Richardson Electronics Ltd (RELL) 2022 Q4 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Richardson Electronics Earnings Call for the Fourth Quarter of Fiscal Year 2022. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Ed Richardson, Chief Executive Officer. Please go ahead.

Good morning, and welcome to Richardson Electronics conference call for the fourth 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'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. Fourth quarter sales were $61.6 million, the highest quarterly sales we've achieved since the sale of RFPD in 2011. Fourth quarter gross margin improved to 32.7% versus 31.8% in the third quarter. Total sales for FY '22 were $224.6 million, an increase of 26.9% over the prior year. In addition, backlog rose again to $206.2 million, nearly double to where we ended FY '21. This supports the continued growth we expect to achieve in FY '23.

While power grid tubes are still a significant and growing part of our business, our expanded focus on designing and manufacturing products has driven sales to new levels and positioned us for continued growth in the face of tougher economic conditions. Today, more than 60% of our business comes from products we either manufacture or have manufactured exclusively for us. In addition, we continue to experience year-over-year growth across all 3 of our business units during the fourth quarter and full year. Power management solutions that support a green environment is an important growth opportunity and strategic focus. Demand for alternative energy in the face of unprecedented fuel prices is growing. We're benefiting from this trend.

From the ultracapacitor modules used in GE wind turbines to future applications such as production of green hydrogen using microwave generators, our existing and new products are capturing attention and solving customer problems. Demand for our 6kW magnetron, a product I was told back in the 80s would not be around in 5 years, continues to grow exponentially and more consumers choose man-made synthetic diamonds over traditional diamond mining. Diversification is an important component to our long-term success. It's no longer just the semiconductor wafer fabrication market driving the upside in our revenues. Although this business was particularly strong for us in the Q4, 6.7% of our business in the quarter came from new products. We also saw growth in our EDG product lines to both existing and new customers.

Canvys continues to add blue-chip customers to its list of new custom display product wins. Simply put, our business is firing on all cylinders, and I believe, we're just getting started. Through a lot of hard work and dedication of our sales, engineering and manufacturing teams and the support of our experienced supply chain, finance and maintenance teams, we're taking the company to new heights. In fact, Q4 was the most profitable quarter the company's had since 2007, which was prior to the sale of 2 of our divisions. Our challenge is growing our engineering and manufacturing capabilities quickly to take advantage of significant opportunities underway across many of our global markets. We're investing in people, in our facilities to support the growth in backlog and to capitalize on new product opportunities to solidify our competitive position in the future.

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

Thank you, Ed, and good morning. I will review our financial results for our fourth quarter and fiscal year 2022, followed by a review of our cash position. Net sales for the fourth quarter of fiscal 2022 increased 22.1% to $61.6 million compared to net sales of $50.5 million in the prior year's fourth quarter due to higher net sales across all 3 business units. PMT sales increased by $10.4 million or 26.8% from last year's fourth quarter, driven by strong growth from our new Power and Microwave Technology partners for various applications, including power management, green energy solutions and 5G infrastructure.

Sales for several electron tube product lines as well as manufactured products for our semiconductor wafer fabrication equipment customers also increased from the fourth quarter of fiscal 2021. Canvys sales increased by $0.6 million or 7.1% due to strong customer demand in North America. Richardson Healthcare sales increased $0.1 million or 4.1%, primarily due to increases in part sales and equipment sales, partially offset by lower sales of Alta750 Tubes. In addition to higher revenues, total company backlog increased to $206.2 million in the fourth quarter of fiscal 2022 from $175.6 million at the end of the third quarter of fiscal 2022 and $110.0 million at the end of the fourth quarter of fiscal 2021. This is the highest level our backlog has been since the sale of RFPD in 2011. Gross margin for the fourth quarter was 32.7% of net sales compared to 32.4% of net sales in last year's fourth quarter.

PMT's margin increased to 34.4% from 32.0% due to product mix, including higher sales of the Ultra3000 and improved manufacturing efficiencies. Canvys gross margin decreased to 30.7% from 35.3% because of higher global freight costs and foreign exchange effects. Healthcare's gross margin was 10.8% in the fourth quarter of fiscal 2022 compared to 29.4% in the prior year's fourth quarter due to a lower level of absorption and higher level of scrap expense. Operating expenses were $15.2 million for the fourth quarter of fiscal 2022 compared to $14.0 million in the fourth quarter of fiscal 2021. The increase in operating expenses resulted from higher employee compensation expenses, primarily due to increased incentive expense, resulting from the highest level of profitability since the fourth quarter of fiscal 2007.

Operating expenses as a percentage of net sales improved to 24.6% during the fourth quarter of fiscal 2022 compared to 27.7% during the fourth quarter of fiscal 2021. The company reported operating income of $5.0 million or 8.1% of net sales for the fourth quarter of fiscal 2022 versus operating income of $2.3 million or 4.6% of net sales in the fourth quarter of last year. Other expenses for the fourth quarter of fiscal 2022, including interest income and foreign exchange, were $0.2 million compared to other expenses of less than $0.1 million in the fourth quarter of fiscal 2021. The noncash income tax benefit of $3.5 million for the fourth quarter of fiscal 2022 resulted from the $4.0 million partial reversal of the tax valuation allowance due to evidence of profitability for realizing a portion of the deferred tax assets in the future. Net income was $8.3 million or 13.4% of net sales for the fourth quarter of fiscal 2022 as compared to a net income of $1.9 million or 3.7% of net sales in the fourth quarter of fiscal 2021.

Without the $4.0 million tax valuation adjustment, net income for the fourth quarter of fiscal 2022 was $4.3 million or 6.9% of net sales. Earnings per common share on a diluted basis in the fourth quarter of fiscal 2022 were $0.59 compared to $0.14 per common share on a diluted basis in the prior year's fourth quarter. Excluding the tax valuation allowance adjustment, earnings per common share on a diluted basis were $0.31 for the fourth quarter of fiscal 2022.

Turning to a review of the results for fiscal year 2022. Net sales for fiscal year 2022 were $224.6 million, an increase of 26.9% from $176.9 million in fiscal year 2021. Net sales increased by $40.8 million or 29.7% for PMT, $5.9 million or 20.0% for Canvys, and $1.0 million or 10.1% for Richardson Healthcare. Gross margin decreased to 31.9% from 33.2%, primarily reflecting product mix in PMT, higher global freight costs and foreign exchange effects in Canvys and increased component scrap expenses for healthcare.

Operating expenses were $55.7 million for the fiscal year, which represented a decrease of $0.2 million from the last fiscal year. The decrease was due to the nonrecurrence of a $1.6 million legal settlement in fiscal 2021 and lower legal fees. These decreases were mostly offset by higher employee compensation expenses, including additional incentive expense due to the strong profitability. Operating expenses as a percentage of net sales improved to 24.8% during fiscal 2022 as compared to 31.6% during fiscal 2021. Operating income for fiscal year 2022 was $16.0 million or 7.1% of net sales as compared to an operating income of $2.9 million or 1.6% of net sales for fiscal year 2021.

Other expenses for fiscal 2022, including interest income and foreign exchange, were $0.2 million as compared to other expenses of $0.6 million for fiscal 2021. The income tax benefit of $2.2 million resulted from the $4.0 million partial reversal of the tax valuation allowance. The company reported net income of $17.9 million or 8.0% of net sales for fiscal year 2022 versus net income of $1.7 million or 0.9% of net sales for fiscal year 2021. Without the $4.0 million tax valuation adjustment, net income for fiscal 2022 was $13.9 million or 6.2% of net sales. Earnings per common share on a diluted basis in fiscal 2022 were $1.31 compared to $0.13 per common share on a diluted basis in the prior year. Excluding the tax valuation allowance adjustment, earnings per common share on a diluted basis were $1.02 for fiscal 2022.

Moving to a review of our cash position. Cash and investments at the end of the fourth quarter of fiscal 2022 were $40.5 million compared to $39.1 million at the end of the third quarter of fiscal 2022 and $43.3 million at the end of the fourth quarter of fiscal 2021. The company continues to invest in working capital to support its growth initiatives. Inventory grew to $80.4 million from $73.7 million at the end of the third quarter of fiscal 2022 and $63.5 million at the end of fiscal 2021. The largest portion of the increase for both the fourth quarter and fiscal year 2022 was due to increases in components and work in process for our manufacturing business.

Also, accounts receivable increased to $29.9 million from $25.1 million at the end of fiscal 2021, primarily due to the high sales growth. Capital expenditures were $1.0 million in the fourth quarter of fiscal 2022 versus $0.8 million in the fourth quarter of fiscal year 2021, approximately $0.7 million related to the investments in our manufacturing business, $0.2 million was for our healthcare business and $0.1 million was for our IT system. Total capital expenditures were $3.1 million in fiscal 2022 as compared to $2.6 million in fiscal 2021.

We expect a higher level of capital expenditures in fiscal year 2023 as we make additional investments in our manufacturing capabilities and facility. We paid $0.8 million in cash dividends in the fourth quarter and a total of $3.2 million in fiscal year 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 first quarter of fiscal 2023. Finally, during fiscal 2022, we repatriated $1.5 million to the U.S. from several foreign locations. Our U.S. domiciled cash and cash equivalents balance totaled $25.5 million as of May 28, 2022, the same balance at the end of fiscal 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 fourth quarter of fiscal year 2022 grew 26.8% to $49.3 million versus $38.9 million in Q4 last year. In addition to a strong sales quarter, PMT achieved excellent book-to-bill ratio of 1.69%. Our sales growth and strong bookings confirm another solid quarter to what shaped up to be an excellent FY '22 with 29.7% growth over prior year. Our gross margin also increased in the quarter to 34.4% versus 32% in the prior year, which was mainly due to continued success in our engineered solutions products for green energy applications and an extremely strong quarter for our semiconductor wafer fab equipment business.

Both business units and PMT supported the strong growth we achieved in bookings and billings in the fourth quarter. Our Electron Device Group, or EDG, had an extremely robust quarter in bookings as we continue growing market share from our competition and finding new applications for legacy tube products, specifically magnetrons used in the development of synthetic diamonds and other green solutions. We also continue to experience excellent growth in our Power & Microwave Group, our PMG business unit. Over the years, we have added new technology partners and new products 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 green initiatives across our global markets.

With respect to 5G and power management, revenues increased by high double digits again in the fourth quarter with a very strong book-to-bill ratio. PMG experienced exceptional growth in demand for green energy applications such as wind energy, electric locomotives and energy storage. Our recently introduced products, such as the patented ULTRA3000 Pitch Energy Module used in wind turbines, continued to gain traction and 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, shipping over 22,000 units in FY '22. We also saw a major increase in bookings with Enel, Invenergy, Evans and numerous other owner-operators of GE wind turbines.

We are in discussions with a major wind turbine OEM for private label development of numerous products, which we hope to announce in the second half of FY '23. During the fourth quarter, we also received an $18 million order for our power management module used in electric locomotives. This module along with products like our Ultra3000 and UltraGen3000 extend our leadership position by further supporting innovative power management solutions using various technologies to replace lead acid batteries across numerous markets and applications. Our patent pending ULTRAGEN3000 designed for generators and cellular base stations and critical facilities had great success in the AFA product trials. We anticipate beta testing should be completed by the end of the calendar year.

As I mentioned, we continue to add new products to our portfolio, and we are on schedule to introduce new products and technology partners throughout FY '23. Our RF microwave components business, also part of PMG, continues to benefit from the high demand associated with 5G, microwave communications and SATCOM applications. The use of these applications is driven by people working from locations requiring the capability to send large amounts of data. Our entire team has done a great job, identifying niche technology partners who collaborate with us globally, and we added more small innovative suppliers in the fourth quarter. We also continue to invest in and focus on resources to support our growth. We are adding design engineers, field engineers and manufacturing capabilities across our organization.

Our growth strategy has been highly successful over the years, and we will continue to develop new 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 past fiscal year, our legacy tube business had a strong return in both bookings and billings. The fourth quarter of FY '22 continued to prove that the demand for our products and services did not go away with the pandemic, and we are even more excited about the trends in bookings that will support strong revenue growth in the coming fiscal year. We continue to receive support from our key partners such as Qorvo, MACOM, Anokiwave, Ellis Materials, Amogreentech and Fuji Semiconductor. Key tube manufacturers in the industry, such as CPI, Thales, NJRC and Photonis work with us to manage our customer requirements.

Our growing in-house engineering and manufacturing teams did a great job supporting increased demand for current products and new product designs. The team also supported product designs for key growth markets, focusing on green energy solutions as the patented ULTRA3000 and patent-pending UltraGen3000 and power management modules for electric locomotives. I am pleased with the progress we are making. We will continue to identify, develop and introduce new products and technologies for green energy and other power management applications. We remain challenged by longer semiconductor lead times and the overall supply chain. This affects both our component business and Engineered Solutions products. We are aggressively investing in inventory that should position us to fill the pipeline and ensure we can meet our customers' needs while we collaborate closely with our customers and suppliers.

Starting in Q1 FY '23 earnings release in October, we've been announcing the new Green Energy Solutions group. This group is formed out of PMT and will be managed by PMT as we continue to focus on power management applications that support the green energy markets globally. I cannot stress enough the value of Richard Electronics model to our customers and suppliers. Our unparalleled capability and global go-to-market strategy are unique to the power and (inaudible) market industries.

We have developed a strong business model, including legacy products and new technology partners that fit well with our engineered solutions capabilities. Through our steadfast and creative focus on customers, we will continue to excel by taking advantage of opportunities as they arise. Our backlog has never been stronger, and the execution of our strategy has never been better. There's no question our customers and technology partners need Richardson products and support more than ever.

And with that, I'll turn it over to Wendy Diddell to discuss Richardson Healthcare.

Thanks, Greg. Good morning, everyone. Fourth quarter sales for the Healthcare group were $2.9 million, an increase of 4.1% over Q4 of FY '21. Chip sales were lower than our prior quarter and prior year due mainly to lower sales in China and Ukraine, while sales from replacement parts and systems were strong. Unfortunately, we had a significant supplier issue in the quarter, forcing us to scrap a number of targets as well as 5 tubes before we temporarily suspended production. As a result, gross margin in the fourth quarter was 10.8% versus 29.4% in Q4 last year. While we are disappointed by this issue, we were able to determine root cause and are now back in full production. Healthcare full year sales were $11.4 million in FY '22, 10% above FY '21 sales of $10.3 million. Both tubes and parts sales increased. System sales were flat due to limited supply.

In May, we completed our second ALTA750G beta and were able to do a soft launch of the 2. We are still waiting to receive CE approval, which is required to sell the G tube in Europe and Canada. This is the second tube in the Canon series, and it works on newer Canon CT scanner models. Sales growth will be gradual as we get the ALTA750G into the market and Canon CT scanners come off with OEM service contracts. We anticipate sales of our Alta750D will also improve as more scanners become available and because we recently received our MDSAP certification and Canadian Device license, allowing our ALTA750D CT tube to be sold in Canada.

We continue to make good progress on the Siemens repaired tube program. This is a series of 4 tube types, including the Straton Z, MX, MX P and MX P46. The Siemens installed base is considerably larger than Canon, and there are no third-party replacement options for these tube types. We are on track to release the repaired Straton Z later in calendar year 2022. The MX and MX P series will follow in 2023. The Siemens program is a critical element to achieving our goal of providing a positive operating contribution to the company by Q4 of FY '24.

I will now turn the call over to Jens Ruppert to discuss the results for 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 outstanding performance and set a new quarterly record with sales of $9.5 million for the fourth quarter of fiscal 2022. Strong customer demand on a global base drove a 7.1% increase in sales over the same period last year. Global sales grew by 20.0% to $35.2 million in fiscal 2022, the highest revenue since fiscal year 2013 due to an increased demand globally and the addition of new customers and programs. This was a remarkable accomplishment considering the long-term business impact of COVID-19 pandemic.

Gross margin, as a percentage of net sales, was 30.7% during the fourth quarter of fiscal 2022, down from 35.3% during the fourth quarter of fiscal 2021. Our fiscal year 2022 gross margin as a percentage of sales decreased to 32.0% from 35.0% versus fiscal year 2021. The decrease in gross margin was related to higher component costs, increased freight costs and foreign currency effects, which impacted many companies around the globe like Canvys. Extended lead times on several key components remains an issue. However, our close relationship with customers and partners overseas enables us to procure long lead time components which has helped us maintain our backlog at prior quarter's record level of $52.4 million.

Canyvs' backlog increased by 52.3% on a year-over-year basis. Our customers are ensuring product availability in advance, and we have orders on the books that are scheduled to ship up to 3 years from now. It is important to understand that we serve a highly specialized customer base for whom it is difficult and costly to change out components. We are extremely proud to count many of the top 10 medical device companies worldwide as our long-term customers. In fact, 76% of our fiscal year '22 revenue came from medical OEMs and all our products are custom designed to their needs. It takes years getting the product to market, but when we are the supplier of choice, we are signed-in for many years to come. All customer orders are binding, and we won't find ourselves in an overstep position. While we expect the growth in the backlog to level out in the near term, we are optimistic that the high demand for our custom monitors, touch screens and all-in-one systems will continue.

We recently released our 32-inch 4K monitor platform and the level of interest is encouraging. The product offers high brightness, a white color garment and a plastic housing to optimize the overweight of the monitor. This platform is customizable with a 12G SDI interface, PCAP touch and 3D polarizer options. This high-end product meets medical requirements and is DICOM compliant. We are targeting the robotic navigation and minimally invasive surgery space with this new platform, and we are confident that our product strategy will result in new leads and business growth.

During the quarter, we received 7 new orders from existing and first-time OEM customers. Some of these include cardiac pulse field ablation, femtosecond laser, (inaudible) light and laser therapy, colposcopy, surgical navigation, C-arm, laser lithotripsy, medical device control and fully integrated operating rooms, robotic-assisted surgery, surgical video documentation, atherectomy laser and endoscopy. In the nonmedical space, our products are used in a variety of commercial industrial applications. This includes CT scanners for inspecting luggage at airports, passenger information systems on buses and trains, human machine interface for process automation, metal 3D printing and product dispensers for retail applications.

We are very pleased with our team's performance. Our strong customer relationship together with a record backlog position us well for future growth. From the variety of customers and applications as well as the value of orders from existing and new customers, it is clear we offer our global customers outstanding products and local service. While our sales organization stays focused on new opportunities, I stay focused on improving the operating performance of the division, maximizing cash flow and improving Canvys' profitability is an ongoing priority. We continue to work closely with our partners to meet the demand of our customers, particularly with the challenges brought on by industry-wide supply chain delays.

I will now turn the call back over to Ed.

Thanks, Jens. Another amazing quarter and year for Canvys. As you can see, there's a lot happening within Richardson Electronics, and I'm encouraged by the positive momentum underway across our business. From green energy to new uses for tubes such as magnetrons, from custom displays used by companies like Medtronic and (inaudible) to very sophisticated CT tubes, our business is growing. We're carefully preserving our cash so we can invest in our employees and our facilities to accommodate the positive demand we're experiencing for engineered solutions.

As of now, we're not seeing the impact of a recession on demand for our products, but we're closely minoring activity and backlog growth across our global markets, and we'll react quickly if needed. At the end of Q1, we'll begin recording a fourth business unit called for Green Energy Solutions. This will highlight the growth in revenue generated from our new solutions as well as existing products using green applications. Our product roadmap is solid, and we expect to grow sales from new customers, new products and new applications. We look forward to sharing more details with you in the coming quarters.

At this time, we'll be happy to answer some questions. Thank you.

(Operator Instructions) Our first question comes from Anja Soderstrom with Sidoti.

Congratulations on an exceptional quarter, lot of exciting things going on. My first question is going to be around the Healthcare and sort of the -- if you could just clarify what sort of put the weight on the margins there and what we can expect in the coming quarters in terms of that?

Ana, it's Wendy Diddell. So yes, so we were disappointed, obviously, in the quarter with the margin and that, as I mentioned in the presentation, was associated with a supply issue where a key part of the tube that we use, there was a change in the process and it caused us to lose both targets and 5 tube. And so, the margin, as a result in the fourth quarter, was down around 10%, that was also impacted because we had to stop production. So we were considerably under-absorbed. I will mention that when we are -- when we closed production in the Healthcare area, we were able to relocate a lot of the people to other areas of the company.

So we didn't lose them completely. We were able to take advantage of the skills that they have and have them work over in the LaFox manufacturing area, working on the wind turbine program and our land program. So that was a positive. But what we can expect going forward, we are back in production. The first quarter, we have not had any supplier issues nor any significant equipment issues. So I would anticipate that the gross margin will go back into the mid- to upper 20s, barring any unforeseen circumstances that could still happen in the next 6 weeks or so.

And I think you mentioned something about Ukraine and China in terms of the Healthcare business. What did the experience there in the fourth quarter and do you expect that to be sustained for (inaudible) now?

Good question. So with respect to Ukraine, one of our significant customers are located there, and they have started buying again. So I would expect to see gradual sales coming back from them. They're temporary located in Poland, and so they're still able to service CT equipment. And in China, that's a timing issue. We already received and shipped a large order in the first quarter. So there's no question about the demand or any issue there. It's just a timing issue. So I think we'll see that come back in the first quarter.

Okay. So that was just isolated to the fourth quarter, the issues with Ukraine and China?

Well, Ukraine is variable, obviously, we have to wait and see how things go there.

Okay. And then with the PMT business, you've been talking about that the wind turbine business there, and you have the large order with NextEra. When can you sort of anticipate a follow-up order from them and what do you expect in terms of that?

Thanks Anja. Greg, do you want to answer that?

Sure. So we have weekly calls with NextEra. We're working on a number of other products for their wind turbines that we'll be announcing here in the second half. We'll be finishing up Phase 1 sometime at the end of the summer, and we'll probably receive the Phase II order, which would be similar in size, if not bigger, in our Q2, and that was the status as of yesterday morning. So it's a great partner. But the good news is that we, over the past 18 months, have now 9 different customers, owner-operators of wind turbines that are purchasing this product. So we have definitely become the incumbent for this product in the industry, especially North America. And we did receive in the quarter, which was amplified the strong bookings quarter, exclusive order and shipments to Invenergy and Enel, which are 3 now with NextEra, 3 of the top owner operators of GE wind turbines in North America. So it's really growing fast.

Okay. And then in terms of the beta test for the power stations, when are those concluded? I want to anticipate some orders from there.

Yes so we received an order for 12 cell towers from T-Mobile. That current beta site testing is happening right now in their facilities there in Phoenix, Arizona. Similar to the Ultracapacitor 3000, it's about a 6-month process for them to do all the analysis and get the beta site testing. So in terms of production orders, I would expect those in Q3 of our fiscal year, starting with T-Mobile.

Okay. And then on the Progress Rail, it seems like you're also just scratching the surface there. What can we expect there? And are there other sort of use cases that you could also support them with?

Well our Progress Rail is owned by Caterpillar and what the benefit of that entire program is we continue to see other opportunities for other products for Progress Rail and for Caterpillar. The program to date is we booked in the quarter, as I mentioned, an $18 million order. This product is the lithium module that we shipped to Brazil, and they assemble it into the electric locomotive structure and then ship that to customers outside of North America. In the meantime, over the past 6 months, we've developed the relationship where we're going to be the manufacturing arm and design arm for products being sold to North American customers, such as Union Pacific, Long Island Railroad. We booked $3.5 million order to build not only the lithium module, but what's called the super structure, which really is the guts of the electric locomotive.

We'll then ship that to Progress Rail who then ship it to their customers. We fully expect an add-on order to that in Q1, about the similar amount, about $3.5 million. In terms of content, the $3.5 million, our content is about $1.2 million for that per locomotive. So any customer in North America is asking for, in some cases, demanding, that as much content whether it's the build, assembly, test, support, is in North America. And with Richardson's capabilities here, Progress Rail picked us in the fourth quarter to do this program with them. So we're very excited about that. And if you saw some press releases, Union Pacific is placing 20 -- orders for 20 locomotives this fiscal year.

Yes. And then there are potential other use cases with Caterpillar as well or...

Yes but for different products. It's just -- to be a confirmed agreement as a design and manufacturing arm for a company like Caterpillar, that just gets you in a position where, for example, with Progress Rail, we have a call every week. And there's about 20 engineers on those calls. And it's just amazing the opportunities as everybody tries to go green, and we have this niche power management capabilities here at Richardson to take advantage of some of these -- I call them niche applications, they're quite large for us, but to others, they're kind of niche. So I recommend, if I could, have anyone on that call because when you hear the 20 engineers talking anybody who thinks we're a tube distributor will realize real quick that we are that and so much more, so much more.

Okay. And then in terms of Canvys, it's been a very strong growth for you. Is that more catch-up from the pandemic or do you think that's going to be sustainable?

So this is Jens. So I absolutely think that's sustainable. Yes we will continue to grow. We have a lot of new opportunities in the pipeline. And as I mentioned it in my script, too, there is -- the go-to-market takes a long time. Sometimes we talk 3, 4, 5 years to the engineers to get everything going. So it's really not a short-term thing. It's a mid-and long-term thing. So we have definitely new opportunities working on. So I anticipate the business further to grow, yes.

Okay. And then what kind of currency impact do you have? Can you just go over the puts and takes there and how we should think about that impacting your results in the coming year?

Bob, do you want to address that, please?

Sure. Well you saw there was more of an impact on the currency in the fourth quarter, mainly due to the drop in the euro versus the dollar, and we expect that to continue. On the other hand, all the forecasts I've been reading coming up in fiscal '20 could go the other direction with the dollar going down. So you're going to see ups and downs. So I would expect in the first quarter, we'll see probably a similar impact to what we had in the fourth quarter but after that, I would expect improvement.

So euros are the largest currency or...

Our biggest exposure is -- correct, yes. That's correct.

Okay. And then you also mentioned, I mean, you're retrofitting your facilities here in the U.S., and you're expecting higher CapEx this year. Can you quantify that?

Yes, we're probably going to spend $2 million or something like that. What we're doing with the COVID situation, more and more of our employees are working from home. So we have a lot of space, especially on the first floor that we're converting into manufacturing and moving all the private offices upstairs. The building was built in 1986, and so, this is the first time we've done a major renovation, and it will take 2 or 3 years, but probably capital expenditure will be $3 million to $5 million over that period.

Our next question comes from Gokul Kannan with Infosys. Our next question comes from Denis Amato shareholder.

I'd add my congratulations -- I want to add my congratulations, that's a super quarter. I just had 2 questions, one sort of a general one. Given the great quarter and given the really good backlog numbers, does anybody have any idea why the partner reaction is so negative today?

We don't, that's for sure. The company has never done better than it's doing now. I think in our 75-year history, this is our 75 year and I've been around 60 years, this is the most profitable year and quarter that we've ever had and with $206 million backlog, it looks like we'll do $250 million or $255 million next year without any problem. So I think we're on track to be a $500 million company here in the next 5 years and extremely profitable.

Yes I just wondered if you've heard anything from analysts or shareholders which would indicate why anyone would have been disappointed with the results?

I think what's happening is that we have some major shareholders that have been onboard for 10 years, they're finally able to take a profit on their holdings, and you can't blame them for that and I think that's what's happening at some of them bailing. But the good news is that for every share that sold, there's also a buyer.

Yes. My second question is for Bob Ben. It appears that in this quarter, you've segregated out for the first time, cash and investments rather than all cash and equivalents. Can you comment on 2 things -- what does the investment component consist of? And 2, given the fact that we now have finally positive interest rates on short-term treasuries, et cetera, what do you see going forward as your ability to finally earn a decent return on all the cash that you've been holding?

Yes. So yes, you just noted that we did make some -- move some of our money into investments, specifically, those are at the CD. And as rates go up, we'll continue to look at that. I would expect that given some of the increases that we should expect this year by the end of the fiscal year, we should get some more investment income than certainly than we've had in the recent past.

It seems like 90-day T-bills now at like 2.5, actually, better than CD rates and more liquidity. Is there ability to put more of that -- the other money into short-term treasuries?

Yes, there is that ability and we're always looking at that. We have an investment committee that reviews that every quarter. So we'll certainly be looking at that. But we -- as I mentioned in my remarks, we have over $25 million in cash in the U.S. and $15 million approximately overseas. So we're constantly reviewing opportunities and we'll do so going forward.

Our next question comes from [David Schneider], private investor.

Looking at the May quarter and the fiscal year in general, just on cash flow from operations for the fiscal year total, it was, let's say, a very small percentage of net income. And just wondering what factors might change that going forward so that the company sees more flow from operations relative to net income?

Bob, do you want to address that, please?

Sure. Well obviously, with cash flow from operations, there's quite a few things in there. The main drivers, of course, are net income, depreciation, accounts receivable, inventory and accounts payable. And as we saw in FY '22, we had significant increases in accounts receivable and inventory specifically. And those were, as I mentioned in my remarks, the accounts receivable increase was largely just due to the growth in sales. We did keep our DSO fairly (inaudible) at approximately 39 days. So that was really a function of the sales increase. On the inventories, we talked about that.

Greg mentioned in his area specifically that we're buying everything we can get in terms of components so that we can stock up and ship our new products as quickly as possible. In addition, our manufacturing business, as I mentioned, is doing similar things and has a lot of work in process, particularly in the semiconductor wafer fab area. So I expect that to continue but maybe at a lesser growth rate in FY '23, and I certainly expect higher net income will help that. So I think it's a combination of higher net income and managing our working capital as best as we can. But as we've noted, it's for reasons with the supply chain and a very high growth rate in the business, it's a bit challenging to keep that under, but we're certainly doing our best.

Yes, at least how I calculate your days inventory outstanding really for the last -- it's been pretty flat for the last 5 quarters. It does bounce around a little bit, but I think you're right on about pretty much the same thing with days sales outstanding and days payable outstanding, cash conversion cycle, the way I calculate it, it was 153 days in the May quarter, pretty steady for the last 5 quarters. So yes, I guess as you described -- sorry.

No, I was just going to say, I do expect improvement, though, in FY '23 cash flow from operations. So I don't think I specifically said that but definitely, I expect improvement.

Okay. A lot of good news. And regarding the word Ukraine did come up in the call once or twice and given the unfortunate situation there, if we were to take a worst-case scenario and just give it a 0 going forward, how relevant would that be to the company?

It's very small. It's a few hundred thousand dollars.

Our next question comes from Ross Taylor with ARS Investment Partners.

I was going to say, you beat my estimates and my expectations for the quarter. If I had to guess, I would say I think you're seeing selling it looks almost like a retail type thing where people were looking for something they didn't get it and they're running out the door because they don't necessarily understand what they own. Away from that, real quick, you mentioned some things I thought were very interesting and no one has followed up. You talked about a white label opportunity in the wind turbine space. Could you -- is that a domestic or a foreign customer you'd be white labeling for?

Greg, do you want to answer that?

Sure. The private label thing we're talking about with a major wind turbine manufacturer it would be a global agreement. The products are used in all their wind turbines. We already have beta sites confirmed. As I mentioned before, we're still in the design stage. But it will be -- actually to start out, it will be North America, India and Spain will be the 3 sites that we'll be testing the product for them.

Okay. And I'm sure you can't tell us who the customer is, but is it a -- is the customer domestic U.S. player or European player?

It's a global player, but mainly Europe.

Okay. Great, that's actually really exciting. That's not what I thought how -- I thought you -- I didn't think you'd answer that question that way. Okay. So then looking at some other things, obviously, you guys just commented on the fact that you've been building up inventories. This is a very common thing I've seen in a lot of my companies given the uncertainty and people who are looking at rapid ramp-ups. How -- what do we need to see in your supply chain to get it so that you'll be comfortable pulling those inventories down to more historic levels and thus converting them into cash just next year?

Well, I think that we have a lot of issues on -- particularly on integrated circuits that we use in the ultracapacitor module. Delivery is like 48 weeks, and we're just sort of hand to mouth. So any time we have a chance to put inventory in, we do and for instance, with the ultracapacitors, we bought all the ultracapacitors well in advance that we know that we have orders coming through for. And we'll continue that as long as there are shortages out there. We'd much rather have inventory so that we can address our customers' demand. And as you know, we have $40 million in cash. So that's not an issue.

No -- and what you're doing is prudent. It's just -- it seems at some point, eventually, we'll get to a more normalized supply chain. And as that happens, we should expect to see, I would think, cash conversion out of there that could be meaningful overall.

No I think that's correct. I think you'll see this year will be sort of cash flow neutral, maybe spend a few million dollars. And then in years to come, we're going to be cash flow positive and building a substantial amount of cash.

Cool. Now you talked about a soft launch in the second Canon series tube. What do you think -- these tubes have always been a little bit of a Holy Grail out there, you've got a great product. You haven't been able to really drag the top line across that you would hope to have dragged Canon. Are you seeing any market reaction to what you're in and what kind of top line leverage do you think we should be seeing as you bring the second tube on and perhaps additional tubes on over this fiscal year?

So we do -- like I said, we do expect the growth to be gradual. We do, however, anticipate a pretty nice level of growth in our fiscal year in that business segment. And that will be partially from the G, the new tube. Part of that will come from the additional D sales. Now that we have the G and the D, we can cover more of the Canon market and so people who might have been reluctant to take their system off of the service contracts with Canon, can now do that and know that they can get both almost the majority of their systems covered by a third-party service company. So with that, we would anticipate some growth in those sales. But for us, again, really the bigger driver of growth is going to be that Siemens program.

Okay. And then you did comment -- yes, so obviously -- what kind of time horizon are we looking at for Siemens do you think?

Yes so we're hoping to have the first one out, which is the Straton Z. We're hoping to have that out before the end of this calendar year. We've got a few that are ready right now that are going to go first to a, let's just call them a close friend, test in their locations and then if they perform as we anticipate they will, then we will look at beta sites for them. And if that all goes well, again, we'll see those launch in the next 3 to 6 months. The bigger part of the line is the MX series. There's 3 tubes in that, and that will be in calendar year 2023. We're still a little bit of ways on that.

And when they launched, you commented you think you get mid- to high 20s operating margin on the recovery after what happened in the last quarter? Do you think that as you launch them, that operating margin should be able to stay the same? Do you think you'd grow it? The division is operating below some of the other areas in the company.

Definitely. Yes we're really counting on that Siemens program to help improve. When you say operating margins, I'm talking about gross margin?

Yes, yes.

Yes and we do anticipate that going up for the 2 reasons: One is that when we sell them, it has nice margin; and then 2, picks up some of the excess capacity that we have in our plant. We've told you before that we've got the capacity to make up to 1,000 tubes over 3 shifts, and we're still making less than 300. So the more tubes we can get into production, the lower the cost per tube goes. So it's a win on the top line, and it's a win at the gross margin line.

Sounds fantastic. And can you -- 2 other areas, can we talk about the market potential and the ramp-up from T-Mobile and others in the wireless space?

Greg, do you want to address that?

Sure. I think it's going to be similar. It will obviously start with North America. We do have Verizon and AT&T in line to do some beta site testing this fall. So the ramp-up, again, like I kind of mentioned, I think production orders will start seeing in our Q3 from T-Mobile, and then we'll be finishing up the beta site testing with Verizon and AT&T at the end of our fiscal year. I will add, in addition to that, we are in the process of a pretty large program with a critical facility, a hospital network here in Illinois that will also use this product for the same generator, same type of situation.

But that will be also something we'd probably see not until Q3 or Q4. But we continue to add customers, continue to do the beta site testing. And again, as I mentioned before, similar to the ULTRA3000, where we had just absolutely excellent results in terms of the beta site testing and lack of failures, we're seeing that with this too. So I think it's going to go from 0 to 100, like Ultra3000 didn't I don't -- but I don't think that's going to be until probably third and fourth quarter of this fiscal year.

Okay. But obviously, it's a pretty exciting area. Will you talk about -- or are you comfortable talking about per site revenue that you expect out of this?

I'm not going to talk about numbers, but for example, the Ultra3000, there's 18 per turbine with this in terms of the cell tower, there's only 1 per cell tower, but obviously, there's enough cell -- So that's kind of the mix.

Okay. And let's switch over to the rail engine, the electric rail engine. So basically, what you're looking at is about 1.2 million to RELL or per engine. Is that what we're looking at right now?

Yes. That's approximately our content. Now as they build these out, these are what I'll call commuter trains and those are used in either shipyards or going from LaFox to Chicago. What they're developing now, what we're doing on these calls is obviously for long-range trains, hauling products across the United States. Our content with that lot obviously be let a lot more because you're getting a lot more lithium modules. But right now 1.2 million is approximately our content today.

So 1.2 million is kind of like what you think as you said, is a commuter rail or a switching and type engine. And so how much -- I mean, obviously, the engines you're talking about -- I assume you're using the ones that one sees when you're out west and the trains go for 2 miles or something, that's the type of use you're talking about?

2 miles or farther, yes we go long range. And so yes, that's -- again, when I mentioned earlier in the call, the access, if you will, do we have to these type of programs, I mean we're talking about this program and then the second half of the call is for new products, and that would be for what's called long-range electric locomotives. And right now, the content there will be much higher than 1.2 million. It's amazing the number of cells they're talking about right now to run that locomotive that far.

That could -- would it be wrong to think it could be an order of magnitude?

Yes, but I don't know what that order of magnitude would be. I don't know if it's 5x, 6. Until I'm more comfortable with what that will be, I'll share that, obviously, as we get closer to product...

Yes. That's a hugely exciting opportunity, switching in the -- that's obviously a huge market from the number of engines that are operating. Okay. And then I think -- go ahead.

Well I was going to say, they all have initiatives whether internally or government to get their emissions down to certain levels by 2030 and 2050. So it's really one of those markets where not a matter of when, I mean, not a matter if, it's a matter of when. And so it's just -- you hit it on the head, it's really exciting to be here in LaFox, downtown LaFox and be working with these type of programs and then read press releases where these huge railroads are announcing how many electric locomotives you're going to buy, and you know that you're going to get potentially over half of that because today, the 2 main providers of those is GE Transportation and Progress Rail. So -- and we're in an amazing partnership with Progress Rail.

Okay. And that's -- as I said, you guys are really knocking the cover off the ball in here. And as I said, I would agree. I don't quite understand why the market is running away like they've just seen a mouse, but I think that gives opportunity to -- for those not in getting in because I'm not -- just listening to you, you guys -- you're talking about getting to $500 million, you should be able to retain or grow your operating margins as you push that direction, I would think.

Absolutely.

Okay. Well, that becomes huge. Okay, especially on a small share count. Okay. I'll pass it on to anyone else who wants to pick up.

(Operator Instructions) Our next question comes from Walter Schenker with MAZ Partners.

Ed, you've indicated -- again, I think you said it that the current fiscal year revenues could be, I think my number, but you've said it, roughly the $250 million range. It's the beginning. The outlook is good. This was a $60 million-plus quarter. And so to get to $250 million, you need on average 4 $60-plus million quarters. This quarter had some issues, positive and negative, increased freight, a tough quarter for medical. But the question is, if I look at how profitable you were this quarter with $60-plus million in revenues, is it reasonable to say this is how you would expect, and this is the level of profitability, broadly, a lot of moving pieces, you would expect in $60 million to $65 million quarters. I'm backing you into making a forecast, which you don't want to make, so I can ask questions, which you might be able to answer.

No I think the level of profitability will be sustained just about where it is now. And with a $206 million backlog going into the year, we're pretty certain we can make that $250 million, $255 million number without too less trouble.

Okay. Not that it wasn't great, but there were some moving pieces. Is there an ability to get either a surcharge or somewhat raise prices to offset you and everybody else is having freight cost issues was a couple of percent on margins. Is there things you can do to recover some of that or not?

Yes. Jens, do you want to address that because most of the freight issues are in Canvys?

Sure. Thanks. Yes. So we have, of course, contracts with our customers and as soon as they expire, we have increased pricing. Of course, we will pass on the freight cost increases from our partners and from the freight forwarders and we are very transparent there. Our customers, for example, say that they can do it cheaper. We are not making money on freight. We are happy that they take care of the import.

But other than that, we have actually, I think, pretty good freight ways in general because we have containers going from Asia to Europe and to North America all the time, right? So we collect it for different suppliers. And therefore, we should have a very fair freight rates even so they are up like everyone freight rates are. So to the question, yes, we will see opportunities where we can pass it on to our customers, absolutely.

Clearly, Jens, the dogs does not like the freight.

No, we just got from me. No, the dog is because someone's working on my deck, and she hates it. Sorry about that. But last comment, and it's not a question. I know Ed and Wendy, every time we meet, I suggest that the Board consider at some point to buyback. If the stock stays around these levels, which is a little over 11x maybe annualizing the fourth quarter, gain, I know in the past, you've wanted to wait till you got the cash flow neutral to positive but during the course of this year, you should get there. And I would, again, as a shareholder, suggest one use of cash is buying back at least some stock going forward. It's -- I keep saying it and you keep smiling at me.

It's a topic of discussion at every board meeting. That's all I could tell you.

Our next question comes from Gokul Kannan with Infosys. Our next question comes from Maricris Goco with FactSet. And I currently show no further questions at this time. I'd like to turn the call back over to Ed Richardson for closing remarks.

Thanks, Shannon. We appreciate your patience and support. It's been a long road, but we're really excited about the future. Reaching this level of performance has taken longer than we anticipated for sure, but we're very excited about what's going on and the tremendous backlog we have. We understand the story is complex. So any time give us a call, and we're happy to answer your questions or better yet, come and see us. It's easier to show you what we do than to tell you about it. We look forwarding our fiscal 2023 first quarter performance with you in October. Thanks very much.

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