Earnings Call
Richardson Electronics, Ltd. (RELL)
Earnings Call Transcript - RELL Q3 2022
Operator, Operator
Good day and thank you for standing by. Welcome to the Richardson Electronics Third Quarter Fiscal Year 2022 Earnings Conference Call. I would now like to hand the conference over to your speaker today, Edward Richardson, Chairman and CEO. Please go ahead.
Edward Richardson, Chairman and CEO
Good morning and welcome to the Richardson Electronics conference call for the third quarter of fiscal year 2022. Joining me today are Robert Ben, Chief Financial Officer; Wendy Diddell, Chief Operating Officer and General Manager for Richardson Healthcare; Greg Peloquin, General Manager of our Power & Microwave Technologies Group; and 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 will 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. Our third quarter set another quarterly sales record since we sold RFPD in 2011. 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 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 materials and components. Despite these challenges, third quarter operating income was $3.6 million or 6.6% of revenue, which is a significant increase from $315,000 or 0.7% 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. Within PMT, our largest business unit, backlog increased across numerous product lines, most notably in power management, semiconductor wafer fabrication, and magnetrons. These products are used in many new applications, including alternative energy, 5G, and manufacturing diamonds, hydrogen, and building products. I am pleased with the performance and I am confident this will lead to continued growth. Considering Russia’s recent aggressive actions against Ukraine, we stopped all shipments to Russia. Historically, we have shipped less than $1 million to Russia each year. We also have customers in Ukraine, which represent less than $1 million in revenue per year, primarily in healthcare. We extend our heartfelt support to our friends, families, and customers in Ukraine and wish for a very swift end to this unjust war. I will 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 Jens will provide more detail on our third quarter performance as well as our new programs.
Robert Ben, Chief Financial Officer
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 5G infrastructure, as well as increasing shipments of our patented ULTRA3000. In addition, sales for several Electron tube product lines, including semiconductor wafer fabrication, increased from the third quarter of fiscal 2021. Canvys sales increased by $1.1 million or 15% due to strong customer demand in North America and Europe. Richardson Healthcare sales increased $0.2 million or 7.4% year-over-year due to an increase in part sales and an increase in demand for the ALTA750 tubes. In addition to higher revenues, total company backlog increased to its highest level since the sale of RFPD of $175.6 million in the third quarter of fiscal 2022 from $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 PMG sales, partially offset by increased shipments of wind turbine modules. Canvys gross margin decreased to 32.2% from 35.2% because of higher global freight costs. Healthcare’s gross margin was 25.1% in the third quarter of fiscal 2022 compared to 33.0% 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 the 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 6.6% of net sales for the third quarter of fiscal 2022, versus operating income of $0.3 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 $0.1 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 5.2% of net sales for the third quarter of fiscal 2022, as compared to a net income of $0.2 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 were $0.21 compared to $0.02 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 9 months of fiscal year 2022, net sales for the first 9 months of fiscal year 2022 were $163 million, an increase of 28.9% from $126.5 million in the first 9 months of fiscal year 2021. Net sales increased by $30.4 million or 30.8% for PMT, $5.2 million or 25.6% for Canvys and $0.9 million or 12.2% for Richardson Healthcare. Gross margin decreased to 31.6% from 33.6%, primarily reflecting product mix in PMT and higher global freight costs in Canvys, partially offset by improved manufacturing efficiencies for Healthcare. Operating expenses were $40.6 million for the first 9 months of the fiscal year, which represented a decrease of $1.3 million from the first 9 months of last fiscal year. The decrease was due to the non-recurrence of a $1.6 million legal settlement in the first 9 months of fiscal 2021 and lower legal fees partially offset by higher employee compensation expenses. Operating income for the first 9 months of fiscal year 2022 was $11 million or 6.7% of net sales as compared to an operating income of $0.6 million or 0.4% of net sales for the first 9 months of fiscal year 2021. Other expenses for the first 9 months of fiscal 2022, including interest income and foreign exchange, were less than $0.1 million as compared to other expenses of $0.5 million for the first 9 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 5.9% of net sales for the first 9 months of fiscal year 2022 versus a net loss of $0.2 million for the first 9 months of fiscal year 2021. Earnings per common share on a diluted basis in the first 9 months of fiscal 2022 were $0.71, compared to a net loss of $0.02 per common share on a diluted basis in the prior year’s first 9 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 its 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 $0.6 million in the 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 healthcare business, $0.2 million was for our manufacturing business, $0.1 million was for IT systems, and $0.1 million was for other projects. We paid $0.8 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 $0.06 per common share, which will be paid in the fourth quarter of fiscal 2022. Finally, during the third quarter of fiscal 2022, we repatriated $0.5 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 26, 2022. Now I will turn the call over to Greg, who will discuss the results for our Power & Microwave Technologies Group.
Greg Peloquin, General Manager of Power & Microwave Technologies Group
Thank you, Bob. Good morning, everyone. Sales for the Power & Microwave Technologies Group, or PMT, in the third quarter of fiscal year 2022, grew 25% to $44 million versus $35.2 million in Q3 last year. In addition to a strong sales quarter, PMT achieved an excellent book-to-bill of 1.47. Our sales growth and strong bookings confirm another solid quarter to what is shaping up to be an excellent FY ‘22. Our 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 component and labor costs. Both business units and PMT supported the strong growth in bookings and billings in Q3. Our Electron Device Group, or EDG, had an extremely robust quarter in bookings as we continue to take market share from our competition and continue to find new applications for our legacy tube products, specifically magnetrons, using the development of synthetic diamonds and other green solutions. In addition, we continue to experience outstanding growth in our Power & 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 5G 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 5G 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 ULTRA3000 pitch energy module used in wind turbines, continued to gain traction with increased sales and bookings in the quarter. We are producing the ULTRA3000 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 ULTRA module technology. We also saw an increase in bookings with key customers such as Enel, Inver Energy, RWE, and the newest other owner operators of GE wind turbines. Our ULTRAGEN3000 design for generators and seller base stations and critical facilities has 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 multimillion-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 ‘23. Again, this product will also be manufactured, tested, and supported from La Fox, Illinois. As I’ve 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 ‘23. Our microwave component business continues to benefit from the positive trends associated with 5G, microwave communications, and SATCOM applications. These applications are utilized as people continue to work from multiple locations, sending and receiving large amounts of data. Our entire team has done an excellent job identifying niche technology partners who collaborate with us globally. We continue to invest in and focus on 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 tube business has had a strong return to both bookings and billings. The third quarter of FY ‘22 continued 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 will support strong revenue in the coming quarter. We continue to receive support from our key technology partners such as Qorvo, MACOM, Nokia Wave, LS Materials, Amogreentech, and Fuji Semiconductor, and key tube manufacturers in the industry, such as CPI, Thales, NJRC, and Photonis. They have 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 ULTRA3000, ULTRAGEN3000, and lithium-based power management modules 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 affects our component business and engineered solutions products. 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 the Richardson Electronics model to our customers and suppliers. Our unparalleled and capability and global go-to-market strategy are unique to the power and RF and microwave industries. We have developed a powerful business model, including legacy products and new technology partners that align well with our engineered solution capabilities. Through our steadfast and 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 is no question our customers and technology partners need Richardson products and support more than ever. And with that, I’ll turn it over to Wendy Diddell and Richardson Healthcare.
Wendy Diddell, Chief Operating Officer and General Manager of Richardson Healthcare
Thanks, Greg, and good morning everyone. Sales for the Healthcare Group increased in Q3 to a quarterly record of $3.13 million. This was 7.4% higher than Q3 of FY ‘21. We sold a record number of tubes during the third quarter, led by increased tube sales in China. Sales of parts exceeded prior year levels. While equipment sales also exceeded prior year levels, they remain constrained due to an 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. Our gross margin was negatively impacted by higher-than-anticipated scrap rates in the quarter related to the use of reclined parts as well as rising freight costs. However, gross margin improved slightly over the most recent second quarter as we again increased the number of tubes produced and continue to address new component quality from our suppliers. The most significant roadblock to higher sales and margin continues to be the breadth of our CT Tube product offering. Our next tube launch is the ALTA750G, the second tube in the Canon series that works on newer Canon Toshiba CT scanners. We have one ALTA750G tube in beta. The second is 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 ALTA750G into the market and Canon CT scanners come off OEM service contracts. We continue to make good progress on the Siemens repaired tube program. This is a series of four tubes, including the Straton Z, MX, MXP, and MX P46. The Siemens installed base is considerably larger than Canon, and there are no third-party replacement options for these types. 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, but not at the expense of our Siemens program. Our number one priority is to shorten the time it takes for Healthcare to provide a positive operating contribution to the company; bringing more tubes to market will improve sales and margins and help us accomplish this goal. I will now turn the call over to Jens Ruppert to discuss the results for Canvys.
Jens Ruppert, General Manager of Canvys
Thanks, Wendy, and good morning, everyone. Canvys engineers, manufactures, and sells custom displays to original equipment manufacturers in industrial and medical markets throughout the world. Canvys delivered an excellent performance with sales of $8.1 million for 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 increased freight costs impacting many customers across the global supply chain. Extended lead times on several key components also remain an issue. However, our close relationship with customers and partners overseas enables us to procure long lead-time components, which has helped us achieve a new record backlog of $52.4 million this quarter. Canvys’ backlog increased 19.4% from this year’s second quarter and is up 66.3% on a year-over-year basis. As you can see, momentum in our business has strengthened. We are optimistic that the high demand for custom monitors, touchscreens, and all-in-one systems 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 analysis, cryolipolysis, corneal cross-linking, eye examination, dental treatment centers, laser ablation, robotic-assisted surgery, medical device control, and fully integrated operating rooms, surgical navigation, patient monitoring, surgery video documentation, diagnostic imaging, and ophthalmology. In the non-medical space, our products are used in a variety of commercial and industrial applications. This includes CT scanners for inspecting luggage at airports, human-machine interface, or HMI, for 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 variety of customers and applications as well as the value of orders from existing and new customers; it is clear of our global customers’ outstanding products and local service. While our sales organization stays focused 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 on by the industry-wide supply chain delays. I will now turn the call back over to Ed.
Edward Richardson, Chairman and CEO
Thanks, Jens, and congratulations to the entire Canvys team for another excellent year. We are 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 are also focused on rewarding our team members for helping the company grow. Fortunately, the amount of lost time due to the COVID-19 pandemic has decreased substantially. Overall, activities across all our global markets are robust and business remains strong. We’re investing in equipment and expanding our manufacturing areas to take advantage of new opportunities. This expansion will support growth for our alternative energy solutions as well as our legacy products such as magnetrons for diamond manufacturing and marine applications. We are hiring additional engineers and production technicians as quickly as we can find them. We’re cross-training employees to improve the flexibility of our workforce and using overtime to meet customers’ requirements. The team has really stepped up when we need them the most. We are reviewing every sale, every opportunity, and every new hire to ensure we are using our cash wisely. As we celebrate our 75th anniversary on May 24, 2022, it’s an exciting time for the company. At this point, we will be happy to answer a few questions.
Operator, Operator
And our first question will come from the line from Wellington Shields. Your line is open.
Unidentified Analyst, Analyst
Thank you. Ed, Wendy, and the group, congratulations on what is a great quarter.
Edward Richardson, Chairman and CEO
Thank you.
Unidentified Analyst, Analyst
Welcome. There is, however, an elephant in the room, and the elephant is margins. And we all appreciate because it’s affecting everybody that across the board in terms of freight and cost of goods sold. At what point in time can pricing come back where you create significantly better margins than you have in this quarter?
Edward Richardson, Chairman and CEO
Well, I think it will be pretty much linear. We’ve been caught in some areas, for instance, in Canvys. Most of our product comes in from Taiwan, Japan, or Korea, and we do the value-added either in Germany or in Boston. But we’ve had to absorb the freight cost for some period of time. And now Jens has done a good job in talking with our customers, and they understand the additional freight costs, and we’re able to pass some of it along. But in one quarter alone, we had $150,000 additional freight cost. I’m not sure, Jens, what was it in this last quarter, can you remember?
Jens Ruppert, General Manager of Canvys
Actually, I don’t remember the exact number, but I think for the first 9 months, it’s more than $900,000.
Edward Richardson, Chairman and CEO
It’s amazing. So anyway, we’re well aware of those costs, and we’ve had a lot of increases in raw materials, things like oxygen-free copper and ceramics and things of that nature. And we’re working hard to increase the prices and pass that along. But I think probably this time next year, it will be back to normal, and it will be linear between now and then.
Unidentified Analyst, Analyst
Alright. Thank you. ULTRA3000, could give me some thoughts, please, on fiscal 2023 in terms of revenues?
Greg Peloquin, General Manager of Power & Microwave Technologies Group
Well, Howard, as we started the year with about $10 million, $11 million in backlog, we continue to add new customers. We booked a number of multimillion-dollar orders. And these rollouts are very similar to any rollout. We have a lot of experience with 3G, 4G, and 5G rollouts. So it’s time. They are testing a product. We have a number of large customers that are doing beta site testing, and across the board historically with the results we had with these Phase 1s, we fully expect us to continue at a run rate; I believe I mentioned this group to be $45 million in 1 to 3 years. And we’re definitely at that run rate.
Unidentified Analyst, Analyst
Could you repeat that? Because it was static on my line, what your run rate is potentially for 2023?
Greg Peloquin, General Manager of Power & Microwave Technologies Group
Well, our 3-year run rate right now, we looked at this group, and based on the sales, our bookings will be much higher than that, but we’re at a run rate to do over the next 2 years about $45 million.
Unidentified Analyst, Analyst
Okay, thank you. Battery Street Energy, cell towers, beta testing, you expect to see some revenues this fiscal year upcoming?
Greg Peloquin, General Manager of Power & Microwave Technologies Group
Just small beta site revenues. That program is also going very, very well. It’s the ULTRAGEN3000. We have beta site testing going with T-Mobile in Phoenix; they placed a second order for 15 more towers with zero failures. That’s running perfectly. But I don’t think we will see any large revenues or bookings until probably Q1, Q2 of FY ‘23. But we’re very, very happy with the speed that this thing has been rolled out and the design itself, and that product is also patented.
Unidentified Analyst, Analyst
Can you give us some sense of what your thoughts are for Q1? I mean, is it $2 million, $5 million? Any sense at all? We’re not holding it for you, it’s just...
Greg Peloquin, General Manager of Power & Microwave Technologies Group
Howard, it’s really hard to say. I mean, if you just do math, the number of towers that they have, but these companies are very conservative when they put a new technology because it isn’t 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.
Unidentified Analyst, Analyst
No, fair enough. Let’s go to another subject in terms of ultracapacitors in locomotives. You’ve accomplished – you had an order for two, that order has been completed. Is that a correct statement?
Greg Peloquin, General Manager of Power & Microwave Technologies Group
No, Howard, and it’s not an ultracapacitor. We’re not in the EV – we’re not in the wind turbine market. We’re not in the electric locomotive market; we’re in the power management. And we’ve been working with Progress Rail and Caterpillar for a while in developing a module. In this case, it’s a module with our partner, Amogreentech. It’s a lithium-based module. We have just completed that design. We have booked the first multimillion-dollar order for 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 million to $7 million opportunity in FY ‘23. But we won’t start building that until June.
Unidentified Analyst, Analyst
No, no. Fair enough. My understanding is about...
Greg Peloquin, General Manager of Power & Microwave Technologies Group
I just want to add to that. In these opportunities, all these opportunities that were – and 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. There is so much opportunity that are going to come out of this electric locomotives, yes, we are the lead partner for the powering system of that. But you look at smart agriculture; they are making as much of their products green, and you got agreements with technology partners in the 5G world, the world leaders, and in the power management side, the leaders in that type of technology and an ever-growing design team, I’m more excited about the relationships and the operations that have come out of it as I am with these individual opportunities, which, by the way, as you’ve seen, are multimillion-dollar opportunities.
Unidentified Analyst, Analyst
My understanding, there are about 400,000 and some-odd locomotives just in the United States. Does that sound about right to you?
Greg Peloquin, General Manager of Power & Microwave Technologies Group
I don’t know about that. I mean, they are diesel; there are not that many electric locomotives but...
Unidentified Analyst, Analyst
Well just the diesel I’m talking about, that’s what you’re – yes.
Greg Peloquin, General Manager of Power & Microwave Technologies Group
Yes. They mentioned they have 60,000 diesel locomotives globally. This is Progress Rail that they outfit. So, I don’t know what the total is. But those are big numbers. We will take half of it.
Unidentified Analyst, Analyst
I appreciate that. Last question. Last quarter, you mentioned other products in the portfolio sometime first half or 2023. Can you expand on that?
Greg Peloquin, General Manager of Power & Microwave Technologies Group
Yes. There is – in listening to the customers, and what issues they are having, there are other products that fit our niche. And we really go after products that we have a niche or we add value. And so one of these products, which we introduced in Q1, we might announce it before that, but we will be doing beta site testing in Q1, also going into the wind turbine. We have a number of other products that will 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 ULTRA3000 itself.
Unidentified Analyst, Analyst
That’s all I have. Thank you again. Congratulations on a good quarter. Ed, Wendy, thank you. All of you, thank you.
Edward Richardson, Chairman and CEO
Thank you.
Operator, Operator
Our next question will come from the line of Ross Taylor from ARS Investment Partners. You may begin.
Ross Taylor, Analyst
Thank you and also congratulations on what’s really shaping up to be a great year. Howard addressed some of my issues. But to kind of recap, what you’re looking at is the operating margin business of the business should be recovering incrementally to kind of historic levels over the next three, four quarters as you’re able to pass the cost increases for components and freight on to your customers at this point?
Edward Richardson, Chairman and CEO
Yes, that’s correct.
Ross Taylor, Analyst
Okay. And looking at that, I listen to you guys talk and you’re in a number of really hot button areas; you are 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?
Edward Richardson, Chairman and CEO
Not really, when you look at $175 million backlog that’s grown from $140 some million in the last quarter, and at the same time, the sales have grown as well, you can understand that the next year or 2 are pretty much guaranteed. We don’t see anything that will slow us down right now. I mean there is no question that we’re on the verge of a third world war and things of that nature that we have no control of. But 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 this that we don’t control.
Ross Taylor, Analyst
But all else being equal, I’m listening to you talk about the new products, new product opportunities, and the like. And it really sounds like you’re on a ramp business. Your margins, while they have been softer than historic, are you expect them to be recovering. We look at this in a market that trades at 17x, 18x earnings, why do you think it is that your share gets so little respect? I mean we’re looking at a stock, as I said, you’re in every area, it seems like you want to be in. And if you cash adjust your share price, you’re trading at 9x earnings, which is basically almost like you’re going broke. What do you think the 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?
Edward Richardson, Chairman and CEO
Well, we don’t understand it either because we just mentioned that next year will be our 75th anniversary, and I hate to admit it, but I’ve been involved for 60 years. And I would say that this is the most exciting time in my career. We 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 bottom line. I guess we sold RFPD in 2011 and took the company from being $700 million in sales and 1,000 employees and losing a ton of money down to a company that was $140 million, but we kept the international infrastructure, which was important to the two businesses, with 24 foreign subsidiaries and 60 offices all over the world. And 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 we will be $215 million, possibly $220 million and show a very nice profit. And I think investors that are aware of the company for a long time are saying, 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.
Ross Taylor, Analyst
Just to be blunt, even if you don’t get it right, quite honestly, the business executes 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 you’re going to make more. It seems like the wind turbine business could generate a substantial portion of what the company generated in revenues all of last year in a year or two. Would that be a wrong assumption?
Edward Richardson, Chairman and CEO
No, we think so. That’s the most exciting business we’re in right now. The green energy business, not only the wind turbines but the electric locomotives and the cell business, just the opportunity is amazing. And fortunately, the patents that we have were in early. I understand that 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.
Ross Taylor, Analyst
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 business as you roll forward and should be generating it. It’s not hard to envision next year, you should earn well over $1 a share in earnings. I think it looks like this year, you should probably earn $0.90 plus a share in earnings, if you just can keep the same earnings power on what I would expect 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 in and looks at what’s effectively a quarter-plus of your market capitalization sitting in cash and doesn’t see it?
Edward Richardson, Chairman and CEO
Well, yes. At the moment, we’re just funding the growth of the business. It’s – 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. We have to carry about $0.5 million in each of the foreign subsidiaries to keep them within their legal requirements. We can use that cash. We can move it around, borrow it from city or to subsidiary. And unfortunately, we don’t have that problem right now. But as you saw, the inventory was up very substantially. We have enough ultracapacitors 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 has been a shortage of integrated circuits, which we’re 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 should be – this year, we will use a little cash. And it looks like next year we will go cash flow positive.
Ross Taylor, Analyst
Yes. And so what you’re saying is this 20% plus top line growth is actually component-constrained growth, so as components become more available, that growth should accelerate?
Edward Richardson, Chairman and CEO
It’s certainly true. Look at the backlog, the $175 million plus backlog. And we – those orders are set up, particularly in EDG where we’re making magnetrons, if we could build them, we could ship every one of them today. It’s just – we can’t build the product fast enough.
Mike Hughes, Analyst
Good morning. Thanks for taking my questions.
Edward Richardson, Chairman and CEO
Good morning Mike.
Mike Hughes, Analyst
Just – how are you Ed?
Edward Richardson, Chairman and CEO
Alright.
Mike Hughes, Analyst
Great quarter. I am so happy for everybody there. What a difference 3 years or 4 years make. I remember back in – some of the comments in 2018 and whatnot. This is so much nicer, anyways.
Edward Richardson, Chairman and CEO
We agree. You have only been with us about, what, 8 years or 9 years, Eric, something like that, maybe more.
Mike Hughes, Analyst
It’s been a while. But it’s worth it. So, anyways, I suspect like you guys, I am a little surprised at the stock price today. And a lot like what Howard said, I think a lot of it has to do with the 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 raise prices commensurate with your cost increase. Is there any – do you have any kind of an estimate as to how much…?
Edward Richardson, Chairman and CEO
Wendy did a fairly decent analysis of it, I will let her…
Wendy Diddell, Chief Operating Officer and General Manager of Richardson Healthcare
Actually, Bob did that. So, Bob hasn’t gotten to speak yet today. So, we will let Bob answer that.
Robert Ben, Chief Financial Officer
Okay. Yes. One thing to keep in mind on the margin is we are 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. And my analysis shows that that’s over half of 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 an impression they are not. I show they add about a point roughly. And then the rest would be other things. We talked about the additional scrap in the healthcare business and freight as well that we have talked about. So, does that give you a rough idea, Eric of – to answer that question?
Mike Hughes, Analyst
Yes. So, a little bit more than half, you expect to be able to get back through pricing increases, correct?
Robert Ben, Chief Financial Officer
Yes.
Mike Hughes, Analyst
Okay. Yes, I just want to make sure that people are aware that you are not transitioning into a lower-margin business through all this growth. I think that’s…
Edward Richardson, Chairman and CEO
Not at all. And just we have gotten caught in between with logistics costs and the higher raw materials cost, higher labor costs. Everything is going up and we haven’t been able to react fast enough.
Robert Ben, Chief Financial Officer
And if I can add a little bit, Eric, one more thing. Last quarter, our margin was 32.7% compared to 31.8% this quarter. So, 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. So, I think it’s important to keep that in mind as well.
Mike Hughes, Analyst
Got it. Thank you. Wendy, of the 37 you have hired in the last three-plus months, what percentage is that of the people that you need?
Wendy Diddell, Chief Operating Officer and General Manager of Richardson Healthcare
Well, if I understand the question, we need 100% of them – you mean how many more do we need?
Mike Hughes, Analyst
Yes.
Wendy Diddell, Chief Operating Officer and General Manager of Richardson Healthcare
Yes. I think we have – I am going off of memory here and approving reps, I think we probably have 5 to 10 additional reps open, most of them in production on the engineering side, that is more, at this point, opportunistic. Healthcare, I think we are full. But in Greg’s area and supporting the ULTRA3000, I think we constantly have an open mind. Maybe we could take up to another five engineers if you have people you want to send us.
Mike Hughes, Analyst
Okay. I don’t, unfortunately. I was thinking maybe I could drive down there one or two days a week and help.
Wendy Diddell, Chief Operating Officer and General Manager of Richardson Healthcare
We have all volunteered to do the same thing. We are like, look, I can build an ULTRA3000. I can get out there and work.
Greg Peloquin, General Manager of Power & Microwave Technologies Group
Eric, we do have a second shift on the production of the ULTRA3000 and it pays time…
Mike Hughes, Analyst
I don’t know that I am qualified to build ULTRA3000, but I could probably sweep the floor. That would probably be.
Greg Peloquin, General Manager of Power & Microwave Technologies Group
We will just test your product twice and you put a director set, Eric.
Mike Hughes, Analyst
There you go. Perfect.
Edward Richardson, Chairman and CEO
You can build the ultracapacitor.
Mike Hughes, Analyst
There you go. Sounds good. I will put my eye on. So, I just want to – real quick, I know this is getting long. I just want to address the magnetrons. 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?
Edward Richardson, Chairman and CEO
We just looked at the total backlog. Wendy, what is it on the magnetrons, just incredible.
Wendy Diddell, Chief Operating Officer and General Manager of Richardson Healthcare
Yes, $13 million, $14 million.
Mike Hughes, Analyst
And what are the growth prospects? What do the growth prospects look like? I mean, it’s probably nowhere near the ULTRA3000, but I assume it’s material?
Edward Richardson, Chairman and CEO
We could sell everyone we can make right now. In some of these new technologies like synthetic diamond thing is just kind of crazy. And now they are using magnetrons also to – they take tires and they take the carbon out of it and they make tile. So, roof tiles, floor tiles, big company in India has placed over 1,000 magnetrons, what is called carbon craft, and they make both synthetic diamonds and tile. And then the applications for hydrogen is just a fuel of the future. There are just so many applications now for microwave, where semiconductors just don’t handle the root power and the high frequency at the same time.
Mike Hughes, Analyst
Right. So, it’s – do you have any type of a patent on your magnetron or any type of sort of a competitive barrier so that someone can’t come in and…?
Edward Richardson, Chairman and CEO
Lots of people have tried to make the YJ1600, and people like Thales and English Electric, and they have all failed. So, it’s a technology that is in a lot of black magic. And no, there are no patents on power grid tubes that I know of any longer. They have all expired. But 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.
Mike Hughes, Analyst
And that’s what you feel like you are with this thing? So, someone who makes...
Edward Richardson, Chairman and CEO
That’s right.
Mike Hughes, Analyst
Let’s just – I mean, this is a dumb question, but someone who makes the magnetrons for our everyday microwaves, could they enter this market?
Edward Richardson, Chairman and CEO
Yes, they do. Panasonic makes one, and so does LG. It’s a different magnetron. 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 are – if you look at companies like Muga and CRM that build generators, they buy from those people, and they customize their equipment to use their product. At the same time, both those companies have been after us as they want to buy all the production that we can make of our magnetron. So, we have something that they can’t get.
Mike Hughes, Analyst
And how long have they been trying?
Greg Peloquin, General Manager of Power & Microwave Technologies Group
No, Howard, and it’s not an ultracapacitor. We’re not in the EV – we’re not in the wind turbine market.
Edward Richardson, Chairman and CEO
Yes. It’s interesting. This is how this whole thing works. You talk to them about a component, and then you build a 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 main one is the battery module that goes into locomotives and they are in a parallel circuit together, and they run the complete train. And then obviously, just like electric power, it’s brake 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 it gets 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, we will continue to gain market share.
Mike Hughes, Analyst
Okay. And just last question for you. On the inventory, I understand why it’s been building up over the last few quarters. But just from a days standpoint, do you think that’s stabilized for now, or will you need to continue to kind of build up ahead of revenue?
Edward Richardson, Chairman and CEO
No, I think it will continue. We try – it’s one of the reasons why we maintain so much cash. Part of the reason why we are successful is we can supply products that other people can’t. And that comes from buying inventory well in advance, particularly what Jens was talking about, where he is buying LCDs a year in advance. We guarantee these big OEMs that they are going to have a display that runs their $3 million piece of equipment.
Mike Hughes, Analyst
Okay. I mean, there is obviously a cost to having higher working capital. Have you kind of – have you thought about or maybe you have already done this, just building that into your price and just having that discussion with the customers, your cost of doing business because your working capital requirements have gone up is higher and it really needs to be reflected in kind of you are delivering a lot of value to your customers, and it hasn’t – it’s not reflected at this point?
Edward Richardson, Chairman and CEO
Right. No, we certainly try to do that. Unfortunately, when you are working with these frame contracts that are a year out, you get caught like we have in the short-term, but we will recover from that, and we will be able to increase our prices as we go along.
Mike Hughes, Analyst
Okay, I appreciate your time. Thank you.
Edward Richardson, Chairman and CEO
Thank you.
Operator, Operator
And our next question will come from the line of Mike Schellinger from MicroCapClub. You may begin.
Mike Schellinger, Analyst
Yes. Regarding – well, regarding backlog to sales, can you characterize what percentage of that challenge is supply chain versus personnel?
Edward Richardson, Chairman and CEO
Yes. No. It’s not personnel. For instance, on the magnetrons, in the normal year on the YJ1600, we build 800 a year. And we went from building 800 last year to we have orders for over 5,000 right now. And so what we have had to do is to build new test sets. We have had to add ovens; we had to add vacuum pumps, all kinds of die tooling and fixtures and delivery on that, a lot of it we build in-house, but what we have to buy some of them as long as six months, and that’s the kind of thing that we would run into. We have geared up now where we can build 200 or 300 a month, and we are going to gear up to build 400 a month, but to get the equipment to do that is what the delivery time has been.
Mike Schellinger, Analyst
Okay. Thank you very much.
Edward Richardson, Chairman and CEO
Sure. Thank you.
Operator, Operator
And our next question will come from the line of David Schneider as a private investor. Your line is open.
David Schneider, Investor
Hi. Can you hear me okay?
Edward Richardson, Chairman and CEO
Yes.
Wendy Diddell, Chief Operating Officer and General Manager of Richardson Healthcare
We can hear you, David.
David Schneider, Investor
Okay. Yes. Just a quick question, an earlier person on the call, couldn’t figure out why the stock was where it is now. And it’s just – this is just my opinion, and then I will ask questions. I just think people nowadays the – I think people will like the stock more at $17 than $11.62. It’s just human nature. And so the fact that it’s $11.62 now, to me, doesn’t bother me at all. So – and the other – now back to the questions, I did notice the – and 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. And I am thinking that maybe to sell finished products, there is a few maybe bits and pieces that you are waiting for delivery on so you can ship things out and book it as revenues. Can you maybe just explain that?
Edward Richardson, Chairman and CEO
That happens a lot, particularly in Greg’s business, where the customer, they want a complement of five different semiconductors and yes, to ship complete. And we only have three of them or four of them in stock. So, we are holding the inventory until we can get the fifth one to ship the kit, if you will, and that happens. Same thing happens when we are building equipment for Lam, if we are short some kind of a capacitor and we have got all the other components for a piece of equipment, we might have $1,000 worth of raw material waiting for $3 capacity.
David Schneider, Investor
And so as far as flipping over to the overall company being free cash flow positive, would big part of that being just that backlog and inventories turning that into cash, or what other factors would be going on?
Edward Richardson, Chairman and CEO
Well, that has a lot to do with it. Obviously, the more money we make then we cross the line. It looks like we will be cash flow positive next year. That’s sort of our forecast. We have done, Bob, you have done, what a 4-year, 5-year cash flow?
Robert Ben, Chief Financial Officer
Yes. We certainly expect the cash flow to improve. Certainly, as sales continue to grow at 15% to 20% a year. And so yes, next year will be a transition year. Hopefully, we will get the cash flow neutral if that will be close. And then after that, our forecast is to generate significant amounts of cash. I think we talked about that earlier with the – some other people on the call.
David Schneider, Investor
Okay. That’s great. Your tax rate was 17% in the quarter you released yesterday, and I know the State of Illinois, they suspended the use of some carry-forwards there. For next – the fiscal year that starts, I guess, what June 1st, what do you think your overall tax rate is going to be?
Robert Ben, Chief Financial Officer
Yes. I – we are forecasting a 27% effective tax rate for fiscal ‘23. And that includes – I think I have mentioned this before on other calls, but we do anticipate we 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 am using a 27% rate going 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 ‘24 and beyond. So, for those years, fiscal ‘24 and beyond, I am using 23% is my estimated effective tax rate.
David Schneider, Investor
Okay, alright. Yes, I will probably e-mail some other questions. And yes, I am happy that fundamentally, you are doing well and that’s the most important thing.
Edward Richardson, Chairman and CEO
Thank you very much.
Operator, Operator
And I am not showing any further questions. I would now like to turn the call back over to the speakers for any closing remarks.
Edward Richardson, Chairman and CEO
Okay. Well, thank you for your interest and your investment in the company, Richardson Electronics. We are optimistic about our future, obviously, and hope you are as well. If you would like to discuss our results, we are a very flat organization, call us any time; happy to talk to you, or better yet, come and see us. It’s easier to show you what we do than 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.
Operator, Operator
And this concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone, have a good day.