17.1 million, or 14.8% for PMT, $19.1 million, or 145.7% for GES, $4.5 million, or 17.3% for Canvys, and $0.1 million, or 1.6% for Richardson Healthcare. Gross margin increased to 33.0% from 31.6%, primarily reflecting a favorable product mix in PMT and decreased component scrap expense and improved manufacturing absorption in healthcare. These increases were partially offset by unfavorable product mix and foreign currency effects for Canvys and unfavorable product mix for GES. Operating expenses were $43.7 million for the first nine months of the fiscal year, which represented an increase of $3.1 million from the first nine months of the last fiscal year.
The increase was due to higher employee compensation and travel expenses. Operating income for the first nine months of fiscal year 2023 was $23.6 million, or 11.6% of net sales, as compared to an operating income of $11.0 million, or 6.7% of net sales for the first nine months of fiscal year 2022. Other expense for the first nine months of fiscal 2023, including interest income and foreign exchange, was $0.1 million, as compared to other expense of less than $0.1 million for the first nine months of fiscal 2022.
The income tax provision was $5.3 million during the first nine months of fiscal 2023, or a 22.5% effective tax rate versus $1.3 million in the prior year's first nine months due to the use of federal NOLs in fiscal 2022. The company reported net income of $18.2 million, or 8.9% of net sales for the first nine months of fiscal 2023 versus $9.6 million or 5.9% for the first nine months of fiscal year 2022. Earnings per common share on a diluted basis in the first nine months of fiscal 2023 were $1.27 compared to $0.71 per common share on a diluted basis in the prior year's first nine months. Moving to a review of our cash position.
Cash and investments at the end of the third quarter of fiscal 2023 were $24.6 million, compared to $31.1 million at the end of the second quarter of fiscal 2023. The company continued to invest in working capital to support the sales growth over the past 10 quarters. Inventory grew to $101.4 million from $97.4 million at the end of the second quarter of fiscal 2023. Accounts receivable increased to $42.2 million from $34.9 million at the end of the second quarter of fiscal 2023, primarily due to the timing of higher sales at the end of the third quarter of fiscal 2023. Capital expenditures were $2.2 million in the third quarter of fiscal 2023 versus $0.6 million in the third quarter of fiscal year 2022.
Approximately $0.9 million related to investments in manufacturing, $0.8 million for our facilities, including manufacturing expansion, $0.3 million for our healthcare business supporting Siemens repaired tube program, and $0.2 million was for our IT system. We expect a higher level of capital expenditures in fiscal year 2023 as we make additional investments in our manufacturing capabilities and facility. We paid $0.8 million in cash dividends in the third quarter. 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 2023. After the end of the third quarter of fiscal 2023, the company entered into a 3-year $30 million revolving line of credit agreement with PNC Bank for additional liquidity as necessary.
Now I will turn the call over to Greg, who will discuss the results for our PMT and GES business groups.
Thank you, Bob. Good morning, everyone. Both of our strategic business units, Power & Microwave Technologies, or PMT, and Green Energy Solutions, or GES, drove strong growth in our quarter. Our GES unit has experienced exceptional growth throughout its first three quarters as the demand for green energy applications such as wind energy, electric locomotives, energy storage, and power management has greatly increased. We continue to apply and focus on resources to this extremely important strategic business unit and growth opportunity for Richardson Electronics. In Q3 FY2023, GES sales were up 103% to $11.5 million versus $5.7 million last fiscal year. Our backlog increased to $54.3 million versus $29 million in Q3 of FY2022.
Green Energy Solutions includes revenues from several products, such as the ULTRA3000, electric locomotive battery modules, the ULTRAGEN3000, and products used in synthetic diamond manufacturing. The growth of these customers and products in GES continues as several major OEMs are active in discussions with us and our engineering teams in the development of power management, energy storage products, and other green energy applications. We have numerous products in design, prototype, and beta testing. We anticipate announcing several new products in the program in the next couple of months. This strategy of developing niche products and technologies, often in concert with our key technology partners, is crucial to our long-term success.
Third quarter FY 23 sales for the Power & Microwave Technologies group, or PMT, which includes EDG and PMG, increased 22%, reaching $46.8 million versus $38.4 million in Q3 last fiscal year. This growth was mainly due to continued success in our RF and wireless infrastructure business and a strong quarter for our semiconductor wafer fabrication equipment business. Our engineered solutions strategy is led by our global technology partners, such as Qorvo, MACOM, Anokiwave, LS Mtron, AMOGREENTECH, and Fuji Electric. Key tube manufacturers and partners include CPI, Thales, Nisshinbo Micro Devices, previously known as NJR, and Photonis. Each of our global partners provide key technologies to support our customers' requirements. Our team has done an excellent job identifying and cultivating opportunities. We continue to add partners who fill technology gaps in our offering and support our growth.
In Q3, we added two new key technology partners, Navitas Semiconductor and VINATech, who fill technology gaps in our component and engineered solutions offering, giving us an expanded source of supply to support as well as create new opportunities. Often through these partnerships, we can identify opportunities for new products that we design and manufacture in-house, increasing the value we provide to customers and allowing us to capture more revenue. To meet our growing business needs, we continue to invest in our infrastructure to support this growth. We are hiring talented design engineers, field engineers, and expanding capital investments to further enhance our manufacturing capabilities. Our growing in-house design engineering and manufacturing teams are doing a great job supporting the increased demand for current products and new product designs. I am pleased with the progress we are making.
We will continue to identify, develop, and introduce new products and technologies for green energy and other power management applications. Our growth strategy has proven to be highly successful over the years, we will continue to develop new products and technology partners, as well as increase our customer base revenue and profits by capitalizing on our existing demand creation infrastructure. To support this growth, we are strategically investing in inventory that positions us to fill the pipeline and ensure we are able to meet our customer needs. We work closely and collaborate with our customers and suppliers to shorten the time between purchasing inventory and recognizing the sale. As the team drives new product technology partners and programs, there are always some headwinds. However, with Richardson unique global model and continued growth with our technology partners in engineered solutions, we are beyond excited about the future.
We expect a slowing in the semiconductor wafer fab market. This cyclical market has occurred continually over the past 20 years. We are more than ready for it. We also acknowledge the difficulty in finding enough design and field engineering talent to support the growth strategy. We are confident that the PMG and GES strategy can offset most, if not all, anticipated slowdown. We continue to improve the health of the business by gaining market share, introducing new products and technology partners, and expanding the value we provide customers. I cannot stress enough the value of Richardson Electronics' model is to our customers and suppliers. Our unparalleled capability and global go-to-market strategy are unique to the power microwave, RF, and green energy markets. We've developed a strong business model, including legacy products and new technology partners that fit well with our engineered solutions capabilities.
Through our steadfast and creative focus on customers, we will continue to excel by taking advantage of opportunities when they arise. The execution of our strategy has never been better. There is no question our customers and technology partners need Richardson's products and support more than ever. As I have said in the past, we are just warming up. With that, I'll turn it over to Wendy Diddell to discuss Richardson Healthcare.
Thanks, Greg. Good morning, everyone. Third quarter sales for Healthcare were $2.4 million, which was lower than the $3.1 million in Q3 of FY22. While sales started off slowly in December and January, sales recovered in February. Most of the decrease in revenue was because we did not ship any CT tubes to China in the quarter. This is purely a timing issue, with orders historically coming in every other quarter. Part sales were below the prior year, the product margin was higher, helping improve the margin in the quarter. CT system sales were higher in the quarter than the previous year. Gross margin in the third quarter improved significantly to 39.8% versus 25.1% in Q3 of last year, primarily reflecting better factory utilization and lower scrap costs. Inbound freight costs were also lower.
We continue to make good progress on the Siemens repaired tube program. This is a series of four tube types, including the Straton Z, MX, MXP, and MXP 46. The Siemens install base is considerably larger than Canon's, and there are no third-party replacement options for these tube types. At the end of the quarter, we released the Straton Z to full production. We are repairing tubes now for stock and expect sales to rise gradually in the coming quarters. We anticipate the Siemens MX series will follow in the 2023 calendar year. We are working on development and validation of a critical component to finish this repair process. As noted in prior calls, the Siemens program is a critical element for our healthcare business unit to reach its goal of providing a positive operating contribution to the company by Q4 of FY 2024.
In addition to our Siemens program, we are working on several new programs that will further improve CT tube sales and factory utilization. These programs include reloading tubes in Brazil. We are working our way through the registration process with a local partner. We are also partnering with an international company to reload and sell several other tube types in the Americas. Our first samples are due later in the quarter. These programs may have a positive impact on our revenue in FY 2024, depending on how quickly we can validate and achieve regulatory approvals. Our current tube product line, the Siemens repaired tube program, and several new parts programs with large third-party service organizations give us a path to break even or better by the fourth quarter of FY 2024. We continue to monitor our progress, and we will make the necessary adjustments to achieve this goal.
I will now turn the call over to Jens Ruppert to discuss the results for Canvys.
Thanks, Wendy. Good morning, everyone. Canvys engineers, manufacturers, and sells custom displays to original equipment manufacturers in industrial and medical markets throughout the world. Canvys delivered excellent performance with sales of $9.7 million for the third quarter of fiscal 2023. Strong customer demand, primarily in North America, drove the 19.0% increase in sales over the same period last year. Gross margin as a percentage of net sales was 32.0% during the third quarter of fiscal 2023, compared to 32.2% for the third quarter of fiscal 2022. The slight decrease in gross margin was primarily related to the product mix and foreign currency effects, but showed an improvement over prior quarters in the fiscal year, reflecting lower freight rates.
Our backlog remains healthy, which we expect to support strong sales throughout fiscal 2023 and into fiscal 2024. Given the number of projects currently in the engineering stage, we are well positioned for continued growth. Our expectations assume no impact from current supply chain obstacles and demand is not negatively impacted by recessionary pressures. During the quarter, we received several new orders from both existing and first-time medical OEM customers. Some of these applications include pulsed field ablation, ophthalmology laser, robotic-assisted surgery, monitor for dental treatment chairs, human machine interfaces, HMI, to control medical devices such as video documentation systems and other operating room equipment, microwave ablation, and surgical navigation. In the non-medical space, our products are used in a variety of commercial and industrial applications.
This includes air traffic control, teleprompting and talent monitors, human machine interfaces for process automation, 3D printing, and all-in-one computers to control milling machines and product dispensers for retail applications. I am proud of our teams around the world, and I'm extremely pleased with their excellent operating performance. Our strong and growing customer relationships and stable backlog position us well 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 localized service. While our sales organization stays focused on new opportunities, I stay focused on improving the operating performance of the division. Maximizing cash flow and improving Canvys profitability is an ongoing priority, and we continue to work closely with our partners to meet the demands of our customers.
I will now turn the call back over to Ed.
Congratulations, Jens, on another great quarter. Canvys continues to deliver thanks to you and your talented team. As you heard from the business unit leaders, there are many programs fueling our growth. As market conditions continue to change, we remain committed to growth through our engineered solutions. While we carefully control our expenses and protect our cash flow, we'll continue to add engineers to expedite new product development. At this time, we'll be happy to answer your questions.
Thank you. Ladies and gentlemen, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. Due to time constraints, we ask that you please limit yourself to one question and one follow-up. Again, we ask that you please limit yourself to one question and a follow-up until all have had a chance to ask a question, after which we will answer additional questions from you as time permits. Please stand by while we compile the Q&A roster. Our first question coming from the line of Anja Soderstrom from Sidoti. Your line is open.
Hi, and thank you for taking my question. I'm just curious. I was a little bit surprised to see the slight drop, the sequential drop in the GES revenue for the quarter. You mentioned product mix affected the margin performance there. Can you just talk about if there's any sort of push out of orders there into the fourth quarter and also about how the product mix is affecting the margins?
Yeah, this is Greg. In terms of the margin, we have had huge shipments in the quarter, specific to our electric locomotive program we have going on. That is still, you know, a prototype build for Progress Rail, Caterpillar. The margins are that until we get up to, you know, economies of scale, larger production, we'll be able to add more margin to that. It was just a lower margin business in the start that we shipped major shipments to. In terms of the sales, you know, excellent sales year-over-year. Backlog continues to grow. We signed new technology partners. We have a number of new products that we'll be announcing here potentially in the next couple weeks, definitely in the fourth quarter.
We're very excited about how this group's gonna finish the year, and then also launch us into FY 24 with continued growth like we're seeing.
Okay. Thank you. Also, you've been talking about some new products in the second half. Can you just talk about when we can expect some of those to come through?
Yeah. They, we will announce those in the fourth quarter. We have beta site testing set up with Siemens and Xtera and Enel, for these products. We'll also be announcing a major program, with a very large customer for the ULTRA3000. That will all be announced this quarter, that we're in today. I can't give any more details than that until we, you know, actually do the full announcement, but it'll be very good launching us into FY 2024.
Okay, thank you. I'll get back in the queue, and I'll come back with more questions.
Thanks, Anja.
Thanks, Anja.
Thank you. Our next question coming from the line of Brett Davidson, your line is open.
Good morning. I wanna follow up on that green energy line of questioning here. You know, slight drop from the prior quarter after showing sequential quarterly 50% growth. Was there something that, you know, happened towards the end of last year that caused an increase in orders? I mean, you know, we're seeing an increase in the backlog and sales level was kind of flat. I'm just trying to wrap my head around exactly what factors are in play here and how that, you know, how that's gonna look going forward.
The main factor in terms of trying to forecast and having variability between quarters is this is a project-based business. We get the design in, we get the order on the system, they pull off that order. It's timing based on when they get their installation resources on site, which like every company in the world, it's hard to find resources. That could delay it by a month or two in terms of the installation, and we don't ship it until they need it on site. It's just purely timing of from a quarter to quarter based on the majority of the business today is project-based, where we'll ship a large orders in the quarter, they'll install over the next two quarters, they'll do another site, and so on and so on.
The good news is we're just on the tip of these sites in terms of the number of wind turbines today that have the ultracapacitor replacing lead-acid battery. Again, in general, it's just mainly timing based on a project-based business.
In this case, then the backlog is probably an indicator than, you know, any current quarter sales. Would that be accurate?
You know, I'd have to match it up. Again, is backlog indicator of the quarterly sales, you're gonna see an increase in Q4 over Q3. I don't know if that answers your question or not.
Well, I'm just, you know, I'm not so much concerned. I don't mind the lumpiness. That works fine for me. Just that the backlog growing is just an indicator that, you know, somewhere down the road there's gonna be increased sales at some point.
Absolutely. Yeah, we are adding every quarter more customers, more programs, more suppliers. Definitely with the key products that we now have, obviously with the patented products, we are getting more backlog and getting it from other customers because I'm a big believer. We don't want any one-hit wonders, although we do have a very large customer out there for this product. We're adding more and more, which is a better business model.
The locomotive, you know, you're testing right now, what does the ramp up for the locomotive business look like?
Yeah, we're kind of in it right now, but the Q3 and Q4 will be huge shipments. In Q1, we'll start building the superstructures, and we'll see that majority of that revenue in Q2 for the specific program we have going on now with Progress Rail Caterpillar.
Oh, nice. That sounds very encouraging.
Yeah.
Well, thank you so much.
Great. Thank you.
Thank you. Our next question coming from the line of P. Ross Taylor from ARS Investment Partners. Your line is now open.
Thank you. Can you guys give us a little bit of color? You had a substantial amount of cash burn. Give us an idea of how much longer you would expect to see that investment, or how long does it take for that investment in inventory and the like to be shifted into revenues and seeing cash rebuilt instead of drawn down?
Hi, Ross, this is Bob Benn.
Hi, Bob.
Yeah, so, hi. One thing to understand is that the very last week of our fiscal quarter, third quarter, we did ship a significant amount of product to certain customers. Pleased to report that that cash was collected shortly after the end of the third quarter in our fourth quarter. I think from a timing perspective, our cash flow would have been a lot better. We wouldn't have burned cash in the third quarter if those sales had gone a little earlier and had been collected.
Mm-hmm.
I think that's important to note. In terms of our fourth quarter, you know, I think we're gonna see an improvement in the accounts receivables, I just noted. In addition, you know, as you know, our inventory's been up significantly over the course of the year, and that's for a variety of reasons. I mean, number one, as you know, we've had 25% sales growth through 9 months. In addition, we've talked about the longer lead times and other supply chain issues going on that require us to have higher in-stock levels. However, after having said that, I do expect our inventory to increase at a lower rate in the fourth quarter. I still think it'll go up given all the issues we're facing. I don't...
Does that answer your question?
Yeah. We're still in a period where you're looking at an inventory build, but cash flow should improve, and we should see a significant rebuild in cash this quarter, is what I heard you say?
Yes. You know, again, Yes, once you add the timing in of the collections and that occurred in Q4 that related to Q3, yes, that's a true statement.
Okay. You showed strong growth in backlog in the green space, overall backlog was pretty flat, down slightly. Can you talk about the components that led to that and why we should see, you know, basically you've talked in the past about mid-teens growth, while we should see the historic level of growth, even though we had kind of flat backlog quarter-over-quarter. Obviously, the market is more than a little scared about something because it sold the stock off aggressively on what were generally, I thought, pretty strong numbers.
It's very difficult for us to you know, to understand. We just reported the best quarter in our history and the stock goes down. The backlog is down primarily because of the semiconductor wafer fab industry. As you may remember, Congress issued something called the CHIPS Act, and because of that, the largest customers in the semiconductor wafer fab said they were precluded from shipping their high-tech equipment into China and their business would be down 30% in the coming year. We're seeing the impact of that for FY 2024, and that's the reason the backlog is down.
You would expect with the other side of the CHIPS Act is a two-edged or two-sided coin, and it has a pretty strong growth driver as you step out, does it not?
It does when they start to build wafer fabs in the United States. That should pick up the business and, you know, the large manufacturers in that space, Lam Research in particular, they're forecasting the second half of 2024 to be very strong, if not stronger than it is today.
Okay, that's great. Lastly, for me before I get back in the queue, would be Progress Rail and talk about that. I think the initiatives you have in the green space are, you know, super exciting. I think, you know, that alone seems to be a company-changing opportunity. Can you talk when you see going from prototype to production in that program, the Progress Rail program?
Yeah. This is Greg again. You know, it kind of goes together. Great collaboration. We have two calls a week with the Progress Rail engineers, both in Brazil and in Muncie.LaGrange. Right now they have orders which we've talked about with end customers of Long Island Railroad and also Australia. The product that we'll be producing and shipping will be very close to the finished product. Once that's completed, they'll expand that capability in terms of electric locomotives to their entire customer base. The upside is absolutely huge. The timing of it is what I kind of mentioned. We're building now and shipping. That's why you're going to see great numbers, you saw in Q3 and Q4. Then we'll send them the superstructures.
They'll do the final assembly, ship them to the customers, and then we should see another round of huge increase in bookings for other programs with Burlington Northern, just to name one.
I hear you saying is that we're literally on the cusp of that program shifting from prototyping to production, and it's going to be something that, as I said, we've talked before about the economics of the space, and they're huge as far as revenues and earnings and cash flow possibilities. Is it correct in assuming that over the next four fiscal quarters, we should see that transition that you're talking about?
Absolutely. Yeah. You know, we'll be shipping our products that we're building and designing for them. They'll build it up in the final assembly in the fall of this year. In FY, you know, 23 or calendar 23, we should be at full production or progress.
That's it. Well.
Yeah.
That's fantastic.
Absolutely.
That's clearly not priced into the stock at seventeen and a half, so thank you very much.
No.
Okay, I'll drop back in. Thank you.
Great. Thank you.
Thank you.
Thank you. Our next question coming from the line of Hafeez Himani. Your line is open.
Hi. Thank you. Can you just give us a little bit more color on the credit facility, the decision to enter into that agreement 3 years along the lines of, you know, is this a function of anticipated, you know, future growth and backlog, future growth and working capital needs? Or is it more a function of some of the headlines we saw and, you know, better to have it and not need it than need it and not have it? Thank you.
Hi. Yes, this is Bob Benn. As you noted, we've, we did enter into a three-year, $30 million revolving line of credit with PNC Bank. I think the terms that we received were very good. Just to give a little bit of color on that. You know, we have a interest rate of term SOFR with a 135 basis point spread, which is very good in today's market. Also, there was no upfront fee and also a 10 basis point unused line fee, which is, in my opinion, a very good offer. We went ahead and did it to provide us with the additional liquidity as we need it, with the company growing at 25% for nine months.
As you can see with the working capital needs, as well as the increase in capital expenditures that I noted in my comments, we felt that we should put this line in place now, more for future needs. We, we don't intend to draw on it in the immediate term, but more for future. One other comment is that our cash of approximately $25 million at the end of the third quarter spread at many operations throughout the world. We have certain operations that have more cash needs than others. For example, our Netherlands operation, where we have a significant third-party warehouse and we store inventory, it has cash needs from time to time.
Because they only generate so much cash from local sales, we have to provide cash for that entity to purchase the inventory, which is used for all of our European sales. You know, it's not just looking at the total cash balance, it's also the cash balance by location and what the various needs are. Once again, we felt this was a good time to put this in place. Very good offer and competitive rates, and then we'd have it for future growth.
Yeah. After having said that, you know, with the earnings of the company, you can see we'll earn over $20 million this year, and we feel very strongly that by the early FY25, we'll be cash flow positive. I don't see us using that line of credit. However, the board wanted us to put it in place, we've done that.
Okay. That's helpful. Just from a working capital perspective, if we're seeing a changing mix in the business just from a historic perspective, is inventory turns gonna be different as the business gets larger? Are there differences in payment terms to the customers as it relates to DSOs as the business mix changes?
I really don't think so. What we've done, you know, for instance, the delivery on the batteries, lithium iron phosphate batteries is like 35-48 weeks. We have the same issue on the ultracapacitors. We put in huge inventories, and we've been building those into modules for the wind turbine industry. As that inventory is sold off, that inventory will come down.
Okay. Then you just mentioned some of the lead times, some of those items. Is that what you're hearing from those vendors, that is kind of the cycle time we should expect going forward? Does that number come down at some point in the future? Is that, you know, the new normal going forward?
You know, overall lead times for, you know, our components that we use both in doing demand creation on the component side but also for engineering solutions, there's been some improvement. Overall that I don't think, you know, the new norm's gonna be a standard 23-week lead time versus a 12-week lead time, which used to be the standard in the semiconductor world. You know, it's gonna improve over time. You know, we're obviously being aggressive with these aggressive orders and new products. We're aggressive with inventory for a while until we get a little bit better understanding on, you know, when these projects are gonna ship, et cetera. But we're just being aggressive right now. I don't think it's the new norm for the long lead times. They will be coming down.
I don't know how much though over time.
Okay, thank you for taking the questions.
Thank you.
Thank you. As a reminder, please limit yourself to one question, one follow-up. Our next question coming from the line of David Snyder, Private Investor. Your line is open.
I'd just like to give you a scenario. It's let's say Joe Biden is walking up a ramp to go on an airplane, he trips, falls, hits his head, and goes, bye-bye. We have our current vice president is the president the next day. Let's say the stock market overall is down 30% that day. Through no fault of your own, your stock, you know, could be down 40% because you're a smaller company. You have no buyback authorization in place. You know, if you've got a buyback authorization in place, nothing says you've got to buy back stock, but it doesn't hurt to have one in place.
Just wondering what your thoughts on that are, and I'd like other, institutional investors and other shareholders, if they communicate with you to give you their opinion also. I know I'd love to see it in place. That's all I've got for right now.
You know, when we sold RFPD back in 2011, we spent $65 million buying our own stock back. At the time, we spent, it was about $8 or $9 a share, and I thought that was way over what we should pay for it. Today, it looks pretty good. You know, we've told you that we're in a position right now where we're using cash basically to buy inventory for long lead times, and we've even put a credit agreement in place just in case we have to use it, which I don't think we will. We don't see any need or opportunity to buy stock back in the near future.
Okay. All right. Yeah, I don't think, you know, based on the valuation of the company, it seems to me like some of the message of the big mix shift of your business has not gotten through as far as, let's say, percent of backlog by segment type of thing. So when people are looking at the backlog year-over-year, they don't realize that, well, you've got this hyper growth segment, which is growing backlog very quickly and other segments that are not, and the fast-growing segment deserves a much higher multiple than the slower growing segments. It seems like that message is getting lost. Do you think I'm right on that? Or do you think there's a way to get that better communicated to the investing public?
Well, David, we'll take that under advisement. It's in, I think it was in all of our scripts. I think Greg mentioned it. It's in the investor presentation itself in terms of the growth rate in backlog, and how much Green Energy Solutions makes up of total backlog. Your point is valid, and we'll work on getting that message, you know, pushed up to the front of the presentation.
All right. Okay. Well, thanks.
Thanks, David.
Thank you. We have a follow-up question from Anja Soderstrom of Sidoti. Your line is open.
Yeah. Hi. Thank you. I had a couple of follow-ups. In terms of the green energy, you see a lot of opportunity within electric locomotives. I'm currently just talking to Progress Rail. Are you exclusive with them, or could you also talk to other manufacturers?
Are we exclusive with them? For the products we build for them, we are exclusive. We're working with many companies in that space. I know there's two large ones in that space. Richardson's kind of got the reputation of being a unique niche manufacturer of products. We are talking to other customers, absolutely.
Okay. Thank you. That's encouraging to hear. In terms of, the energy storage, you had a prototype that was due in this summer, I think. Where are you with that?
The e-energy storage container. In the next, if you will, the next quarter or the summer, We're gonna introduce two key products that go into wind turbines and another product that goes into electric locomotives. The energy storage system or container that is still in development. We do have beta site customers that we're working with. I would look at something in terms of even an alpha-type product later this fall at the earliest. Right now, all hands are on deck for these key products that we're introducing this quarter because in this case, we actually have beta customers that we have weekly calls with and we're tweaking the design specific to their application. It's just a...
from a new product introduction process, it is definitely key when you have a key product that's patented in some cases, and you already have existing customers ready to go for this product. Then we'll move some resources and add some resources to get our energy storage systems container, if you will, up and running.
Okay, thank you. That was all for me.
Thanks, Anja.
Thank you. Our next question coming from the line of Daniel Berner of Berner Family Fund. Your line is open.
Hi. Good morning, Ed and team. Good to hear from you again. I wanted to follow up on Ross's question about moving from prototype to production. When we are talking about the electric locomotive arena, you know, when you talk about, you know, the revenues that are being generated currently, are these predominantly the lithium-ion modules that you're prototyping, or are these smaller revenue per unit items like the electric start components? Maybe if you could help break that down and maybe just talk a little bit more concretely about, you know, about the timing from prototype to commercial production or what you envision that possibility as?
Great. As of today, in terms of production, it's battery modules that we're designing and making, and it's based on lithium iron phosphate technology. The reason we use the word prototype, it's because this is the first time they've built electric locomotive. They didn't have a standard product. This is the first electric locomotive built by Progress Rail slash Caterpillar. We're in the design stage with that. Until that's completed, that's a prototype to me. It is in complete unison, us and Progress Rail, they're in complete unison with their end customers. I guess what I'm saying is, even though we're saying prototype, by the time it gets to the end customer here, based on their projections in September, it will be production units.
That's kind of the transition from prototype to production.
Great.
I.
The opportunity, you know, the opportunity is actually huge. You know, there are 25,000 or thereabout, locomotives, diesel locomotives in the United States. About half of them are Progress Rail, and every one has a battery start. Those units are anywhere from $1,200 apiece to $5,000 apiece. We're providing prototypes for those units as we speak. The opportunity for the future is amazing, and we're just starting in that area.
Yeah. No, that, that's understood for sure. You know, I guess when I hear the word prototype, I'm thinking that perhaps there are competing technologies that, you know, they may decide after evaluating the prototype, for instance, catenary lines, or third rail, or maybe reverting back to legacy diesel. You know, I guess, are we beyond the point where, you know, these end customers are on the fence, or are they, you know, committing to sort of, you know, wheel-driven lithium ion module, you know, technologies for retrofits and for their electric trains going forward? You know, I think that's the hesitation.
Well, to give you some idea with, you know, with Progress Rail, this year we shipped them over $18 million, so I think that's a commitment.
I understand. That's, that's a valid point for sure. Ed, can you maybe speak one more time, I know you and I have talked about this in the past, you know, the advantages of your module, versus, third rail and catenary systems?
Sure. In the wind energy, the ultracapacitor module has a 10-year life versus less than 2 years for lead-acid batteries. These modules go 300 feet off the ground in a GE wind turbine, in the cone of the turbine. Of course, every time it fails, a technician has to go 300 feet up to change it. Not only the length of life on the module, but the cost and the downtime that's involved with lead-acid batteries versus the ultracapacitor is certainly substantial. Greg, you wanna comment further on that?
Yeah. No, you hit it on the head. In addition, ultracapacitor technology, the thermals of those are much better than, in essence, a car battery. That's what they're using today. The biggest cost is not the battery itself, it's the installation, repair, and switching it out, in and out. Our product solves that problem for them at the cost advantage for them, but the technology itself, works better in the wind turbines for that, for that function. One of the main products.
Sorry, guys.
Coming up. Go ahead.
No, sorry, guys. I was actually asking on the electric locomotive end, if you could compare the lithium-ion modules that you're building to, you know, competing technologies like, catenary wire, you know, electric locomotives or third rail locomotives, and maybe describe for us, you know, why this is a preferred technology for your end customer.
Yeah. We showed Progress Rail a number of technologies. As I mentioned before, with our technology partners, we showed them ultracapacitor technology. We showed them lithium iron phosphate technology. We showed them lithium capacitor or lithium hybrid ultracapacitor technology. I can't speak for their whole system, but for their system, again, we're building a portion of that system. For their whole system, that technology works best for them in terms of what that train needs to accomplish. These first trains are short-term. I mean, commuter trains. They're not long hauls. We are talking to them about other technologies for their long-haul trains. Again, we support and supply the technology and for their overall system, lithium iron phosphate works best for their design.
I didn't think we were gonna do this.
You closing it?
I thought we just did.
No, I said no, leave it open.
I'll leave it open.
Just...
Okay. Thank you, guys.
Okay.
Yeah, that's great. Thank you.
Okay. Thank you.
Thank you. One moment for our next question. Our next question coming from the line of P. Ross Taylor from ARS Investment Partners. Your line is open.
Thank you. Real quick, I would agree with the comment that the Street doesn't understand the earnings model and the opportunity in the company, and I think that's made abundantly clear by both the tone of today's call as well as the action in the stock. I wanna kinda go back over some earnings numbers. Last year, you reported, what, about $1.29, and you lost over $5 million in the healthcare business. If that would basically leave you having earned about $1.60 in the rest of the company, plus let's say, call it $1.55+ . That means right now we're trading at about 12 times or less earnings.
I understand the comment about the idea of buying back stock because quite honestly in a market trading at, you know, 17, 18+ times earnings, the idea that you've got a company growing at mid-teens or better trading at about 60%, 70% of the market multiple seems to be farcical. In looking at... You talk about the idea that the healthcare should be working its way to kind of neutral by the end of your next fiscal year. You're still on track for that. Wendy, I think you made that comment, so I think you're still on track for that. Obviously, you've got a tremendous amount of earnings power that's buried in this company at this point, and it's not seen by the Street.
Some of that's because I don't think it's being highlighted by the sell side in their reports. They're also not necessarily highlighting the opportunities. How many of these projects we're talking about here, rail, energy storage, do you think in 2 fiscal years or more can generate the kind of revenues that you're currently seeing out of the semi-cap equipment space, which is your largest business segment right now or customer segment?
Yes, absolutely. You know, we look at it that the company will be growing, 12%-15% a year going forward, with or without the semiconductor wafer fab industry. Green energy is certainly going to be much larger than that industry. If you look at that within, five years, the company will be $500 million and extremely profitable. There's no question about it.
When you look at these various product lines, it seems like what you're talking about with rails and you talked about in the past is as we shift from this early stage kind of, you know, perhaps testing stage for the customers to the rollout stage, we're talking about what, you know, million, $3 million-plus per engine was what we've talked about in prior calls?
It can be very much larger than that. The one that's being built in Brazil. By the way, Wendy and I, and Greg as well, visited Progress Rail in Brazil. We visited them about two months ago, and Greg back in the fall. Their team has really been extremely cooperative. In that particular locomotive, when it's finished, will be the largest electric locomotive in the world. It's we've supplied over $18 million into that unit. Greg just handed me a note. They've given us additional quotes for $91 million worth of product going into their locomotives in the future. You know, it's not a matter of if, it's a matter of when and how quickly these things go into production.
To give you an idea, this one locomotive they're building, which we've supplied over $18 million worth of product, is being shipped to an iron ore mine in Australia. It's built so that it goes a mile and a half up in the mountain and loads iron ore on flat cars.
Then goes down to a port where the iron ore is loaded onto barges to go to a refinery to make steel. Then it goes back up the mountain. The unit is such that it's absolutely energy neutral. It uses the battery modules to go up the mountain, and it builds energy as it goes down the mountain to unload the iron ore. That continues where it actually uses no additional energy at all. It gives you the idea of the opportunity behind these electric locomotives. By the way, they're bidding now a second one of those to be delivered over the next 2 or 3 years. Each one of them has $18 million minimum in it as far as products that we supply.
I wanna add to that one other thing. We are also in design and building products in the design stage for their diesel locomotive fleet. Existing diesel locomotive fleet, obviously those locomotives are there. It's also kind of the same concept as the ULTRA3000. It replaces the lead acid batteries that are currently used, in this case, some of their starter modules. We're doing both. We're waiting for electric, you know, locomotives market and products to catch on. In the meantime, we're also in concert with, you know, Progress Rail, Caterpillar, and others, building products for their existing fleet. You know, green energy type products. It's a combination. That's why we're excited about it, both ends.
What I'm hearing again is that you have, like, $18 million out of one particular locomotive. The long-haul fleet obviously in the U.S. is a huge opportunity, and from my understanding, you cannot have without massive rewiring and shifting of the system, you cannot have many of the alternative technologies that were mentioned a bit ago. But looking at this setup, it does strike me as, and I'm, you know, struggling to get you to kind of say, "Yes, we have a bunch of things here that in the next couple of years should be as valuable to us as semi-cap equipment is." Right now you've got a market that's probably trading your stock at 10 times what the business ex medical is gonna earn this year.
You know, am I wrong when I look at that kind of valuation and math and think that, you know, you guys have that?
No.
upside opportunity? No?
You're absolutely right, you know. We're just at the tip of the iceberg, you know. For instance, in the wind turbines alone, we've only retrofitted about 10% of the 30,000 GE wind turbines that are in the United States, and Siemens has 10 times that many. People ask us, "Well, what inning are you in?" The answer is we're just in the batter's box in the first inning. You know, this is just starting. It's a tremendous opportunity. Again, we think the company will be $500 million in five years and, you know, from $20 million in earnings, $22 million, Bob, this year.
Close.
Yeah. Just multiply that out going five years out.
I mean, the opportunities seem huge. I do understand the comment about, you know, buying back stock. I understand you're investing in the business now. If this situation doesn't rectify itself, if the market doesn't kinda wake up to the opportunity, there will be a time when I'll probably call you up and suggest that you be buying back stock as well. Thank you for your insights and your comments.
All right. Thanks for your input.
Take care.
Thank you. I will now turn the call back over to Mr. Richardson for any closing remarks.
No, Olivia, we thank you very much. Thanks to all of you again for your investment and support and interest. Please give us a call or plan to visit us when you can. It's a lot easier to show you what we do than to talk about it. We look forward to our ongoing discussions and sharing our fiscal 2023 fourth quarter and full year performance with you in July. Thank you very much.
Ladies and gentlemen, that does end our conference call today. Thank you for your participation. You may now disconnect.