Richardson Electronics, Ltd. Q3 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to Richardson Electronics Earnings Call for the Third Quarter of Fiscal Year 2024. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ed Richardson, Chief Executive Officer. Please go ahead.

Good morning, and welcome to Richardson Electronics conference call for the third quarter of fiscal year 2024. 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, which includes the 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 also like to remind you that we'll be making forward-looking statements that 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 SEC filings for an explanation of our risk factors. I'm pleased to report that we returned to profitability in the third quarter. Sales increased 18.7% sequentially, reflecting improving business conditions. Stronger demand for our ULTRA3000 from new and existing wind customers drove higher Green Energy Solutions sales. The sequential increase in sales and profitability is encouraging, reflecting the benefits of our diversification strategies as well as our team's focus on enhancing profitability and strengthening our balance sheet. Our net sales continued to reflect the cyclical nature of the sales to semiconductor wafer fab customers, which declined $11.5 million in sales during the quarter. We believe Q3 will be our lowest semiconductor revenue quarter. Our customers continue to tell us they anticipate growth in the back half of calendar year 2024, leading to record sales in calendar year 2025. Another highlight in the quarter was the $4 million sequential decrease in inventory, reflecting prudent strategies aimed at improving working capital levels. Throughout fiscal 2024, we focused on improving inventory levels to better align with expected demand across our markets. Inventory grew primarily in response to supply chain constraints over the past several years. I'm pleased with the progress that our global teams are making. The quarter marks the first time we've seen a decline in inventory in more than two years. I'll now turn the call over to Bob Ben, our Chief Financial Officer, to review our third quarter financial performance in detail. Then Greg, Wendy, and Jens will discuss our business unit performance, including an update on the new products, programs, and customers that continue to drive our optimism for the future.

Thank you, Ed, and good morning. I will review our financial results for our third quarter of fiscal year 2024, followed by a review of our cash position. Net sales for the third quarter of fiscal 2024 were $52.4 million compared to net sales of $70.4 million in the prior year's third quarter. PMT sales decreased by $15.7 million from last year's third quarter, primarily driven by a decline in manufactured products for our semiconductor wafer fabrication equipment customers. Sales for Green Energy Solutions increased $0.1 million from last year's third quarter, which included a large sale of EV locomotive battery modules that did not recur in fiscal 2024. Canvys sales decreased by $3.1 million, primarily due to short-term customer pushouts in North America. Richardson Healthcare sales increased by $0.7 million compared to the third quarter of fiscal 2023 as higher CT tube and parts demand offset lower system sales. Backlog totaled $147.7 million at the end of the third quarter of fiscal 2024 versus $150.7 million at the end of the second quarter of fiscal 2024. The sequential decline was in PMT and Canvys. Green Energy Solutions backlog of $36.8 million increased from the second quarter of fiscal 2024 by $1.1 million. Consolidated gross margin for the third quarter was 29.5% of net sales, compared to 31.8% in last year's third quarter, primarily due to product mix and underabsorption. Without underabsorption of the company's manufacturing facility, management estimates that the company's consolidated gross margin for the third quarter of fiscal 2024 would have been 31.0%. PMT's gross margin decreased to 28.3% from 32.9%, primarily due to product mix and $0.8 million of manufacturing underabsorption. Green Energy Solutions gross margin increased in the third quarter of fiscal 2024 to 26.6% from 25.7% in the prior year's third quarter due to product mix. Canvys gross margin increased in the third quarter of fiscal 2024 to 34.4% from 32.0% in the prior year's third quarter because of product mix. Healthcare's gross margin increased to 41.6% in the third quarter of fiscal 2024 compared to 39.8% in the prior year's third quarter as a result of an improved product mix. Operating expenses were $14.4 million for the third quarter of fiscal 2024, compared to $14.8 million in the third quarter of fiscal 2023. The decrease in operating expenses resulted from lower incentive expenses, partially offset by higher R&D expenses in support of the company's growth initiatives. The company reported an operating income of $1.0 million for the third quarter of fiscal 2024 versus operating income of $7.6 million in the third quarter of last year. Other expense for the third quarter of fiscal 2024, including interest income and foreign exchange, was less than $0.1 million, compared to other income of $0.4 million in the third quarter of fiscal 2023. Income tax provision was $0.2 million or a 23.4% effective tax rate versus an income tax provision of $1.7 million or a 20.7% effective tax rate for the third quarter of fiscal 2023. Net income for the third quarter of fiscal 2024 was $0.8 million or $0.05 per diluted common share compared to net income of $6.3 million or $0.44 per diluted common share in the third quarter of fiscal 2023. Turning to a review of the results for the first nine months of fiscal year 2024. Net sales for the first nine months of fiscal year 2024 were $149.1 million, a decrease from $203.8 million in the first nine months of fiscal year 2023, which reflected lower sales across our business segments. Gross margin decreased to 30.3% from 33.0%, primarily reflecting product mix and manufacturing underabsorption in PMT, product mix in Green Energy Solutions, as well as increased scrap expense and manufacturing underabsorption in Healthcare, which was partially offset by a favorable product mix and lower freight costs for Canvys. Operating expenses were $44.7 million for the first nine months of the fiscal year, which represented an increase of $1.0 million from the first nine months of the last fiscal year. The increase was due to higher salaries and R&D expenses, partially offset by lower incentive expenses. Operating income for the first nine months of fiscal year 2024 was $0.5 million as compared to an operating income of $23.6 million for the first nine months of fiscal year 2023. Other expense for the first nine months of fiscal 2024, including interest income and foreign exchange, was $0.2 million as compared to other expense of $0.1 million for the first nine months of fiscal 2023. Income tax provision was $0.1 million or an effective tax rate of 39.2% during the first nine months of fiscal 2024 versus an income tax provision of $5.3 million or an effective tax rate of 22.5% in the prior year's first nine months. The company reported net income of $0.2 million or $0.01 per diluted common share for the first nine months of fiscal year 2024 versus net income of $18.2 million or $1.27 per diluted common share for the first nine months of fiscal year 2023. Moving to a review of our cash position. Cash and investments at the end of the third quarter of fiscal 2024 were $18.9 million, compared to $22.8 million at the end of the second quarter of fiscal 2024. The use of cash during the third quarter of fiscal 2024 primarily resulted from a $5.3 million increase in accounts receivable and a $4.1 million decrease in accounts payable, partially offset by a $4.0 million decrease in inventory. U.S. cash and investments were $5.2 million at the end of the third quarter of fiscal 2024 versus $8.8 million at the end of the second quarter of fiscal year 2024. Capital expenditures were $0.4 million in the third quarter of fiscal 2024 and relate to investments in our IT system versus a total of $2.2 million in the third quarter of fiscal year 2023. We paid $0.8 million in cash dividends in the third quarter of fiscal year 2024. In addition, 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 2024. As of the end of the third quarter of fiscal 2024, the company had no outstanding debt on its $30 million revolving line of credit with PNC Bank. Now I will turn the call over to Greg, who will discuss the results for our PMT and GES business groups.

Thank you, Bob, and good morning, everyone. We are pleased to share that in fiscal 2024 third quarter, we experienced strong quarter-over-quarter sequential growth and slight year-over-year growth for our Green Energy Solutions group, or GES. GES sales were up 342% sequentially from $2.6 million to $11.5 million. In addition, our GES book-to-bill is 1.07 for the third quarter with the addition of new customers, new products, and new technology partners. As we implement our GES growth strategy and until our new products are mature, we are seeing fluctuations from quarter to quarter in terms of sales. The team continues to do a great job identifying customer requirements, establishing design and manufacturing capabilities, and launching beta site testing. In a short amount of time, we have designed numerous products, received several patents, and developed a growing list of key customers. All this will help develop a more predictable quarterly revenue stream. As a reminder, GES benefited from several large projects last fiscal year, including electric locomotive development and large-scale rollout of pitch energy modules to replace lead acid batteries with our major owner-operators of GE wind turbines such as NextEra, Enel, and Invenergy. We remain confident that our market share continues to expand. Our customers repeatedly tell us we have maintained our market share for our core GES applications, identified new opportunities, and the slowdown in revenue in Q1 and Q2 was purely a timing issue. In fact, our customer pipeline and number of opportunities continue to increase as we take advantage of significant energy transformation projects globally. Our combined GES and PMT backlog remains strong at over $98 million. Given our inventory position, we believe we will continue to ship many incoming orders from stock as we were able to do in Q3. This resulted in significant inventory reduction, which we expect will convert into cash in the coming quarters as receivables are collected. We remain focused on managing our business to support our customers' needs when they are ready. So with that, let's look at the third quarter performance for both GES and PMT groups in more detail. GES sales were $11.5 million in the quarter, up from $11.4 million in the prior year's third quarter, and up over 342% from the prior quarter, driven by a larger customer base, mainly for the ULTRA3000 as well as increased new product revenue from designs with our component technology partners. We continue to grow market share with the customers needing our niche power management-focused patent green energy products. Beginning in Q3 FY '24, we saw an increase in the budget for individual site rollouts for our wind customers. With over 53 million shipped program to date, we are excited to see this and expect to see positive trends continue in Q4 FY '24. We also continue to beta test our patent-pending ULTRAUPS3000, which replaces lead acid batteries in the UPS system at the base or down tower of the wind turbine. The ULTRAUPS3000 will be used by other owner-operators of GE and Siemens wind turbines. Tests are going well, and we have led to important improvements in the product. We anticipate generating production revenue from the ULTRAUPS3000 product line in late September 2024 as beta testing is completed with our customers. We're also testing the ULTRAPEM3000 or multi-brand products, which serve the same function as the ULTRA3000 but different mechanical designs with other wind turbine platforms such as SSB, Suzlon, Senvion, and Nordex, expanding our market outside of North America. One major program I mentioned in Q2 for the ULTRAPEM3000 is beta testing with Suzlon on both an OEM and replacement basis. The replacement opportunity is for more than 7,000 turbines in India alone, with several thousand more in North America and Europe. We expect to ship production orders for the Suzlon program starting in late October 2024. The ULTRAPEM3000 is also in final testing with several owner-operators in Latin America and North America, which manage Suzlon SSB pitch systems. We'll be rolling out four new versions of Senvion, Suzlon, Nordex, and SSB in Europe at the Clean Energy Show in Hamburg, Germany, in September 2024. In the EV locomotive segment, due to supply chain issues for piece parts for our suppliers and design changes, our prototype superstructure builds for Long Island Railroad and BNSF electric locomotives will now be completed this quarter and into Q1 of next fiscal year. We anticipate production units will begin shipping in the third and fourth quarters of calendar 2024. We have beta orders for a patented ULTRAGEN3000 starter module with two large diesel and EV locomotive manufacturers. It's important to note that we are exclusive to both of these manufacturers. If all continues as planned, we anticipate production orders will begin in late July 2024. In summary, last quarter, we anticipated sequential revenue growth in Q3 and Q4 within our GES business unit, driven by new products, customers, and technology suppliers, and supported by the forecast and backlog from our project-based customers. We saw that large increase in sales over Q2 and year-over-year growth in Q3. We're expecting quarter-over-quarter growth again in Q4. I want to stress that despite the slow growth in the first six months of the fiscal year, we did not lose any market share. In fact, we continued to increase our market share with new products, new applications, and new customers. Turning to the Power & Microwave Technologies group, or PMT, which includes the Electron Device Group or EDG and our legacy tube business and the Power Microwave Group or PMG, our Power & Microwave Components Group. Sales decreased 33% from $46.8 million to $31.2 million. This decline was primarily due to the slowdown in our semiconductor wafer fabrication equipment business. The decline in the semiconductor wafer fab business was slightly offset by growth in the RF and microwave power components group. We expect to see quarter-over-quarter growth for our semiconductor wafer fabrication equipment business in Q4 FY '24 based on customer feedback and market predictions and with a book-to-bill of over 1.14 for PMT overall coming out of Q3. Our Engineered Solutions strategy is led by our global technology partners. In Q3, we continued to add technology partners who fill technology gaps in our offering and support our growth, including Wolfspeed, Ideal Power, and MCI Components. Often through these partnerships, we identify opportunities for new products that we design and manufacture in-house. This increases the value we provide customers and allows us to capture more revenue while expanding and diversifying our customer base. In April, we are excited to be expanding our RF and microwave portfolio with the addition of Wolfspeed Cree semiconductors through our global relationship with MACOM. These long-term supplier relationships are extremely strong. And when appropriate, we work with them on strategic long-term purchases to maintain proper levels of supply. We negotiate special terms, stock adjustment privileges, and shipping schedules to help improve cash flow. In addition, having inventory on hand allows us to capture and maintain market share. We collaborate with our customers and suppliers and leverage our customers' forecasts to help us strategically invest in inventory and ensure we can meet our customers' needs. Our growing customer base and strong relationships with these customers help us develop new products and opportunities. We will continue to invest in our infrastructure to support our growth. We are bringing on talented design and field engineers and making investments to enhance our manufacturing capabilities. Our growing in-house design engineering and manufacturing teams are doing a great job supporting the increased demand for current and new product designs. With this team, we'll continue to identify, develop, and introduce new product and technologies for green energy and other power management and microwave applications. I cannot stress enough the value Richardson Electronics model brings to our customers and suppliers. Our unparalleled capability and global go-to-market strategy are unique to the power energy and RF microwave and green energy markets. We 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 as they arise. 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 Diddell to discuss Richardson Healthcare.

Thanks, Greg. Good morning, everyone. Third quarter sales for the Healthcare division were $3.1 million, an improvement of 29.6% compared to the third quarter of last year and a slight increase over the second quarter. CT tube and part sales were up versus the prior year's third quarter, while system sales were down primarily due to the timing of cash receipts from our customers in Latin America. In the quarter, we again benefited from sales of our repaired Siemens Straton Z tubes. Healthcare's gross margin in the quarter improved to 41.6% compared to 14.8% in our most recent second quarter. Gross margin in the same period last fiscal year was 39.8%. The gross margin improvement was primarily due to a favorable product mix, including higher parts and Siemens tube sales. We also realized the benefit of restructuring done at the end of the second quarter and reallocation of resources focused on the Siemens repaired tube program. We continue to make excellent progress with the Siemens program. The Siemens repair program includes four tube types, the Straton Z, MX, MXP, and MXP46. The repaired Straton Z is in full production and performing well in the field. Straton Z sales are starting to ramp up as we have a steadier flow of production and can expand our customer base. The repaired MX series tubes are performing well in beta and live tests. While we may be able to sell a small number of repaired tubes in the next two quarters, we anticipate the full release of the MX series later this summer when we're able to replace critical components. We continue to closely monitor Healthcare's financial performance with the goal of achieving a breakeven point in the fourth quarter. With limited sales of the repaired Siemens series, this will remain challenging, but we are taking the right steps to balance our investments with other opportunities in the company.

Thanks, Wendy, and good morning, everyone. Canvys engineers manufacture and sell custom displays to regional equipment manufacturers across global industrial and medical markets. Canvys sales for the third quarter of fiscal 2024 reflect certain customer pushouts primarily in North America. As a result, sales were $6.6 million for the third quarter compared to a very strong quarter last year with sales of $9.7 million. One area I'd like to highlight is our $46.2 million backlog. As you can see, our backlog remains robust, providing us with a strong foundation for future revenue growth. This backlog not only demonstrates the confidence our clients have in our products and services but also reflects our ability to secure long-term contracts in a competitive market environment. Another notable highlight from the third quarter of fiscal 2024 is the improvement in our gross margin. We are pleased to report that our gross margin as a percentage of net sales increased to 34.4% compared to 32.0% during the same period last year. This improvement underscores our relentless focus on operational excellence and cost management. Through strategic initiatives and operational enhancements, we've been able to enhance our efficiency and optimize our cost structure, resulting in improved margin. During the quarter, we received several new orders from both existing and first-time medical OEM customers. Some of these applications include patient monitoring, colposcopy, surgical navigation, super pulsed laser systems, and robotic-assisted surgery. These applications underscore our commitment to providing innovative solutions that meet the evolving needs of our customers in the medical sector. Furthermore, they highlight our ability to establish and cultivate long-term relationships with both existing and new clients, positioning us for sustained growth in these key market segments. In the non-medical space, our products are used in a variety of commercial and industrial applications. This includes displays used in the public transportation space such as train driver consoles and passenger information monitors, air traffic control, human-machine interface applications for surface inspection machines, and teleprompting and talent monitors and clocks used in the broadcast market. As we navigate through the dynamic market environment, it's important to acknowledge that some of our customers have exhibited a cautious approach to the prevailing uncertainties. However, despite this caution, we remain optimistic about the recovery of demand in the coming quarters. We've observed promising indicators and anticipate a gradual rebound as market conditions stabilize. Our ongoing dialogue with customers supports our confidence in the potential recovery ahead. One of the key drivers for our optimism is increased business stemming from new design wins. These wins underscore the recognition and acceptance of our products and solutions in the market. Our engineering teams have been diligently engaged, demonstrating a high level of activity and commitment to our strategic objectives. Despite the challenges posed by external factors, our engineering team has remained focused on innovation and product development, laying the groundwork for future growth opportunities. We've strategically positioned ourselves to capitalize on emerging opportunities, and these design wins validate the effectiveness of our approach. As we continue to leverage these wins, further penetrating target markets, we're anticipating a positive impact on our revenue growth and market share. 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 will be focusing on executing our strategic initiatives to drive sustainable growth and create long-term value for our shareholders. I will now turn the call back over to Ed.

Thanks, Jens. I know customer pushouts have been a source of frustration for you and your team. But with a strong backlog and recent wins, we're confident that the business will improve sequentially. Despite headwinds from economic conditions, higher interest rates, and a lagging economy in China, we maintain our optimism and remain committed to our long-term growth strategies. We continue to pursue significant projects and develop new engineered solutions that take advantage of opportunities created by recent government stimulus programs and global energy transition trends. We believe we're well positioned to capitalize on large, rapidly growing global markets. This is exactly why we maintain a strong balance sheet with access to additional sources of capital, if necessary, to fund this growth. We're convinced our ever-expanding product roadmap for Green Energy Solutions to large global customers will be crucial as a part of our revenue growth going forward. The solutions we offer not only help achieve lower carbon emission goals, but they also create cost savings for our growing customer base. In the wind market, for example, lead acid batteries must be replaced every one or two years. Our ULTRACAPACITOR 3000 has a life expectancy of more than 10 years. Wind turbine operators may never have to replace ULTRA3000 before replacing the wind turbine. This saves customers labor costs as well as ensures greater uptime, resulting in more power generated. International growth opportunities as well as expansion to other wind turbine brands within the US provides more evidence that demand for our ULTRACAPACITOR modules is there and growing. Last quarter, we referred to opportunities created by the Inflation Reduction Act of 2022 such as the 100-kilowatt generators to power pilot reactors to make crystalline diamond materials for high-tech applications. In this quarter, we'll ship the first generator. These generators are over $100,000 apiece. We expect this will be the first of many of the demands for large chips used in many applications such as AI and electric vehicles. This will also have a positive impact on the demand for semiconductor wafer fab equipment. Electric vehicle rail is still in its infancy, but states like California are mandating that the transition from diesel locomotives. So while this may be rolling out slower than we originally anticipated, the opportunity remains significant. Other applications like mining are outside the United States, and the emphasis on alternative green solutions remains a top priority. We are working closely with customers, engineering teams that are an integral player in their supply chain. I want to stress again that our customers' products and opportunities are growing. None of these projects or programs we've discussed have been lost or canceled. Our balance sheet remains strong with nearly $19 million in cash and no debt. We're working hard to improve our working capital position and convert inventory to cash. Our approach will remain focused on maintaining a healthy cash position and a strong balance sheet while we focus on improving profitability and producing positive operating cash flow in FY '25. Overall, we remain extremely excited by the direction we're headed in and the global opportunities we're pursuing to create value for our shareholders. At this time, we'll be happy to answer your questions.

The first question is from Anja Soderstrom from Sidoti. Your line is now open.

Hey, Ed, and team, good morning. It was nice to see a sequential jump in the quarter. And what drove that? Was it a specific large project or was there several different projects that would have driven that GES business increase?

Yeah, it's actually a great increase in the customer base. A major portion of the increase was the ULTRA3000 business. Just for an example, last year, we had five, six customers. This past quarter, we shipped to over 12 new customers for this product as it becomes market accepted, the word gets out, people are doing it, the budgets got approved. And we said from the very beginning that Q1 and Q2, they were putting their capital expenditure together, and those two would be slow, and we've seen an increase in Q3 and Q4, and that was exactly what happened. They got their CapEx approved for 2024 and they started placing orders. And we had built up stock to support that based on their forecast, and we were able to ship from stock. So it was actually an increase in the number of customers, and the largest increase in terms of our product was the ULTRA3000.

Okay. And that's the one you had a press release out in March, right, that you completed a Phase 1 of shipping 50,000 modules?

They looked at it and reviewed everything, which is done in phases. According to them, their Phase 1 capital expenditures were approved, generating about $53,000, and we began seeing Phase 2 start up in the third quarter. So that was another reason.

And what do you think we can expect from Phase 2? Is that going to be the same magnitude or could it be an expansion since you have more customers now?

It will be that and a little bit higher based on the forecast from these customers. Again, we started with, in a good way, the four largest owner-operators of GE wind turbines. The balance are the smaller group, but if you add them all together, it could be about the same amount. So we're expecting that plus for Phase 2.

Thank you. Regarding the anticipated sequential growth in the fourth quarter, what gives you confidence, and what visibility do you have looking ahead?

I mean we're very confident about it based on the deliveries and the backlog and the inventory we have to shift to that. And so far, like we saw in Q3, the customer base are meeting their forecasts, which is surprising because people can't forecast very well. No one can. So it's mainly based on our book-to-bill being over 1, the backlog and the schedule of that backlog, and the fact that we have inventory to support it going forward.

Okay. I have a question about the inventory. That was great work done. Now, as we look ahead, should we expect inventory to continue declining in dollar amount, or will it remain flat or possibly increase in the upcoming quarters?

I'll touch on GES. We expect sales to increase and inventory to go down specific to the GES, and I'll let the other SBU people.

Yeah. I would just add to that, Anja, that we do have the entire management team focused on it. While we wouldn't go so far as to say it's absolutely going to decrease, that is everybody's intent is to make that happen. So we're all on board. We're pushing out where we can. We're cutting back where we can, and trying to negotiate different arrangements with certain suppliers.

Okay, thank you. I want to be respectful to others on the call. So I'll get back in queue. Thank you.

Thanks, Anja.

Thank you. One moment for our next question. Our next question comes from the line of Ross Taylor from ARS Investment Partners.

Ed, team, congratulations on a strong operating performance in the quarter. It's nice to see you back in the green profitability wise.

Thank you.

You mentioned that you believe we are at the lowest point for the semi-cap equipment business, which has significantly impacted profitability. You also mentioned that your customers anticipate calendar year 2025 to be a record year for them in this sector. Should I conclude that you expect calendar year 2025 to generate record revenues for your company?

Yeah. I mean, we're listening on a regular basis to Lam Research, who is our largest customer, but we also sell to Tokyo Electron and Applied Materials and a number of other customers in that space. And they're all telling us that in 2025, the semi wafer fab business will be higher than ever. As you know, last year, we did $40 million in that space at a very nice margin. And this year, it's less than $20 million. So if you can count on it being over $40 million, next year should be a record year.

And should you be able to do the same kind of margins or better than you saw back a year ago?

Yes. I mean, we're proprietary on a lot of those products. So our margins are very good.

Historically, there has been a nearly direct correlation in sell-through rates. Additionally, you've mentioned on this call and in prior discussions that the Green Energy business is exploring a significant number of opportunities expected to arise in the next 12 to 18 months. Therefore, I assume you anticipate that the Green business will achieve a record level of performance as we look towards the next year and into 2025.

Well, we've seen a lot of pushouts in that space. We think that it's a matter of when, not if. There's certainly a tremendous opportunity in all kinds of areas, not only the ultracapacitors or wind turbines, but especially with the electric locomotives and the battery starts for diesel locomotives. But it seems as if it's rolling out much slower than we anticipated.

Thank you. One moment for our next question. Our next question comes from the line of Barry Mendel from Mendel Money Management.

Hi, Wendy. About a year ago, you mentioned that Progress Rail might be your largest customer moving forward. I haven't heard much about them recently, so can you update me on the situation with Progress Rail?

Well, the main thing going on currently in Progress Rail, we've met all the commitments for their initial orders for the prototypes, both in North America and Brazil. Their main customers, as I think you know, are in Australia and then Long Island Railroad in Burlington Northern. So we've built the product, and we shipped it to them. They're now building up the entire train and then working with their customers through a long design-in phase. However, I think in FY '25, the two main programs we have going in the locomotives market are the two starter modules that we make for the two largest owner-operators of diesel locomotives. We just got a release for 25 trains. That product is designed and developed here in LaFox. So, for example, one of the owner manufacturers of diesel locomotives, there's 25,000 trains that this product will go into over-time. So, if I look at FY '25, we look at potentially in the fourth quarter, their end customers will start buying electric trains, but in the meantime, we've continued to identify other opportunities in the locomotive space. And in this case, it's the starter module that we have designed for them.

So, you're saying you could start shipping up in your fiscal fourth quarter?

The actual orders for the diesel locomotives that we've shipped include battery modules and super-structures in the fourth quarter of fiscal year '25. Moving forward, we will begin releasing our starter modules designed for the diesel locomotives in the first quarter. The other components are for electric locomotives. We have a strong relationship with the manufacturers and are discovering new opportunities, including designing IGBT modules for them. It's clear that once their electric locomotives gain acceptance from end customers and orders begin to come in, we will see a significant dollar amount of content from our products, making those two manufacturers our largest customers.

Our next question comes from Chip Rui from Rui Asset Management.

Good morning, Wendy, and thank you for taking the call. I want to touch on the balance sheet a bit. The inventories at $112.6 million, along with the cash, look very strong compared to the company's market value. With that in mind, could you discuss the quality of the inventory and your ability to deliver? Are there any aging issues or other factors that might hinder delivering that inventory at cost on the balance sheet, or ideally, even better? I recall from last quarter that the finished goods inventory was $99 million. Could you clarify the percentage of finished goods in relation to total inventory? I’d like to know if the items on the shelf are likely to be taken as-is or if they require modifications or other considerations.

Hi Chip, this is Bob Ben. We feel very confident about the quality of our inventory. As you mentioned, we have around $113 million in total inventory, with a reserve of about $5 million that we review quarterly. To give you a clearer picture, we evaluate each product in our inventory at least once a year, with some being reviewed more frequently. This process is also assessed by our auditors. Overall, we are quite satisfied. I am currently trying to find the exact figure for our finished goods, but as you might expect, the majority of our inventory consists of finished goods. The largest portion can be found in the Electron Device Group, particularly in our core tube products, as well as those from our Canvys and Healthcare divisions. Additionally, as Greg mentioned, our GES segment has approximately $15 million worth of inventory at this moment. I apologize for not having the exact numbers available right now, but we'll provide that information in our 10-Q later today, where we will detail the finished goods amount in the footnotes. Did I address your question, or do you have any more specific inquiries?

Thank you. One moment for our next question. Our next question comes from the line of Ross Taylor from ARS Investment Partners.

I need to be cautious about how I express this since there is a strict approach to questions. What I wanted to address, and the previous question touched on it, is that your company's stock is currently trading about $1 above its net working capital. It's being sold below book value, and there is no debt on the balance sheet. You mentioned during this call the potential for monetizing inventories, stating that the inventories are good and largely consist of finished goods, which effectively represent stored profits and an overstated cost impact. Considering all of this, and following Warren Buffett's advice to buy when others are fearful, why hasn't the company been more proactive in repurchasing its own stock? Not only has there been a lack of aggressiveness, but there hasn't been any buyback activity at all. This confuses me, especially since you mentioned that next year should be a record year, and last year you reported over $1.50, adjusting for some one-time items gives us about $1.40. Currently, your stock is trading at $10, below book value. I have to believe you think the company is worth more than its book value. What’s holding you back? Given your long history, I would expect your bankers believe you are financially sound. If not, perhaps consider better banking partners. Why aren't you adding some debt to the balance sheet to seize this significant opportunity in front of what looks like a promising '25?

Well, we talk about it at every Board meeting, the possibility of buying stock back. Right now, as we've mentioned, we're really pushing and trying to keep positive cash and reduce the inventory to do that. And once we get to a position we're cash flow positive, we'll certainly look at the possibility of buying stock. To give you some idea, when we sold our FPD in 2011, we bought $65 million of the stock back. And every time we bought the stock back, the price of the stock would go down. So, the investment people were looking at, the value of the company on cash only, and all we achieved was to drive the price of the stock down. So we don't have a very good experience on buying stock back.

I don’t want to bring this up, but Edison famously mentioned how many times he failed at inventing the lightbulb while continuing to try. The notion that it didn’t work in the past is frustrating, and if I sound exasperated, it’s because the past doesn’t define your business. You have a much broader base with numerous growth opportunities. If your Board cannot recognize that you’re a different company now compared to then, or if you can't see it yourself, we need a new Board that possesses vision and courage. I believe that if Warren Buffett attended one of your Board meetings, he would point out that you’re missing a golden opportunity. The past shouldn’t hinder progress; it should propel it forward. Ed, I’ve spoken with you, and we know each other. You’re intelligent enough to understand that past events, influenced by different stakeholders in varying business environments, don’t accurately represent who you are today and what you should be focused on now.

Well, we certainly appreciate your opinion.

Thank you. One moment for our next question. Our next question comes from the line of Joseph Nerges from Segren Investments.

Good morning. Thank you for taking my question. I was very interested in a press release from last month when you signed that global distribution agreement with Ideal Power. And I guess my key question here is, do we have any plans to develop proprietary products around their bidirectional technology?

Absolutely. We have two calls each month focused on that. This aligns perfectly with the model we established when I returned. We have partnered with technology companies that possess disruptive technology, particularly in our key markets of power management and RF, and Ideal Power is a great fit for that. Their technology is unique and disruptive. We have an exclusive global partnership and are already discussing a couple of their products for one of our designs. Definitely, we will design their components into our suppliers. Many of our battery manufacturers can leverage this technology for their modules, which will then be utilized by our customers and for our internal engineered solutions. There are a few products we are currently developing that I cannot disclose yet, but we will certainly incorporate Ideal Power into those initiatives. They have been fantastic to work with, and we have established a strong engineering relationship. When you see a press release from a company like this with disruptive technology, it typically serves three purposes: we design it into our suppliers, integrate it with our customers, and utilize it for our engineered solutions as opportunities arise.

It's great to see that the applications of our technology are very widespread. I'm thinking about our UPS product, the ULTRAUPS3000, and I'm wondering whether we can enter the data center market with a UPS product or something similar, considering the competition in these markets.

Yes. Yeah. The UPS product and that technology can be used in so many applications. I will tell you, it is a major, major program. It's an inverter application for one of our key customers that we will be using Ideal Power for. And again, it's a new relationship, a few months, but although we've talked to them and we know the people there, it's a small and incestuous market. So I've worked with many of the people that are there in other capacities over the years. But the answer to your question is yes. And specifically, there is one right now that's a major program. It's for an inverter application, inverter module, that this will be the product that we're using. And we think with their technology, it will separate the spec sheet from anything that's out there today. So we're excited about Ideal Power and also all of our technology partners. That's the process we go through.

Yeah. Well, I look forward to seeing what we guys come up within the next several months. Thank you. Thanks again for answering my question.

Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Barry Mendel from Mendel Money Management.

Yes, a follow-up on the Progress Rail and Wabtec. What's the ASP on the starter modules for them?

Yeah. We have NDAs with them. I can't share our cost or our resells to those applications or even on those type of customers. Too many competitors out there listening.

Okay. And in terms of Ideal Power, how big or how important could that be for you? Is there any dollar amount you could put on there? And actually, isn't it somewhat of a distribution agreement as well?

Yeah, it's both. It's all based on the number of new products they introduce. Right now, their portfolio is very limited. They are developing a module, and they have a couple of discrete devices. But if you just look at the markets that they go into, it's millions of dollars. But I've had a lot of experience with technology partners in this type of go-to-market strategy. And if one of these programs that we're doing from an engineered solutions point of view, it's millions, right? From a discrete point of view, it's peer NPI process, new product introduction process, both our global capabilities, where I feel the best in the world of bringing technology companies to get them to market as they invest in technology, and we have the infrastructure to bring it to market. But it's millions of dollars. I can't come up with a number, but I've seen companies like this that we started with that became Qorvo, and we know how big they are. So sky's the limit, but the thing that excites us about this is the markets that they're developing products for us are growth markets. I know it's inverters and industrial, but it's great for the green energy as people need to reduce the input on their emissions. So I can't put a dollar on it, but it's millions of dollars. It could be one product that we design internally or one major electric vehicle charging station that we end up designing the product into.

Yeah, I know. I talked to them yesterday actually, and they spoke highly of what you're doing for them already.

We trained our global field sales engineers and design engineers from day one, and within 24 hours, we had their product in front of customers. Unique to us, we can assign application codes to each of our customers, up to five. When a customer like Ideal Power releases a new product for a specific application, our global field sales engineers can quickly sort through our customer base to identify anyone who has previously built an inverter or an electric charging station. That product, along with samples and sales tools, reaches the customer within 24 hours. We're excited about Ideal Power, and we have connections there since it's a small and interconnected market.

Thanks.

You bet.

Thank you. Please hold on for our next question. Our next question comes from David Schneider.

Hi everyone. First, I'd like to commend Ross Taylor for his excellent insights, though he missed a few points that don't need revisiting. I've noticed that the stock has experienced fluctuations over the years due to the cyclical nature of the semiconductor cap equipment business. Could the partnership with Ideal Power potentially stabilize that? Currently, the market seems to be valuing your company as if it has no growth. Do you think that the new product applications from Ideal Power could alter this outlook and help the company be recognized as a growth entity again?

I believe that our collaboration with Ideal Power and our other technology partners reflects our progress in this business, as demonstrated by the press releases announcing our new partnerships. These partnerships relate to engineered solutions, of which we have many opportunities. As I previously mentioned, we are launching new products with companies like Suzlon, Nordex, Senvion, and SSB. Collectively, these efforts will help mitigate the fluctuations we've seen in the semiconductor manufacturing equipment industry over the last two decades. We anticipate these changes, with some partners contributing more than others, aligning with our aim to enhance profitability and stock price growth. This strategy also supports us during the ups and downs we've experienced in the semiconductor wafer fabrication market for the past 20 to 30 years. Yes, Ideal Power will play a role in this, along with our range of technology partners and new products in high-growth sectors such as green energy and power management. Over the last two and a half years, we've focused significantly on green energy, which has contributed around $40 million annually, helping to buffer against downturns. However, the recent year has seen a severe decline, similar to the significant growth we experienced in 2023, while 2022's performance could not compensate for that. That's why we are observing flat or declining overall sales.

Thank you. At this time, I would now like to turn the conference back over to Ed Richardson for closing remarks.

Well, thank you again for joining us today. We appreciate your investment and interest in Richardson Electronics. We look forward to our ongoing discussions and sharing our fiscal 2024 with you in July. Please don't hesitate to give us a call at any time. We're happy to talk to you directly if you want to set up an appointment. Thanks very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.