Good day, and thank you for standing by, and welcome to the Richardson Electronics Conference Call for the Third Quarter of Fiscal Year 2021. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded.

I would now hand the conference over to your speaker today, Ed Richardson..

Good morning, and welcome to Richardson Electronics conference call for the third quarter of fiscal year 2021.

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. We're still calling in from remote locations.

As a reminder, this call is being recorded and will be available for audio 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. Given the ongoing impact of COVID throughout the world, we're very pleased with our results for the third quarter of fiscal year 2021. Our sales in the quarter were 18.3% above our third quarter last year at the start of the pandemic.

After posting operating income of $852,000 last quarter, which was our best operating quarter since the first quarter of FY 2019, we finished the third quarter of fiscal 2021 with operating income of $1.9 million. This excludes the one-time payment to settle our dispute with Varex.

We chose to settle the case to avoid further legal costs and distraction. The ongoing strength in the semiconductor wafer fab market and continued growth in both our Healthcare and Power and Microwave Groups contributed to increased profit. Sales of our power grid tube lines also improved during the quarter, as customers resumed operations.

Canvys continues to improve its profitability as well in spite of customer push outs caused by the pandemic. Unfortunately, we're not out of the woods yet while COVID vaccines are rolling out globally, many countries are still under lockdown, including Germany, France, and Brazil.

Our first concern is the safety of our employees, our suppliers, and our customers. I again say thank you to the entire Richardson team for following our guidelines by staying healthy and keeping the business running without disruption. Our continued success would not be possible without everyone working together.

I'll now turn the call over to Bob Ben who will provide a detailed recap of our third quarter and year-to-date performance. Then Greg, Wendy, and Jens will discuss individual business unit performance, our successes, and our opportunities for future growth..

Thank you, Ed, and good morning. I will review our financial results for our third quarter and first nine months of fiscal year 2021, followed by a review of our cash position. In addition, please note that I will be discussing non-GAAP financial measures.

I refer you to our third quarter fiscal year 2021 press release for a reconciliation of non-GAAP items to the comparable GAAP measures.

Net sales for the third quarter of fiscal 2021 increased to $45.2 million, or 18.3% compared to net sales of $38.2 million in the prior year's third quarter, primarily due to higher net sales for Richardson Healthcare and PMT, partially offset by lower net sales for Canvys.

Richardson Healthcare sales increased $0.9 million, or 41.7%, primarily due to an increase in demand for the ALTA750 tubes, reflecting the highest quantity sold in any quarter. In addition, pre-owned CT scanner sales increased in Latin America.

PMT sales increased by $6.2 million, or 21.6% from last year's third quarter because of higher sales of semiconductor wafer fab equipment specialty products, as well as power conversion in RF and microwave components. Power grid tube sales continued to be negatively impacted by the pandemic.

However, sales at certain product lines increased from the third quarter of fiscal 2020. Canvys sales decreased by $0.1 million, or 1.7% due to temporary decreased customer demand in Europe related to COVID-19, partially offset by an increase in North American sales. No customers were lost.

Gross margin for the quarter was 34.9% of net sales compared to 33.1% of net sales in last year's third quarter. PMT margin increased to 34.9% from 32.8% due to a favorable product mix. Canvys margin is a percent of net sales increased to 35.2% from 32.8% also because of its product mix.

Healthcare margin as a percent of net sales was 33.0% in the third quarter of fiscal 2021 compared to 38.3% in the prior year's third quarter, primarily due to a smaller percentage of replacement parts sales.

Operating expenses were $15.5 million and non-GAAP operating expenses were $13.9 million for the third quarter of fiscal 2021 compared to $12.7 million in the third quarter of fiscal 2020. The increase included a one-time cost of $1.6 million for a legal settlement with Varex Imaging Corporation.

Richardson did not admit liability, but wanted to move forward selling its ALTA750 tubes and avoid further legal expenses. The increase in non-GAAP operating expenses resulted from a $0.3 million increase in legal fees and from our normal employee compensation expenses, including incentives and annual merit increases.

These increases were partially offset by lower travel expenses. Throughout the pandemic, the company decided to support its employees through regular merit increases and incentive plans, and by avoiding layoffs or furloughs..

Thank you, Bob. Good morning, everyone. The Power and Microwave Technologies Group, or PMT, sales in the third quarter of fiscal year 2021 grew 21.6% to $35.2 million versus $28.9 million in Q3 last year. In addition to an excellent sales quarter, PMT achieved a book-to-bill of 1.59.

This incredible sales growth and strong bookings numbers has put us in a great position for a strong Q4. Our gross margin increased in the quarter to 34.9% versus 32.8% in the prior year. Gross margin improved through new designs and growth of engineered solutions.

Our engineered solutions product supporting the semiconductor wafer fab market had another record quarter in terms of revenue. We also continue to have excellent growth in our PMG or Power Microwave Group.

This growth was led by our growing line of new technology partners, supporting RF and wireless applications like 5G infrastructure and power management applications. Also supporting the growth in the quarter was there a legacy tube business which sales exceeded the prior year. We saw an extremely positive booking trend in PMG..

Thanks, Greg and good morning, everyone. I am pleased to announce that the Healthcare Group had sequential growth in total revenue and then in the number of ALTA tubes sold again in the third quarter. In our last call, we reported higher ALTA tubes sales than any prior quarter. We achieved this again in Q3.

Total sales in the quarter were $2.9 million, a 41.7% increase over sales in the same period last year. Sales of parts, equipment and tubes all increased over prior year's third quarter. Gross margin improved to 33% from 25.6% in Q2. Margin was down versus 38.3% in the third quarter of FY 2020.

We continue to have some supply chain challenges related to COVID, primarily slower deliveries on key components. This limited the number of tubes we made in the quarter. While we were able to meet customer demand, we still have additional production capacity.

We've added resources to support the growth, and we are in good shape as we get ready to launch the G and the Siemens repair programs later this year. Pre-owned CT scanners continue to be in short supply as hospitals face financial challenges and hold on to their equipment longer.

We believe supply will be constrained until the pandemic is under control and financial performance in the healthcare industry improves. While this will limit our system sales for the near future, we believe this creates more opportunities for higher margin replacement tubes and parts. We are prepared to meet this demand.

As far as new developments, we launched our tube reloading program in China late in the third quarter. We are just beginning to feel its positive impact on revenues. We are optimistic that this will be a good growth market for us. New tube development remains on schedule with the ALTA750 G launching later this summer.

Siemens repair tubes will follow later in the fall and into calendar year 2022. We continue to add experienced engineers to round out our capabilities and speed up development time. In FY 2022, we will have a broader range of tubes to offer to our customers.

As we expand our list of medical certifications, this will also expand our geographic footprint into countries such as Canada. I will now turn the call over to Jens Ruppert to discuss the results for Canvys..

Thanks, Wendy and good morning, everyone, Canvys, which includes the engineering, manufacturing, and sale of custom displays to original equipment manufacturers and industrial and medical markets delivered a good performance with sales of $7.1 million during the third quarter of fiscal 2021, an increase over last quarter, but a small decrease of 1.7% over the same period last year.

Customer demand for equipment decreased temporarily due to the coronavirus and the resulting business impact on the OEMs globally. Some areas such as Germany and France are still on lockdown due to the increased cases.

Gross margin as a percentage of net sales was 35.2% during the third quarter of fiscal 2021, up from 32.8% during the third quarter of fiscal 2020. The increased gross margin was related to a favorable product mix.

Our healthy backlog, along with a number of projects that are currently in the engineering stage, position as well for continued growth, assuming no long-term impact from COVID-19. We continue dealing with extended lead times that likely won't recover until the end of this calendar year.

Some key components such as LCDs have standard lead times of up to 30 weeks now. We at Canvys are fully committed to easing any burden on our customers, and we are working closely with the manufacturers keeping the impacts to a minimum.

We continue compensating for the lack of face-to-face customer visits and trade shows during the pandemic by focusing on our online awareness. We are adding application stories on our newly designed website and regularly issuing newsletters that feature unique products where we see good potential for new business.

We are confident that our online strategy will result in new leads and business growth. During the quarter, we received seven new orders from both existing and first-time medical OEM customers.

Some of these applications include cryolipolysis systems that break down fat cells by cooling off body fat; cataract and refractive surgery systems; laser systems for therapeutic and refractive applications of cutting-edge corneal surgery, lithotripsy systems where pulled laser is used to break down stones in the kidney and gallbladder; robotic assisted surgery platform to improve precision and accuracy in knee surgery; microsurgery systems where displays are mounted on surgical microscope; patient monitoring systems and radio therapy systems where highly customized displays are embedded in a remote console to control ceiling mounted cameras that monitor patients during radiation treatment.

In the non-medical space, we received orders for various display products. Our products are used as electronic rear view mirrors on subways and trams, as human machine interface for high speed, high precision milling machines at the teleprompter and talent systems for well-known news stations.

Products include displays and all-in-one monitors with an integrated PTC. 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 customers outstanding product and service.

While our sales organization stays focused on new opportunities, I will continue to review and adjust our business strategy to improve the operating performance of the division. Maximizing cash flow is an ongoing priority.

We will continue to work with our partners to help produce inventory, while being able to meet the demands of our customers, particularly during the pandemic and the challenges it brings to our supply chain. I will now turn the call back over to Ed..

Thanks, Jens. You and your team continue to produce excellent work in the face of adversity. Over the last several years you added many new high-profile medical and industrial customers. That effort is helping the display division weather the short-term decline in equipment purchases.

Through careful component selection and inventory purchases, you've met our customer demand while managing company assets. There are many reasons to be optimistic about Richardson Electronics future. We're seeing our growth initiatives, improve revenue, profitability, and cash flow.

New developments within our engineering and manufacturing groups will help deliver sequential growth. This includes new CT tube replacement options, as well as products that support 5G and alternative energy.

While COVID continues and the long-term effects remain unknown, we will continue to challenge our teams to reduce more products and sources of supply to improve our operating performance. Our business model is complex, but the variety gives us an opportunity to balance the highs and lows of the separate businesses.

We will continue to carefully manage expenses and maximize cash flow. Lessons we've learned during COVID will become part of our new life, such as using teams for meetings instead of travel and providing our employees with flexibility in their work locations.

We want to make sure we have funds available to support our growth initiatives and improve our financial returns. At this point, we'll be happy to answer a few questions..

Thank you. We have a question from the line of Eric Landry with BML Capital. Please go ahead..

Good morning..

Good morning, Eric..

Hi. Greg, I'd like to talk about the ULTRA3000 for a second, if I could here..

Sure..

So, have you any idea what the installed base on these mills is of the batteries, is that this product aims to replace?.

Yes. We have the numbers of the number of GE and Siemens wind turbines that are in North America and Europe, and that is the market we're going after..

How about the size of that? I mean, any general description of how big that market is and how penetrated you are currently?.

Well, the number of wind turbines that are top and that's who we're working with today, our top four owner/operators is about 5,000 -- I'm sorry, 6,000 turbines in North America..

Okay. And I mean, just generally, I mean, you feel you're maybe 5%, 10% penetrated in what's sort of the potential for this market..

Yes. It's -- that's the total number. The time that this replaces acid batteries is about two years, so obviously, you're not going to do them on the same year, but we hope to get 10% to 15% of that market. We feel we have a product that does that.

The results so far from the beta sites, I've mentioned on the last call, a very big successful, zero failures, and we had one of the largest owner/operators in North America place a production order in Q3..

Okay. So, right now, the business is rather nascent. I'm assuming.

I mean, is there any chance that it could become -- I don't know -- rivalry, maybe your semiconductor fab business in mid cycle or something like that? I'm just trying to get my arms around what kind of size this new business could grow to?.

Yes. It it'll be equal to, if that -- based on the opportunity, because this will generate a portfolio of products. The stuff we do for the wafer fab market is built to print for the most part right now. And so, we can expand this product into Europe.

So, I think that the total market is larger, but it will be equal to not -- a little bit higher than the current -- the semiconductor business that we do..

Okay. Great. And on the semiconductor business, I think last we talked, Ed mentioned that your customers were telling you everything looks fine through calendar 2021, if I remember correctly.

Is that still the case?.

Yes. We just had a conference call yesterday with our largest customer in this semi fab space. And they told us on that call that they're currently producing $4 billion a quarter. And they anticipate in -- not anticipate, but their plan is to go to $6 billion a quarter in the next calendar year. And if that happened, our business would increase 50%.

So -- and we're right now running at the highest level of business with that customer and combined with some smaller ones we've ever had. So, unfortunately, we're off there. I won't use the right adjective, but we used to be on their bad list, because we couldn't produce product fast enough.

And we have a new manufacturing manager over the last few years and he has his folks trained and we're delivering the product on time and to their requirements. So, we're really pleased with the business. Unfortunately, it can go up and down like a roller coaster, but right now everything says it's going up. So..

Well, congratulations on graduating from that list. If I heard you correctly there, Ed, you indicated that your largest customers indicating 2022 is going to be a booming year as well.

Did I hear that correctly?.

Yes..

Okay..

Yes. They're saying they're going to go $4 billion a quarter to $6 billion a quarter production..

That's great to hear.

Ed and Wendy, so, I'm assuming that the settlement covers the G as well as the D, right? So, there will be no issues with IP on either of those tubes?.

Well, the patents on the G are expiring. So, quite honestly, they could come back after us on the patents on the G if we were to violate them, but we don't intend to.

We have workarounds on the patents and we told them we wouldn't take the G to market until the patent expires, and that's I think it's actually in April, isn’t it?.

It’s actually tomorrow.

Tomorrow it expires. So, we'll be going to market with a G in probably the first quarter of our next fiscal year..

And Eric, just to be clear that the G version does not use either of the patents that are expiring, that were on the D..

Okay. Good. Okay.

Looking at the Siemens tubes, what is the IP environment like surrounding that tube? Is it similar to what it was like with Canon, or is it a different environment altogether?.

Well, Siemens is probably the largest supplier of CT scanners in the world. And so there -- the market is probably 10 times the size of the Canon market. And the other side of that at this point, there isn't any alternative supplier for those tubes. So, we're really optimistic about the opportunity to sell the -- they're actually repaired tubes.

It's a much different tube than the Canon tube, but we've added some Siemens engineers who have a lot of experience and feel really confident at the market by the end of the calendar year..

Okay.

So, when you say repaired, I'm assuming that's not repaired like changing the oil and sending it back out like some of the smaller shops do with the Canon tubes, correct?.

No..

No. No, no, not at all. I mean, it's -- there are things like replacing the bearings and the target and things of that nature that we have the capability to do..

And no one else is doing this right now..

No, they're not right..

Great. That's -- thanks for taking my call. I'll get back in line if I have anything else. Thank you. .

Thank you, Eric..

Thanks, Eric..

And I will like to turn the call back to Ed Richardson for his final remarks..

Okay. Thank you, Carmen, and thanks to all of you for joining us and your ongoing interest in Richardson Electronics. We look forward to discussing our fourth quarter and full-year performance with you in July. In the interim, I wish you continued good health and success. And if you have further questions, please feel free to call us.

Thank you very much..

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