Richardson Electronics Ltd. (RELL) Q3 2022 Earnings Call Transcript

Richardson Electronics Ltd. (NYSE: RELL) Q3 2022 earnings call dated Apr. 07, 2022

Corporate Participants:

Edward J. Richardson — Chairman, Chief Executive Officer and President

Robert Ben — Executive Vice President, Chief Financial Officer and Corporate Secretary

Greg Peloquin — Executive Vice President, Power & Microwave Technologies

Wendy Diddell — Executive Vice President and Chief Operating Officer, Richardson Healthcare

Jens Ruppert — Executive Vice President and General Manager, Canvys

Analysts:

Howard Brous — Wellington Shields — Analyst

Ross Taylor — ARS Investment Partners — Analyst

Tim O’Connell — Chain of Lakes Investment — Analyst

Khadir Richie — Richie Capital Group — Analyst

Walter Schenker — MAZ Partners — Analyst

Eric Landry — BML Capital — Analyst

Mike Hughes — SGF Capital — Analyst

Mike Schillinger — Macrocap Club — Analyst

David Schneider — — Analyst

Presentation:

Operator

Good day and thank you for standby. Welcome to the Richardson Electronics Third Quarter Fiscal Year 2022 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Ed Richardson, Chairman and CEO. Please go ahead.

Edward J. Richardson — Chairman, Chief Executive Officer and President

Good morning. And welcome to Richardson Electronics conference call for the third quarter of fiscal year 2022. Joining me today are Robert Ben, Chief Financial Officer; Wendy Diddell, Chief Operating Officer and General Manager for Richardson Healthcare; Greg Peloquin, General Manager of our Power and Microwave Technologies Group; and Jens Ruppert, General Manager of Canvys.

As a reminder, this call is being recorded and will be available for playback. I would also like to remind you that we’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.

Our third quarter set another quarterly sales record since we sold RFPD in 2011. It was also our seventh consecutive quarter of sequential revenue growth, which is remarkable when you consider the number of holidays that are in our third quarter. In fact, all three business units performed better than Q3 last year. And we overcame the unprecedented absences due to COVID-19 cases, particularly throughout the month of January.

Net sales for the third quarter of fiscal 2022 were $55.3 million, 22.3% higher than last year’s third quarter. Gross margin declined due to higher percentage of lower margin sales, higher freight costs and cost increases for raw material and components. Despite these challenges, third quarter operating income was $3.6 million or 6.6% of revenue, which is a significant increase from $315,000 or 0.7% of revenue for the same period last year.

Backlog at the end of the quarter was $175.6 million, up 19.5% over the second quarter. Each of our three business units had higher backlog, driven by strong bookings growth. Within PMT, our largest business unit, backlog increased across numerous product lines, most notably in power management, semiconductor wafer fab and magnetrons. These products are used in many new applications, including alternative energy, 5G and manufacturing diamonds, hydrogen and building products. I’m pleased with the performance and I’m confident that this will lead to continued growth.

Considering Russia’s recent aggressive actions against the Ukraine, we stopped all shipments to Russia. Historically, we ship less than $1 million to Russia each year. We also have customers in the Ukraine, which represent less than $1 million in revenue per year, primarily in healthcare. We extend our heartfelt support to our friends, families and customers in the Ukraine and wish for a very swift end of this unjust war.

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

Robert Ben — Executive Vice President, Chief Financial Officer and Corporate Secretary

Thank you, Ed, and good morning. I will review our financial results for our third quarter and first nine months of fiscal year 2022, followed by a review of our cash position.

Net sales for the third quarter of fiscal 2022 increased to $55.3 million, up 22.3% compared to net sales of $45.2 million in the prior year’s third quarter due to higher net sales across all three business units. PMT sales increased by $8.8 million or 25% from last year’s third quarter, driven by strong growth from our new Power and Microwave Technology partners for various applications, including Power Management and 5G infrastructure, as well as increasing shipments of our patented ULTRA3000.

In addition, sales for several electron tube product lines, including semiconductor wafer fabrication, increased from the third quarter of fiscal 2021. Canvys sales increased by $1.1 million or 15% due to the strong customer demand in North America and Europe. Richardson Healthcare sales increased $0.2 million or 7.4% year-over-year due to an increase in part sales and an increase in demand for the ALTA750 tubes.

In addition to higher revenues, total company backlog increased to its highest level since the sale of RFPD of $175.6 million in the third quarter of fiscal 2022 from $146.9 million at the end of the second quarter of fiscal 2022 and $98.7 million at the end of the third quarter of fiscal 2021. Backlog increased in all three business units when compared to both third quarter last year and our most recent second quarter.

Gross margin for the third quarter was 31.8% of net sales compared to 34.9% of net sales in last year’s third quarter. PMT’s margin decreased to 32.2% from 34.9% due to a higher mix of lower margin PMG sales, partially offset by increased shipments at wind turbine modules. Canvys gross margin decreased to 32.2% from 35.2% because of higher global freight costs. Healthcare’s gross margin was 25.1% in the third quarter of fiscal 2022 compared to 33.0% in the prior year’s third quarter due to an increase in component scrap expense and rising freight costs.

Operating expenses were $13.9 million for the third quarter of fiscal 2022 compared to $15.5 million in the third quarter of fiscal 2021. The decrease in operating expenses resulted from the non-recurrence of a $1.6 million legal settlement in the third quarter of fiscal 2021. In addition, lower legal fees were offset by higher employee compensation expenses. The company reported operating income of $3.6 million or 6.6% of net sales for the third quarter of fiscal 2022 versus operating income of $0.3 million or 0.7% of net sales reported in the third quarter of last year.

Other expenses for the third quarter of fiscal 2022, including interest income and foreign exchange, were $0.1 million compared to other expenses of less than $0.1 million in the third quarter of fiscal 2021. The income tax provision of $0.6 million for the quarter reflected a provision for foreign income taxes and the offset of a US tax provision against the valuation allowance. In addition, state income taxes for Illinois increased due to the suspension of net operating loss carryforwards until the end of fiscal 2023.

Net income was $2.9 million or 5.2% of net sales for the third quarter of fiscal 2022 as compared to a net income of $0.2 million or 0.5% of net sales in the third quarter of fiscal 2021. Earnings per common share on a diluted basis in the third quarter of fiscal 2022 were $0.21 compared to $0.02 per common share on a diluted basis in the prior year’s third quarter.

Now, turning to a review of the results for the first nine months of fiscal year 2022. Net sales for the first nine months of fiscal year 2022 were $163 million, an increase of 28.9% from $126.5 million in the first nine months of fiscal year 2021. Net sales increased by $30.4 million or 30.8% for PMT, $5.2 million or 25.6% for Canvys and $0.9 million or 12.2% for Richardson Healthcare.

Gross margin decreased to 31.6% from 33.6%, primarily reflecting product mix in PMT and higher global freight cost in Canvys, partially offset by improved manufacturing efficiencies for healthcare. Operating expenses were $40.6 million for the first nine months of the fiscal year, which represented a decrease of $1.3 million from the first nine months of the last fiscal year. The decrease was due to the non-recurrence of a $1.6 million legal settlement in the first nine months of fiscal 2021 and lower legal fees, partially offset by higher employee compensation expenses.

Operating income for the first nine months of fiscal year 2022 was $11 million or 6.7% of net sales as compared to an operating income of $0.6 million or 0.4% of net sales for the first nine months of fiscal year 2021. Other expenses for the first nine months of fiscal 2022, including interest income and foreign exchange, were less than $0.1 million as compared to other expenses of $0.5 million for the first nine months of fiscal 2021.

The income tax provision of $1.3 million reflected a provision for foreign income tax and the offset of US tax provision against the valuation allowance. In addition, state income taxes for Illinois increased. The company reported net income of $9.6 million or 5.9% of net sales for the first nine months of fiscal year 2022 versus a net loss of $0.2 million for the first nine months of fiscal year 2021. Earnings per common share on a diluted basis in the first nine months of fiscal 2022 were $0.71 compared to a net loss of $0.02 per common share on a diluted basis in the prior year’s first nine months.

Turning to a review of our cash position. Cash and investments at the end of the third quarter of fiscal 2022 were $39.1 million compared to $39.7 million at the end of the second quarter of fiscal 2022 and $47.4 million at the end of the third quarter of fiscal 2021. The company continues to invest in working capital to support its growth initiatives. Accounts receivable increased to $31.6 million at the end of the third quarter of fiscal 2022. However, days outstanding were 39 at the end of the third quarter compared to 40 days at the end of the second quarter. In addition, inventory grew to $73.7 million from $70.7 million at the end of the second quarter of fiscal 2022, primarily due to increases in components and work in process for our manufacturing business.

Capital expenditures were $0.6 million in the third quarter of fiscal 2022, the same as in the third quarter of fiscal year 2021. Approximately $0.2 million related to investments in our Healthcare business, $0.2 million was for our manufacturing business, $0.1 million was for our IT System and $0.1 million was for other projects.

We paid $0.8 million in cash dividends in the third quarter of fiscal 2022. In addition, based on our current financial position, our Board of Directors declared a regular quarterly cash dividend of $0.06 per common share, which will be paid in the fourth quarter of fiscal 2022.

Finally, during the third quarter of fiscal 2022, we repatriated $0.5 million to the US from Japan, bringing our total year-to-date repatriations to $1.5 million. Our US domiciled cash and cash equivalents balance totaled $24.8 million as of February 26, 2022.

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

Greg Peloquin — Executive Vice President, Power & Microwave Technologies

Thank you, Bob. Good morning, everyone. Sales for the Power and Microwave Technologies Group, or PMT, in the third quarter of fiscal year 2022 grew 25% to $44 million versus $35.2 million in Q3 last year. In addition to strong sales quarter, PMT achieved an excellent book-to-bill of 1.47. Our sales growth and strong bookings confirm another solid quarter to what is shaping up to be an excellent FY ’22.

Our gross margin decreased in the quarter to 32.2% versus 34.9% in the prior year, which was mainly due to some product mix as well as increased freight, component and labor costs. Both business units in PMT supported the strong growth in bookings and billings in Q3. Our Electron Device Group, or EDG, had an extremely robust quarter in bookings as we continue to take market share from our competition and continue to find new applications for our legacy tube products, specifically magnetrons using development of synthetic diamonds and other green solutions.

In addition, we continue to experience outstanding growth in our Power and Microwave Group, or PMG. Over the years, we’ve added a growing line of new products and technology partners targeting RF and Power Management applications. This includes 5G infrastructure programs as well as programs dedicated to the consistently growing Power Management and energy storage applications that support numerous green initiatives.

With respect to 5G wireless and power management, revenues increased by high double-digits again in Q3 with a very strong book-to-bill. Power management saw growth in applications for wind energy, electric vehicles and energy storage, recently introduced products such as our patented ULTRA3000 Pitch Energy Module used in wind turbines continued to gain traction with increased sales and bookings in the quarter. We are producing the ULTRA3000 with remarkable results in the field and millions of accumulated hours of operation. During the third quarter, we received our second patent for the Pitch Energy System for wind turbines. This extends our leadership position by further supporting our innovative ULTRA module technology.

We also saw an increase in bookings with key customers such as Enel, Enver Energy, RWE and numerous other owner operators of GE wind turbines. Our ULTRAGEN3000 designed for generators and seller base stations in critical facilities has had good success in alpha product trials. And in the quarter, we received our first beta site order with T-Mobile. We also booked our first multi-million-dollar order for our Power Management module used in electric vehicles, in this case electric locomotives. This order will start shipping in Q2 of FY ’23. Again, this product will also be manufactured, tested and supported from LaFox, Illinois.

As I’ve mentioned, we continue to add new products to our portfolio and are on schedule to introduce new products that support green energy applications in the first half of FY ’23. RF and microwave component business continues to benefit from the positive trends associated with 5G, microwave communications and SATCOM applications. These applications are utilized as people continue to work from multiple locations sending and receiving large amounts of data.

Our entire team has done an excellent job identifying mixed technology partners who collaborate with us globally. We continue to invest in and focus in resources to support these growth markets. These resources include design engineers, field engineers and manufacturing capabilities. We also added several small niche technology partners who fill technology gaps in our portfolio. This strategy has been highly successful and we will continue to use it to develop new engineered solution products as well as increase our customer base, revenue and profits by capitalizing on our existing demand creation infrastructure.

We are excited to see that over the years, in these past three quarters, our legacy tube business has had a strong return to both bookings and billings. The third quarter of FY ’22 continue to prove that the demand for all of our products and services did not go away with the pandemic. And we’re even more excited about the trends in bookings that will support strong revenue in the coming quarter.

We continue to receive support from our key technology partners such as Qorvo, MACOM and Nokia Wave, Ellis Materials [Phonetic], Amogreentech and Fuji Semiconductor and key tube manufacturers in the industry such as CPI, Thales, NJRC and Photonis. They’ve all worked with us to manage our customer requirements. Our growing in-house engineering and manufacturing teams did a great job supporting increased demand for our products and new product designs. The team also supported product designs for key growth markets, including green energy applications such as the ULTRA3000, ULTRAGEN3000 and lithium-based power management module for our electric locomotives.

I’m pleased with the progress we are making. We will continue to identify, develop and introduce products using numerous technologies for green energy power management applications. However, we remain challenged by longer semiconductor component lead times and overall supply chain. This affects our component business and engineered solution products.

We are aggressively investing in inventory that should position us well and fill the pipeline to ensure we can meet our customers’ needs while we collaborate closely with our customers and suppliers. I cannot stress enough the value of original products modeled to our customers and suppliers. Our unparalleled and capability and global go-to-market strategy are unique to the power and RF and microwave industries. We have developed a powerful business model, including legacy products and new technology partners that fit well with our engineered solution capabilities. Through our steadfast and greater focus on customers, we will continue to excel by taking advantage of opportunities when they arise.

Our backlog has never been stronger and the execution of our strategy has never been better. There is no question, our customers and technology partners need Richardson’s products and support more than ever.

And with that, I’ll turn it over to Wendy Diddell in Richardson Healthcare.

Wendy Diddell — Executive Vice President and Chief Operating Officer, Richardson Healthcare

Thanks Greg. And good morning, everyone. Sales for the Healthcare Group increased in Q3 to a quarterly record of $3.13 million. This was 7.4% higher than Q3 of FY ’21. We sold a record number of tubes during the third quarter, led by increased tube sales in China. Sales of parts exceeded prior year levels. While equipment sales also exceeded prior-year levels, they remained constrained due to ongoing lack of used systems available for purchase and resale.

Gross margin in the second quarter was 25.1% versus 33% in Q3 last year. Our gross margin was negatively impacted by higher than anticipated scrap rates in the quarter relating to the use of reclaimed parts as well as rising freight costs. However, gross margin improved slightly over the most recent second quarter as we again increased the number of tubes produced and continue to address new component quality from our suppliers.

The most significant roadblock to higher sales and margin continues to be the breadth of our CT tube product offering. Our next tube lunch is the ALTA750G, the second tube in the Canon series that works on newer Canon Toshiba CT scanners. We have one ALTA750G tube in beta, the second is scheduled for install next week. We anticipate a full rollout after 30 days of acceptable performance. Sales growth will be gradual as we get the ALTA750G into the market and Canon CT scanners come off OEM service contracts.

We continue to make good progress on the Siemens Repaired Tube Program. This is a series of four tubes, including the Stratton Z, MX, MXP and MXP-46. The Siemens installed base is considerably larger than Canon and there are no third-party replacement options for these types. We are on track to release the Siemens types in calendar year 2022 and 2023 with revenue starting slowly in fiscal year 2023.

We are also evaluating other tube types for future development, but not at the expense of our Siemens program. Our number one priority is to shorten the time it takes for healthcare to provide positive operating contribution to the company. Bringing more tubes to market will improve sales and margin and help us accomplish this call.

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

Jens Ruppert — Executive Vice President and General Manager, Canvys

Thanks, Wendy. And good morning, everyone. Canvys engineers manufactures and sells custom displays to original equipment manufacturers in industrial and medical markets throughout the world. Canvys delivered an excellent performance with sales of $8.1 million for the third quarter of fiscal 2022. Strong customer demand on a global basis drove the 15.0% increase in sales over the same period last year.

Gross margin as a percentage of net sales was 32.2% during the third quarter of fiscal 2022, down from 35.2% during the third quarter of fiscal 2021. The decrease in gross margin was related to an increased freight cost impacting many customers across the global supply chain.

Extended lead times on several key components also remain an issue. However, our close relationship with customers and partners overseas enables us to procure long lead time components, which has helped us achieve a new record backlog of $52.4 million this quarter. Canvys’s backlog increased 19.4% from this year’s second quarter and is up 66.3% on a year-over-year basis as you can see momentum in our business has strengthened. We are optimistic that the high demand for custom monitors, touchscreens and all-in-one systems will continue for the foreseeable future.

During the quarter, we received several new orders from both existing and first-time medical OEM customers, some of these applications include cell analyzers, CryoLife policies, corneal cross-linking, [Indecipherable], dental treatment centers, laser ablation, robotic assisted surgery, medical device control and fully integrated operating rooms, surgical navigation, patient monitoring, surgery video documentation, diagnostic imaging and ophthalmology.

In the non-medical space, our products are used in a variety of commercial and industrial applications. This includes CT scanners for inspecting luggage at airports, human machine interface, or HMI, for high-speed, high-precision milling machines, product dispensers for retail applications and tailor prompting products.

We are pleased with our team’s performance. The new record backlog positions us for future growth. From the verity 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 closely with our partners to help us reduce inventory, while being able to meet the demands of our customers, particularly with the challenges brought on by the industry-wide supply chain delays.

I will now turn the call back over to Ed.

Edward J. Richardson — Chairman, Chief Executive Officer and President

Thanks, Jens. And congratulations on the entire Canvys team for another excellent year. We’re very pleased with the company’s performance in the third quarter, particularly given the challenges we face and the very fluid business environment. Our backlog is growing and we’re working around the clock to increase production and meet our customers’ demand.

We will continue managing supply chain issues as well as higher freight costs, particularly with rising fuel costs. We’re also focused on rewarding our team members for helping the company grow. Fortunately, the amount of lost time due to COVID-19 pandemic has decreased substantially. Overall, activities across all our global markets are robust and business remains strong. We’re investing in equipment and expanding our manufacturing areas to take advantage of new opportunities. This expansion will support growth for our alternative energy solutions as well as our legacy products such as magnetrons for diamond manufacturing and marine applications.

We’re hiring additional engineers and production technicians as quickly as we can find them. We’re cross-training employees to improve flexibility of our workforce and using overtime to meet customers’ requirements. The team has really stepped up when we need them the most. We’re reviewing every sale, every opportunity and every new hire to ensure we’re using our cash wisely. As we celebrate our 75th anniversary on May 24, 2022, it’s an exciting time for the company.

At this point, we’ll be happy to answer a few questions.

Questions and Answers:

Operator

[Operator Instructions] And our first question will come from the line of [Technical Issues] from Wellington Shields. Your line is open.

Howard Brous — Wellington Shields — Analyst

Hi, thank you. Ed, Wendy and the group, congratulations on what is a great quarter. There is, however…

Edward J. Richardson — Chairman, Chief Executive Officer and President

Thanks, Howard.

Howard Brous — Wellington Shields — Analyst

You’re very welcome. There is however an elephant in the room and the elephant is margins. And we all appreciate because it’s affecting everybody across the board in terms of freight and cost of goods sold. At what point in time can pricing come back where you create significantly better margins than you have in this quarter?

Edward J. Richardson — Chairman, Chief Executive Officer and President

Well, I think it will be pretty much linear. We’ve been caught in some areas. For instance, in Kansas, most of our product comes in from Taiwan or Japan or Korea. And we do the value-added either in Germany or in Boston. But we’ve had to absorb the freight cost for some period of time. And now, Jens has done a good job talking with our customers and they understand the additional freight costs. And we’re able to pass them along. But in one quarter alone, we had $150,000 additional freight costs. I’m not sure, Jens, what was it in this last quarter, can you remember?

Jens Ruppert — Executive Vice President and General Manager, Canvys

Actually I don’t remember the exact number, but I think for the first nine months is more than $900,000.

Edward J. Richardson — Chairman, Chief Executive Officer and President

Wow, it’s amazing. So, anyway, we’re well aware of those costs and we’ve had a lot of increases in raw materials, things like oxygen-free copper and ceramics and things of that nature. And we’re working hard to increase the prices and pass that along. But I think Howard this time next year it will be back to normal, it will be linear between now and then.

Howard Brous — Wellington Shields — Analyst

All right, thank you. ULTRA3000 give me some thoughts please on fiscal 2023 in terms of revenues?

Robert Ben — Executive Vice President, Chief Financial Officer and Corporate Secretary

Well, Howard, as you know we’ve started the year about $10 million, $11 million in backlog. We continue to add new customers, we booked a number of multimillion dollar orders and these rollouts are very similar to any rollout. We have a lot of experience with 3G, 4G and 5G rollouts. So it’s time, they’re testing a product. We have a number of large customers that are doing beta site testing and across the Board historically with the results we had with these Phase 1s we fully expect us to continue at a run rate. I believe I mentioned this group to be $45 million and wonderfully three years and we’re definitely at that run rate.

Howard Brous — Wellington Shields — Analyst

Could you repeat that because that was static on my line. What’s your run rate is potentially for 2023?

Robert Ben — Executive Vice President, Chief Financial Officer and Corporate Secretary

Well, our three year run rate right now, we looked at this group and based on the sales our bookings will be much higher than that. But we’re at a run rate to do over the next two years above $45 million.

Howard Brous — Wellington Shields — Analyst

Okay, thank you. Battery Street Energy, cell towers, beta testing, you expect to see some revenues this fiscal year upcoming?

Robert Ben — Executive Vice President, Chief Financial Officer and Corporate Secretary

Just small beta site revenues, that program is also going very, very well. It’s the ULTRA Gen 3000. We have beta site testing going with T-Mobile and Phoenix, they placed a second order for 15 more towers with Zeal Peris [Phonetic] it’s running perfectly. But I don’t think we’ll see any large revenues or bookings till probably Q1, Q2 of FY ’23 onward, but we’re very, very happy with the speed that this thing has been rolled out and the design itself. And that product is also will be patented.

Howard Brous — Wellington Shields — Analyst

Can you give us some sense of what your thoughts are for Q1? I mean is it $2 million, $5 million? Any sense at all? We’re not holding to you, it’s just…

Robert Ben — Executive Vice President, Chief Financial Officer and Corporate Secretary

Howard, it’s really — it’s really hard to say, I mean if you just do math, the number of towers that they have. But these companies are very conservative when they put a new technology because it is a new technology to generators. So, from a bookings point of view, Howard, I would think in the first half of the year 3 million to 4 million in bookings, how much of that will actually ship? I don’t know, Howard, I can’t give you an answer on that.

Howard Brous — Wellington Shields — Analyst

Fair enough. Let’s go to another subject in terms of ultracapacitors and locomotives. You’ve accomplished, you had an order for two, that order has been completed, is that a correct statement?

Robert Ben — Executive Vice President, Chief Financial Officer and Corporate Secretary

No, Howard and it’s not an ultracapacitor, you know, we’re not in the EV, we’re not in the wind turbine market, we’re not in the electric locomotive market when the power management and we’ve been working with Progress Rail and Caterpillar for a while in developing a module, in this case, it’s a module with our partner Amogreentech, it’s a lithium-based module. We have just completed that design. We have booked the first multi-million dollar order for a number of electric locomotives. They continue to gain market share in terms of outfitting these locomotives and we expect that to be also a $6 million to $7 million opportunity in FY 2023, but we won’t start building that till June.

Howard Brous — Wellington Shields — Analyst

No, no. Fair enough. My understanding is [Indecipherable].

Robert Ben — Executive Vice President, Chief Financial Officer and Corporate Secretary

I just want to add to that, in these opportunities, all these opportunities that were and these new products are driven by components and the greatest thing about this is we have weekly calls with their engineering teams and this is Caterpillar. There are so many opportunities that are going to come out of this, electric locomotives, yes, we are their lead partner for the powering system of that, but you look at smart agriculture, they’re making as much of their products green and we’ve got agreements I would tell net technology partners in the 5G world they are world leaders and in the power management side, the leaders and that type of technology in an ever-growing design team.

I’m more excited about the relationships (05 05:00) come out of it as I am with these individual opportunities which by the way as you’ve seen are multi-million dollar opportunities.

Howard Brous — Wellington Shields — Analyst

My understanding there are about 400 and some odd thousand locomotives just in the United States, does that sound about right to you?

Robert Ben — Executive Vice President, Chief Financial Officer and Corporate Secretary

I don’t know about that, I mean they’re diesel or test that many electric locomotives, but…

Howard Brous — Wellington Shields — Analyst

These I’m talking about, that’s what you, yeah.

Robert Ben — Executive Vice President, Chief Financial Officer and Corporate Secretary

Yeah, you know, they mentioned, they have 60,000 diesel locomotives globally, this was Progress Rail that they outfit. So I don’t know what the total is, but those are big numbers, we’ll take apple it.

Howard Brous — Wellington Shields — Analyst

Appreciate that. Last question, last quarter you mentioned other products in the portfolio sometime first half or 2023. Could you expand on that?

Robert Ben — Executive Vice President, Chief Financial Officer and Corporate Secretary

Yeah, there is — in listening to the customers and what issues are having there is other products that fit our niche and we really go after products that we have a niche where we add value. And so one of these products which we introduced in Q1 we made announcement before that, but we’ll be doing beta site testing in Q1 also goes in the wind turbine. We have other products that will go into critical facilities for power management, but the one product that we’re going to introduce in Q1 is a larger opportunity than the ULTRA3000 itself.

Howard Brous — Wellington Shields — Analyst

That’s all I have. Thank you, again. Congratulations on a good quarter. Wendy, thank you. All of you, thank you.

Robert Ben — Executive Vice President, Chief Financial Officer and Corporate Secretary

Thank you.

Operator

Our next question will come from the line of Ross Taylor from ARS Investment Partners. You may begin.

Ross Taylor — ARS Investment Partners — Analyst

Thank you and also congratulations on what’s really shaping up to be a great year. Howard addressed some of my issues, but to kind of recap, what you’re looking at is the operating margin business — the business should be recovering incrementally to kind of historic levels over the next three, four quarters as you’re able to pass the cost increases for components and freight on to your customers at this point?

Edward J. Richardson — Chairman, Chief Executive Officer and President

Yes, that’s correct.

Ross Taylor — ARS Investment Partners — Analyst

Okay. And looking at that, I listened to you guys talk and you’re in a number of really hot-button areas, you were providing some really exciting technology. Do you see anything about the outlook for your business that should slow your growth over the next couple of years?

Edward J. Richardson — Chairman, Chief Executive Officer and President

Not really, when you look at $175 million backlog that’s grown from 140 some million in the last quarter. And at the same time, you know the sales have grown as well. You can understand that the next year or two are pretty much guaranteed. We don’t see anything that was slow us down right now. I mean there is no question that we’re on the verge of a third world war and things of that nature that we have no control of. But we do very little business in that area, so that doesn’t have too much impact, but certainly there are things like that that could impact this we don’t control.

Ross Taylor — ARS Investment Partners — Analyst

But often equal I’m listening to you talk about the new products, new product opportunities and the like. And it really sounds like you’re on a ramp business, your margins, while they’ve been softer than historic or you expect them to be recovering? We look at this in the market that trades at 17, 18 times earnings. Why do you think it is that your share gets so little respect, I mean we’re looking at the stock as I said, you’re in every area, it seems like you want to be in. And if you cash adjust your share price, you’re trading at nine times earnings, which is basically almost like you’re going broke. What do you think that market is missing or what do you need to do to get the market to wake up to the opportunity that’s sitting in this company?

Edward J. Richardson — Chairman, Chief Executive Officer and President

Well, we don’t understand it either because you know we just mentioned that next year will be our 75th anniversary and I hate to admit it. But I’ve been involved for 60 years and I would say that this is the most exciting time in my career. We look at the business like a table with six legs and five of them are on fire right now and we just — we can produce all the products that we have orders for and healthcare is coming along. We think by 2024 that we can start to show a profit in healthcare and that will add a great deal to the bottom line. I guess we sold RFPD in 2011 and took the company from being $700 million in sales and 1,000 employees and losing a ton of money down to a company that was $140 million, but we kept the international infrastructure which was important of the two business with 24 foreign subsidiaries and 60 offices all over the world. And so it took us a long time, they had enough products to fully absorb that infrastructure. And when we got to $160 million, we broke even, last year we were $177 million and showed a small profit and now this year will be 215 possibly 220 and show a very nice profit. And I think investors that are aware of the company for a long time are saying this guy isn’t going to get it right ever, but it’s starting to get there now and I think that in the years to come, the company would be very profitable.

Ross Taylor — ARS Investment Partners — Analyst

Just to be blunt even if you don’t get it right, quite honestly, the business executes well enough and the value is there that this is to me probably the greatest value IC in the equity market today because you’re making money and you’re going to make more, it seems like the wind turbine business could generate a substantial portion of what the company generated in revenues all of last year in a year or two, would that be a wrong assumption?

Edward J. Richardson — Chairman, Chief Executive Officer and President

No, we think so, that’s the most exciting business we’re in right now, the Green Energy business, not only the wind turbines, but the electric locomotives and the cell business just the opportunity is amazing and fortunately the patents that we have we’re in early. Understand that lots of people understand the opportunity in green energy and there are lots of people working on that market, but we seem to be well ahead of a lot of the competition.

Ross Taylor — ARS Investment Partners — Analyst

Talk about your cash and you’ve obviously been investing some of that cash in working capital and the like, but you’re also generating cash as a business as you roll forward should be generating it, it’s not hard to envision next year you should earn well over $1 share in earnings. I think it looks like this year, you should probably earn 90 plus cents a share in earning. [Technical Issues].

Edward J. Richardson — Chairman, Chief Executive Officer and President

Just funding the growth of the business, you know it’s, first of all, we have 24 foreign subsidiaries and as Bob mentioned, only about $25 million of the cash is in the United States where we can use it. We have to carry about $0.5 million in each of the foreign subsidiaries to keep them within their legal requirements. We can use that cash, we can move it around, borrow it from subsidiary-to-subsidiary and fortunately we don’t have that problem right now. But as you saw the inventory was up very substantially, we have enough ultracapacitors in the building to build every order and every order that we are projecting. And we did that for a reason, we haven’t been able to ship as fast as we wanted to because there has been a shortage on integrated circuits, which we’re now getting in stock. But it’s basically funding the receivables and the inventory that’s required for the growth that we’re seeing.

We showed the — this year we’ll use a little cash and it looks like next year we’ll go cash flow positive.

Ross Taylor — ARS Investment Partners — Analyst

Yeah. And so you’re saying this 20 plus percent top line growth is actually component constrained growth. So as components become more available that growth should accelerate?

Edward J. Richardson — Chairman, Chief Executive Officer and President

Yeah, it’s certainly true. Look at the backlog, the $175 million plus backlog and we — those orders are set up particularly in EDG where we’re making magnatron, if we could build them we could ship every one of them today. It’s just — we can’t build a product fast enough.

Ross Taylor — ARS Investment Partners — Analyst

Okay. While you guys are doing a great job operating it, I think we need to think about getting some coverage and getting people to actually care about the business, because the opportunity is clearly there, one of the most attractive as I said our valuation basis it’s hard to find something in this market that comes anywhere close to a 20 plus percent top line grower trading at a single-digit cash adjusted multiple, it’s just…

Edward J. Richardson — Chairman, Chief Executive Officer and President

We appreciate your confidence and we absolutely agree with you.

Ross Taylor — ARS Investment Partners — Analyst

Well let’s hopefully both prosper in the next year.

Edward J. Richardson — Chairman, Chief Executive Officer and President

All right. Thank you very much.

Ross Taylor — ARS Investment Partners — Analyst

Thank you, gentlemen.

Operator

Our next question will come from the line of Tim O’Connell from Chain of Lakes Investments, you may begin.

Tim O’Connell — Chain of Lakes Investment — Analyst

Hi, good morning and congratulations on the great quarter.

Edward J. Richardson — Chairman, Chief Executive Officer and President

Hi, Tim, thank you.

Tim O’Connell — Chain of Lakes Investment — Analyst

Hi. So some of my questions have already been answered, but I was hoping for a little more color on the locomotive business, the way I look at it that the revenue number per locomotive, how many there are in this world, your relationship with progress and the revenue number per locomotive, this appears to be a much larger opportunity than the wind turbine business. So my questions are, what kind of market share do you think you can get there? How quickly do you see these manufacturers adopting battery power and kind of what’s the plan to go after this market, whether it’s just with progress or any other manufacturers? Thanks.

Edward J. Richardson — Chairman, Chief Executive Officer and President

Yeah. So right now we have 100% market share with Progress Rail, Caterpillar and there’s really two leaders in this market, it’s Progress Rail and GE Transportation. Our partnership is with Progress Rail, it’s at a design level and there’ll be other products. Our content continues to grow as they ask us to design other parts of the system, other than just in this case not just, but the module. So right now, our content about $1 million a locomotive and that growth is really dependent on how much market share Progress Rail grabs.

We expect this to be in terms of bookings as the royalties electric vehicles. I think if you look at line, you can see companies like Union Pacific, Long Island Railroad placing orders and they mentioned Progress Rail seeing kind of get some numbers of what that’s expected. So yeah, we’re very excited about it. It’s really dependent on how much market share Progress Rail gets and we believe they’re going to get a majority of it and I’ll just add to that again, because I’m on these weekly calls, the opportunity in other products within Caterpillar also, yes, that overall makes us bigger than the ULTRA3,000, but the ULTRA3000 business is going to generate other opportunities from these same owner operators and we are talking to people like Siemens and GE who are the manufacturers and there is another product that we introduced in Q1, that is causing them a lot of pain due to the lead acid batteries that will more than double the opportunity if you want to call it the windmill ultracapacitor business.

Tim O’Connell — Chain of Lakes Investment — Analyst

Okay, thanks, good color and I just think this is such a great area for you guys being and in the undiscovered green energy company here with Richardson.

Edward J. Richardson — Chairman, Chief Executive Officer and President

Well, the interesting part of it is, we booked the first large order, one of the things we used every aspect of Richardson in 75 years. The reason we beat our competition is, these products are sent 15 to 20 different sites, in this case all throughout North America. Our distribution business which has been over 75 years can do that with their eyes closed, our competition couldn’t do that.

On the locomotive side, they are mandating US based rail roads that it has to have be manufactured and tested and supported from the US, that just was perfect for us, we’re here in La Fox, Illinois and we have niche capabilities and we over years these high power tools that we make and thermal dissipation that they’ve been working with for years, we have those just world-class knowledgeable engineers of ultracapacitor technology and we’re very selective.

Yeah, I could come up with 15 other green products, but we have a real niche and again it’s big money, it’s 10s of $20 million, but it’s still niche for us and we just have found after 15 years of ultracapacitor experience that we have the ability to address these somewhat niche applications, better than some of these larger companies. And you’re right, if you put it all together, it is absolutely a home run.

Tim O’Connell — Chain of Lakes Investment — Analyst

Great. I’m looking forward to seeing you guys success.

Edward J. Richardson — Chairman, Chief Executive Officer and President

Thank you.

Robert Ben — Executive Vice President, Chief Financial Officer and Corporate Secretary

Thank you very much.

Operator

And our next question will come from the line of Khadir Richie from Richie Capital Group, you may begin.

Khadir Richie — Richie Capital Group — Analyst

Hi, good morning. Thank you very much for taking my call. Yeah, congrats on the performance and in reference to Ross Taylor’s comments, our team is new to Richardson and we’re continuing to learn about the business over time, so perhaps others are taking notice as well.

Edward J. Richardson — Chairman, Chief Executive Officer and President

We hope so.

Khadir Richie — Richie Capital Group — Analyst

Yeah. It seems that you’re delivering quite a bit of momentum in the business. And we noted the significant growth in your backlog that continues to build. Can you possibly characterize this growth a bit, what part of that growth could be related to the global supply chain and could there possibly be some over-ordering or pulling future quarters forward versus a real increase in demand that can be repeated, can you discuss that?

Edward J. Richardson — Chairman, Chief Executive Officer and President

Well, a very large share of our backlog is for products that we manufacture. And a lot of those products were either sole source or very nearly sole source. There are other companies that can make the product, but it would require the customer to redesign the equipment to use their product. So, we don’t see over-ordering. That type of thing normally happens in the commodity semi-conductor business, I’d like Greg comment on that. A very, very large portion of our backlog is with products that we manufacture where we are sole source or nearly so.

Khadir Richie — Richie Capital Group — Analyst

Got it. Thank you. And you mentioned that — it was mentioned earlier in the call that you’re aggressively ordering inventory so you can meet your future demand. Can you discuss how you’re thinking about acquiring inventory and how has your strategy really changed in the current environment?

Edward J. Richardson — Chairman, Chief Executive Officer and President

Well, in most cases, for instance, in the integrated circuit used in the ultracapacitor, the delivery has been 48 weeks. But formally — fortunately with Greg’s relation with the people in the semiconductor industry, he has been able to get the product. And I don’t know, Greg, what have we got delivery on 15,000 — 17,000 units so far?

Greg Peloquin — Executive Vice President, Power & Microwave Technologies

Yes. So, the semiconductor industry is my background, but Richardson has always been very aggressive on inventory. And so, when we started seeing these orders and we talk to the — there is a part of our business that’s quite large that is components made by Qorvo, MACOM, Fuji, all these Tier 1 semiconductors. We talked to them daily and they give us insight of what’s going on. And if we see a hiccup coming, we’re very aggressive about getting the inventory. So, even though we are frustrated that we aren’t in it as much as we want, I really think Richardson has done a better job than our competitors and we’ve actually gained market share because of our aggressive ordering and just our communication.

It’s still — the RF and wireless and power world is a very niche incestuous market. And I’ve been doing this 35 years and most of the people and my staff are doing the same. So we have contacts, we talk of the plan, we communicate information, I just think we’ve done a good job getting in our orders and communicating with our suppliers to get ahead of the game. And I think we’ve done a better job than our competitors. And I think that is part of the reason we’re gaining market share.

Edward J. Richardson — Chairman, Chief Executive Officer and President

You might — Jens comment on Canvys, $50 million of the backlog for us is with Canvys. And Jens is a display engineer who have been in the business a long time. And he has lean contracts with these medical OEMs where he’s bringing in LCDs or ordering them out once in advance to make sure the customers have the product. Jens, you want to comment on that?

Jens Ruppert — Executive Vice President and General Manager, Canvys

Yeah, I think you addressed it very well. I mean, we have customers that place orders for a long time out, basically two to three years even. And sometimes we’re still struggling to get components. However, due to those long-term contracts and relationships we have, I call it secret sources where we can still get the material almost on time for everything we need. So it’s a great relationship we have with our suppliers. So I’m not very disturbed or [Indecipherable] about the future. So I’m looking forward to serve the customers with the products they need on time.

Khadir Richie — Richie Capital Group — Analyst

Okay, great. Thank you. And just one last quick question. Can you discuss any challenges that you’ve had on the workforce management front in regards to finding the engineering talent and managing kind of rising salaries and how you’re navigating that front?

Edward J. Richardson — Chairman, Chief Executive Officer and President

Sure. Wendy, do you want to comment on that? You’ve been in the front on that one.

Wendy Diddell — Executive Vice President and Chief Operating Officer, Richardson Healthcare

So, I’ll start. So, just to keep it in perspective, one of the data points I find particularly interesting and illustrative to answer your question. Since the beginning of the calendar year, in LaFox manufacturing alone, we’ve hired 37 people. So, we are using a combination of all the traditional sources to find people. We increased our finders fee to our employees for bringing in people. We’ve hired a recruiting specialist to add to our HR team to specifically go out and proactively find candidates for physicians.

In the engineering area, we’ve had a really strong intern program over the past number of years. And we’ve been fortunate to be able to bring in a lot of those engineers as full-time employees as they graduate. And then, Greg Peloquin and Greg Kenny has done a great job of also finding additional engineers to join our team. So, on that front, it’s a continual recruiting effort and we’re hiring again more people than we’ve hired in a long time. It’s not always easy and not surprisingly, right. I mean, we have the same challenge every other company, we’re fighting for employees. We have raised our minimum salaries, our minimum hourly rates to be able to attract more people. That has added obviously to our cost pressure, but it’s more important for us. I mean, we’ve got people right now working six and seven days a week every single week in order to meet the demand. So, we are taking care of them, we’re getting back to them and acting responsibly in terms of our compensation programs.

Edward J. Richardson — Chairman, Chief Executive Officer and President

And that referral bonus goes to any investor that refers [Speech Overlap].

Wendy Diddell — Executive Vice President and Chief Operating Officer, Richardson Healthcare

Yes, yes. We’ve got investors that are sending us resumes and people they know. We went to a conference that…

Edward J. Richardson — Chairman, Chief Executive Officer and President

It applies to anyone and everyone.

Wendy Diddell — Executive Vice President and Chief Operating Officer, Richardson Healthcare

Yeah. So, it’s good. But we can always use more and it’s a continual effort.

Khadir Richie — Richie Capital Group — Analyst

All right. That’s great to hear. Thank you. That’s all my questions. Thank you and congrats, again.

Edward J. Richardson — Chairman, Chief Executive Officer and President

Thanks very much.

Operator

Our next question comes from the line of Walter Schenker from MAZ Partners. You may begin.

Edward J. Richardson — Chairman, Chief Executive Officer and President

Hi, Walter.

Walter Schenker — MAZ Partners — Analyst

Good morning. Hi, Ed. Hi, Wendy. Well, I thought no one has asked Wendy a question, I just got one. In looking at the medical market, one of the things you learned and therefore we learned if you entered the market was that a significant number of potential customers were under maintenance contracts. And therefore, until those rolled over, it really wasn’t much of an opportunity for you. But over time, the opportunity should grow as you pick some of these people over time. In looking at the year-over-year against looking one quarter, is that not happening to the degree you hoped and therefore you really need a broader line or can we see some more significant growth as people come off maintenance contracts and theoretically are open to save some money if they go to you instead of their prior contractor?

Wendy Diddell — Executive Vice President and Chief Operating Officer, Richardson Healthcare

So, I think, with the launch of the G, the second tube in the Canon family, that will open up the door for more people to take their systems off the OEM contracts. Right now, we only have the D, as you know, and that covers a certain range of Canon CT scanners. The G expands that range. And so, people would be more open-minded to using a third-party service organization because they don’t run the threat of having some of their equipment still have to be covered by the OEM. So that’s going to help, I think, increase the sales of the D and the G. So that answers part of your question.

Certainly expanding our product range is absolutely critical, Walter, as we’ve been discussing. Having the Siemens range of tubes, and again there’s four in that series, that market is much, much larger than the Canon market. The installed base is much larger. Siemens, I think, is the number one player in CT scanning market. So that again will add more volume. And I think the success — we get success and the more tubes you get out there, whether it’s a Canon tube or at the Siemens tube, the more people will come to you and look to you for additional purchases. So, it’s really a combination of getting that G out there, which will help us get more Canon equipment off the contract, and then the volume will be incrementally driven by the Siemens program. Does that answer your question?

Walter Schenker — MAZ Partners — Analyst

It does. Just I guess it’s still too small. Initially, may be somewhat surprisingly despite you being very small, there is some pricing adjustments by the dominant player in the industry once you entered and try to underprice them at this point pricing and I realize it’s only on one product is reasonably stable?

Wendy Diddell — Executive Vice President and Chief Operating Officer, Richardson Healthcare

Yes. It’s reasonably stable, yes. We don’t see anything crazy over time.

Walter Schenker — MAZ Partners — Analyst

And we won’t see — you know how Siemens is going to react until you are in the market.

Wendy Diddell — Executive Vice President and Chief Operating Officer, Richardson Healthcare

That’s correct. We — again, optimistically perhaps, we don’t see them having the same knee-jerk reaction. I mean, as we’ve discussed, we think there has been a lot of money left on the table. But I think we collectively feel that Siemens will be less likely to have that kind of cost reduction.

Walter Schenker — MAZ Partners — Analyst

Okay. And then, just my final very quick comment, which is not going to get a response, so I’m doing because I can smile and say it. It’s to Ed, I couldn’t get you to buy high. Many people couldn’t get your buyback stock when it was half the current price in the more recent periods, as you go into a positive cash flow and maybe significant positive cash flow going forward in ’23 and ’24 fiscal years and Ross laid out how cheap the stock is, which we all agree. I, as one shareholder, would very much appreciate if you revisited buying back stock, again you’re only small premium to book, you’ve got a lot of cash at a very low multiple. I couldn’t push it before but maybe in ’23 and ’24, there is hope that the company at least consider if the stock continues to be so undervalued. That’s just the statement. Thank you.

Edward J. Richardson — Chairman, Chief Executive Officer and President

Right. Well, we did buy $65 million of the stock back after we sold RFPD. And at the time, we started paying a price somewhere between $8 to $9 and I thought it was the fortune one that stock went to $4 or $5. It looks pretty good today. So, you never know — never say never.

Walter Schenker — MAZ Partners — Analyst

Okay. Thanks, Ed.

Edward J. Richardson — Chairman, Chief Executive Officer and President

Thanks, Walter.

Operator

Our next question will come from the line of Eric Landry from BML Capital. You may begin.

Edward J. Richardson — Chairman, Chief Executive Officer and President

Good morning, Eric.

Eric Landry — BML Capital — Analyst

Good morning. Hi. How are you?

Edward J. Richardson — Chairman, Chief Executive Officer and President

All right. Good morning.

Eric Landry — BML Capital — Analyst

Good. Great quarter. I’m so happy for everybody there. What a difference three or four years make. I remember backing some of the comments in ’18 and whatnot. This is so much nicer, anyways. We agree.

Edward J. Richardson — Chairman, Chief Executive Officer and President

You’ve only been with us about what eight or nine years, Eric, something like that, maybe more?

Eric Landry — BML Capital — Analyst

It’s been a while, but it’s worth it. So, anyways, are you suspect like you guys — I’m a little surprised at the stock price today. And a lot like what Howard said, I think a lot of it has to do with the margin degradation. So, perhaps you could comment on how much — I think it’s 310 basis points of the decline is due to an increase in shipping and your inability thus far to raise prices commensurate with your cost increase. Is there any — do you have any kind of an estimate as to how much?

Edward J. Richardson — Chairman, Chief Executive Officer and President

Yeah. Wendy did a fairly decent analysis of it. I’ll let her…

Wendy Diddell — Executive Vice President and Chief Operating Officer, Richardson Healthcare

Actually Bob did that. So — Bob hasn’t gotten to speak yet today. So we’ll let Bob answer that.

Edward J. Richardson — Chairman, Chief Executive Officer and President

Okay.

Robert Ben — Executive Vice President, Chief Financial Officer and Corporate Secretary

Yeah. One thing to keep in mind on the margin is, we’re in a lot of different businesses. And the mix of sales, whether it’s product mix or customer mix always affects us differently every quarter. So, I think that’s important to keep in mind. And my analysis shows that that’s over half of the change, the three point change in the quarter. Yes, certainly component prices and labor costs are affecting us. I certainly don’t want to give you the impression they’re not. I show they have about a point roughly. And then, the rest would be other things. We talked about the additional scrap in the healthcare business and freight as well that we’ve talked about. So, does that give you a rough idea, Eric, of the answer to your question?

Eric Landry — BML Capital — Analyst

Yeah. So, a little bit more than half you expect to be able to get back through price increases. Correct?

Robert Ben — Executive Vice President, Chief Financial Officer and Corporate Secretary

Yes.

Eric Landry — BML Capital — Analyst

Okay. Yeah, I just want to make sure that people are aware that you’re not transitioning into a lower-margin business through all this growth. I think that’s…

Robert Ben — Executive Vice President, Chief Financial Officer and Corporate Secretary

Not at all — not at all. Just we’ve gotten caught it between with logistics costs and the higher raw materials costs higher labor costs, everything is going up and we haven’t been able to react fast enough.

Eric Landry — BML Capital — Analyst

You’re right.

Edward J. Richardson — Chairman, Chief Executive Officer and President

If I could add a little bit, Eric, one more thing. Last quarter, our margin was 32.7% compared to 31.8% this quarter. So, it’s still a drop, but not nearly as much. And I might add, last year’s third quarter at 34.9% was our highest point all year last year. So, I think it’s important to keep that in mind as well.

Eric Landry — BML Capital — Analyst

Got you. Thank you. Wendy, of the 37 you’ve hired in the last three-plus months, what percentage of that — of the people that you need?

Wendy Diddell — Executive Vice President and Chief Operating Officer, Richardson Healthcare

Well, we — as I understand the question, we need 100% of — you mean, what — how many more do we need?

Eric Landry — BML Capital — Analyst

Yeah.

Wendy Diddell — Executive Vice President and Chief Operating Officer, Richardson Healthcare

Yeah. I think we have — I’m going off the memory here in improving reps. I think we probably have five to 10 additional reps open, most of them in production on the engineering side. That is more, at this point, opportunistic healthcare, I think we’re full but in Greg’s area [Phonetic] and supporting the ULTRA3000, I think we constantly have an open mind. Maybe we could take up to another five engineers if you have people you want to send.

Eric Landry — BML Capital — Analyst

Okay. I don’t unfortunately. I think, maybe I could drive down there one or two days a week and help.

Wendy Diddell — Executive Vice President and Chief Operating Officer, Richardson Healthcare

We have all volunteer to do the same thing. We’re like, look, I can build an ULTRA3000. I can get out there.

Edward J. Richardson — Chairman, Chief Executive Officer and President

Eric, we do have a second shift on the production of the ULTRA3000 in a [Speech Overlap].

Eric Landry — BML Capital — Analyst

I don’t know that I’m qualified to build ULTRA3000, but I could probably sweep the floor, that would be it.

Edward J. Richardson — Chairman, Chief Executive Officer and President

We’ll just test your product twice. Can you put in the record that, Eric?

Eric Landry — BML Capital — Analyst

Yeah. Perfect.

Edward J. Richardson — Chairman, Chief Executive Officer and President

No problem. You can build the ULTRA capacity.

Eric Landry — BML Capital — Analyst

There you go. Sounds good. I’ll put my — so I just wanted — real quick I know it should get long. I just want to address the magnetrons. And the way I see it, this is probably somewhere around maybe your second or third largest opportunity right now is that anywhere near accurate?

Edward J. Richardson — Chairman, Chief Executive Officer and President

We just looked at the total backlog. Wendy, what is it on the magnetron…

Wendy Diddell — Executive Vice President and Chief Operating Officer, Richardson Healthcare

Yeah, $13 million, $14 million.

Edward J. Richardson — Chairman, Chief Executive Officer and President

Yeah, $13 million or $14 million is the backlog right now in the magnetron business and that’s almost double what it was a year ago.

Eric Landry — BML Capital — Analyst

And what are the growth prospects? What do the growth prospects look like? I mean, it’s probably know where near the ULTRA3,000 but I assume it’s material.

Edward J. Richardson — Chairman, Chief Executive Officer and President

We could sell everyone we can make right now. It’s some of these new technologies, like synthetic diamond thing is just going crazy. And now they’re using magnetrons also to — they take tires and they take the carbon out of it and they make tile. So, roof tiles, floor tiles, big company in India is placed to over 1,000 magnetrons with this carbon craft and they make both synthetic diamonds and tile. And then the applications for hydrogen is just a few of the future. There’s just so many applications now for microwave where semi-conductor just handle the brute power and the high frequency at the same time.

Eric Landry — BML Capital — Analyst

Right. So, it’s — do you have any type of a patent on your magnetron or any type of — sort of a competitive barriers so that someone can’t come in and…

Edward J. Richardson — Chairman, Chief Executive Officer and President

Lots of people have tried to make YJ1600 and people like Towers and English Electric and they’ve all failed. So, it’s a technology that is a lot of black magic and now there are no patents on power grid tubes that I know of any longer. They’ve all expired. But once you can learn to build them and other people don’t know how to build them, you’re pretty much in a sole source position.

Eric Landry — BML Capital — Analyst

And that’s what you feel like you are with this thing. So, someone who make — let’s just — I mean, this is a dumb question, but someone who makes the magnetrons for our everyday microwaves, could they enter this market?

Edward J. Richardson — Chairman, Chief Executive Officer and President

Yeah, they do. Panasonic makes one and so does LG. It’s a different magnetron. And the only way you can use it is to build a new piece of equipment and build the power supply and all the accessories to utilize that magnetron and there are people that do that. There if you look at companies like Moga and CRM, they build generators, they buy from those people and they customize their equipment to use their product. At the same time, both those companies have been after they want to buy all the production that we can make of our magnetron.

So we have something that they can get.

Eric Landry — BML Capital — Analyst

And how long they have been trying?

Edward J. Richardson — Chairman, Chief Executive Officer and President

It’s perpetual and we sell to them. It’s — as long as we can build a more so than anybody.

Eric Landry — BML Capital — Analyst

Okay. Great, thanks. Last thing and I’ll get along you, Greg. The locomotive product, is this like is this similar to the cell tower product where it’s used as a starter or is this actual these actual completely 100% battery powered locomotives?

Robert Ben — Executive Vice President, Chief Financial Officer and Corporate Secretary

Yeah, 100% battery powered locomotives, the module, it doesn’t use ultracapacitors, it uses lithium iron phosphate batteries and it spot the size of two car batteries together and in a standard locomotive for the power levels that these are going into, there is about 160 per train, but it runs the entire train now. Also I want to add, Eric, that the first ones that are coming out are like for short distances, for example, you know, taking the train to Chicago, these aren’t long haul, but those are coming and that’s some other designs we’re working on with Progress Rail and Caterpillar.

Edward J. Richardson — Chairman, Chief Executive Officer and President

In order to sell in the beta the original design that we’re going to make ways ten thousand pounds, another good thing, we’ve got a big cement loading dock out there that, yeah, it’s interesting, this is how this whole thing works, you talked about a component. And then you build a module and then they keep adding more to it can you build this? And so I mean eventually could rebuild the entire system here in La Fox, yes, but right now the main land is the battery module that goes in locomotive in there, in parallel circuit together and they — they run the complete train and then obviously just like electric car it’s break regeneration. And right now, they’re used in the shipyards to move things around and then for commuter trains going from here to Chicago.

The big market obviously more power and more of these batteries as it gets the long haul spending parts across the country. And again, I just can’t — we are a design partner for Progress Rail and as they gain market share we’ll continue to gain market share.

Eric Landry — BML Capital — Analyst

Well, okay, that’s it for me. I appreciate and you guys you’re really kick in as there. So, great job. Thank you.

Edward J. Richardson — Chairman, Chief Executive Officer and President

Thanks, Eric.

Robert Ben — Executive Vice President, Chief Financial Officer and Corporate Secretary

Thanks, Eric.

Operator

Our next call comes — our next question will come from Mike Hughes from SGF Capital, you may begin.

Mike Hughes — SGF Capital — Analyst

Good morning, thanks for taking my questions.

Edward J. Richardson — Chairman, Chief Executive Officer and President

Good morning, Mike.

Mike Hughes — SGF Capital — Analyst

Just, how are you, Ed?

Edward J. Richardson — Chairman, Chief Executive Officer and President

Good.

Mike Hughes — SGF Capital — Analyst

Good, good, good to hear. Just a follow-up on the locomotive business and maybe I missed this, but is it safe to assume the gross margins on that business will be kind of in line with the company wide average kind of 30% to 35%, is that fair?

Edward J. Richardson — Chairman, Chief Executive Officer and President

Yes, it will be accretive, all the products, the ULTRAGEN3000, ULTRA3000 and then the lithium-ion EV locomotive are accretive to the overall corporate margin of 35 plus.

Mike Hughes — SGF Capital — Analyst

Okay, great. And you said the content per locomotive and this was your content was a million dollar, is that correct?

Edward J. Richardson — Chairman, Chief Executive Officer and President

Right around $1 million, I think, yeah, great, great new our current content is about $1 million locomotive.

Mike Hughes — SGF Capital — Analyst

Okay, okay. Good. And then the backlog is really impressive, but I assume everything that’s in the backlog is price protected. So just one number one, if you could confirm that. And then number two, is there anything you could do on a go-forward basis to kind of — this is probably the highest rate of inflation you’ve seen since the 1970s. Is there anything you can do on a go forward basis, protect yourself from bookings something now and it’s not going to ship for a year from now where raw materials might be higher. Can you just address that issue?

Edward J. Richardson — Chairman, Chief Executive Officer and President

Well, we have a policy, you know that when we quoted, the quote is only good for 30 days. If we take our frame order and we guarantee them a price over a period of a year, then it’s on us. But — and we also normally have a currency fluctuation clause in each order as well, so that we’re quoting in the US dollar, even though the customer may be in India or China or Europe somewhere else. So we try to protect ourselves as much as we can, but obviously we’re getting caught now and we think that we can correct that sort of on a linear basis over the next year.

Mike Hughes — SGF Capital — Analyst

Okay. And then on the last call as you indicated that you thought you could grow 15% to 20% a top line next year, is that still the case, is that still your thinking?

Edward J. Richardson — Chairman, Chief Executive Officer and President

Yeah, absolutely with $175 million backlog and we’ll end the year probably somewhere between 215 and 220, it probably — we can look at 250 next year something like that. Maybe a little more.

Mike Hughes — SGF Capital — Analyst

Okay. So if you kind of did the midpoint for this year, let’s say, 218, it grew at a 15% rate, that would translate into $250 million, which is just shy of $63 million a quarter. So, at what point do you step up to that higher level of revenue and is a gating factor the just the integrated circuit shortages, so you’re $55 million now, when does it go to $63 million on average?

Edward J. Richardson — Chairman, Chief Executive Officer and President

It will be linear, yeah, it will be linear. Normally, our fourth quarter is our best quarter and it’s amazing usually the third quarter is really low because of the Christmas holiday and the Chinese New Year and that kind of thing, but if you look at it the third quarter revenue wise was quite good as well. But the fourth quarter is usually our highest quarter. And normally our summer quarter or the holiday quarter is the lowest, but that hasn’t happened either, it just continue to grow on a linear basis.

Mike Hughes — SGF Capital — Analyst

Okay. And then just on SG&A line, it was $13.1 million in the prior quarter and it was $13.9 million this quarter, who are the drivers behind that and is the $13.9 million, maybe $14 million a quarter a good number on a go-forward basis?

Edward J. Richardson — Chairman, Chief Executive Officer and President

Rob, you want to comment on that?

Robert Ben — Executive Vice President, Chief Financial Officer and Corporate Secretary

Sure. Yes, Mike. Well to answer your question versus second versus third quarter, we continue to accrue our employee incentive expense, we have merit increases that happen throughout the year versus the previous quarters and year. So, most of that increase was in the employee compensation expenses. But quarter-to-quarter we have different factors, that impact is going forward on the $14 million. Yes, I expect it to be closer to that in the fourth quarter and beyond. Next year to get that growth, we’re going to have to make some investments whether it’s an SG&A or we talked earlier about working capital and capital expenditure. So I don’t think what do you think, we can achieve this growth without making some of those, but $40 million is a good number with some growth next year going forward.

Mike Hughes — SGF Capital — Analyst

Okay. And then just on the magnetron business, Ed, I think on the — or someone else on the management team in the last call indicating there’s a generator sale at $75,000 to $100,000 and then there is tubes that are $7,000 and there is some question of kind of how much share you would get on the generator space. Can you just any updated thoughts on that?

Edward J. Richardson — Chairman, Chief Executive Officer and President

Yeah, this is pretty much in the hydrogen area where they’re taking methane gas and converting it into a settling in hydrogen and they do that with 100-kilowatt generator and the two that goes into that generator is about $7,000, by the way our competition just raise their price to almost $11,000 for those magnetron, it will be interesting to see what happens there, but $7000 or $8000 has been in the area where we’ve been in the past.

And the generator is — depending upon what bells and whistles around, it is $100,000 generator. And quite often, we get the two business, we have lots of competition in the generator business and the three companies that are start-ups that we’re aware of in the United States wanted to buy 100 generators each. So it gives you an idea what the potential could be and other than some beta quarters, we don’t have any mass production orders on those, but it’s — it just gives you some idea of what the hydrogen business is going to be in the future or could be.

Mike Hughes — SGF Capital — Analyst

Okay. And then, just this semi-cap equipment end market, what type of growth are you looking for into next fiscal year for that business line?

Edward J. Richardson — Chairman, Chief Executive Officer and President

OM is our largest customer there and we pretty much follow their guidelines. What are they telling is now, Wendy, we do those vendor meetings.

Wendy Diddell — Executive Vice President and Chief Operating Officer, Richardson Healthcare

Yeah, kind of low-double-digits, 10% to 15% is what we’re expecting. They have their own supply chain challenges that I think are limiting their growth.

Mike Hughes — SGF Capital — Analyst

Okay. So would that translate into like a $27 million, $28 million number for that business?

Wendy Diddell — Executive Vice President and Chief Operating Officer, Richardson Healthcare

Yeah, that’s a good number.

Mike Hughes — SGF Capital — Analyst

Okay. And then, just last question for you on the inventory, I understand why it’s been building up over the last few quarters. But just from a day standpoint, you think that’s stabilized now or will you need to continue to kind of build up ahead of revenue?

Edward J. Richardson — Chairman, Chief Executive Officer and President

No, I think it will continue. We try and it’s one of the reasons why we maintain so much cash. Part of the reason why we’re successful is, we can supply products that other people can’t. And that comes from buying inventory well in advance. Particularly what Jens is talking about where he is buying LCDs a year in advance, he guarantees big OEMs that they’re going to have the display that runs at $3 million piece of equipment.

Mike Hughes — SGF Capital — Analyst

Okay. And there’s obviously a cost to having higher working capital. Have you kind of — have you thought about or maybe you’ve already done this just building that into your price and just having that discussion with the customers that your cost of doing business because your working capital requirements have gone up — is higher and it really needs to be reflected in kind of — you’re delivering a lot of value to your customers and it hasn’t — it’s not reflected at this point.

Edward J. Richardson — Chairman, Chief Executive Officer and President

We certainly try to do that. Unfortunately when you’re working with these frame contracts that are a year out, you get caught like we have in short-term, but we will recover from that and we’ll be able to increase our prices as we go along.

Mike Hughes — SGF Capital — Analyst

Okay. I appreciate your time. Thank you.

Edward J. Richardson — Chairman, Chief Executive Officer and President

Thank you.

Operator

Our next question comes from the line of Mike Schillinger from Macrocap Club [Phonetic]. You may begin.

Mike Schillinger — Macrocap Club — Analyst

Yes. Regarding — hello.

Edward J. Richardson — Chairman, Chief Executive Officer and President

Hi, Mike.

Mike Schillinger — Macrocap Club — Analyst

Regarding converting backlog to sales, can you characterize what percentage of that challenges supply chain versus personnel?

Edward J. Richardson — Chairman, Chief Executive Officer and President

Yeah. No, no, it’s not personnel. For instance, on the magnetrons, in normal year, on the YJ1600, we build 800 a year. And we went from building 800 last year to we have orders for over 5,000 right now. And so, what we’ve had to do is to build new test sets. We’ve had to add ovens. We had to add vacuum pumps, all kinds of jigs, dies, tooling and fixtures and delivery on that — a lot of it we build in-house. But what — we have to buy some of them as long as six months. And that’s the kind of thing that we run into. We’ve geared up now where we can build 200 or 300 a month, and we’re going to gear up to build 400 a month. But to get the equipment to do that is what the delivery time has been.

Mike Schillinger — Macrocap Club — Analyst

Okay. Thank you very much.

Edward J. Richardson — Chairman, Chief Executive Officer and President

Sure. Thank you.

Operator

And our next question will come from the line of David Schneider [Phonetic] as a Private Investor. Your line is open.

David Schneider — — Analyst

Hi. Can you hear me okay?

Edward J. Richardson — Chairman, Chief Executive Officer and President

Hi, David.

Wendy Diddell — Executive Vice President and Chief Operating Officer, Richardson Healthcare

Hey, David.

David Schneider — — Analyst

Okay. Yeah, just a quick question. Earlier person on the call, we couldn’t figure out why the stock was where it is now. This is just my opinion and then I’ll ask questions. I just think people nowadays — I think people like the stock more at $17 than $11.62, it’s just human nature. And so, the fact that it’s $11.62 now, to me it doesn’t bother me at all. So — and the other — back to the questions, I did notice, I think you did go over this, I just need a little clarification. I do monitor inventories and so the sequential increase in inventory seems to have grown faster than the increase in revenues. And I’m thinking that maybe to sell finished products, there is a few maybe bits and pieces that you’re waiting for delivery on so you can ship things out and book it as revenues. Can you maybe just explain that?

Edward J. Richardson — Chairman, Chief Executive Officer and President

That happens a lot, particularly in Greg’s business, where the customer, they want a complement of five different semiconductors and ship complete and we only have three of them or four of them in stack. So we’re holding the inventory until we get the fifth one to ship the kit, if you will, and that happens.

David Schneider — — Analyst

Okay.

Edward J. Richardson — Chairman, Chief Executive Officer and President

Same thing happens when we’re building equipment for LAM if we’re short, some kind of a capacitor and we’ve got all the other components or piece of equipment, we might have $1,000 with the raw material waiting for $3 capacitor.

David Schneider — — Analyst

And so, as far as flipping over to the overall company being free cash flow positive, with big part of that being just that backlog and inventories turning that into cash or what other factors could be going on.

Edward J. Richardson — Chairman, Chief Executive Officer and President

Well, that has a lot to do with it. Obviously the more money we make, then we cross the line. It looks like we’ll be cash flow positive next year. That’s sort of our forecast. We’ve done a lot of four, five-year cash flow.

Robert Ben — Executive Vice President, Chief Financial Officer and Corporate Secretary

Yeah. We certainly expect the cash flow to improve certainly as sales continues to grow 15% to 20% a year. And so, yeah, next year will be a transition year, hopefully we’ll get the cash flow neutral, now it’ll be close. And then after that, our forecast is to generate significant amounts of cash. I think we talked about that earlier with some other people on the call.

David Schneider — — Analyst

Okay. That’s great. Your tax rate was 17% in the quarter and you released yesterday and another state-to-bill annoyance, they suspended such some carry forwards there. For next fiscal year that starts, I guess what June 1, what do you think your overall tax rate is going to be?

Robert Ben — Executive Vice President, Chief Financial Officer and Corporate Secretary

Yeah. I’m forecasting 27% effective tax rate for fiscal ’23. And that includes, I think I’ve mentioned this before on another calls but we do anticipate we’ll be using all of our federal NOLs by the end of this fiscal year. So, we have to factor in federal tax next year. So, I would assume I’m using a 27% rate going forward. But then, once Illinois, we can use the Illinois NOLs again after fiscal 2023, I expect that to go down as we can utilize those in fiscal ’24 and beyond. So, for those years fiscal ’24 and beyond, I’m using 23% as my estimated effective tax rate.

David Schneider — — Analyst

Okay. Well, that’s good. And how big is the Illinois carry forward?

Edward J. Richardson — Chairman, Chief Executive Officer and President

It’s over $40 million significant.

David Schneider — — Analyst

Okay. All right. Yeah, I’ll probably email some other questions. And yeah — I’m happy that fundamentally you’re doing well and that’s the most important thing.

Edward J. Richardson — Chairman, Chief Executive Officer and President

Thank you very much.

Operator

Thank you. No I’m not showing any further questions now. I’d now like to turn the call back over to the speakers for any closing remarks.

Edward J. Richardson — Chairman, Chief Executive Officer and President

Okay. Well, thank you for your interest and your investment in the company Richardson Electronics. We are optimistic about our future obviously and hope you are as well. If you’d like to discuss our results, we’re very flat organization and cause anytime happy to talk to you. Or better yet, come and see us, it’s easier to show you what we do, then tell you about it. And we look forward to discussing our fourth quarter and full-year performance with you in July. Thank you very much.

Operator

[Operator Closing Remarks]