Q3 2022 Richardson Electronics Ltd Earnings Call
Good day, and thank you for sending money.
Welcome to the Richardson electronics third quarter fiscal year, 2022 earnings conference call.
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And I like to hand, the conference over to your speaker today.
Chen Chairman and CEO . Please go ahead.
Good morning, and welcome to Richardson Electronics conference call for the third quarter of fiscal year 2022.
Joining me today are Robert Ben Chief Financial Officer, When do you did Dal Chief operating officer, and General manager for Richardson Healthcare, Greg Pellegrin General manager of our power and microwave technologies group.
And yen's Rupert general manager of canvas.
As a reminder, this call's being recorded and will be available for playback.
I would also like to remind you that we'll be making forward looking statements. They are based on current expectations and involve risks and uncertainties.
Therefore, our actual results could be materially different.
Please refer to our press release and S. T SEC filings for an explanation of our risk factors.
Our third quarter set another quarterly sales records since we sold our P. D in 'twenty 11.
It was also our seventh consecutive quarter of sequential revenue growth, which is remarkable when you consider the number of holidays that are in our third quarter.
In fact, all three business units performed better than Q3 last year and.
And we overcame the unprecedented absences due to COVID-19 cases, particularly throughout the month of January .
Net sales for the third quarter of fiscal 2022 were 55.3 million 22, 3% higher than last year's third quarter.
Gross margin declined due to a higher percentage of lower margin sales higher freight costs and cost increases for raw material and components.
Despite these challenges third quarter operating income was $3 $6 million or six 6% of our revenue.
Which is a significant increase from 315000 or <unk>, 7% of revenue for the same period last year.
Backlog at the end of the quarter was $175 6 million up 19, 5% over the second quarter.
Each of our three business units had higher backlog driven by strong bookings growth.
We then PMT, our largest business unit backlog increased across numerous product lines, most notably in power management.
Conductor wafer fab and magnetron <unk>. These products are used in many new applications, including alternative energy five G and manufacturing diamonds hydrogen and building products.
Pleased with the performance and I'm confident this will lead to continued growth.
Considering Russia as recent aggressive actions against the Ukraine, we stopped all shipments to Russia here.
Starkly, we've shipped less than $1 million to Russia each year.
We also have customers in the Ukraine, which represent less than $1 million in revenue per year, primarily in health care.
We extend our heartfelt support to our friends families and customers in the Ukraine and wish for a very Swift ended this unjust war.
I'll now turn the call over to Bob Ben Chief Financial Officer to review, our third quarter financial performance in more detail, then Greg Wendy and Yen's, who will provide more detail on our third quarter performance as well as our new programs.
Thank you Ed and good morning, I will review our financial results for our third quarter and first nine months of fiscal year 2022, followed by a review of our cash position.
Net sales for the third quarter of fiscal 2022 increased to $55 3 million up 22, 3% compared to net sales of $45 2 million in the prior year's third quarter due to higher net sales across all three business units.
PMT sales increased by $8 8 million or 25% from last year's third quarter, driven by strong growth from our new power and microwave technology partners for various applications, including power management, and <unk> infrastructure as well as increasing shipments of our patented ultra 3000.
In addition sales for several electron tube product lines, including semiconductor wafer fabrication increased from the third quarter of fiscal 2021.
Canvas sales increased by $1 1 million or 15% due to the strong customer demand in North America and Europe .
Richardson healthcare sales increased <unk> 2 million or seven 4% year over year due to an increase in part sales and an increase in demand for the Alt a 750 tubes.
In addition to higher revenues total company backlog increased to its highest level since the sale of RFP D of $175 6 million in the third quarter of fiscal 2022.
Mm $146 9 million at the end of the second quarter of fiscal 2022, and $98 7 million at the end of the third quarter of fiscal 2021.
Backlog increased in all three business units when compared to both third quarter last year and our most recent second quarter.
Gross margin for the third quarter was 31, 8% of net sales compared to 34, 9% of net sales in last year's third quarter.
Pmt's margin decreased to 32, 2% from 34, 9%.
Due to a higher mix of lower margin <unk> sales, partially offset by increased shipments of wind turbine modules.
Canvas gross margin decreased to 32, 2% from 35, 2% because of higher global freight costs.
Health Care's gross margin was 25, 1% in the third quarter of fiscal 2022 compared to 33% in the prior year's third quarter due to an increase in component scrap expense and rising freight costs.
Operating expenses were $13 9 million for the third quarter of fiscal 2022 compared to $15 $5 million in third quarter of fiscal 2021.
The decrease in operating expenses resulted from the non recurrence of a $1 6 million legal settlement in the third quarter of fiscal 2021.
In addition, lower legal fees were offset by higher employee compensation expenses.
The company reported operating income of $3 6 million or six 6% of net sales for the third quarter of fiscal 2022 versus operating income of zero point $3 million or 0.7% of net sales reported in the third quarter of last year.
Other expenses for the third quarter of fiscal 2022, including interest income and foreign exchange were 0.1 million compared to other expenses of less than zero point $1 million in the third quarter of fiscal 2021.
The income tax provision of 0.6 million for the quarter reflected a provision for foreign income taxes, and the offset of a U S tax provision against the valuation allowance.
In addition state income taxes for Illinois increased due to the suspension of net operating loss carryforwards until the end of fiscal 2023.
Net income was $2 9 million or five 2% of net sales for the third quarter of fiscal 2022.
As compared to a net income of zero point $2 million or 0.5% of net sales in the third quarter of fiscal 2021.
Earnings per common share on a diluted basis in the third quarter of fiscal 2022 or.
We're 21 cents compared to <unk> <unk> per common share on a diluted basis in the prior year's third quarter.
Now turning to a review of the results for the first nine months of fiscal year 2022.
Net sales for the first nine months of fiscal year 2022 were $163 million, an increase of 28, 9% from $126 5 million in the first nine months of fiscal year 2021.
Net sales increased by $34 million or 38% for PMT.
$5 2 million or 25, 6% for canvas.
And <unk> 9 million or 12, 2% for Richardson healthcare.
Gross margin decreased to 31, 6% from 33, 6%, primarily reflecting product mix and PMT and higher global freight costs and canvas, partially offset by improved manufacturing efficiencies for health care.
Operating expenses were $40 6 million for the first nine months of the fiscal year.
Which represented a decrease of $1 3 million from the first nine months of the last fiscal year.
The decrease was due to the non recurrence of a $1 $6 million legal settlement in the first nine months of fiscal 2021.
And lower legal fees, partially offset by higher employee compensation expenses.
Operating income for the first nine months of fiscal year 2022.
Was $11 million or six 7% of net sales as.
As compared to an operating income of <unk> 6 million or 0.4% of net sales for the first nine months of fiscal year 2021.
Other expenses for the first nine months of fiscal 2022, including interest income and foreign exchange.
We're less than 0.1 million as compared to other expenses of zero point $5 million.
For the first nine months of fiscal 2021.
The income tax provision of $1 3 million.
Reflected a provision for foreign income tax and the offset of U S tax provision against the valuation allowance.
In addition state income taxes for Illinois increased.
The company reported net income of $9 6 million or five 9% of net sales for the first nine months of fiscal year 2022.
Versus a net loss of <unk> 2 million for the first nine months of fiscal year 2021.
Earnings per common share on a diluted basis in the first nine months of fiscal 2022 or.
Were <unk> 71.
Compared to a net loss of <unk> <unk> per common share on a diluted basis in the prior year's first nine months.
Turning to a review of our cash position cash and investments at the end of the third quarter of fiscal 2022 were $39 1 million compared to $39 7 million at the end of the second quarter of fiscal 2022.
And $47 4 million at the end of the third quarter of fiscal 2021.
The company continues to invest in working capital to support growth initiatives accounts receivable increased.
To $31 6 million at the end of the third quarter of fiscal 2022.
However days outstanding were 39 at the end of the third quarter compared to 40 days at the end of the second quarter.
In addition inventory grew to $73 7 million from $70 7 million at the end of the second quarter of fiscal 2022.
Primarily due to increases in components and work in process for our manufacturing business.
Capital expenditures were zero point $6 million of third quarter of fiscal 2022, the same as in the third quarter of fiscal year 2021.
Approximately 0.2 million related to investments in our health care business.
0.2 million was for our manufacturing business 0.1 million was for our it system and 0.1 million was for other projects.
We paid zero point $8 million in cash dividends in the third quarter of fiscal 2022.
In addition, based on our current financial position our board of directors declared a regular quarterly cash dividend of <unk> <unk> per common share, which will be paid in the fourth quarter of fiscal 2022.
Finally during the third quarter of fiscal 2022, we repatriated zero point $5 million to the U S from Japan, bringing our total year to date Repatriations to $1 5 million.
Our U S domiciled cash and cash equivalents balance totaled $24 8 million as of February 26th two.
<unk> 2022.
Now I will turn the call over to Greg who will discuss the results for our power and microwave technologies group.
Thank you Bob Good morning, everyone sales.
Sales for the power and microwave technologies group or PMT in the third quarter of fiscal year 2022 through 25% to $44 million versus $35 2 million in Q3 last year. In addition to strong sales quarter PMT achieved an excellent book to bill of 147% our sales growth and strong booking.
Confirm another solid quarter.
To what is shaping up to be an excellent FY 'twenty two.
Gross margin decreased in the quarter to 32, 2% versus 34, 9% in the prior year, which was mainly due to some product mix as well as increased freight components and labor costs.
Both business units in PMT supported the strong growth in bookings and billings in Q3.
Our electron device group or EDG and extremely robust quarter in bookings as we continue to take market share from our competition and continue to find new applications for our legacy <unk> products, specifically magnetron using development of synthetic diamonds and other green solutions.
In addition, we continue to experience outstanding growth in our powered microwave group or PMG.
Over the years, we have added a growing line of new products and technology partners targeting RF and power management applications.
This includes <unk> infrastructure programs as well as programs dedicated to the consistently growing power management and energy storage applications that support numerous green initiatives.
With respect to <unk> wireless and power management revenues increased by high double digits again in Q3 with a very strong book to Bill.
Power management saw growth in applications for wind energy electric vehicles and energy storage.
Recently introduced products such as our patented ultra 3000 pitch energy module used in wind turbines continue to grain traction with increased sales and bookings in the quarter.
We are producing the altra 3000 with remarkable results in the field and millions of accumulated hours of operation.
During the third quarter, we received our second patent for the pitch energy system for wind turbines.
This extends our leadership position by further supporting our innovative Altair module technology.
We also saw an increase in bookings with key customers such as you know in <unk> energy RW and numerous other owner operators of GE wind turbines.
Our ultra Gen 3000, designed for generators and seller base stations and critical facilities.
Had good success in alpha product trials and in the quarter. We received our first beta site order with T mobile.
We also booked our first multi million dollar order for our power management module used in electric vehicles in this case electric locomotives.
This order will start shipping in Q2 of FY 'twenty three again this product will also be manufactured tested and supported from the Fox, Illinois.
As I have mentioned, we continue to add new products to our portfolio and are on schedule to introduce new products that support Green energy applications in the first half of FY 'twenty three.
Our RF and microwave component business continues to benefit from the positive trends associated with <unk> microwave communications and satcom applications.
These applications are utilized as people continue to work for multiple locations, sending and receiving large amounts of data.
Our entire team has done an excellent job of identifying niche technology partners, who collaborate with us globally.
We continue to invest and focus and resources to support these growth markets.
These resources include design Engineers field engineers and manufacturing capabilities. We also added several small niche technology partners, who fill technology gaps in our portfolio.
This strategy has been highly successful and we will continue to use it to develop new engineered solution products as well as increase our customer base revenue and profits by capitalizing on our existing demand creation infrastructure.
We are excited to see that.
Over the years in these past three quarters, our legacy <unk> business.
He has had a strong return to both bookings and billings.
The third quarter of FY 'twenty to continue to prove that the demand for all of our products and services did not go away with the pandemic.
And we're even more excited about the trends in bookings that would support strong revenue in the coming quarter.
We continued to receive support from our key technology partners, such as Corvo may come a Nokia wave Ellis materials, ammo Greentech and Fuji semiconductor.
And key to manufacturers in the industry, such as CPI, Talis and JRC and Phototonus, they've all worked with us to manage our customer requirements.
Our growing in house engineering and manufacturing teams did a great job supporting increased demand for our products and new product designs.
The team also supported product designs for key growth markets, including Green energy applications, such as the Ultra 3000 Ultra Gen 3000, and lithium based power management module for our electric locomotives.
I am pleased with the progress we are making we will continue to identify develop and introduce products using numerous technologies for green energy power management applications.
However, we remain challenged by longer semiconductor component lead times and overall supply chain. This effects, our component business and engineered solution products we.
We are aggressively investing in inventory that should position us well and fill the pipeline to ensure we can meet our customers' needs, while we collaborate closely with our customers and suppliers.
I cannot stress enough the value of original electronics model to our customers and suppliers are.
Our unparalleled in capability and global go to market strategy, our unique to the power and RF and microwave industries, we have.
Developed a powerful business model, including legacy products, and new technology partners that fit well with our engineered solution capabilities.
We are steadfast in creative focus on customers, we will continue to excel by taking advantage of opportunities when they arise.
Our backlog has never been stronger.
And the execution of our strategy has never been better.
There's no question, our customers and technology partners need Richardson's products and support more than ever.
And with that I'll turn it over to Wendy to Dell and Richardson healthcare.
Thanks, Greg and good morning, everyone.
For the health care group increased in Q3 to a quarterly record of $3 3 million. This was seven 4% higher than Q3 of FY 'twenty one.
Sold a record number of kids during the third quarter led by increased sales in China sales.
Sales of parts exceeded prior year levels, while equipment sales also exceeded prior year levels.
We remain constrained due to ongoing lack of new systems available for purchase and resale.
Gross margin in the second quarter was 25, 1% versus 33% in Q3 last year.
Gross margin was negatively impacted by higher than anticipated scrap rates in the quarter relating to the use of reclaimed parks as well as rising freight cost.
However, gross margin improved slightly over the most recent second quarter as we again increase the number of tubes produced and continued to address new component quality from our suppliers.
The most significant roadblocks to higher sales and margin continues to be the breadth of our <unk> product offering.
<unk> is the ultra sound and 50 G.
Second tube in the Canon series that works on newer Canon's Toshiba scanners.
We have one 750 G tube and data.
Scheduled for install next week, we anticipate a full rollout after 30 days of acceptable performance.
Sales growth will be gradual as we get the 750 <unk> into the market and canon scanners come off OEM service contracts.
We continue to make good progress on the Siemens repaired two program.
This is a series of four tubes, including the Stratton Z annex NXP and NXP 46.
The Siemens install base is considerably larger than Canada, and there are no third party replacement options by these tight.
We are on track to release, the Siemens types in calendar year, 2022, and 2023 with revenue starting slowly in fiscal year 2023.
We are also evaluating other tube types for future development.
At the expense of our Siemens program.
Our number one priority is to shorten the time it takes for health care to provide positive operating contribution to the company bringing.
Bringing more tubes to market below improved sales and margin and help us accomplish this call.
I will now turn the call over to <unk> to discuss the results for canvas.
Thanks, Wendy and good morning, everyone.
Canvas engineer manufacture since as custom displays to original equipment manufacturers.
And the industrial and medical markets throughout the World Ken.
Canvas delivered an excellent performance with sales of $8 1 million.
The third quarter of fiscal 2022.
Strong customer demand on a global basis drove the 15.0% increase in sales over the same period last year.
Gross margin as a percentage of net sales was 32, 2% during the third quarter of fiscal 2022.
Down from 35, 2% during the third quarter of fiscal 2021.
The decrease in gross margin was related to an increased freight costs impacting many customers across the global supply chain.
Extended lead times on several key components also remained an issue however, our close relationship with customers and partners overseas and enables us to procure long lead time components, which has helped us achieve a new record backlog.
$52 4 million.
This quarter.
Ken This is backlog.
Increased 19, 4% from this year's second quarter.
And this is up 66, 3% on a year over year basis.
As you can see momentum in our business has strength.
We are optimistic that the high demand accustomed monitor us.
Screens and all in one system will continue for the foreseeable future.
During the quarter, we received several new orders from both existing and first time medical OEM customers. Some of these applications include.
Cell analyzers.
<unk> policies.
Corneal cross linking.
I explanation.
Enter treatment centers.
Laser ablation.
Robotic assisted surgery.
Medical device control and fully integrated operating rooms.
Surgical navigation patient monitoring surgical video documentation diagnostic imaging and ophthalmology.
In the nonmedical space our products are used in a verity of commercial and industrial applications.
This include Ctg's Kenneth for inspecting luggage at airports human machine interface or HMA.
High speed high precision milling machines product dispensers for retail applications and tailor, prompting products.
We are pleased with our team's performance the new record backlog positions us for future growth.
From the verity of customers and applications as well as the value of orders from existing and new customers. It is clear we of our global customers outstanding products and liquid service.
While our sales organization stay focus on new opportunities.
I continue to review and adjust our business strategy to improve the operating performance of the division.
Maximizing cash flow is an ongoing priority.
We continue to work closely with our partners to help us reduce inventory, while being able to meet the demands of our customers, particularly with the challenges brought.
And by the industry wide supply chain delays.
I would now trying to call back over to Ed.
Thanks, again and congratulations on the entire canvas team for another excellent year.
We're very pleased with the company's performance in the third quarter, particularly given the challenges we face and the very fluid business environment.
Our backlog is growing and we're working around the clock to increase production and meet our customers demand.
We will continue managing supply chain issues as well as higher freight costs, particularly with rising fuel costs.
We're also focused on rewarding our team members for helping the company grow.
Unfortunately, the amount of lost time due to COVID-19 pandemic has decreased substantially.
Overall activities across all our global markets are robust and business remains strong we're.
We're investing in equipment and expanding our manufacturing areas to take advantage of new opportunities.
This expansion will support growth for alternative energy solutions as well as our legacy products, such as Magnum trends for Diamond manufacturing and marine applications.
Hiring additional engineers and production technicians as quickly as we can find them.
We're cross training employees to improve flexibility of our workforce and using overtime to meet customers' requirements.
The team has really stepped up when we need them the most.
We're reviewing every sale every opportunity and every new hire to ensure we're using our cash wisely as.
As we celebrate our 70 <unk> anniversary on May 24, 2022, it's an exciting time for the company.
At this point, we'll be happy to answer a few questions.
At this time as a reminder to ask a question you will need to press star one on your telephone and two are drilling a question just press the pound key once again, that's done well for questions. Please standby, while we compile the Q&A roster.
Okay.
And our first question will come from the line.
From Wellington Shields your line is open.
Thank you.
Ed Lindsay and the group congratulations on what is a great quarter.
There is however.
You're very welcome there is however, an elephant in the room and the elephant is margins.
And we all appreciate because it's affecting everybody.
Across the board in terms of freight.
The goods sold.
At what point in time, Ken pricing come back where you create.
Significantly better margins than you have in this quarter.
I think it'll be pretty much linear.
We've been caught in some areas for instance in Canada.
Most of our product comes in from Taiwan, or Japan or Korea.
And we do the value added either in Germany or in Boston.
But we've had to absorb their freight costs for some period of time and now <unk> has done a good job talking with our customers and they understand the additional freight costs and we're able to pass along but.
In one quarter alone, we had $150000 additional freight costs I'm not sure what was it in this last quarter and you remember.
Well actually I don't remember the exact number but I think for the for the first nine months is more than $900000.
Yes, it's amazing.
Anyway.
Where are those cost and we've had a lot of increases in raw materials things like oxygen free copper in ceramics and things of that nature.
We're working hard to increase the prices in past that Iran. Right I think.
At this time next year, it will be back to normal it won't be linear between now and then.
Alright, thank you.
Ultra 3000.
Some thoughts please on fiscal 2023 in terms of.
Revenues.
Well Howard as you know.
We started the year.
10 of $11 million in backlog.
We continue to add new customers, we booked a number of multimillion dollar orders.
Nice Rollouts are very similar to any rollout we have a lot of experience with <unk> rollout. So it's time.
Testing a product we have a number of large.
Customers that are doing beta site testing across the board historically with the results we had with these phase ones, we fully expect.
US to continue at a run rate I believe I mentioned this group.
$45 million in one to.
Three years, and we are definitely at that run rate.
Could you repeat that because it was static on my line Whats your run rate is potentially for 2023.
While our three year run rate right now when you look at this group and based on the <unk>.
Sales or bookings will be much higher than that great, but we're at a run rate to do over the next.
Two years.
$45 million.
Okay. Thank you battery <unk> energy.
Cell towers beta testing.
You would expect to see some revenues this fiscal year.
Coming.
Just small beta site revenues that program has also gone very very well, it's the altra Gen 3000.
Beta site testing going with.
T mobile in Phoenix, They placed the second order for 15 more towers.
With zero failures, it's running perfectly.
But I don't think we'll see any.
Large revenues or bookings.
Probably Q1 Q2 of FY 'twenty three.
But we're very very happy with the speed that this thing has been rolled out in the design itself and that product is also.
We will be patented.
Could you give us some sense of what's your.
For Q1.
Is it two.
2 million $5 million.
Any sense at all.
We're not holding until you it's just truly.
It's really hard to say I mean, if you just do math the number of towers that they have but these these companies are very conservative when they put a new technology because it is a new technology to generators. So from a bookings point of view Howard I would think in the first half of the year.
$3 million to $4 million in bookings how much of that will actually ship I don't know Howard I can't give you an answer on that.
Fair enough.
Yes.
Let's go to another subject in terms of ultra capacitors and locomotives.
Accomplished had an order for two.
Does that order has been completed is that a correct statement.
No Howard and it's not an ultra capacitor.
We're not in the EV and we're not in the wind turbine market, we're not in the.
Electric locomotive market when the power management, and we've been working with progress rail and caterpillar.
For a while and developing a.
Our module in this case, it's a module with our partner Emerald Green Tech.
Lithium based.
Module.
We have just completed that design, we have booked the first multimillion dollar order for <unk>.
A number of electric locomotives.
They continue to gain market share in terms of outfitting these locomotives.
And we expect that to be also a 6% to $7 million.
Opportunity in FY 'twenty three.
But we won't start building that until June .
No no fair enough.
Yes.
My understanding is about.
Yeah.
You want to add to that.
In these opportunities.
All these opportunities that were in these new products are driven by components and the greatest thing about this is we have weekly calls with their engineering teams and this is caterpillar.
So many opportunities that are going to come out of this electric locomotives, yes, we either lead partner for the powering system of that but you look at smart agriculture.
<unk> as much of their products Green when you got a.
Agreements with net technology partners in the <unk> World that are world leaders and in the power management side the leaders in that type of technology and an ever growing design team.
Im more excited about the relationships and the opportunities that have come out of it as I am with these individual opportunities, which by the way as you've seen are multibillion dollar opportunities.
My understanding there are about 400, some odd thousand.
Locomotives, just in the United States, So that sounds about right to you.
I don't know about that I mean, they are diesel there's not that many electric locomotives, but diesel I'm talking about that is yes.
Yes.
They mentioned they have 60000 diesel locomotives globally. This is progress rail that they that they outfit. So I don't know what the total is.
But.
Those are big numbers will take Catholic.
I appreciate that last question last quarter, you mentioned other products in the portfolio sometime first half or 2023 can you expand on that.
Yes, there is.
And listening to the customers and what issues are having there's other products that fit our niche and we really go after products that we have a niche where we add value and so one of these products, which were introduced in Q1.
We might announce that before that but we will be doing beta site testing in Q1 also goes in the wind turbine. We have number of other products that are go into critical facilities for power management.
But the one product that we're going to introduce in Q1 is a larger opportunity than the altra 3000 itself.
So all I have.
Thank you again.
Congratulations on a good quarter.
Thanks, Ed when do you think you all of you.
Thank you. Thank you.
Our next question will come from the line of Ross Taylor from Aon risk investment partners.
You may begin.
Thank you and also congratulations on what's really shaping up to be a great year.
Howard address some of my issues, but to kind of recap what youre looking at is the operating margin business.
This should be Ricky.
<unk> incrementally.
Kind of historic levels over the next three four quarters as we were able to pass the cost increases for components and freight onto your customers at this point.
Yes, that's correct.
Okay and looking at that.
I listened to you guys and Youre in a number of really hot button areas, you're providing some really exciting technology do you see anything about the outlook for your business that should slow your growth over the next couple of years.
Not really when you look at $175 million backlog, that's grown from 140.
And in the last quarter and at the same time.
The sales are growing as well you can understand that.
The next year or two are pretty much guaranteed.
We don't see anything that would slow us down right now.
I mean, there's no question that.
We're on the verge of a third World War and things of that nature that we have no control of.
We do very little business in that area. So that doesn't have too much impact, but certainly there are things like that that could impact.
Joel.
But all things equal I'm listening to you talk about the new products, new product opportunities and the like and it really sounds like you are on the ramp business your margins.
While they have been.
Softer than historic or you expect them to be recovering.
We look at this in a market that trades at 17 18 times earnings why do you think it is that your share of it gets so little respect I mean, we're looking at the stock as I said Youre in every area. It seems like you want to be in.
And if your cash adjust.
Your share price you are trading at nine times earnings which is.
Basically almost like Youre going below what do you think that market is missing or what do you need to do to get the market to wake up to the opportunity that's sitting in this company.
While we don't understand it either.
Are we just mentioned that.
Next year will be our 70, <unk> anniversary and I hate to admit it but I have been involved for 60 years and I would say that.
This is the most exciting time in my career.
Look at the business like a table with six legs and five of them are on fire right now and we just we can't produce all the products that we have orders for.
And healthcare is coming along we think by 2024 that we can start to show a profit in healthcare.
And that will add a great deal to the Bottomline.
I guess, we sold RF PD in 2011 and took the company from being $700 million in sales and 1000 employees in.
And losing a ton of money.
To accompany that was $140 million, but we kept the international infrastructure, which was important for the two business with 24 foreign subsidiaries and 60 offices all over the world.
So it took us a long time to add enough products to fully absorb that infrastructure and when we got to $160 million. We broke even last year, we were at $177 million and showed a small profit and now this year will be $2 15, possibly $2 20.
So a very nice profit.
And I think investors that are aware of the company for a long time or thing this old guy isn't going to get it right ever but it's starting to get there now and I think that.
In the years to come the company would be very profitable.
Well just to be blunt and if you don't get it right quite honestly the biz.
Business execute well enough and the value is there that.
This is to me probably the greatest value I see in the equity market today, because you're making money and youre going to make more it seems like the wind turbine business could generate a substantial portion of what the company generated revenues all of last year and a year or two would that be a wrong assumption.
We think so that's the most exciting business. We're in right now the green energy business not only the wind turbines.
The electric locomotives and the cell business.
Just.
The opportunity is amazing and Fortunately the patents that we have we're in early <unk>.
Lots of people understand the opportunity in Green energy and there are lots of people working on that market, but we seem to be well ahead of a lot of the competition.
Talk about your cash and you've obviously been investing some of that cash in working capital and the like but you're also generating cash as a as a business as you roll forward should be generating it it's not hard to envision next year, you should earn well over $1 share in earnings I think it looks like.
This year, you should probably own.
90, plus cents a share in earnings if you just can keep the same earnings power on what I would expect it will be higher revenues in the fourth quarter.
What do you do with that cash is that part of the problem is that the market sits and looks at what's effectively a quarter plus of your market capitalization sitting in cash.
Yes at the moment, we're just funding the growth of the business.
First of all we have 24 foreign subsidiaries and as Bob mentioned only about $25 million of the cash is in the United States, where we can use it and we have to carry about a half a million hours in each of the foreign subsidiaries to keep them.
Within their legal requirements.
We can use that cash we can move it around borrowed from subsidiary to subsidiary and Fortunately, we don't have that problem right now.
But as you saw the inventory was up very substantially we have enough ultra capacitors in the building to build.
Every order and every order that we are projecting.
And we did that for a reason we haven't been able to ship as fast as we wanted to because there's been a shortage on integrated circuits, which are now getting in stock but.
It's basically funding.
The receivables and the inventory that's required for the growth that we're seeing.
We shouldnt be.
This year, we will use a little cash and it looks like next year will go cash flow positive.
And so you are saying is this 20 plus percent topline growth is actually component constrained growth so as components become more available that growth should accelerate.
Yes, it's certainly true look at the backlog the $175 million plus backlog.
And those those orders is set up particularly in.
EDG, where we're making magnetron, if we could build them we could ship every one of them today.
We can't build the product faster.
Okay, well you guys are doing a great job operating at I think we need to think about getting some coverage and getting people to actually care about the business because the opportunity is clearly there you know one of the most attractive but as I said on a valuation basis, it's hard to find something in this market.
Anywhere close to a 20 plus percent topline grow we're trading at a single digit cash adjusted multiple let's just.
We appreciate your confidence and we absolutely agree with you.
Well lets hope, we both prosper and the next year.
Right. Okay. Thank you very much thank you gentlemen.
Our next question comes from the line of Tim O'connell from chain of Lakes investments you may begin.
Hi, good morning, and congratulations on the great quarter.
Hi, Tim Thank you hi.
So some of my questions have already been answered, but I was hoping for a little more color on the locomotive business.
The way I look at it you know that the revenue number per locomotive.
How many there are in this world.
Your relationship with progress.
And the revenue number per locomotive.
This appears to be a much larger opportunity than the wind turbine business.
So my questions are what kind of market share do you think you can get there.
How quickly do you see these manufacturers adopting battery power and kind of what's the plan to go after this market, whether it's just with progress or any other manufacturers.
Yes so.
Right now, we have 100% market share with progress rail caterpillar and Theres really two leaders.
In this market its progress rail.
And <unk> transportation.
Our partnership.
With progress rail.
It's at a design.
Level and there'll be other products our content continues to grow.
As they ask us to design other parts of the system.
Other than just the in this case not just that but the module. So right now our contents about $1 million of locomotive.
And.
And that growth is really dependent on how much market share.
Progress rail grabs.
We expect this to be.
In terms of bookings.
As the World. These electric vehicles I think if you look online you can see companies like Union Pacific.
Long Island railroad, placing orders and they mentioned progress rail. So you can kind of get some numbers of what.
That's expected.
So yes, we're very excited about it.
It's really dependent on how much market share progress rail get Tonight, we believe theyre going to get a majority of it.
And I'll just add to that again, because I'm on these weekly calls the opportunity in other products within Caterpillar also yes that overall makes us bigger than the ultra 3000, but.
But you also had 3000 business is going to generate.
Other opportunities from these same owner operators and we're talking to people like Siemens and GE.
With the manufacturers.
And there is another product that we introduced in Q1 that is causing them a lot of pain due to the lead acid batteries.
That will more than double the opportunity if you want to call. It the windmill ultra capacitor business.
Okay. Thanks.
Good color and I just think this is such a great area for you guys of being in and the undiscovered Green Energy company here with Richardson.
And the interesting part of it is we booked the first large order.
One of the things we used every aspect of Richardson 75 years. The reason we beat our competition is these products are sent up 15% to 20 different sites in this case all throughout North America.
Our distribution business, which has been around for 75 years can do that with their eyes closed our competition could do that.
On the locomotive side.
They are mandating.
U S based.
Erodes that it has to have be manufactured and tested and supported from the U S.
That just was perfect for us we're hearing la box, Illinois, and we have niche capabilities. We over years. These these high powered tubes that we make and thermal dissipation that they've been working with.
For years, we have.
Just world class knowledgeable engineers of ultra capacitor technology, and we're very selective.
Yes, I could come up with 15, other green products, but we have a real niche and again its big money its tens of million dollars, but.
It's still niche niche for us and we just have found.
After 15 years of ultra capacitor experienced that.
We have the ability to address these somewhat niche applications better than some of these larger companies and Youre right you put it all together it is absolutely a homerun.
Great I'm looking forward to seeing you guys success.
Thank you. Thank you very much.
And our next question comes from the line of could do Ritchie from Ritchie Capital Group you may begin.
Hi, good morning. Thanks.
Thank you very much for taking my call.
Yes, congrats on your performance in reference to.
Ross Taylors comment.
<unk> is new to Richardson and we're continuing to learn about the business over time, so perhaps others are taking notice as well.
We hope <unk>, yes, yes.
Yes, it seems that youre delivering quite a bit of momentum in the business and we noted the significant growth.
In your backlog that continues to build.
Can you, possibly characterize this growth a bit.
Part of that growth.
Could be related to the global supply chain and could there, possibly be some over ordering or pulling future quarters forward versus.
Real increase in demand that can be repeated can you can you discuss that.
Well, a very large share of our backlog is through products that we manufacture in on a lot of those products were either sole sourced or very nearly soles or.
There are other companies that can make the product, but it would require the customer to redesign the equipment to use their product.
So we don't we don't see over ordering.
That type of thing normally happens in the commodity semiconductor business Greg.
Yes.
I mean on that.
A very very large portion of our backlog bids were products that we manufacture where we are sole source or nearly so.
Got it thank you.
And you mentioned that.
It was mentioned earlier in the call.
You're aggressively.
<unk> inventory.
So you can meet your future demand can you think can you discuss how you're thinking about acquiring inventory.
And how is your strategy really changed in the current environment.
Well in most cases for instance into the integrated circuit used in the ultra capacitor that delivery has been 48 weeks, but formerly Fortunately with Greg's relations.
Our people in the semiconductor industry. He has been able to get the product in.
I don't know Greg what do we got in delivery on 15 17000 units. So so far yes. So.
The semiconductor industry is my background, but Richardson has always been very aggressive on inventory.
So.
When we started seeing these orders and we talk to the agenda as a part of our business that's quite large it is.
Ponant, they're made by Corvo may come.
<unk> all these.
Tier one semiconductor we talk to them daily and they give us inside of what's going on.
We see a hiccup coming we're very aggressive about getting the inventory. So even though we are frustrated that we arent, giving as much as we want.
I really think Richardson has done a better job than our competitors and we've actually gained market share because of our aggressive ordering and just our communication.
The RF and wireless in our world is a very niche.
Incestuous market.
I've been doing this 35 years and most of the people on my staff and doing the same. So we have contacts we talk about the plan communicate.
Information I, just think we've done a good job.
Getting in.
Our orders and <unk>.
Communicating with our suppliers to get ahead of the game and I think we've done a better job than our competitors and I think that is part of the reason, we're gaining market share.
You might have <unk> comment on canvas $50 million of the backlog plus Kansas and.
Troy engineered <unk> been in the business a long time.
Yes.
Tracks, where these medical Oems, where he is bringing in ltvs are ordering them out.
In advance to make sure the customer product.
Do you want to comment on it.
Yes, I think you addressed it very well I mean, we have customers that place orders for a long long time out with basically two to three years even in sometimes.
Struggling to get components. However.
Two two of those long term contracts and relationships we have we have.
I'd call it secret sources, where.
We can still get the material almost on time for everything we need so it's it's a great relationship we have with our suppliers so a much better year.
Disrupt.
Or pessimistic about the future so I'm looking for watch.
After customers.
With the products they need on time.
Okay, great. Thank you and just one last quick question can you discuss any challenges that you've had on the workforce management front in regards to finding.
The engineering talent managing kind.
Kind of rising salaries, and how you're navigating that front.
Sure when do you want to comment on that <unk> been in the front on that one.
So just to keep it in perspective, one of the data points I find particularly interesting.
David to answer your question.
Since the beginning of the calendar year and lethargic manufacturing.
We've hired 37 people.
So we are using a combination of all the traditional sources defined people.
Our.
Our finders fee to our employees for bringing in people, we've hired a recruiting specialists to add to our HR team to go out and proactively find candidates for disposition.
Engineering area, we've had a really strong.
Interim program over the past number of years and we've been fortunate to be able to bring in a lot of those engineers.
Full time employees as they graduate and then Greg pellet plant and Greg Kenny has done a great job of finding additional engineers to join our team.
On that front, it's a continual recruiting effort and we're hiring again more people than we've hired in a long time.
Not always easy and not surprisingly right I mean, we haven't seen challenge every other company we are fighting for employees.
We have raised our minimum salaries, our minimum hourly rate to be able to attract more people.
That has added obviously northwest pressure, but it's more important for us I mean, we've got people right now working six and seven days a week every single week.
To meet the demand.
Thank you.
And then we're getting back to them and.
Acting responsibly in terms of our compensation program.
And that referral bonus goes to any investor that prefers.
Sure.
For you all.
We've got investors that are sending us.
Resumes and people. They know we went to a conference and it applies to anyone and everyone.
We can always use more in it.
It's a continual effort.
Alright, that's great to hear thank you that's all my questions. Thank you and congrats again.
Thanks very much.
Our next question will come from Reno to Schenker.
Mass partners you may begin.
Good morning, Hi, Ed Hi, one depot.
So no one's guests Glenn to your question, we just got one but in looking at too.
And looking at the medical market.
One of the things you Laurence and therefore, we learned.
You entered the market was that a significant number of potential customers were under maintenance contracts and therefore until.
Those rolled over there really wasn't much of an opportunity for you, but over time the opportunity should grow as you pick off some of these people over time.
And looking at the year over year and eight to look at one quarter.
Is that not happening to the degree you hoped and therefore, you really need a broader line or can we see some more significant growth.
As people come off maintenance contracts and theoretically are open to save some money if they go to you instead of their prior contractor.
So I think with the launch of the Chi the second too in the canon family.
That will open up the door for more people to take their systems off the OEM contract.
Right now we only have the D. As you know and that covers a certain range.
<unk> <unk> scanners.
Range.
Range and so people would be more open minded to using a third party service organization.
Because they don't run the threat of having some of their equipment still have to be covered by the OEM.
So that's going to help I think increase the sales of the D and the G. So the answer is part of your question.
Certainly expanding our product range is absolutely critical and Walter as we've been as we've.
Been discussing.
Having the Siemens range up to and again, there's four in that theory and that market is much much larger than the canon market. The installed basis is much larger Siemens I think is the number one player in <unk> scanning market.
That again will add more volume.
I think that.
Success Begets success and the more teams you get out there whether it's the canon Gib, our entertainment and what people will come to you and look to you for additional purchases.
It's really a combination of getting that GE out there, which will help us get more cannon equipment off the contract.
The volume will be incrementally driven by the Siemens program does that answer your question.
It does just that.
Yes, it is still too small initially.
Maybe somewhat surprisingly.
Despite you being very small there is some pricing adjustments by the dominant player in the industry.
Once you entered and tried to underprice sum.
At this point pricing and I realize its only on one product.
As reasonably stable.
April .
Not see anything.
Okay.
And we won't know how Siemens is going to react until you are in the market.
That's correct.
Optimistically, perhaps we don't see them, having the same knee jerk reaction I mean, as we've discussed we think theres been a lot of money left on the table, but I think we collectively feel that Siemens will be less likely to have that kind of cost reduction.
Okay and then just my final very quick comment, which is not going together a response, so I'm doing it because I can smile and say it.
It's to add.
Couldnt get you to buy high yes.
Many people, who can get you to buy back stock.
When it was half the current price and the more recent periods as you go into a positive cash flow and may be significant positive cash flow.
Going forward in 'twenty, three and 'twenty four fiscal years and Ross laid out how cheap the stock is which we all agree.
I as one shareholder would very much appreciate if you revisited buying back stock.
Again.
These small premium to book, you've got a lot of it a lot of cash you are at a very low multiple.
I couldnt push it before but maybe in 'twenty three and 'twenty four.
Hope the company or at least consider it if the stock continues to be so undervalued.
The statements.
We did buy we did by $65 million with the stack back after we sold RF PD and at that time.
King.
A price somewhere between eight and $9 and I thought it was unfortunate on the stack went to four or five it looks pretty good today. So you never know never say never.
Okay. Thanks, Ed.
Well.
Okay.
Our next question will come from the line.
Eric Landry from BMO capital you may begin.
Good morning, good morning.
Hi.
Alright.
Good morning.
Yeah.
Great quarter.
So happy for everybody there.
What a difference three or four years, Mike I remember back in.
Some of the comments in 2018 and whatnot.
This is so much nicer anyways.
We agree you've only been with us about what eight or nine years, Eric something like that maybe more.
It's been a while.
It's worth it so anyways.
Hi.
Are you suspect like you guys and I'm, a little surprised at the stock price today.
And a lot like what what Howard said I think a lot of it has to do with the market margin.
Degradation, so perhaps you could comment on.
How much I think it's 310 basis points of the decline is due to an increase in shipping and your inability thus far to.
To raise prices commensurate with your cost increase.
Is there any do you have any kind of an estimate as to how much.
When do you did a fairly decent analysis of it I'll, let her actually Bob did that okay.
It hasn't gotten to speak yet today, so I will let Bob alright, okay.
Yeah, one thing to keep in mind on the margin as you know we're in a lot of different businesses and the mix of sales, whether it's product mix or customer mix always affects us differently every quarter. So I think that's important to keep in mind.
The analysis shows that thats over half of the.
The change the three point change in the quarter.
Yes, certainly.
Component prices and labor costs are affecting us I certainly don't want to give you the impression they are not.
I show that about a point roughly and then the rest would be other things we talked about the additional scrap.
In the health care business.
Yeah.
And freight as well that we've talked about so.
Does that give you a rough idea Eric of.
So.
So a little bit more than half you expect to be able to get back through price increases correct.
Yes.
Okay, Yeah I just.
I just wanted to make sure that that people are aware that you are not transitioning into a lower margin business through all of this growth I think that's not at all not at all it just gotten caught in between with logistics costs and the higher raw materials costs higher labor costs.
Everything is going up and we haven't been able to react fast enough.
Alright, if I could just add.
Eric Eric one more thing last quarter, our margin was 32, 7% compared to 31, 8%. This quarter. So it's still a drop but not nearly as much and I might add last year's third quarter at 34, 9% was our highest point all year last year.
I think so.
It is important to keep that in mind as well.
Got you.
Thank you Wendy after 37 years, you've hired in the last three plus months.
What percentage of that.
Is that of the people that you need.
Well, if I understand the question, we need 100%, but you mean, how many more do we need yes.
Yeah, I think we have I'm going off memory here in improving rack I think we probably have five to 10 additional reqs open most of them in production.
On the engineering side that is more at this point opportunistic healthcare I think were fall, but Greg and supporting the Ultra 3000, I think we constantly have an open mind, maybe we could take up to another five engineers. If you have people you understand.
Mhm.
Okay I don't Unfortunately.
I was thinking maybe I could drive down there are one or two days a week in health.
We have volunteered to do the same thing.
I can build a melter 3000, I can I can get out there and Eric we do have a second shift on the production that we ought to see that.
And then face time with their app.
Yes.
I don't know that I'm qualified to build all of the 3000, but I could probably sweep the floor.
Probably.
Test your product twice what it is.
Director.
Eric.
Thank you.
You can do the output capacity.
There you go sounds good I'll put my arm.
Right.
So I just wanted to real quick I know this is getting long I just want to address the <unk>.
The magnitude and the way I see it this is probably somewhere around.
Maybe your second or third largest opportunity right now is that anywhere near accurate.
We just looked at the total backlog when do you what is it on the Mega trends it's incredible.
13 million 14 million.
13, or $14 million is the backlog right now in the magnet drive business.
That's almost double what it was a year ago.
Uh huh.
And what are the growth prospects, what do the growth prospects look like I mean, it's probably nowhere near the Altra 3000, but I assume it.
Material.
We could sell every one we can make right now some of these new technologies like synthetic synthetic diamond thing has just gone crazy.
And now they're using.
Magna trends also too.
They take tires and they take the carbon out of it and they make tayo the roof tiles floor tiles.
Big Company in India is placed over 1000 magnets trends with its called carbon craft and they make both synthetic diamonds and tayo.
And then the applications for hydrogen is just.
Fuel of the future.
Alright, so many applications now for microwave.
For semiconductors, just one handle the Bruce power and the high frequency at the same time.
Right. So it's.
Yes.
Do you have any type of a patent on on your magnetron or any type of sort of a competitive barrier so that someone.
You can't come in and.
Lots of people have tried to make though I'd say six to 800 and depot light towers, and English electric and they've all failed so it.
It's a technology that has a lot of black magic and no. There are no patents on power grid tubes that I know of any longer they are all expired.
<unk>.
Once you can learn to build them and other people don't know how to build them you are pretty much in a sole source position.
And that's what you feel like you are with with this thing so someone who rate.
So, let's just I mean this is a dumb question, but someone who makes the magnetron four hour everyday microwaves.
Could they entered this market.
Yes, they do Panasonic makes one and so does LG.
It's differ.
Different magnets, Ron and the only way you can use it is to build a new piece of equipment and build the power supply and all the accessories to utilize that magnetron and there are people that do that there.
You look at companies like <unk> and serum that generators, they buy from those people and they customize their equipment they use their product.
At the same time both of those companies have been after us they want to buy all the production that we can make of our magna trend. So we have something that they can't get.
And how long it would they've been trained.
Oh, it's perpetual and we sell to them.
As long as we can build the most sell to anybody.
Okay, great. Thanks, Les last thing because I know, we're getting long here Greg.
The locomotive product is this like is it similar to the.
The cell tower product, where it's used as a starter or is this actual these actual.
<unk>, 100% battery powered locomotives.
Yes, 100% battery powered locomotives.
The module it doesn't use ultracapacitors.
Uses lithium iron phosphate.
Batteries and it stopped.
It's about the size of two.
Car batteries together and in a standard locomotives for the power levels that these are going into there's about 160 per train, but it runs the entire train now also I want to add Eric that the.
The first one that are coming out.
Like for short distances for example.
Taking the train to Chicago these aren't long haul, but those are coming and thats. Some other designs, we're working on with.
Progress rail and caterpillar tell them the.
Yes.
The beta the original design that we're going to make ways 10000 pounds.
That's another good thing, we've got a big cement loading dock out there.
Yeah.
Interesting.
This is how this whole.
<unk> works you talked to them about a component and then you build the module and then they keep adding more to it can you build this and so.
I mean, eventually could we build the entire system here in La Fox, Yes, but right now the the main one is the battery module.
That goes in locomotive and Theyre in parallel circuit together.
They run the complete train and then obviously just like electric power.
It's break regeneration.
And right now they are used in.
Shipyards to move things around and then for commuter trains going from here to Chicago.
The big market, obviously more power more of these batteries.
As to get the long haul.
Sending parts across the country.
And again I just can't we are a design partner for progress rail and as they gain market share will continue to gain market share.
Well, Okay. That's it for me I appreciate it and you guys.
Youre really kicking <expletive> there so great job. Thank you. Thanks.
Thanks, Eric.
Yes.
And our next call. Our next question will come from.
My cues from SGS capital you may begin.
Good morning, Thanks for taking my questions Good morning, Mike.
How are you Ed.
Good.
Good good good to hear.
Just to follow up on the locomotive business and maybe I missed this but is it safe to assume the gross margins on that business would be kind of in line with the company wide average kind of 30% to 35% is that fair.
Yes, it'll be accretive all the products. The altra Gen 3000 up to 3000, and then the lithium ion.
Locomotive.
<unk> accretive to the.
Overall corporate margin of 35% plus.
Okay, Great and you said the concept per locomotives and this was your content was $1 million is that correct.
We're at around right around $1 million I think right.
Great.
<unk> content is about $1 million of locomotives.
Okay, Okay, good and then.
The backlog is really impressive, but I assume everything that's in the backlog is price protected.
So just.
Number one.
Could confirm that.
And then number two is there anything you could do on a go forward basis to kind of this is probably the highest rate of inflation you've seen since the 19 seventies is there anything you can do on a go forward basis protect yourself from bookings something now and it's not going to ship for a year from now where raw materials might be higher can you just address that issue.
Well, we have a policy you know when.
When we quoted the quotes only good for 30 days.
We take a frame order and we guarantee them a price over a period of the year then it's on us.
And we also normally you have a currency fluctuation clause in each order as well.
So that we're quoting in the U S dollar or even though the customer may be in India, or China or Europe somewhere else.
So we try to protect ourselves as much as we can but obviously, we're getting caught now and we think that.
We can correct that.
Sort of on a linear basis over the next year.
Okay.
And then on.
On the last call you indicated that you thought you could grow 15% to 20% at the topline.
Next year is that still the case is that still your thinking.
Yes, absolutely with $175 million backlog.
And we will end the year, probably somewhere between $2 15 in 2020.
It probably we can look at $2 50 next year something like that maybe.
Maybe a little more.
Okay. So if you kind of did the midpoint for this year, let's say 2018. It grew at a 15% rate that would translate into $250 million, which is just shy of $63 million a quarter. So at what point do you step up to that higher level of revenue and as a gating factor.
The just the integrated circuit shortages. So your 55 million now when does it go to 63.
On average.
Be linear.
Yes, it will be linear.
Normally our fourth quarter is our best quarter.
And.
It's amazing when you usually the third quarter is really low because of the Christmas holiday and the Chinese new year and that kind of thing.
If you look at it the third quarter revenue wise was quite good as well.
But the fourth quarter is usually our highest quarter.
Okay normal and then our summer quarter or the.
The holiday quarter is lowest but that hasn't happened either just continue to grow in a linear basis.
Okay, and then just on the SG&A line. It was $13 1 million in the prior quarter and it was $13 9 million.
This quarter.
What are the drivers behind that and is the $13 9 million, maybe $14 million a quarter a good number on a go forward basis.
Bob do you want to come in and it sure yes, Mike.
Well to answer your question versus second versus third quarter, we continue.
To accrue or <unk>.
Employee incentive expense, we have merit increases that happened throughout the year versus the previous quarters and year.
So most of that.
The increase was in employee compensation.
Expenses, but quarter to quarter, we have different factors that impact is going forward on the $14 million, yes, I expect it to be closer to that.
In the fourth quarter and beyond.
Next year to get that growth, where we're going to have to make some investments whether it's in SG&A or we talked earlier about working capital and capital expenditure. So I don't want anybody to think we can achieve this growth without making some of those.
But 14 million is a good number with some growth next year going forward.
Okay, and then just on the magnetron business had I think on the are at or someone else on the management team on our last call, indicating there's a generator sale at 75000 to $100000 in those the tubes that are $7000 and there was some question of kind of how much share you would get on the generator space can just any updated thoughts on that.
Yes, this is pretty much.
In the hydrogen area, where theyre, taking methane gas and converting it into acetylene and hydrogen and they do that with a 100 kilowatt generator and the two that goes into that generator.
Is it about 7000 hours by the way our competition just raised their price to almost $11000 for those magnet trends, so it'll be interesting to see.
What happens there but.
Seven or 8000 has been in the area, where we've been in the past.
And the generators.
Depending upon what bills bells, and whistles around it it's $100000 generator and quite often we get the two business, we have lots of competition and the generator business.
And the three companies that are startups that we're aware of in the United States wanted to buy 100 generators each.
It gives you an idea what the potential could be.
Other than some beta.
Orders, we don't have any mass production orders on those but.
It just gives you some idea of what the hydrogen business is going to be in the future or could be.
Okay, and then just the semi cap equipment end market.
What type of growth are you looking for into next fiscal year for that business line.
<unk>, our largest customer there and we pretty much followed their guidelines what are they telling us now when do we do those vendor meetings.
Yeah kind of low double digits, 10%, 15% is what we're expecting they have their own supply chain challenges that I think are limiting their growth.
Okay, So would that translate into like a 27 $28 million number for that business.
About right that number yes.
Okay and then just last question for you on the inventory I understand why it's been building up over the last the last few quarters.
But just from a day standpoint, you said things have stabilized now or will you need to continue to kind of buildup.
Revenue.
No I think it'll continue you know we try and it's one of the reasons why we maintain so much cash part of the reason why we're successful as we can supply products that other people cant and that comes from buying inventory well in advance, particularly what <unk> is talking about where he's buying lcd's a year in advance.
Aaron Ts Big Oems that they're going to have the display that run through a $3 million piece of equipment.
Okay, I mean, there's obviously a cost to having higher working capital have you kind of have.
Have you thought about or maybe you've already done. This just building that into your price and just having that discussion with the customers that your cost of doing business because your working capital requirements have gone up.
Is higher and you had a really needs to be reflected in kind of delivering a lot of value to your customers and it hasnt its not reflected at this point.
Right now, we certainly try to do that.
Unfortunately, when you're working with these frame contracts that are a year out.
You get caught like we have.
In short term, but we will recover from that and we will be able to increase our prices as we go along.
Okay I appreciate your time thank you.
Thank you.
Our next question comes from the line of Mike Schellinger from Micro Cap club you may begin.
Yes regarding.
Well regarding converting backlog to sales.
Can you characterize what you know.
The percentage of that challenges supply chain versus.
Personnel.
Yes.
Yes.
Yeah, No no. It's not personnel for instance on the Magna trends and in a normal year YJ 600, we built 800 a year.
And we went from building 800 last year do we have orders for over 5000 right now.
So what we've had to do is to build new tests that we've had to add ovens, we had to add vacuum pumps, all kinds of jigs dies tooling and fixtures and delivery on net a lot of it we built in house, but what we have to buy some some of them as long as six months and that's the kind of.
Thing that we run into.
We've geared up now where we can build two or 300, a month and we're going.
To gear up to build 400, a month, but to get the equipment to do that is what the delivery time of spin.
Okay. Thank you very much.
Sure. Thank you.
And our next question comes from the line of David Schneider.
Private Investor Your line is open.
Hi can you hear me.
Yeah David.
Yeah, just a quick question.
Earlier.
Person on the call.
I Couldnt figure out why the stock was where it is now.
As others.
This is just my opinion and then I'll ask questions I just think.
People nowadays.
I think people like the stock more 17 and 11 six two it's just human nature.
That's 11 six to now to me it doesn't bother me at all.
Okay.
Now back to the questions.
<unk>.
I did notice the.
I think you did go over this I just need a little clarification.
I do monitor inventories and so the sequential increase in inventory seems to have grown faster than the increase in revenues.
Thinking that maybe to sell finished products there is a few.
Maybe bits and pieces that youre waiting for delivery honestly, you can ship things out.
As revenues can you maybe just explain that.
That happens a lot, particularly in greg's business, where the customer they want a complement of five different semiconductors and.
Yeah and to ship complete and we only have three of them are four of them in stacks that were holding the inventory until we can get the fifth one did ship the kit.
If you will and that happens.
Okay.
Same thing happens when we're building equipment for Lam, if we're short some kind of a capacitor and we've got all the other components are a piece of equipment, we might have thousands of dollars worth of raw material waiting for three dollar capacity.
And so as far as flipping over to.
To the overall company being free cash flow positive.
A big part of that being.
Just that that backlog of inventories turning turning that into cash.
What other factors would be going on.
Well that has a lot to do with it obviously the more money. We make then we crossed the line it looks like we'll be cash flow positive next year, that's sort of our.
Our forecast.
We've done that Bob you've done a quite a four five year cash flow.
Yes, we certainly expect the cash flow to improve certainly of sales continues to grow at 15% to 20% a year.
And so yes next year will be a transition year.
Hopefully, we'll get the cash flow neutral and that will be close.
Then after that our forecast is to generate significant amounts of cash I think we talked about that earlier with some other people on the call.
Okay, that's great.
Your tax rate was 17% in quarter.
Quarter, you released yesterday in another state of Illinois.
They suspended the UCITS carryforwards, there for next fiscal year that starts.
I guess what June 1st what do you think your overall tax rate is going to be.
Yes.
Our forecasting 27% effective tax rate for fiscal 'twenty three.
That includes I think I've mentioned this before on other calls but.
Do you anticipate will be using all of our federal Nols by the end of this fiscal year. So.
We have to factor in federal tax next year, so I would assume or I'm using a 27% rate.
Forward, but then once Illinois, we can use the Illinois Nols again.
After fiscal 2023, I expect that to go down as we can utilize those in fiscal 'twenty four and beyond so for those years fiscal 'twenty four and beyond I'm using 23% is my estimated effective tax rate.
Okay, well, that's good and how big is the Illinois carryforward.
It's over $40 million significant.
Okay.
Alright, yes.
Probably email some other questions.
Yes.
I'm happy that fundamentally you are doing well and that's the most important thing.
Thank you very much.
Thank you and I'm not showing any further questions.
I'd like to turn the call back over to the speakers for any closing remarks.
Okay, well. Thank you for your interest and your investment in the company at Richardson Electronics.
We are optimistic about our future, obviously and hope you are as well.
Like to discuss our results.
Very flat organization cause anytime happy to talk to you or better yet come and see us it's easier to show you what we do as I can tell you about it.
And we look forward to discussing our fourth quarter and full year performance with you in July .
Thank you very much.
And this concludes today's conference call. Thank you for participating you may now disconnect everyone.
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