Richardson Electronics - Q4 2024

Executive Summary

• Q4 FY2024 net sales were $47.4M and diluted EPS was -$0.01 as GES and PMT faced timing pushouts and weaker RF/Microwave demand; consolidated gross margin improved 320 bps YoY to 31.1% on favorable product mix, while backlog held at $147.8M.
• Cash ended at $24.3M with no debt; operating cash flow of $7.2M in Q4 reflected inventory and AR reductions, marking the first YoY inventory decline since FY2017.
• GES bookings were strong (up 70% YoY in Q4) and GES backlog rose to $42.3M (+$5.5M seq), though shipments were pushed into Q1 FY2025; management expects a return to YoY sales growth and higher profitability in FY2025.
• Dividend maintained at $0.06 per common share and $0.054 for Class B, with management highlighting semi wafer fab recovery expected in calendar 2025 and evaluating strategic options for Healthcare as potential catalysts.

What Went Well and What Went Wrong

What Went Well

• Gross margin expanded to 31.1% (+320 bps YoY) with all SBUs improving, led by PMT (31.1%), Healthcare (32.5%), and Canvys (33.5%) on favorable mix and lower scrap costs.
• Strong cash generation and balance sheet discipline: Q4 operating cash flow of $7.2M; cash increased to $24.3M; first YoY inventory reduction since FY2017, positioning for growth investments.
• GES commercial momentum: Q4 bookings +70% YoY; backlog up 16% sequentially to $42.3M, adding new customers/products (ULTRAGEN starter modules; pitch energy modules on Suzlon, Senvion, Nordex, SSB) and global expansion.
  • “We believe we will return to year-over-year sales growth and higher profitability in fiscal 2025.” — Edward J. Richardson.

What Went Wrong

• Revenue declined 19.5% YoY to $47.4M; PMT -$1.0M YoY, GES -$10.6M YoY due to non-recurring EV locomotive battery sale in prior year; Canvys -$0.5M YoY on medical OEM softness.
• Operating income swung to a slight loss (-$0.1M) versus $1.4M prior year; diluted EPS -$0.01 vs $0.27 prior year, with tax valuation allowance (+$0.9M expense) partially offset by R&D credits ($0.4M current; $0.5M prior years).
• Healthcare remained below breakeven in Q4 amid supply chain challenges; full-year loss ~$3M; company evaluating strategic options for the business.

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Welcome to Richardson Electronics Earnings call for the fourth quarter of fiscal year 2024. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you would need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would like now to turn the conference over to your speaker today, Ed Richardson, Chief Executive Officer. Please go ahead.

Edward Richardson (CEO)

Good morning and welcome to Richardson Electronics Conference Call for the fourth quarter of fiscal year 2024. Joining me today are Robert Ben, Chief Financial Officer; Wendy Diddell, Chief Operating Officer and General Manager for Richardson Healthcare; Greg Peloquin, General Manager of our Power and Microwave Technologies Group, which includes Green Energy Solutions; and Jens Ruppert, General Manager of Canvys. As a reminder, this call is being recorded and will be available for playback. I'd also like to remind you that we'll be making forward-looking statements. They're 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. Fiscal 2024 was a difficult year for Richardson Electronics due to challenging conditions within our semiconductor wafer fab market and program delays across several of our green energy solutions opportunities.

Economic uncertainties and higher interest rates also contributed to lower sales in certain segments of our business. While these trends impacted sales and profitability during the year, our teams focused on improving gross margins, reducing inventory levels, strengthening our strong balance sheet, and investing in our long-term strategic growth opportunities. In fact, the fourth quarter marked the second consecutive quarter where we experienced reduction in inventory and the first year-over-year decline in inventory since fiscal 2017. In addition, the company generated $7.2 million in operating cash flow during the fourth quarter, and we ended the year with no debt and $24.3 million in cash and cash equivalents. While it was a tough year for sales growth, our business remained strong, and I'm pleased with the direction we're headed.

The strategies we're pursuing include increased engineered solutions, leveraging our distribution partners and global customer base, and supporting opportunities such as green energy. During fiscal 2024, key successes included achieving a significant milestone in the number of wind turbine generator modules sold, expansion of our global customer base in green energy solutions market, and the launch of starter modules used to replace lead-acid batteries in locomotives. In fact, within our GES business, we now offer multiple solutions for lead-acid battery replacements and several OEM turbines compared to the ULTRA3000 last year. Greg, Wendy, and Jens will provide more details on our business unit performance, including an update on our growth strategies, new product development, program wins, and expanding customer relationships. First, I will turn the call over to Bob Ben, our Chief Financial Officer, to review our fourth quarter and fiscal year 2024 financial performance.

Robert Ben (CFO)

Thank you, Ed, and good morning. I will review our financial results for our fourth quarter and fiscal year 2024, followed by a review of our cash position. In addition, please note that I will be discussing non-GAAP financial measures. A reconciliation of non-GAAP items to the comparable GAAP measures is available in our fourth quarter fiscal year 2024 press release that was issued yesterday. Net sales for the fourth quarter of fiscal 2024 were $47.4 million, compared to net sales of $58.8 million in the prior year's fourth quarter. PMT sales decreased by $1.0 million from last year's fourth quarter, primarily due to lower sales of RF and microwave products. Sales for GES declined $10.6 million from last year's fourth quarter, which included approximately $11 million of EV locomotive battery modules that did not recur in fiscal 2024.

Canvys sales decreased by $0.5 million, primarily due to economic conditions impacting medical OEM sales in North America. Richardson Healthcare sales increased by $0.7 million, or 24.3%, compared to the fourth quarter of fiscal 2023, as a result of higher systems, CT tube, and parts demand. Backlog totaled $147.8 million at the end of the fourth quarter of fiscal 2024 versus $147.7 million at the end of the third quarter of fiscal 2024. The sequential increase was in GES, partially offset by slight decreases, primarily in PMT and Canvys, which remain healthy. GES backlog of $42.3 million increased by $5.5 million since the third quarter of fiscal 2024. Consolidated gross margin for the fourth quarter was 31.1% of net sales, a significant improvement compared to 27.9% in last year's fourth quarter. All of our business units had higher gross margin in the quarter versus prior year.

PMT's gross margin increased to 31.1% from 29.0% due to a favorable product mix. GES gross margin increased in the fourth quarter of fiscal 2024 to 25.5% from 23.4% in the prior year's fourth quarter due to product mix. Healthcare's gross margin increased to 32.5% in the fourth quarter of fiscal 2024, compared to 23.7% in the prior year's fourth quarter, as a result of an improved product mix and lower scrap costs. Canvys's gross margin increased in the fourth quarter of fiscal 2024 to 33.5% from 32.9% in the prior year's fourth quarter because of product mix. Operating expenses were $14.8 million for the fourth quarter of fiscal 2024, compared to $15.0 million in the fourth quarter of fiscal 2023. The decrease in operating expenses resulted from lower incentives expense, partially offset by higher R&D expense.

The company reported an operating loss of $0.1 million for the fourth quarter of fiscal 2024 versus operating income of $1.4 million in the fourth quarter of last year. Other expense for the fourth quarter of fiscal 2024, including interest income and foreign exchange, was less than $0.1 million, compared to other income of $0.1 million in the fourth quarter of fiscal 2023. Income tax benefit was less than $0.1 million, and non-GAAP income tax benefit was $0.4 million for the fourth quarter of fiscal 2024, versus an income tax benefit of $2.6 million and non-GAAP income tax benefit of $0.2 million in the prior year's fourth quarter. The fourth quarter of fiscal 2024 included $0.4 million for an R&D tax credit for the current fiscal year and a one-time total credit of $0.5 million for fiscal years 2020 through 2023.

In addition, the fourth quarter of fiscal 2024 included $0.9 million in income tax expense for the establishment of an Illinois state tax valuation allowance related to the limitation of NOLs. Net loss for the fourth quarter of fiscal 2024 was $0.1 million, and non-GAAP net income was $0.3 million, compared to net income of $4.1 million and non-GAAP net income of $1.8 million in the fourth quarter of fiscal 2023. Loss per common share diluted was $0.01 per share, and non-GAAP earnings per common share diluted were $0.02 in the fourth quarter of fiscal 2024, compared to earnings per common share diluted of $0.27 and non-GAAP earnings per common share diluted of $0.11 in the fourth quarter of fiscal 2023.

Turning to a review of the results for fiscal year 2024, on a year-to-date basis, net sales for fiscal year 2024 were $196.5 million, a decrease from $262.7 million in fiscal year 2023. Net sales decreased by $35.6 million for PMT, $24.4 million for GES, and $6.9 million for Canvys, while sales increased by $0.7 million for Richardson Healthcare. Gross margin for fiscal 2024 was 30.5% in net sales, compared to 31.9% during fiscal 2023, primarily because of product mix and manufacturing under absorption in PMT, product mix in GES, and increased manufacturing under absorption in healthcare, partially offset by a favorable product mix and lower freight costs for Canvys. Operating expenses were $59.5 million for the fiscal year, which represented an increase of $0.8 million from last fiscal year. The increase in operating expenses resulted from higher R&D and salaries expenses, partially offset by lower incentives.

Operating income for fiscal year 2024 was $0.3 million, compared to an operating income of $25 million for fiscal year 2023. Other expenses for fiscal 2024, including interest income and foreign exchange, were $0.2 million, as compared to other income of less than $0.1 million for fiscal 2023. Income tax expense was $0.1 million, and non-GAAP income tax benefit was $0.3 million for fiscal 2024. The income tax expense of $0.1 million for fiscal 2024 resulted from the $0.9 million establishment of an Illinois state tax valuation allowance, offset by both current year R&D tax credit of $0.4 million and prior year's R&D tax credits of $0.5 million. The income tax expense was $2.7 million, and non-GAAP income tax expense was $5.0 million for fiscal 2023.

Net income for fiscal 2024 was $0.1 million, and non-GAAP net income was $0.5 million versus net income of $22.3 million and non-GAAP net income of $20.0 million during fiscal 2023. Earnings per common share diluted were $0.00, and non-GAAP earnings per common share diluted were $0.03 for fiscal 2024, compared to earnings per common share diluted of $1.55 and non-GAAP earnings per common share diluted of $1.39 for fiscal 2023. Moving to a review of our cash position, cash and cash equivalents at the end of fiscal 2024 were $24.3 million, compared to $18.9 million at the end of the third quarter of fiscal 2024 and $25.0 million at the end of fiscal 2023. Cash generated of $5.4 million in the fourth quarter of fiscal 2024 was primarily due to decreases in accounts receivable and inventory, partially offset by lower accounts payable. U.S.

cash and cash equivalents were $6.5 million at the end of fiscal 2024 versus $5.2 million at the end of the third quarter of fiscal 2024 and $7.6 million at the end of fiscal 2023. Capital expenditures of $1 million in the fourth quarter of fiscal 2024 were primarily related to our facilities and IT systems versus $2.4 million in the fourth quarter of fiscal year 2023. Total capital expenditures were $4.0 million in fiscal 2024, as compared to $7.4 million in fiscal 2023.

We paid $0.8 million in cash dividends in the fourth quarter and a total of $3.4 million in fiscal year 2024. 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 2025. As of the end of fiscal 2024, the company had no outstanding debt on its $30 million revolving line of credit with PNC Bank. Now, I will turn the call over to Greg, who will discuss the results for our PMT and GES business groups.

Gregory Peloquin (General Manager, Power and Microwave Technologies Group)

Thank you, Bob, and good morning, everyone. While our fiscal 2024 fourth quarter results for both PMT and our GES strategic business units were challenging, we remain optimistic about the future, both short and long term. First, looking at GES, with the bookings and backlog being a strong indicator of the health of a business, we were excited to see Q4 was our strongest booking quarter this fiscal year, growing our backlog 16% over Q3. In addition, our bookings in Q4 FY 2024 were up 70% versus Q4 FY 2023. Strong bookings include sales to new customers for recently introduced products, including our ULTRA Gen starter modules for locomotives and pitch energy modules and new wind turbine platforms. The increase in bookings led to a higher backlog in GES during the fourth quarter and gives us confidence that Q1 FY 2025 will show a sequential growth.

In addition, I'm pleased to report that our gross margin in GES improved over the previous year. Looking at our results in more detail, after showing revenue growth in our green energy group in Q3, our revenue decreased to $4.7 million in the quarter. We had a number of Q4 push-outs into Q1 FY 2025 that negatively impacted our shipments during the quarter. However, as we predicted, the second half of FY 2024 was up over 131%, with revenues of $16.2 million versus $7 million in the first half of the year. Our GES growth strategy is still somewhat in its infancy stage, and as our new products mature, we'll see sales fluctuate from quarter-to-quarter. On the positive side for FY 2024, we had sales of $23.2 million, with numerous new customers, products, and technology partners added throughout the year.

The team continues to do a good job identifying customer requirements, establishing design and manufacturing capabilities, and launching beta site testing. In a short amount of time, we have designed numerous products, received several patents, and developed a growing list of key customers. All of this will help develop a more predictable quarterly revenue stream. Last year, GES benefited from several large projects, including prototype electric locomotive development and large-scale rollout of pitch energy modules to replace lead-acid batteries with major owner-operators of GE wind turbines, such as NextEra, Enel, and Invenergy. In FY 2024, we saw the market share grow with an agreement to outfit 1,000 diesel locomotives with our patent-pending starter module. In addition, our pitch energy modules were selected by four new wind turbine platforms, including Suzlon, Senvion, Nordex, and SSB.

We now have over 18 wind turbine owner-operators purchasing numerous products from us, and we are expanding globally with the rollout of the new wind turbine platforms in Europe, Latin America, and Southeast Asia. Our customers repeatedly tell us that we have maintained our market share for our core GES power management applications, suggesting the slowdown in shipments in FY 2024 was primarily a timing issue. In fact, our customer pipeline and the number of opportunities continue to increase as we take advantage of significant energy transformation projects globally. Turning to power and microwave technologies, or PMT, which includes the Electron Device Group, EDG, our legacy tube business, and power and microwave group, or PMG, sales decreased 3% from $31.5 million to $30.5 million in the fourth quarter. This decline was primarily due to the slowdown in our semiconductor wafer fabrication equipment business.

However, we saw semi-fab demand increase during the quarter as we experienced higher shipments and bookings. In fact, Q4 FY 2024 was our largest revenue quarter this year for the semi-wafer fab business, up 71% over Q3. We expect to see year-over-year growth for our semiconductor wafer fabrication equipment business in FY 2025, based on customer feedback and market predictions. On the RF and wireless side, we are extremely happy to see a book-to-bill of $1.38 going into FY 2025. Our combined GES and PMT backlog remains strong at over $102 million. Given our inventory position, we will continue to ship many incoming orders from stock, as we were able to do in Q3 and Q4 this past fiscal year. This resulted in a reduction of inventory, which will convert to cash in the coming quarters as receivables are collected.

We remain focused on managing our business to support customers' needs when they are ready. Having inventory on hand allows us to capture and maintain market share. We collaborate with both our customers and suppliers and leverage our customers' forecasts to help us strategically invest in inventory and ensure we can meet our customers' needs. A key to our growth strategy is selectively expanding our global technology partners. In Q4, we added technology partners who fill technology gaps in our offering and support our growth strategy. Often these partnerships, we identify opportunities for new products that we design, manufacture, and test in-house. This increases the value we provide customers and allows us to capture more revenue while expanding and diversifying our customer base. These long-term supply relationships are extremely strong, and when appropriate, we work with them on strategic purchases to maintain proper inventory levels.

We negotiate special payment terms, stock adjustment privileges, and shipping schedules to help improve cash flow. We continue to invest in our infrastructure to support our growth. We are bringing on talented engineers, both field engineers and design engineers, and making investment to enhance our design and manufacturing capabilities. Our growing in-house design engineering and manufacturing teams are doing a great job supporting increased demand for current products and new product designs. With this team and our field sales engineers, we will continue to identify, develop, and introduce new products and technologies for green energy and other power management applications, along with microwave applications. Going into FY 2025, we remain excited about the opportunities with our PMT and GES businesses. Bookings in Q4 FY 2024 exceeded bookings in Q4 FY 2023. We did not lose any market share in FY 2024.

In fact, we gained market share with our current customers and grew our share with the addition of new products and customers. With the positive outlook in the semi-fab market, key customers forecasting growth in FY 2025, and our technology partners continuing to drive our business and unique global business model, we have many reasons to be excited about our growth strategies and the future of our business. I cannot stress enough the value of Richardson Electronics' model to our customers and suppliers. Our unparalleled capability and global go-to-market strategy are unique to the power and energy, RF and microwave, and green energy markets.

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 when they arise. 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. With that, I'll turn it over to Wendy Diddell to discuss Richardson Healthcare.

Wendy Diddell (COO and General Manager, Richardson Healthcare)

Thanks, Greg. Good morning, everyone. Fourth quarter sales for the healthcare division were $3.5 million, an improvement of 24.3% compared to the fourth quarter of last year and a $400,000 or 13.3% increase over the most recent third quarter. CT tubes, parts, and system sales were up versus the prior year's fourth quarter. During the quarter, we continued to benefit from sales of our repaired Siemens Stratton Z tubes. On a full-year basis, healthcare sales were $12.1 million, reflecting a 5.7% increase over FY 2023 full-year sales. Sales of both CT tubes and parts improved over the prior year by 8% and 6%, respectively, while system sales were down by nearly 4%. We sold more Siemens tubes in FY 2024, which were offset by lower sales of the ALTA750 inserts to China.

Healthcare's gross margin in the quarter improved to 32.5% compared to 23.7% gross margin in the same period last fiscal year. The gross margin improvement was primarily due to a favorable product mix, including higher parts and Siemens tube sales and lower scrap charges. On a full-year basis, gross margin was 30.4% versus 30.7% in FY 2023. This was primarily related to a positive product mix, including Siemens tubes, offset by manufacturing under absorption. During the quarter, we made significant improvements to the Siemens repair program. The Siemens repair program includes four tube types: the Stratton Z, MX, MXB, and MXB46. While the repaired Stratton Z is in full production and performing well in the field, we were not able to meet demand in the quarter due to supply chain challenges.

We focused on production processes, which will carry over to the MX series repairs beginning this summer. Unfortunately, we failed to meet our objective on the MX Life tube test. However, with a critical patent expiring in June, we're now in a better place to repair the MX tubes. As a result of our supply chain challenges and limited production in the fourth quarter, we did not achieve break-even in the quarter. While we are continuing efforts to improve sales and profitability, the company is beginning to evaluate strategic options for the healthcare business. I will now turn the call over to Jens Ruppert to discuss the results for Canvys.

Jens Ruppert (General Manager, Canvys)

Thanks, Wendy, and good morning, everyone. Canvys engineers manufactures and sells custom displays to original equipment manufacturers across global industrial and medical markets. Canvys reported revenues of $8.7 million in the fourth quarter of fiscal year 2024, a modest decrease from the $9.2 million in the same quarter of the previous year, but a 31.8% sequential improvement from the $6.6 million in sales during the third quarter of fiscal year 2024. The sequential improvement in sales for this quarter was driven by recovering demand within the North American market. In fiscal year 2024, sales dropped by 17.5% to $32.4 million, largely due to push-outs earlier in the year from our North American customers. We ended the quarter with $42.9 million in backlog, providing a strong base of business for fiscal year 2025. A significant achievement in the fourth quarter was the improvement of our gross margin.

Our gross margin, as a percentage of net sales, rose to 33.5%, up from 32.9% in the fourth quarter of fiscal year 2023. Our fiscal year 2024 gross margin, as a percentage of sales, increased to 33.8% from 31.5% in fiscal year 2023. The increase highlights our unwavering commitment to operational excellence and stringent cost control. During the quarter, our firm received orders from both repeat and first-time medical OEM customers. Some of these applications include systems for polymerase chain reaction, or PCR, pulsed field ablation, patient monitoring, medical device control, microsurgery, dental displays, and robotic-assisted surgery. These new design wins demonstrate our dedication to delivering solutions that address the changing demands of our medical customers. Additionally, they showcase our capabilities to build and maintain long-term relationships with current and prospective customers who demand high standards, ensuring our ongoing expansion within this crucial industry.

In fact, today, we serve more than half of the top 10 global medical device companies. We also provide solutions for numerous commercial and industrial purposes. Our products are used in control rooms, train cockpits, as human-machine interface for large-size printing machines, ticket vending machines, and packaging machines. Further, we secured a sizable order for all-in-ones used in connection with product dispensers in retail environments. Due to significant market uncertainties, including economic challenges, regulatory changes, and other factors, we recognize that many of our customers have adopted a conservative stance with respect to new product development and inventory. Nevertheless, we remain cautiously optimistic that customer demand will continue to improve in the upcoming year.

We are noticing encouraging signs and expect a steady recovery if the market environment becomes more stable. What we hear directly from our customers reinforces this belief. Another key indicator is the increased number of projects our teams are working on. These new opportunities underscore growth within the markets we serve and the recognition and acceptance of our products and services. While our sales organization stays focused on new opportunities, I remain focused on executing our strategic initiatives to drive sustainable growth and create long-term value for our shareholders. I will now turn the call back over to Ed.

Edward Richardson (CEO)

Thanks, Jens. While it was a tough year for Canvys, your strong backlog and a pipeline of new opportunities with key medical OEMs support our confidence in a return to growth in FY 2025. As a result, we believe Canvys will continue to produce exceptional operating performance in the future. Despite headwinds from uncertain economic conditions and higher interest rates, we're optimistic and committed to our long-term growth strategies. The list of our opportunities within our green energy solutions business unit continues to grow. While the projects have taken more time to develop than we initially thought, we know we are making a positive impression on a growing list of customers in the global wind energy market, transportation, and power management.

None of the opportunities we've discussed over the past several quarters have been lost, and we continue to leverage our unique market position with leading technology partners to drive interest in our engineered solutions. A key component to our growth is to cultivate new opportunities within our green energy business. By leveraging our core engineering capabilities and relationships with our technology partners, we're expanding our product lines into our large, fast-growing global markets. Over the past two years, we've announced wins on large global platforms within the wind, transportation, and power management markets, and we believe each new platform supports meaningful multi-year revenue opportunities. To support our growth strategies, we believe it's critical and important to maintain a strong balance sheet. Throughout fiscal 2024, we focused on improving our working capital levels and converting our inventory to cash. I'm pleased with the progress we made this year.

We continue to closely manage our balance sheet to provide us with the flexibility to support our growth initiatives. We believe investing in growth produces the greatest return on investment compared to the uses of capital at this point. As our growth strategies scale and we're further solidifying our operating cash flow, we look at additional opportunities to allocate capital. While sales mix will impact gross margin on a quarter-to-quarter basis, we believe our compelling financial model is positioning to produce operating leverage as sales growth.

We're starting to see early indications of improved demand within the semiconductor wafer fab markets, which, combined with our existing growth strategies, support our optimism that we will return to year-over-year sales growth and higher profitability in fiscal 2025. On behalf of everyone at Richardson Electronics, I look forward to updating you on the progress we're making, and we'll be happy to answer your questions.

Operator (participant)

Thank you, ladies and gentlemen. Due to time constraints, we ask that you please limit yourself to one question and one follow-up. Again, we ask that you please limit yourself to one question and one follow-up until all have had a chance to ask a question, after which we will answer additional questions from you as time permits. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment, please, while we compile the Q&A roster. Our first question comes from Bobby Brooks with Northland Capital Markets. Your line is open.

Bobby Brooks (VP and Senior Equity Research Analyst)

Hey, good morning, guys. Thank you for taking my call. So, you know.

Gregory Peloquin (General Manager, Power and Microwave Technologies Group)

Hey, Bobby.

Bobby Brooks (VP and Senior Equity Research Analyst)

Good morning. So, you know, the third quarter, something that you guys had talked about, and you mentioned a bit in the prepared remarks, was just a healthy broadening of customers wanting the ULTRA3000. And in the third quarter, GES revenues were really strong. Obviously, GES revenues stepped down sequentially. So I'm just curious to hear if that broadening trend seen in the third quarter was extended into the fourth quarter, and could you quantify that for us at all? And then maybe just talk about if that trend continued, then what was the driver of this sequential step down in GES?

Gregory Peloquin (General Manager, Power and Microwave Technologies Group)

Sure, Bobby. Good to hear from you again. You know, having fluctuations from quarter-to-quarter in both revenues and bookings is very, very common when you're introducing new products through the NPI process and virtually a business startup. So we're seeing that that's common. But if you look at just the fiscal year, what keeps us excited in those numbers, we've added a number of new products, a number of new customers throughout the year. So in Q2, Q1, Q2, that became revenue in Q3. And so we had a large increase in bookings and actually year-over-year growth coming out of a record year. And then throughout the year, we've added over 20 new owner-operators buying wind turbine pitch energy modules. In addition to that, throughout the year, we've added four new platforms with Suzlon, Senvion, Nordex, and SSB.

We also designed and developed with two of the largest locomotive manufacturers starter modules, one ultracapacitor-based, one lithium iron phosphate-based. Some of the large bookings you saw in Q4 were from that. You're going to see fluctuations in both revenues and bookings. We had strong bookings in Q2, which turned into shipments in Q3. We had excellent bookings in Q4, and that's transitioning into what's looking at a very strong Q1 FY 2025 Q1. That's kind of the premise of where the growth comes and why it fluctuates. We're adding more and more new customers that are buying this product as it becomes well-known in the very niche market of wind turbine manufacturers. Then we continue to add new technology partners and new products to keep that pipeline going.

But until it gets to more of a consistent revenue stream, we're going to see fluctuations quarter-to-quarter. But the end result is $23.2 million in revenue, margins up, profits are up, strong backlog of nearly $50 million going into Q1, 4 new pitch energy platforms with 4 new wind turbine manufacturers, which, by the way, with those, like we are with GE, we are exclusive. And adding new products to our very large EV and diesel locomotive manufacturers. Again, as I mentioned, starter modules. We also have IGBT inverter modules that we're working on, have small orders for those, both in the wind turbine market and the electric locomotive and diesel locomotive market. And then to tie one last thing out of that, Bobby, and we talked about that when you're here, we're now expanding that globally.

So this has mainly been North America, is where we launched it. But as of next week, we have beta site testing going on in Italy and France. And as you already know through the press release, we're nearing the end of the beta testing with Suzlon in India. And if you look at these manufacturers, Suzlon has 12,000 turbines worldwide, Senvion has 4,000, Nordex close to 2,000, and the SSB is about 3,500. So we haven't touched the surface yet as far as I'm concerned. And once we get these products introduced in a more consistent revenue stream, you're going to kind of see these upticks from a positive point of view in revenue and bookings, but also kind of updating in quarter-to-quarter.

Bobby Brooks (VP and Senior Equity Research Analyst)

Got it. That's really good to hear. And then just switching topics to PMT, Greg, you mentioned that the sales in the wafer fab were up 71% sequentially, but then PMT sales overall stepped down sequentially. So what was weaker within PMT that offset that 71% increase? Or maybe just that 71% increase in the semi-wafer fab stuff was off of a very small base in the third quarter?

Gregory Peloquin (General Manager, Power and Microwave Technologies Group)

Yeah. I mean, you get numbers like that of 171% because it's compared to the prior year. And as you know, in the prior year, it was a record year for those products. So comparatively, year-over-year, that we're dealing with that comparison. In the fourth quarter was our lowest year in terms of revenue and bookings for our semiconductor wafer fab companies. And we just had a stronger as it comes to pick up their forecast and that backlog. That's why you're seeing your numbers like that. But it's a comparison, but it's quarter-over-quarter growth in bookings and billings.

Wendy Diddell (COO and General Manager, Richardson Healthcare)

Yeah. Just to clarify, yeah, Q4 was stronger than Q3 in revenue for the semiconductor market. And to your point, though, it was still considerably lower than the run rate it was in FY 2023.

Gregory Peloquin (General Manager, Power and Microwave Technologies Group)

Right.

Bobby Brooks (VP and Senior Equity Research Analyst)

Okay. So it was that nice sequential growth was because it was off of a small base. And what we're looking at.

Gregory Peloquin (General Manager, Power and Microwave Technologies Group)

Exactly.

Bobby Brooks (VP and Senior Equity Research Analyst)

Okay. All right. Thank you. I'll return to the queue.

Gregory Peloquin (General Manager, Power and Microwave Technologies Group)

Thanks, Bobby.

Operator (participant)

The next question comes from Anya Soderstrom with Sidoti. Your line is open.

Anja Soderstrom (Financial Analyst of Equity Research, Small-Mid Cap Technology Sector)

Hi, and thank you for the question. So hey, a follow-up on this wafer fab. Do you still expect the uptick in fiscal 2025, or do you see that maybe building up slower than you previously anticipated?

Gregory Peloquin (General Manager, Power and Microwave Technologies Group)

Yeah. According to the customers and then some of the market reports, which all of you see also, the real uptick that they're suggesting will be in calendar year 2025 or our second half of our FY 2025. So we're going to see growth, as Bobby mentioned, off a smaller base in Q1 and Q2, but the real uptick, getting back to some normal numbers from the past, will be in calendar year 2025.

Anja Soderstrom (Financial Analyst of Equity Research, Small-Mid Cap Technology Sector)

Okay. Thank you. In terms of the margins, it seems like that was helped a lot by product mix. Last year was a little bit pressured, I think, by the locomotive prototype you shipped. Can we expect something similar to occur in the coming quarters, or is this margin sort of sustainable from here?

Gregory Peloquin (General Manager, Power and Microwave Technologies Group)

Yeah. The margins we make are obviously stronger on products we design, manufacture, and test, and lower on products like technology partners where we're designing in their components into customers' applications. So as the uptick grows in our engineered solutions capability, that margin will be maintained. And as we just talked about, we're expecting both Lam and our green energy engineered solutions to grow quarter-over-quarter and year-over-year in FY 2025.

Anja Soderstrom (Financial Analyst of Equity Research, Small-Mid Cap Technology Sector)

Okay. Thank you. Then in terms of inventory, you've been working that down, but it seems like you need to keep some inventory for strategic purposes. How should we think about the inventory going forward? Do you think that should continue to decline, or will it start increasing?

Gregory Peloquin (General Manager, Power and Microwave Technologies Group)

Yeah. The inventory itself, we made some strategic purposes because it's funny how people forget. We were dealing with for almost a year and a half of supply chain issues where we couldn't get products for 50 weeks-55 weeks. And so these infrastructure rollouts, I'll call it, because that's my background, is in the RF base station market. But it's very similar to the wind turbine market. We made a very strategic decision to buy product so we could support this growth because we, again, as I mentioned before, customers are increasing, new products are increasing.

That's why we were able to have pretty strong bookings and shipments in the quarter. And we expect to see that in FY 2025 as the business grows. But yeah, we just made a strategic decision, brought that product in, and now we're seeing sales increase. That will have a direct effect on lowering our inventory.

Wendy Diddell (COO and General Manager, Richardson Healthcare)

What will impact that, Anya, is we still have one significant vendor that is doing last-time builds for us because they're going to be exiting manufacturing. So that'll offset, but the team will continue to focus on and strongly focus on inventory reduction as we go forward to help offset that other vendor's product line growth. Does that make sense for you?

Anja Soderstrom (Financial Analyst of Equity Research, Small-Mid Cap Technology Sector)

Yes. Thank you for reminding me of that. That was all from me.

Wendy Diddell (COO and General Manager, Richardson Healthcare)

Thanks, Anya.

Gregory Peloquin (General Manager, Power and Microwave Technologies Group)

Thanks, Anya.

Operator (participant)

Our next question comes from Ross Taylor with ARS Investment Partners. Your line is open.

Ross Taylor (Partner and Portfolio Manager)

Thank you. The curse of a first initial. Congratulations, first of all, on converting inventory to cash. That was a very impressive performance in the last quarter. Also on beginning the strategic alternative exploration for the medical imaging side and just generally how you guys manage the business through what's been a pretty difficult period. If we were to see in the calendar year 2025 a return to kind of peak-level demand out of your semi-cap equipment companies, how much would we expect to see the revenues there drop?

It's kind of an inverted question in the sense of how much did revenues drop in that area in your fiscal 2024 over 2023? Given that you carry, I think, high 40%s or even 50% kind of operating margins in that space, that would, I think, be a very major driver of what both free cash flow and earnings will be going forward. What kind of numbers are we looking at being able to get back to as this industry recovers?

Gregory Peloquin (General Manager, Power and Microwave Technologies Group)

Yeah. You're exactly right. The revenue with the largest customer was down $25 million versus FY 2024 versus FY 2023. That was very hard to make up, and that's a strong margin business because we do manufacture that ourselves and engineering involved. Based on, again, what the customers are saying, they are saying they expect to get back to FY 2023 levels in FY 2025. So from there, it's just math, and that has a huge impact on both revenue and profits going forward. I don't know if Bob has a breakdown on what that would mean, but that's kind of what we're looking at for calendar year FY 2025.

Wendy Diddell (COO and General Manager, Richardson Healthcare)

Calendar year.

Gregory Peloquin (General Manager, Power and Microwave Technologies Group)

Yeah. Calendar year for calendar year.

Wendy Diddell (COO and General Manager, Richardson Healthcare)

Yeah. Just to clarify, that's calendar year 2025.

Ross Taylor (Partner and Portfolio Manager)

Yeah. And you said the largest customer was $25 million. You do have other customers in the space. What do you think the semi-cap equipment space as a whole acted as a drag in this last year on the revenue side?

Gregory Peloquin (General Manager, Power and Microwave Technologies Group)

I don't think it's down that much, but.

Robert Ben (CFO)

But last year was $40 million, and this year is down in the low, what, $12 million-$14 million?

Wendy Diddell (COO and General Manager, Richardson Healthcare)

$14 million.

Robert Ben (CFO)

Yeah. $14 million. So you can see the decline. They're telling us that by the end of calendar 2025, that it's going to be a higher growth rate than it was in 2023. So if it exceeds $40 million and the margins are very strong, you can get an idea of what the impact is on our company.

Ross Taylor (Partner and Portfolio Manager)

Yeah. That's hugely powerful if you're looking at it in measurable on dollars per share. And looking at that, how much did the CT tube business cost us in 2024? You were able to see a nice recovery at the end of the year, but still not get back to break even. So what was the drag there?

Wendy Diddell (COO and General Manager, Richardson Healthcare)

Yeah. It was still right at that $3 million, just right under $3 million.

Ross Taylor (Partner and Portfolio Manager)

Okay. Okay. So what we're looking at is calendar year 2025 could see both a resolution to the CT tube business. Either you get back to break even and start making money out of it, or perhaps it moves to a new home. And a significant recovery in the semi-cap business where you're looking at perhaps a mid-$20+ million increase in revenues at high margins. So really, calendar year 2025 is setting up to be a pretty exciting year, isn't it?

Gregory Peloquin (General Manager, Power and Microwave Technologies Group)

We think so, for sure.

Wendy Diddell (COO and General Manager, Richardson Healthcare)

Yeah. And Ross, you didn't even really factor in all of the programs that Greg mentioned on green energy. Go ahead, Greg.

Gregory Peloquin (General Manager, Power and Microwave Technologies Group)

Yeah. One thing, I mentioned the number of programs and new products, but let's remember also within the green energy group, about $22 million in that repeat. We hit every schedule that the end customer asked us. The products have worked great. However, they're still not delivering the actual full electric locomotive until September to their end customer. Then that customer will test it throughout the next six months. So there's a chance that in FY 2026 or the second half of calendar year FY 2025, the electric locomotive business that we experienced in that record year in FY 2023 will also start coming back.

That's big numbers too. So yeah, there's a lot of things juggling a lot of things, and a lot of things have to do with things kind of, unfortunately, outside of our control. As a company, we've kept the pedal to the metal and got ourselves in a position with new products, new technology partners, and have not lost any market share on these products. So when it does come back, we'll be able to support it all.

Ross Taylor (Partner and Portfolio Manager)

One quick question. There's a lot of negative press on offshore wind, but the industry is primarily onshore, is it not?

Gregory Peloquin (General Manager, Power and Microwave Technologies Group)

Yes. All of our businesses onshore. Yeah, we talked to them, the GEs, the Siemens of the world. Yeah, that market or that application is not getting as many legs as they thought. So in the meantime, we have a lot of market share to grab, a lot of SAM to grab with all the stuff that we've been doing over the last couple of years.

Ross Taylor (Partner and Portfolio Manager)

Well, it does look like we're coming out of the jungle. Hopefully, things calendar 2025, particularly the second half of calendar 2025, looks like it could be a real lighted-up year. Thank you very much.

Gregory Peloquin (General Manager, Power and Microwave Technologies Group)

Thank you, Ross.

Ross Taylor (Partner and Portfolio Manager)

It's sure coming together that way.

Operator (participant)

As a reminder to ask a question, please press star one one on your telephone. Our next question comes from Chip Rewey with Rewey Asset Management. Your line is open.

Chip Rewey (Principal)

Good morning. Thanks for taking my call. Hey, guys. The prior question really set up my question really well because I think the cyclical story in PMT is fairly easy to understand. And let's hope it comes through. If it's a quarter late, kind of in my mind, who cares? But maybe Greg on green energy. It seems to me all of your growth there potentially is into existing aftermarket, meaning you're not selling on an OEM basis. And if you think about the GE model, the aftermarket model, whether it's aerospace or healthcare, it's compelling. And I think one of the things to me that's compelling about it is even if it's white space growth for you, it's growth into existing aftermarkets for both wind and rail. So I'm trying to get a better understanding of how quickly those sales could grow.

The numbers on wind turbines out there are huge, and existing locomotives where you could replace the lead-acid batteries are huge. So maybe walk through what you think the eventual share of replacement could be. Do you think all of the lead-acids will be replaced or some? And maybe why would an operator not replace with one of your solutions if it seems to be much better on an operating basis? Is there something else that makes the trade-off not work? Again, to me, it seems it's a slam dunk. And if it comes through, it could come through fast. But maybe just talk through what you see 2025, 2026 on where these sales for the rail and the wind could really come in.

Gregory Peloquin (General Manager, Power and Microwave Technologies Group)

Yeah. So the numbers, you hit it on the head. If you look at the TAM, it's obviously huge with the number of wind turbines globally. However, we started this by, in my many years of doing this, I always look at the SAM. That's where you can be successful. You have a product that either has a technological or a cost advantage. And we were able to take over that replacement business of lead-acid batteries and existing wind turbines. However, each time, we still look at getting into the OEM side of it. And I should add, that is our first OEM business, meaning it's designed into new wind turbines, will be with Suzlon. We've worked out with them. We've developed the software. In India, specifically, they've gotten government approval or financing to produce 1,000 turbines a year, which will have our product in it.

So right now, yes, we look at the aftermarket, but there's another play that's come up that we're seeing more and more companies like Vestas or Siemens, who many of these companies buy wind turbine farms, and they're servicing GE, Suzlon, Nordex, and SSB wind turbines. And it's the whole repower program. And so what they do is kind of like take your old car when you're in college and just replace everything and get it running. They're making our part standard with that. So when they replace the blades and the UPS and the inverter, they're also at that time replacing our product. So what that told me was that that increased the opportunity in terms of the number of wind turbines that will be either replaced through the aftermarket, and then you add on this repowering program, which would include our product.

So it's been hard to get what percent of the global wind turbine market they'll do this. They're all telling us that over time, they want to replace them all because the lifetime of these ultracapacitor batteries will last for the duration of the turbine itself. So a wind turbine is not repowered for about 15 years-20 years. The lead-acid batteries fail every 18 months. Our product lasts 10 years-15 years. But the real thing that we noticed this year specifically was, and we say push-outs and delays, it was really capital expenditures. So wind turbines, they have a lot of issues with different parts other than the lead-acid batteries. So I don't think they have to borrow money to put in our product, but they definitely have to borrow money to do repowers and to replace and update and fix other products within that wind turbine.

And at 8%+ to borrow money, they've had to be very selective in what they needed to do. So there are some things they needed to fix to keep them going. Ours is a fix from a profit point of view, meaning the cost of climbing a turbine, putting in a lead-acid battery, replacing it every 18 months with a highly paid technician, as opposed to going up one time and replacing with ours for pretty much the life of the turbine. That has been kind of put on hold. But again, as we keep saying, we haven't lost any market share. While we're waiting, we're introducing new platforms. That's kind of the progression of what we're seeing as we learn about this, and I'll call it wind turbine infrastructure rollout to support energy needs of a growing world. Does that answer your question, or was it?

Chip Rewey (Principal)

Very helpful. Given what the power industry is saying about the need for power, probably compelling. Can you give us the same kind of overview on the electric battery and the starter modules for trains?

Gregory Peloquin (General Manager, Power and Microwave Technologies Group)

Yeah. So it's the same scenario where all these companies are trying by 2030 to reach a certain number of having their product be less emissions. And so part of that is all these products like wind turbines and also electric trains. We talked a little bit, I think, in the past, maybe in one of the investor presentations of starter modules for refrigeration trucks. But anyway, the starter modules replace lead-acid batteries in the electric and diesel locomotive. And those products were designed specifically with two of the largest diesel train manufacturers in North America. And kind of similar to how we started out in the ULTRA3000, if you will, from design to orders was about six months. And we have now, between the two of them, over $4 million in backlog, which we'll be shipping over FY 2025.

So that product was based on the ULTRA GEN product, which can be used with people like Kohler and Generac. And we have a lot of things going on. But specific to the starter modules, that has been a great success. And as I mentioned, I think earlier this morning, we have a contract for 1,000 trains for one of the largest train manufacturers in North America. So it's kind of taking the same technology, and we have a very, very knowledgeable group on ultracapacitor technology and battery technology. And then we have a very strong design team that understands power management and all these applications. And all these new applications, all these current existing products have to change their power source or power management to meet either green energy needs or for them to introduce new products. And we're just in a great place in terms of technology partners.

The components, for example, the starter modules that we're making have five different technology partners designed into them. So it's such a unique model in this industry where we have better pricing and relationships and know what the next technology is, kind of what they have in terms of new technology coming out before it's even introduced that we can design in. We have those agreements. Then we have an engineering team that can design, test, and manufacture these. I call them niche products, but at these numbers, it's not so much niche to us. And then the ability, as I talked about, to bring these technologies globally to customers throughout the world, it's just a great model. And we're doing everything we can to continue that pipeline to support all three of those cells.

Chip Rewey (Principal)

Thank you.

Operator (participant)

Our last question comes from Andrew Rem with Odinson Partners. Your line is open.

Wendy Diddell (COO and General Manager, Richardson Healthcare)

Morning, Andrew.

Andrew Rem (Portfolio Manager)

Morning, Greg. Hi. I'm sorry. Can you maybe give some color on when exactly does the patent expire and you get kind of blue sky for your portfolio of tubes?

Wendy Diddell (COO and General Manager, Richardson Healthcare)

The patents that you're questioning, Andrew, already expired in June. That was a patent on the window. What that does is it allows us to repair more tubes in the MX Series. I think that's what you're referring to.

Andrew Rem (Portfolio Manager)

Yeah. So then when we think about the break-even, so you said you lost $3 million on the year. How should we think about, I mean, what's kind of the go, no-go decision? How much time do you give yourself? Because it sounds like basically it just started or the window just kind of opened. How long do you allow? How much time do you need to kind of determine this is worth continuing to own or not?

Wendy Diddell (COO and General Manager, Richardson Healthcare)

Well, I think we've made it clear that we're exploring options while we work on the profitability element. So there is no defined timeframe. I will tell you that during our planning session, we definitely show a significant improvement in the operating performance of the healthcare group as we move forward with the Siemens repaired tubes. So, Andrew, that's I think all we're prepared to say right now.

Andrew Rem (Portfolio Manager)

Can you say what the annualized loss was just in the fourth quarter?

Wendy Diddell (COO and General Manager, Richardson Healthcare)

In the fourth quarter, it was about 600 or 700. But what I'll also, well, I can't tell you anything else. That's it. Yes.

Andrew Rem (Portfolio Manager)

And then, Greg, can you just clarify the backlog in PMT specifically? So you gave the backlog in GES, but what was it in PMT?

Gregory Peloquin (General Manager, Power and Microwave Technologies Group)

Do the backlog number real quick, Bob, for PMT.

Robert Ben (CFO)

Yeah.

The backlog is made up mainly of engineered solutions. So it'd be LAM. Then the balance of that, the largest backlog of it is power and microwave components used for mainly base stations, SATCOM. One of the biggest growing parts of the RF and wireless group is defense and radar applications.

Edward Richardson (CEO)

Total?

Robert Ben (CFO)

Total $102 million total.

Gregory Peloquin (General Manager, Power and Microwave Technologies Group)

So about $54 million for PMT.

Robert Ben (CFO)

Yeah.

Gregory Peloquin (General Manager, Power and Microwave Technologies Group)

Does that answer your question?

Andrew Rem (Portfolio Manager)

Yeah. I guess it doesn't quite add up. If it was 54 and you had 42 roughly in GES and you're saying the total was 102?

Robert Ben (CFO)

Yep. Yeah. Then that would be 60. Yep.

Andrew Rem (Portfolio Manager)

Okay.

Gregory Peloquin (General Manager, Power and Microwave Technologies Group)

So what was it for PMT? $42.3 for GES, so $60 for—okay. Sorry. PMT was $60 million in backlog going into FY 2025.

Robert Ben (CFO)

Yep

Edward Richardson (CEO)

Okay. Thank you.

Gregory Peloquin (General Manager, Power and Microwave Technologies Group)

Yep.

Wendy Diddell (COO and General Manager, Richardson Healthcare)

Thanks, Andrew. We'll talk to you soon, sir.

Operator (participant)

I would now like to turn the call back over to Ed for closing remarks.

Edward Richardson (CEO)

Thanks, Michelle. Well, thanks to all of you again for joining us today. We appreciate your investment and interest in Richardson Electronics. We look forward to our ongoing discussions and sharing our fiscal 2025 first quarter with you in October. Please don't hesitate to call us anytime. We're happy to take your calls. Thank you very much.