Richardson Electronics Ltd (RELL) 2022 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to Richardson Electronics' earnings call for the second quarter of final -- of fiscal year 2022. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your host, Ed Richardson, Chief Executive Officer. Please go ahead.

Good morning, and welcome to Richardson Electronics' Conference Call for the Second Quarter of Fiscal Year 2022. We hope everyone had a happy and healthy holiday season and New Year. 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'd 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 very happy about the positive momentum underway across our business. Net sales for the second quarter of fiscal 2022 were $54 million, 27% higher than last year's second quarter. The second quarter revenue was our highest revenue quarter in 11 years. It also marked our sixth consecutive quarter of sequential revenue growth, which benefited from exceptional performance by all 3 business units. Strong revenues, combined with higher gross margin, produced second quarter operating income of $4.5 million or 8.4% of revenue. We've not experienced this level of profitability since we sold RFPD in 2011.

The business is firing on all cylinders and our backlog continues to increase. The core business is strong and our growth initiatives are creating new revenue streams. We are achieving this level of success in the face of increasing global supply chain and logistics challenges. We continue to uncover new opportunities that put us in an excellent position for future growth.

I'll now turn the call over to Bob Ben, Chief Financial Officer, to review our second quarter financial performance in more detail. Then Greg, Wendy and Jens will provide more information on our second quarter performance as well as our new programs.

Thank you, Ed, and good morning. I will review our financial results for our second quarter and first 6 months of fiscal year 2022, followed by a review of our cash position. Net sales for the second quarter of fiscal 2022 increased to $54.0 million, up 27.3% compared to net sales of $42.4 million in the prior year second quarter due to higher net sales across all 3 business units. PMT sales increased by $8.8 million or 26.7% from last year's second quarter, driven by strong growth from our new power and microwave technology partners for various power and microwave applications, including power management and 5G infrastructure, as well as increasing shipments of the ULTRA3000.

In addition, sales for certain electron tube product lines increased from the second quarter of fiscal 2021. Canvys sales increased by $2.4 million or 36.5% due to strong customer demand in North America and Europe. Richardson Healthcare sales increased $0.3 million or 10.9% year-over-year primarily due to an increase in demand for ALTA750 tubes.

In addition to higher revenues, total company backlog increased to $146.9 million in the second quarter of fiscal 2022 from a high of $126.5 million at the end of the first quarter of fiscal 2022 and $81.1 million at the end of the second quarter of fiscal 2021. Backlog increased in all 3 business units when compared to both second quarter last year and our most recent first quarter.

Gross margin for the second quarter increased versus the first quarter to 32.7% of net sales, although down compared to 33.8% of net sales in last year's second quarter. PMT margin decreased to 33.5% from 34.2% due to a higher mix of lower-margin PMG sales, partially offset by increased shipments of wind turbine modules.

Canvys gross margin decreased to 31.8% from 35.5% because of higher global freight costs. Health care gross margin was 24.5% in the second quarter of fiscal 2022 compared to 25.6% in the prior year second quarter, primarily due to increased component scrap expense. Operating expenses were $13.1 million for the second quarter of fiscal 2022 compared to $13.5 million in the second quarter of fiscal 2021. The decrease in operating expenses resulted from lower legal fees, partially offset by higher employee compensation expenses.

The company reported operating income of $4.5 million or 8.4% of net sales for the second quarter of fiscal 2022, the highest level since the company sold its RFPD business in 2011. In addition, operating income expanded significantly from $0.9 million or 2% of net sales reported in the second quarter of last year. Other income for the second quarter of fiscal 2022, including interest income and foreign exchange, was $0.2 million compared to other expense of $0.1 million in the second 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 suspension of net operating loss carryforwards until the end of fiscal 2023.

Net income was $4.1 million or 7.6% of net sales for the second quarter of fiscal 2022 as compared to a net income of $0.7 million or 1.6% of net sales in the second quarter of fiscal 2021. Earnings per common share on a diluted basis in the second quarter of fiscal 2022 were $0.30 compared to $0.05 per common share on a diluted basis in the prior year's second quarter.

Turning to a review of the results for the first 6 months of fiscal year 2022. Net sales for the first 6 months of fiscal year 2022 were $107.7 million, an increase of 32.6% from $81.2 million in the first 6 months of fiscal year 2021. Net sales increased by $21.6 million or 34.1% for PMT, $4.2 million or 31.1% for Canvys and $0.7 million or 15.3% for Richardson Healthcare. Gross margin decreased to 31.5% from 32.9%, primarily reflecting an unfavorable product mix in PMT and higher global freight costs in Canvys, partially offset by improved manufacturing efficiencies for healthcare.

Operating expenses were $26.6 million for the first 6 months of the fiscal year, which represented an increase of $0.1 million from the first 6 months of the last fiscal year. The increase was due to higher employee compensation and travel expenses partially offset by lower legal expenses. Operating income for the first 6 months of fiscal year 2022 was $7.3 million, or 6.8% of net sales as compared to an operating income of $0.2 million or 0.3% of net sales for the first 6 months of fiscal year 2021.

Other income for the first 6 months of fiscal 2022, including interest income and foreign exchange, was $0.1 million as compared to other expense of $0.5 million for the first 6 months of fiscal 2021. The income tax provision of $0.7 million reflected a provision for foreign income taxes 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 $6.8 million or 6.3% of net sales for the first 6 months of fiscal year 2022 versus a net loss of $0.5 million for the first 6 months of fiscal year 2021. Earnings per common share on a diluted basis in the first 6 months of fiscal 2022 were $0.50 compared to a net loss of $0.04 per common share on a diluted basis in the prior year's first 6 months.

Turning to a review of our cash position. Free cash flow for the second quarter of fiscal 2022 was $3.9 million, the same as in the second quarter of fiscal 2021. Cash and investments at the end of the second quarter of fiscal 2022 increased to $39.7 million compared to $36.4 million at the end of the first quarter of fiscal 2022 and $46.0 million at the end of the second quarter of fiscal 2021.

Capital expenditures were $0.8 million in the second quarter of fiscal 2022 compared to $0.6 million in the second quarter of fiscal year 2021. Approximately $0.3 million related to investments in our healthcare business, $0.2 million was for our IT system and another $0.2 million was for our manufacturing business.

We paid $0.8 million in cash dividends in the second 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 third quarter of fiscal 2022. Finally, during the second quarter of fiscal 2022, we repatriated $0.3 million to the U.S. from Taiwan, bringing our total year-to-date repatriations to $1.0 million. Also, we plan on additional repatriations in fiscal 2022. Our U.S. domiciled cash and cash equivalents balance totaled $23.0 million as of November 27, 2021.

Now I will turn the call over to Greg, who will discuss the results for our Power and Microwave Technologies Group.

Thank you, Bob, and good morning, everyone. Sales of the Power & Microwave Technologies Group, or PMT, in the second quarter of fiscal year 2022 grew 26.7% to $41.7 million versus $32.9 million in Q2 last year. In addition to a strong sales quarter, PMT achieved an excellent book-to-bill ratio of 1.45. Our sales growth and strong bookings mark a solid launch to what is shaping up to be an excellent FY '22.

Our gross margin decreased in the quarter to 33.5% versus 34.2% in the prior year, which is mainly due to product mix. Both business units in PMT supported the strong growth in bookings and billings in Q2. Our Electron Device Group, or EDG, had double-digit growth and sales and even a stronger quarter in bookings as we continue to take market share from our competition and find new applications for our legacy tube products. We are excited to see the strong returns in both bookings and billings over the past 3 quarters.

Key tube manufacturers in the industry, such as CPI, Thales, NJRC and Photonis, work with us to manage customer requirements. The second quarter of FY '22 continued to prove that the demand for our products has remained strong. We are even more excited about the trends in the bookings that will support strong revenue growth in the coming quarter. One of the strongest areas of increased EDG demand is in our microwave product line. Our magnetrons are used in various growing applications, including synthetic diamond manufacturing and the conversion of carbon into green type products. Our semiconductor wafer fabrication business also remains strong.

We also continue to have excellent growth in our Power and Microwave business group, or PMG. Our key technology partners such as Qorvo, MACOM, Anokiwave, LS Materials and Fuji Semiconductor support our global field engineering organization designing in new products into key markets and applications. The business is benefiting from a growing line of new technology partners and new products targeting RF wireless and power management applications. These include 5G infrastructure programs, microwave communications and SatCom applications as well as in 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 Q2. As people continue to work for multiple renewal locations, they must be able to send and receive large amounts of data.

In power management specifically, we saw growth in applications for wind energy, solar, electric vehicle and energy storage. Our products, such as our patented ULTRA3000 pitch energy module used in wind turbines, continue 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 successful operation.

Our growing in-house engineering and manufacturing teams did a great job supporting increased demand for current products and new product designs. Our engineers and partnership with Battery Street Energy also developed the ULTRAGEN3000, which is currently in field tests with T-Mobile and AT&T. We will continue to identify and develop and introduce new products using ultracapacitor and other technologies for power management applications. And in 2022, we will be adding other products to our portfolio.

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, including design engineers, field engineers, manufacturing and supply chain capabilities. We will also be adding small niche suppliers to fill technology gaps going forward. This strategy has been highly successful and we'll continue to use and develop new products, customers, revenue and profits by capitalizing on existing demand creation infrastructure.

Like many businesses today, we remain challenged by longer semiconductor and component lead times. This affects our component business and Engineered Solutions products. To compensate, we are taking an aggressive stance on inventory to fill the pipeline, ensuring we can meet our customers' needs, and we're working closely with our customers and suppliers. I cannot stress enough the value of Richardson Electronics model to our customers and suppliers. Our unparalleled capability and global to market strategy are unique to the power, RF and microwave industries. We have developed a powerful business model, including legacy products and new technology partners, that fit well with our engineered solutions capabilities.

Through our steadfast and creative focus on our customers, we will continue to excel by taking advantage of opportunities when they arise. There is no question, customers and technology partners need Richardson's products and support more than ever. And with that, I'll turn it over to Wendy Diddell in Richardson Healthcare.

Thanks, Greg, and good morning, everyone. Sales for the Healthcare Group improved in Q2 to $3.1 million, a quarterly record since we entered the CT replacement parts business. Sales were $2.3 million last quarter and $2.8 million in Q2 last year. We sold a record number of tubes during the second quarter, led by increased tube sales within the U.S. Sales of parts and P3 agreements also exceeded prior year levels, while equipment sales declined due to ongoing lack of system availability.

Gross margin in the second quarter was 24.5% versus 25.6% in Q2 last year. Our gross margin was impacted by our production level and our scrap rates. However, gross margin improved slightly over the first quarter, as we increased the number of tubes produced and continued to address component quality from our suppliers. Most of this progress was made in November, the final month of the quarter, reflecting changes made earlier in the fiscal year. We believe Healthcare segment gross margin will continue to improve in the third quarter, barring any unforeseen issues.

Currently, we still have 1 ALTA750G tube in beta, and it continues to perform well. We anticipated a full rollout before the end of the calendar year, but we delayed the launch until the second beta tube site is fully validated, now planned for the end of January. We also worked through various supply chain issues to ensure we have sufficient components for production. Sales growth will be gradual as we get the ALTA750G into the market and Canon CT scanners come off of OEM service contracts.

We made good progress on the Siemens repaired tube program in the quarter. While we did not ship any repaired (technical difficulty), we are on track to release all 4 of the Siemens pipes in calendar year 2022 with revenue starting in fiscal year 2023. Siemens CT installed base is significantly larger than Canon, and there are no third-party replacement options for Siemens pipes, making this an attractive market. We still have additional production capacity, and having a broader range of tubes to offer our customers will have a positive impact on sales and improve gross margin as we leverage our manufacturing operations. Our ongoing goal is to shorten the time it takes for Healthcare to provide positive operating contribution to the company.

I will now turn the call over to Jens Ruppert to discuss the results for Canvys.

Thanks, Wendy, and good morning, everyone. Canvys engineers, manufacturers and sells custom displays to global equipment manufacturers in industrial and medical markets. Canvys delivered outstanding performance and set a new quarterly record with sales of $9.2 million for the second quarter of fiscal 2022. Strong customer demand globally drove a 36.5% increase in sales over the same period last year. In addition, we continued to experience a nice pickup in demand after the COVID-related slowdown in the previous year.

Gross margin as a percentage of net sales was 31.8% during the second quarter of fiscal 2022, down from 35.5% during the second quarter of fiscal 2021. The decrease in gross margin was related to increased freight costs, impacting many companies across the global supply chain. In addition, extended lead times on several key components and increased freight costs 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 $43.9 million this quarter. We are optimistic that the high demand for custom monitors, touchscreens and all-in-ones will continue in 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 cryolipolysis, robotic-assisted surgery, medical device control and fully integrated operating room, surgical navigation, patient monitoring, surgical video documentation, radiofrequency ablation, ophthalmology and medical training simulators.

In the nonmedical space, our products are used in a variety of commercial and industrial applications, including CT scanners for inspecting luggage at airports and control rooms. We are very pleased with the performance of our team. The new sales record, combined with a record backlog, position 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 we offer 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 with our partners to help reduce inventory while being able to meet the demands of our customers, particularly during the pandemic and the challenges it brings to our supply chain. I will now turn the call back over to Ed.

Thanks, Jens. Canvys had another phenomenal quarter with excellent growth. You've raised the bar for the Canvys team and for the company. Well done.

We're very happy with the company's performance. The business has never been stronger. Everyone presenting on today's call played a role in the continued improvement. I thank them and their teams for the years of hard work and perseverance that's now paying off. But now is not the time for us to get comfortable. With this level of growth comes more hard work. investment in people, equipment and inventory. That's not an easy task given the supply chain challenges and labor shortages. I'm convinced, however, that we'll continue to be creative and strong willed and will overcome these challenges.

I'm also pleased that the company generated cash in the quarter despite ongoing investments to support growth. We're not quite cash flow neutral for the year but with our strong second quarter, we're trending in the right direction. We will continue to closely manage our cash. It will be needed to support the growing backlog and the many growth opportunities we're pursuing. At this point, we'll be happy to answer a few questions.

(Operator Instructions) First question comes from Howard Brous with Wellington Shields.

Ed, Wendy, Greg, Jens, all of you, congratulations on a great quarter. I just have a couple of questions. Greg, you mentioned synthetic diamonds and manufacturing of hydrogen. Can you explain what you're doing, what kind of business, what kind of backlog, what kind of opportunity? What kind of contracts in each area? This is (multiple speakers)

Yes. So that's a huge growing market, as many people know, is synthetic diamond deposition; growing diamonds with clarity that's better than real diamonds. The technology has looked at solid state, but there's products, legacy tube business that actually supports those applications better. And Richardson has an amazing product. It's a YJ 1600 that is kind of becoming the product of choice for a number of customers in this industry. We booked a very, very large order with 1 of the larger companies that do synthetic diamonds in Asia, and we also booked a very large order for a company that builds those products also in Europe. So it's really a global capability. And with the YJ 1600, Ed, you know that better than anyone in the industry.

Sure. I think, Howard, you mentioned hydrogen production, and that's done with a 915-megahertz magnetron at 100 kilowatts or 75 kilowatts. And there are a number of new startups in the United States that are taking methane gas that's collected from garbage dumps and other locations, and they turn it into acetylene and hydrogen. Acetylene in course is used in torches and all kinds of cutting applications, but hydrogen is meant to be the fuel of the future. They're talking about running locomotives and boats and ultimately, trucks and cars on hydrogen, which will certainly solve the global warming problem if we stop using fossil fuel.

And at this point, they are start-ups. There are 3 companies in the United States who are working with it, want to buy 100 generators. The generator we manufacture is about a $75,000 to $100,000 unit, and it uses a 915-megahertz tube that we also manufacture that's about a $7,000 unit. So between the 3 of them, there's an opportunity there for 300 generators and 300 tubes and the tubes last about 2 years in contant operation, so it's an ongoing aftermarket. And we really think that's a major opportunity. It's interesting, the -- I was told 25 years ago, the tube business wouldn't exist. And this year, the tube business growing 20%, 30% and lots of new applications, particularly in microwave.

Can you quantify synthetic diamonds in terms of magnitude of the business?

Right now, we have orders for about 3,400 YJ 1600s, and they sell probably average about $3,000, $4,000 a piece. So that will give you some kind of idea about the -- the 915 megahertz, at 75 to 100 kilowatts, it's also used in that business. I'd have a difficult time telling you what the world market is, but it's so large we can't produce enough tubes right now. I can tell you that.

You just talked about an opportunity annually of $20 million. Is that something that starts this year? Or are you talking about in 2022 -- 2023, excuse me.

Probably 2023. It's in a start-up stage right now. And we have lots of competition on the generators. We normally get the tube business. So the question is, do we get $7,000 a unit or do we get $100,000 a unit, and we'll get some of both.

All right. Let me continue then. ULTRA3000, Greg, you had mentioned electric vehicles. Are there any other areas for ULTRA3000?

Yes. The Component business and just the whole power management group with ultracapacitors, but also for other power management type products, has just boomed, especially in the second quarter. We have design wins in 5 different customers that are electric vehicle. We did get a design win at VINsmart, which is the Vietnam manufacturer of electric vehicles. That's for the DC to DC converter within the car. And we booked 4 very large orders for EV charging stations with 4 different companies and all 3 of them -- 1 was in Asia, 1 was in Europe and 1 was in North America. So our global footprint really helps.

On the ULTRA3000, that's just -- again, as you know, Howard, we introduced that 6 months ago. And the bookings and billings continue to grow. We're -- with great work by our global supply chain and a few old relationships that have new positions in the semiconductor industry, we were able to get the components to increase our build. We're shipping just over 2,000 units a month out of this facility, and we're looking to double that in the third quarter throughout 2022. And we have the backlog to support that.

So we had 4 prototype orders and production orders at the beginning of the quarter. We now have nine separate customers that either we have a beta site order, a prototype order or a production order in-house. So it's going nowhere near as fast as we'd like, but the opportunity is still there. We seem to be becoming the incumbent with 0 to no failures in the field. So we're very excited about it. We have new products coming out in 2022 for the wind turbine market using ultra capacitors.

As you know, the ULTRAGEN product, we have beta site testing going on with that. And we'll also be producing a power supply that's used in wind turbines, that's also lead acid battery today that they want to convert to ultracapacitors. So as you know, we also got our second patent. So the product and the technology we feel is very locked up. And we'll be announcing here sometime in the third quarter a partnership with one of the largest builders of solar and wind farms in North America.

It's kind of a different avenue to get to market, kind of a different customer base, but definitely a different way to go to market with our products. We're very excited about that. That will be announced sometime this quarter. So everything is kind of -- we're just checking the boxes and increasing our capacity. We'll be rolling out our own internal PCB and conformal coating line right here in La Fox, Illinois, which will increase our capacity by a minimum of 35% to 40%. And we're looking to literally double our backlog in 2022 calendar year.

So how things are going, I would say, well, considering all the conditions out there with COVID, customer lead times, capacity, component lead times and introducing a new product into an industry.

Every time you answer a question, I develop another question. Can you quantify electric vehicles, charging stations in terms of orders you've gotten and potential orders? And is the composition (multiple speakers)?

Yes, it's multimillion. The exact number I don't have, and I probably don't want to share that with our competitors, but it's a multimillion dollar backlog of products going into electric vehicle, I'll call it applications, Howard, because some go into the car itself and it mainly goes into charging stations.

Two more questions, Greg, and I'll end it. One, what do you do with Garmin?

With Garmin?

Yes, Garmin.

Yes. Garmin's EDG is one of the company's largest customers, both on the component level for their radars and their GPS and on the EDG side. They've been a customer for...

20 years.

Yes.

They're used in weather radar systems, both in pleasure boats and commercial boats and also in aircraft. So Garmin's business is up about 30% this year, and they're saying next year it will probably be up 50%. And we also sell to Honeywell and Honeywell is primarily aircraft radar and their business is up substantially. We're proprietary on those products. And we sell to Raymarine, Sperry, anyone that's making marine or weather radar systems. So that's pulse microwave versus the CW microwave that's used in synthetic diamonds and producing hydrogen and things of that nature.

Can you quantify -- can you talk about up 30% at Honeywell? Is that dollar amount per unit that we can make assumptions about?

No. We couldn't -- all the business together is probably $10 million, going up 30%, something like that. And that's just the weather radar business.

So if we can take a look -- and this is the last comment and question, and then I'll let somebody else. If I take a look at this business for this year, you're talking about $220 million in revenue and highly profitable. What can I look for in general terms for 2023 in terms of revenue, earnings, whatever you can comment on?

Well, you can see we went from $177 million last year, and it looks like we'll be $215 million or $220 million this year. So that's 20% increase, something like that. Right now, we have a $146.5 million backlog, which is the largest backlog in the company's history. We hope to ship a large percentage of that yet in this fiscal year. So I think you can look at about 20% growth a year. That's just sort of ballpark.

Congratulations, all of you.

Our next person is Brett Davidson.

This might be a little long-winded here, but eventually I'll get to the point. It's been very entertaining watching the company's new products gain traction and the employees deserve -- the employees and management deserve hardy congratulations. Part of that goes back to your decision to keep employees on when COVID hit. Yes. I don't know, maybe a bonus is due or a grant of shares or something along those lines.

We've done a lot of that. That's...

Good. That's good to hear because you're going to need them.

I wish we add more.

So I've done the math on the backlog and it's up over $20 million from the prior quarter. Quarter-over-quarter, it's a 16% increase. Yes, that's unsustainable. At this rate, at the end of the third quarter, the backlog would be $171 million. At the end of the fourth quarter, it'd be $198 million. You're talking about pushing towards a year's worth of sales. So it's not a problem of the same magnitude of being cash flow negative, but it's a problem.

So what I'm looking for is a qualitative ballpark estimate of the impact that's creating this backlog. So I'm sure labor plays into it. Supply chain plays into it. The strong bookings play into it. So where -- what is it that's contributing to this large increase in backlog? And maybe if you could just put like percentages on these impacts in a general fashion.

Well, I look at it like we have a table with 6 legs. And right now, 5 of those legs are hitting on all cylinders and health care is making progress. So that it's all across the board. I think as we sort of got out of -- temporarily out of the COVID issue last year, that, for instance, with weather radar, people started running pleasure boats. And so they bought new radar systems and executive aircraft were used more, and so they bought radar systems.

And people are spending money on diamonds, so synthetic diamonds have taken off and so forth and so on. I don't think we can anticipate that surge to last forever, but I think 20% growth across all the lines of the business is probably a good number. It's a complicated answer, but every 1 of our businesses is experiencing phenomenal growth right now. We haven't seen anything like this since we sold RFPD in 2011.

What is the primary driver of the increase in the backlog? Is it labor shortage? Is it just the strong bookings alone?

Well, it's all across the board. You know we sell into the semiconductor wafer fab industry, and because of the demand for integrated circuits, there are new wafer fabs going in all over the world. And that's -- in that segment of the business, it's about $25 million of our business, and it's up probably 15%, 20% this year and anticipated to continue like that. In every business, the microwave business we talked about, is up 20%, 30%. And the ultracapacitor is new to us and we have $15 million backlog right now that we'll be shipping in the fiscal year, and it looks like we'll do $25 million next year. And just go on and on. It's a complicated footprint.

We're in so many different businesses. But on the other hand, that makes the company very, very stable. We sell 20,000 customers all over the world and 60% of our business is outside the United States. So it's -- the nice part about it is it's very stable. It's only taken us 75 years to get here.

Hey, that's okay, better late than never. So correct me if I'm wrong, but in order to have kept backlog flat, you guys would have had to have done $75 million in revenue this past quarter. So how do you get there?

Well, that's the problem right now. We need more engineers. Greg talked about the YJ 1600. In our best year, we produced 800 YJ 1600s. We have in-house orders for 3,450 of those right now. And we're trying to gear up to build them. But I can tell you at the moment, delivery is way out there, and that's all across the board. If we could get more engineers and if we could get more raw material -- all the raw material of oxygen-free copper and silver and platinum and gold that we use in tubes, the prices have gone -- skyrocketed as long -- as well as the logistic costs. So it's a really unusual period. Probably our biggest issue is supply chain: getting products and raw materials.

So based on that, then, we could probably expect to see that backlog just keep growing for the rest of the year?

Well, it certainly has in the -- over the last period. I don't think it's going to grow like that forever, but certainly, in the next year I'm sure that's the case.

Got it. And the only other question that I want to address is -- the $0.06 dividend is great. Looked really big at a $4 share price; don't look quite so big anymore. But cash is going to start to pile up. Has there been any discussions on how to best put that to use?

Well, I think we'll cross that bridge when we get there. Right now, the Board is really concerned that we have enough cash to fund the growth of the company. But it looks like next year, we'll go cash flow positive, and then we can start to consider what we'll do with that cash. But at the moment, let's get there first.

Yes. Well, I'm pretty confident on my side that you're going to get there. But do me a favor, give everybody a hearty pat on the back and a good job.

Well, thank you very much. It takes 450 people to make it work, so.

Our next question comes from Mike Hughes with SGF Capital.

First question, just high level. You're thinking 215 -- around $215 million in revenue this year, and that could potentially grow 20% next year. Is that what you said previously?

Yes, maybe 15%, 20%. I'd rather under promise and over perform if I can.

Sure, sure. So even 15% growth would be roughly $30 million in incremental revenue. And the gross profit dollars incrementally on that would be, at least I would think, $10 million. So if that did happen, how much of the $10 million would fall to the bottom line? Meaning, how much does OpEx need to go up to support that type of growth?

Well, it's interesting. When we sold RFPD, we had 24 foreign subsidiaries all over the world. And that infrastructure is required to support the tube business, which is obviously our foundation. It's a $100 million business even yet today. And it took us all these years, from 2011 up until last year, to finally fully absorb or start to absorb that infrastructure. At about $160 million we went profitable. $177 million, you can see what happened last year and at $215 million, it really starts to add. And so what happens is because we don't have to add infrastructure a large percentage of that falls to the bottom line. I can't quantify it for you exactly, but we certainly don't need to add infrastructure to grow the business other than engineers if we can find them.

I think usually we estimate about 3% to 5% year-over-year SG&A increase.

Okay. 3% to 5% SG&A increase is what we're estimating.

And a lot of that is tied to incentive increases.

Right. Okay. So off the top of head, 5% of SG&A would add about $2.5 million. So if you had incremental gross profits of roughly $10 million, subtract maybe $2.5 million and then maybe some sales commission, $6.5 million, $7 million of it could fall to the bottom line in rough terms. Would you agree with that?

No, it's pretty close.

Okay. Good. Excellent. On Canvys, which is a business that's performed very well over time, I know everyone's having freight cost issues, but how quickly can you recover those and get the margins back to where they were a few quarters ago, the gross margins?

Jens, would you like to answer that?

Sure. Thank you very much. Yes, that's a good question. So we actually started to pass through our freight cost increase to our customers, of course, and we offer our customers to use even their own freight for a while to believe we have to expense it. And all of those customers came back and said, no, we are fine with you, please continue. So we're passing it on as a set line item to be transparent to our customers. And so I'm pretty sure that you will get to the gross margins we had before, within the next 6 months or so.

Okay. Great. And then just same question on health care. I think Wendy mentioned that the gross margins there may improve in the current quarter. Can you just speak to that?

Yes, that's correct. As we stabilize and increase the number of tubes we make each quarter, that will reduce the amount of under-absorption we've experienced historically, which has been 1 of the major drains on our gross margin. And as I mentioned, as we exited the second quarter, so November was our last month, it was already much stronger.

And just kind of taking a sneak peek into the third quarter, we finished December, things are looking good. So it doesn't mean that a piece of equipment or something can't break down. But right now, the increase in production quarter-over-quarter is what I think will really help improve the gross margin for health care.

Okay. Great. And I may have missed it, but did you say what the ULTRA Capacitor 3000 revenue was for the just reported quarter?

No, we didn't. I don't want our competition to know what we're shipping because they could do the math, but we're shipping about 2,000 units a month, which is about $1.5 million to $2 million a month out the door.

What do you have in backlog right now?

Backlog, we have about $13 million in backlog.

Right. Okay. On the last call, you indicated that you -- that business could potentially do $12 million to $14 million in revenue over the next 3 quarters. You obviously have the November quarter in the books now, so do you think the $12 million to $14 million is still achievable?

Yes. As I mentioned before, the team has done a great job improving our capacity and output. So we're going to have a great Q3 and great Q4 this fiscal year, and that will get us to that run rate, absolutely.

Okay. Last question for Ed. You kind of touched on the semi cap equipment business. I think on the last call or maybe the prior one, you had an expectation of maybe $25 million of revenue for that business. Is that still tracking around that number?

Yes. Yes. I would probably be -- we may exceed that a little bit. Our largest customer is Lam, and they're talking about -- because they point at us and all of their vendors, but they're having supply chain issues. And so their growth hasn't gone quite as high as they thought it would. They're easy to follow. They're, as you know, a public company, and they announce all these figures. But they were talking about doing $6 billion a quarter, and I think they're under $5 billion right now. And they're saying that because of supply chain issues. Our business in that area has gone up to about $25 million, $26 million. There are several companies included in that besides, but the Lam's the largest.

Okay. And I actually did have one last detail question. How should we think about the tax rate over the next few quarters?

Mike, this is Bob Ben. Well, we continue to use our NOLs, but you don't see it because they're offset against the valuation allowance. And we anticipate that we'll have enough remaining NOLs through the end of the fiscal year to continue to not pay federal tax. However, next year, if things go -- keep going along as they are, then we'll be in a federal tax position, which right now is 21%. I also mentioned that Illinois suspended the NOLs, so we're not able to use those through the end of fiscal year 2023. So I'm looking at effective tax rate next year of around 27%. But for this year, I think you can take the first half tax expense and just double that for this year. So next year, again, we'll be in the 27% effective tax rate position if things continue along as they are.

Our next question comes from Bill Wilson.

I just wanted to try to throw a few things out there. First, I wanted to say that you've exceeded my wildest expectations. And that may sound good, but I am underinvested. So what I'm kind of aiming at is even better clarity -- or I shouldn't say clarity, but even more expectations of -- for the future. Which kind of brings me to the idea that maybe something would be in order for a spin-off or even a Dutch auction. There's almost free money from the banks right now. And I don't know if Dutch auctions are even considered anymore by anybody. But it's just a wild idea that I thought I would throw out there.

And then the other thing is I've read where a lot of the Silicon Valley engineers are moving to New Zealand for various reasons. And I would think that if the infrastructure is there in La Fox, that there would be some outreach to some of that outflow. And the company could command almost overnight that doubling for small investors like myself that would make it something really worthwhile to being in. But that's a lot I threw out there. I just thought I'd get your thoughts, and you don't even have to comment on the Dutch auction if it's not even something considered.

Yes, it's an interesting concept. I haven't heard it talked about in a long time. Right now, we're trying to conserve cash to grow the business internally and -- so we haven't thought about those things, but we can certainly bring it up with the Board. Yes, we like New Zealand. We'd like to hire some of those engineers. That's our biggest problem right now is attracting engineering talent.

Yes. I'm just a big fan of organic growth. I always have been. But in times like this, where there's massive amounts of money slushing around the world in search of those few products that are beneficial for our environment, et cetera, in health care, obviously, that it would be -- sounds like a great idea, too. Because I just can't imagine with all the balls in the air that the management there would be fully capable without a Dutch auction aimed at doubling internal and external resources, which could be something that would be more easily done than normal. But I just --

(multiple speakers)

I just wanted to thank you again because it was a wild explosion of products and innovation, and it looks like it's going to continue, so thank you.

Our next question comes from Julian Glass with Story Trading.

On behalf of all of us at Story Trading, we're a collaborative group of individuals, a very large collaborative group now, I thank you very, very much. We came to you about half a year ago and it's been quite a hell of a journey. So well done. And we can't judge businesses by share price performance. You've done an amazing job all throughout, but we have to thank you for the last 6 months. If I could ask 2 quick questions. (multiple speakers)

If I could ask 2 quick questions, 1 very specific, 1 much more general. Of course, one can't have a ball -- a stargazing ball, but I'm English and a bit of a Luddite, so my knowledge of ultracapacitators really stems from Back to the Future with Michael Fox. But I heard you mention that it could be converted for use to solar, the ULTRA3000. I got that. And then I heard someone talk about cars. And I'm just trying to work out. I did see some (inaudible) pamphlet which talked about the density of all capacitators at some point, theoretically, being sufficiently portable even to compete with lithium, but I suspect I don't really know enough to understand its versatility.

And if I could also ask what your patent protection is in the field, because I think you mentioned Battery Street collaboration, and they presumably designed some of this. So I'm trying to work out where your proprietary long-term future lies in it. Because it is a huge field, really, leaving aside supply constraints this week and next week, looking 2, 3, 4, 5 years out, this is just the future, really.

No, we agree. Go ahead, Greg.

Yes. So I mean the design of the ULTRA3000 was specifically designed, Phase I, for wind turbines, specifically manufactured by GE. But you're exactly right. The world wants to get rid of lead acid batteries. We see numerous applications where that needs to be done for green energy and those needs. And so we designed the ULTRA3000, introduced it to market, and we've done a very good job in North America. We're expanding into Europe. But in North America, introducing this product, getting beta site testing done. And as we talked about, the backlog continues to grow and the shipments continue to grow.

The next application -- and as you know, we have a very large 5G organization in terms of sales and technology partners, and that business is growing quite fast also -- was the ULTRAGEN3000, which is the same concept. It replaces lead acid batteries and generators. Now your end customers today are people like T-Mobile and AT&T, but also people like Generac and Kohler and other manufacturers. And so there's a time frame of grabbing market share. We have well over 15 to 20 years of ultracapacitor knowledge, but building these modules, our design team is growing and doing that. So to expedite it, we formed a partnership with Battery Street, who had a design started, and it was down the path, and they worked with our engineers here and we did some redesigns to it.

And that is -- I think I mentioned in my update that we have, at the middle of December, beta site testing at 3 locations, 1 for T-Mobile in Phoenix, AT&T in Northern California and Verizon in Utah. So that's how we're introducing that, is in a partnership with BSE. We'll be the exclusive manufacturer and we're looking at some patents for that. What we did after the ULTRA3000 design was done, we filed a patent for that. And the patent overall for the product -- it has about 20 embodiments, various things that if you do any of those embodiments, you're infringing on our patent.

Well, in working with some of these large owner-operators of wind turbines in North America. We've done a number of revs, specifically for them. The product, as I mentioned before, were great technically in the field, but there's some unique whistles and bells that they've requested. So when we did those, we realized that those are also patentable. So we applied for those patents, and we got that second patent, which has about the same number of embodiments on it in our Q2. So we're very comfortable that we have this product from a patent point of view in a competitive point of view, lined up to grab market share and be the incumbent for this product.

Now there's a number of applications that can use ultracapacitor technology. And those will be some new products we're introducing here in 2022. One of them is a power supply that's currently runs on lead acid batteries. And the other one is a bridge unit that bridges the power level when a critical facility or any other type of facility loses power. So yes, now on the automotive side, the capacity -- the ultra capacities we're working with are much higher power.

The ultracapacitors that go into these electric vehicles, they're looking at that technology. But our involvement right now is on the component level, IGBTs, DC to DC converters and other components that go into charging stations and in this case, with VINsmart Into the vehicle. So I think, and we all believe that there will be a number of applications globally that will be in place to remove lead acid batteries in any type of equipment or function, again, based on the fact that they're like a car battery.

And so anything that you have to change remotely go up 300 feet like a winter is a huge cost because these teens fail every 18 months to 2 years. So the demand for this type of product, and we definitely have a lead technically, cost-wise, et cetera is going to be huge for this company. And we've already seen that just in literally for the first 6 months that we've introduced the product to market.

That adds a lot of flavor. I mean just pushing the boundaries further and I'd hate to be wind mills pardon the pun. But I mean, if every house ends up with solar panels and you're starting the car. Is it -- would it be potentially or is it too small for these ultracapacitors to be installed in every house?

The technology will be there eventually. I think ultra capacitors will pretty much eliminate your car batteries and those functions. We have another huge application that we're working on, and we do have a prototype order for a capacitors and locomotives.

. They have lead acid batteries, that's all backup power. They want to convert because the technology is there, and Richardson has the capabilities, design application-specific modules using ultra capacitors. And we're currently working with on that. That will be something we'll see in terms of large shipments and revenue in the second half of 2022. So I wasn't -- go ahead.

I wasn't trying to pin you down to the actual day because this is about a business not about dollars and this next week, but I understand the path. I appreciate that. That's very, very helpful. If I could just come back to the mitigation now, and I think one of the people previously asked the question, I think it was getting to the point where the fulcrum point of earnings comes through because you kindly telegraphed what your revenues would be a few weeks ago.

But the earnings, I think, probably surprised us all. And it just seems to have reached that point where the costs are almost becoming fixed. And every dollar earned is marginal profit. And I think you already said that. But if I've got it right, most of the revenue coming through from here on, at least in some of the divisions, will flow through directly to profit 70% of it. Did I get that right? Or is that the feel or did I mistake?

The margin, yes. Obviously, we have incentives, everybody here is incentivized on performance, and they should be. They're doing a great job. But the overall infrastructure is large enough to handle a lot more business. So a large percentage falls to the bottom line.

Given the supply constraints. Well done amazing, amazing time and hopefully, the future -- hopefully, COVID will disappear and everything will return to normal and hope you'll be at the forefront of new technology. I hope 1 day to be able to invite you to get pats on the back from all the investors at Story Trading. But I appreciate your side.

Our next question comes from Eric Landry with BML Capital.

Everyone fantastic work all around. I know you've heard it from everyone, but we really appreciate it. And Jens, especially, you don't hear much from anybody on these calls, but we appreciate what you're doing.

You hung in there with Eric when we weren't doing so well. So thank you for the staying power.

We're quite glad we did. So anyways -- and I remember speaking of when things weren't so good years ago and all the way up until, I don't know, maybe several quarters ago, you've mentioned many, many, many times that health care and the CT Tube business was the future of the company. I suspect now that's got some competition as far as the future of the company goes, correct?

Yes. It's amazing that the Green Energy business is with the ultra capacity leading it right now. It's just a phenomenal business. We've only invested about $1 million in that business and the first order was $10 million at a 35% margin and the served available market out there for these products is just unlimited. So we're still -- we believe in health care, it's a huge market. The aftermarket for service and parts is about $8 billion or $9 billion in the CT space and as we say, we're pregnant. We've invested $35 million. And it looks like by 2024, we'll start making money in that business as well. But if you compare the return on investment to the green energy business, there is no comparison. And I've never seen a business like it, frankly.

Yes. Yes, it's very, very exciting. I guess I kind of wish I wouldn't say that investment number is going to attract all kinds of people to the business. But I guess, it is what it is.

Well, we have to take advantage of it while we're there. Fortunately, we have patents on what we've done so far that protect us at least in the wind turbine space. But I'm sure there are lots and lots of people looking at green energy. We're not alone, and we just need to move faster. We need engineering talent. That's what we need.

Yes. You and everybody else Greg, is there anything you can mention about the sort of the time frame of these cell tower field tests? Are we looking at 1.5 years like it took for wind? Or is this -- Is this faster or slower? And the overall market will end up being somewhat similar, smaller or bigger? Anything you can sort of mention about the cell tower stuff.

Yes. I think it's going to be a similar rollout that we saw with the ULTRA3000. In talking to this specifically, and by the way, the first test with T-Mobile and Phoenix went fantastic. The product were great. But it is a cell tower. And so any downtime on a cell tower, just like a wind turbine when they can't charge somebody for using it is millions of dollars. So I think they're going to be a little bit more cautious. I think the beta site cycle will still be 6 months to a year. But I think we're going to see probably a nice start in terms of a large production order with one of the service providers, potentially the second half or late calendar year 2022.

The market to us is similar in size, but it's expandable once you get into probably the OEMs like a Generac or Qorvo. But the way they do it is, for example, right now, we're testing in Phoenix, and they're going to expand it into another region. I expanded into a number of more towers push it and make sure that it works perfectly before they convert to ultracapacitors versus lead acid batteries. So I don't see any large revenue coming in 2022, and I'm talking calendar right now, Eric, but I think we're going to see some strong bookings in the second half of 2022.

Great. And you mentioned -- is that 9 additional wind customers you're talking to right now?

Well, when I say talking to -- so we talked to a lot more than 9%, but there's 9 current customers that were either have a prototype order, a production order or a beta site order with -- and at the beginning of Q2, I think, as you know, Eric, and I think you know who they were, we had 4. So we expanded that in the quarter to 5 others, and they're big name people. I mean it's a big name, wind turbine manufacturers and wind farm owners.

Got you. Okay. I'll wrap it up here quickly because I know we're on line on time. Ed, you mentioned 20% growth a few times during the call. So not to pin you down, but is that something you expect over the next 1, 2, 3, 4, 10, 20 years, is there any number of years that you expect 20%.

I would think that our visibility is probably out 2 or 3 years. And after that, it's -- who knows? But I'd say the next 2 or 3 years, 20% growth is something that we anticipate.

Good. Okay. So we'll pencil on 2 or 3, and then we'll take it up to 40% for the 3 after that.

Thank you. I hope.

Won't expect less from you. Congratulations.

And we have a last question from the line of John Francis from Francis Capital.

Greg, can you provide us with a bit more color on the locomotive market for ultracapacitors, please?

Yes. So we're in long conversations with 2 companies, 1 is a division of Caterpillar. And what it is, it's very similar to the wind turbine market or the cell site generator market, where these locomotives today, a lot of their backup power for all aspects of the locomotive lead acid batteries. And again, same concept like a car battery, cold weather, you name it. They fail every 18 months to 2 years, and it's very costly to replace them. So they actually contacted us after they saw the ULTRA3000 press release and asked us that we can design a module for a locomotive. So we've been working with them and the initial order that we booked in the second quarter was about $800,000, and this was for the components.

We're looking at building that module here in Fox, Illinois. And that market opportunity for us right now, just what the 2 we're talking to is a $5 million to $6 million market which it's interesting. We're in a lot of stuff, but we don't go outside of our niche. And I just think that's another huge attribute of Richardson Electronics. We are for 75 years in power management, power applications and then, of course, in the past few years and prior before we sold it a huge participant in the 5G infrastructure market.

And so this is just, to us, is another power management application that in this case, they're looking at both Amogreentech which I believe you saw that press release, partnered with them in the quarter also and ultracapacitor modules to replace the lead acid batteries in their locomotives.

And I'll pass it back to Mr. Richardson for his final remarks.

All right. Well, thank you for your interest and investment in Richardson Electronics. We're obviously excited about our future and we hope you are as well. If you'd like to discuss our results, please don't hesitate to call us. We're a flat organization. Wendy and I and Greg and Jens are available anytime and Bob Ben. When the timing is right, we'd love to have you visit our facility in Le Flax, Illinois. We're about an hour west of here. And it's much easier to show you what we do than to tell you about it is a complicated footprint. So we look forward to discussing our third quarter performance with you in April. Thank you very much. Call us any time.

Thank you. And this concludes today's conference call. Thank you for participating, and you may now disconnect.