Richardson Electronics Ltd (RELL) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Good morning, good afternoon and welcome to the Richardson Electronics Limited third quarter earnings release.

At this time, all phone lines are muted or in a listen only mode. However, after our presentation today, there will be opportunities for questions. The instructions will be given at that time. Should you require assistance during today's earnings release you may reach an AT&T operator by pressing zero then star.

As a reminder, today's call is being recorded for replay purposes. We ask that you stand by at the conclusion of today's release to receive that replay information. With that being said, I would now like to turn the call over to your host, Richardson Electronics Limited Chairman of the Board and Chief Executive Officer Mr. Ed Richardson.

Please go ahead sir.

Good morning. I have Bruce Johnson with me, who is President, Bill Garry, Chief Financial Officer and Greg Peloquin, who's Executive Vice President of the RS and wireless group. We released earnings at the close of business last night and for any of you that didn't receive the earnings, it's available on our web site which is www.rell.com.

We reported $109.4 million in sales with a marginal profit of $75,000. Certainly we weren't happy with the sales and earnings numbers, but there were quite a number of positive events during the quarter which we'd like to talk about. The gross margin was down from 25.9 percent to 24 percent, which obviously affected the bottom line. I wanted to talk about that for just a moment. The major impact was in Asia. In Asia our sales continue to increase. The sales in Asia were up 24 percent in the quarter. However, the gross margin on that business dropped from 28.9 percent to 23 percent.

The major impact here is a substantial amount of business is being referred to us by major vendors like and Motorola who had been selling this product direct in the past and has now chosen to utilize our strategy of engineered solutions and have us handle the business.

Initially we're forced to take this business at rather low margins as it's referred to us and of course as we become acquainted with the customers and they are utilizing our engineering service, we're able to increase the margin. But today it's having a negative impact, especially on our business in Asia.

At the same time as you know, we sold our medical glassware business to Philips in the quarter which we'll talk about in detail. However, the glassware business in the quarter was at 18.8 percent margin, of course which will be eliminated for the most part going forward. The good news is that the medical monitor business during the quarter which we're retaining and actually gearing up our focus as far as sales and the medical monitor side. The margin on that business was 27 percent plus.

During the quarter, we really saw December particularly and the first two weeks of January to be what I would call an anomaly. Normally of course December's a two-week month for us. Europe and North America for that matter, tend to shut down for about a two-week holiday period in December. What we saw happen this year was the majority, especially the telecommunications industry, take advantage of the holiday period, allow people to take vacation, shut down production. In the normal two-week shut down in the December time frame turned into a four-week shut down that spilled over into January. So we saw sales particularly in December down substantially in bookings as well.

In January, sales were impacted by the first two weeks being more of a holiday period. But we really saw the bookings turn around in January. So what we've done to look at it and Bruce will go into it in detail, but we just took out the two-week holiday period in December and the weakness that we saw in January and if you do that, you see sequential increases continuing. As we talked about at the end of the second quarter, we saw improvement all through September, October and November. Then we came into December. That improvement disappeared and also the first two weeks in January.

But what we have seen is in the second two weeks of January, bookings increased. January was the best booking month we had seen in over a year and February followed right behind that and February turned out to be the best booking month that we've seen in 14 months. And Bruce will go into the details. That would not only in the RF and wireless side but also in the industrial products group and throughout the (inuadible).

The interesting part about that is that the orders that are being placed today are fairly short-term orders. So when we're looking at bookings, these orders are placed for 90 day delivery cycle, 120 days at most and a year ago, we were looking at orders that were placed on a 12-month release basis and what means to us at the indication, is that the majority of those orders will be shipped in the fourth quarter. So we're anticipating a rather strong fourth quarter and all the indications look that way at this point.

I want to talk about the sale of the medical glassware business that Philips. We've been working on this program for over a year, attempting to divest the medical glassware business and we're finally successful in doing that in the third quarter.

We sold three of our loading facilities that reloaded X-ray glassware, X-ray source tubes and X-ray image intensifiers. One facility was in Texas, another in Virginia and we sold the equipment and the loading facility in Holland which is being relocated. However, Philips intends to run, continue to run their reload facility in Texas as well as Virginia.

The medical glassware business accounted for about half our medical sales which were about $40 million last year. In fact the glassware business was losing money and as I mentioned in the third quarter, the gross margin on the glassware business was 18.8 percent. This business has turned extremely competitive as companies like GE and Philips and Siemens all made a strategy to get into the multi-vendor service business and sell competitive glassware to compete with the other medical manufacturers in the market. And seeing that, we made a decision to exit this business about a year ago and it's really been difficult to actually conclude the transaction.

We will retain the medical monitor business which has been an excellent business for us. That business grew 72 percent last year and the margin in the third quarter was 27.7 percent. So the elimination of the glassware business actually should improve margins as we focus on the medical monitor business going forward.

Also the monitoring business is an excellent (inuadible) systems group actually from a product standpoint, the medical systems group had been supporting the medical monitor business all along. The interesting part in selling the business to Philips, they acquired the reload facilities and all of the people who were instrumental in doing the reloading. About 20 or 25 people actually went with Philips but Philips made a decision that they didn't want to acquire our FSEs or field sales engineers.

So we've retained the majority of the field sales engineers. These are the people of course who've had the relationship with their customers. In the past those sales engineers who had sort of been splitting their efforts in selling both glassware and monitor tubes, a rather difficult situation because the medical monitors are sold for patient monitoring, for MRI in different applications than the X-ray tubes that are sold for diagnostic imaging in the X-ray room. So this will really allow the engineers to concentrate on the monitor business.

The interesting part is that the medical monitor business over the past couple of years, combined with our existing monitor business in the display systems group has increased from $30 million two years ago to $53 million projected for this year. So it's a substantial business and we think with the FSE's now concentrating on the medical monitoring business, it will be an excellent growth opportunity for the future.

At the same time as you can see, we took a reserve for $4.6 million basically for inventory that Phillips made a decision they didn't want to acquire. For example, we had a large inventory of Toshiba image intensifiers that Philips made a decision not to acquire the inventory at all. We've taken a reserve on that inventory based upon going out of this business. At the same time, we still have the field sales engineers in place and we have the relationships with the customers and we have the right to sell this inventory going forward. So we're hopeful that we can recover some of the cost of that inventory going forward.

I think overall, obviously we'd like to see sales and earnings much higher than they were in the quarter. But we remain profitable and it really has to do with our strategy of engineered solutions and moreover the diversity of the company. When you look at the companies that we're compared to, the commodity distributors and other companies in this telecommunications industry, they're reporting double digit declines in the quarter and we continue at least to show black ink and it really has to do with the company being diversified to the point where about half of our business has been after markets that are very stable and the other half of course is in areas like the RF and wireless business which we still think is the growth engine of the company going forward.

At the same time last year, about 50 percent of our business was international business outside of the United States and the geographic diversity also helps us. As I mentioned, Asia was up 24 percent, continues to show remarkable increases. Areas like the display systems group showed double digit growth. As we talked about the medical monitor business and also the change from analog to digital, the whole display area is growing dramatically. They were up 13 percent in the quarter and the security systems division continued to be up. They were up almost 8 percent. So the diversity between products and markets continues to carry the company, even in this economic cycle that we looked at that's been so severe. And at the same time we have growth in this team doing their magic. They're really relentless on cost control and that's of course why we've been able to continue to show a profit, even though it's been marginal. It all beats around our continuing strategy of engineered solutions.

I wish we had better visibility going forward. We did see a lot of indicators in the quarter that show us that we think anyway the fourth quarter will be very positive. Again, the majority of the bookings that we've seen in the third quarter, record bookings in January and February, those should be shipped in the fourth quarter. So we are convinced that the fourth quarter will show a marked improvement over the third quarter and going forward.

I'll let Bill Garry go into the financial details and also Bruce then will talk about the highlights of the quarter and going forward and Greg's here to answer any questions on the RF and wireless group as well. So Bill.

Thank you Ed.

As Ed's mentioned, sales in the quarter were $109.4 million compared to $126.3 million a year ago. While the overall comparisons are still affected by the current economy, we did have positive results in display systems which posted a 13 percent gain in Asia Pacific that was up 24 percent, led by the wireless group. As Ed mentioned, gross margins were down in the quarter at 24 percent compared to 25.9 percent a year ago and again as Ed mentioned, is related to the Asia Pacific market.

SG&A was at 23.4 million flat against the immediately preceding quarter and down $255,000 from the same period a year ago. We continue to monitor the cost closely and Bruce will embellish upon this during his discussion.

Non operating expenses included the charge of 4.6 million related to the disposition of the medical glassware business. The charge is composed of 3.5 million related to inventory with a balance relating to provisions for warranty, severance and resale cost. Also included in non operating expenses is interest expense. In the quarter, interest was $2.8 million flat with the second quarter and down from $2.9 million in the current year because of reduced average debt levels and lower interest rates.

Foreign exchange gains and losses were insignificant in both the three and nine-month periods for both the current and prior year periods. The effective tax rate was 36 percent on the quarter and the nine months, up from 33 percent a year ago as benefits of loss carry have been consumed in Italy and France. Net earnings excluding medical glassware charge was $75,000. The charge for the medical glassware business was net of tax $2.9 million.

With respect to the balance sheet, we ended the quarter with $19.1 million in cash, up from 15.3 million at the end of the second quarter. Debt was $148.8 million compared to $145.6 million at the end of the second quarter. Therefore, debt, net of cash improved by $600,000 in the three-month period ended February.

Receivables at February were $82.4 million compared to $81.2 in the previous quarter. Inventory ended the quarter at $127.3 million down from $140.6 million at November. That reduction includes $10 million from the disposable medical glassware business at $3 million from ongoing efforts to reduce inventories.

Bruce?

Good morning. Just to give you an overview of the SBUs and the geography and everyone's mentioned and you know the sales came in about 13.4 percent below last year in the quarter, 4.5 percent sequentially down. However, as Ed has mentioned, the months of January and February represented our best two months in bookings really in over 14 months and I think the encouraging thing about this is the decline that we saw, it started about a year ago, so we're now coming into a period of time when the business one year ago was declining and based on the booking numbers we have and we're starting to ascend.

RWC again was down in the quarter as mentioned, by about 24.1 percent, but the February billings included in that quarter were the highest that we've achieved since May and second only to the record number of February of last year. Also an encouraging sign is the fact that North American February billings represented our best billings this fiscal year and we view this as a positive leading indicator because North America is really where our biggest challenge has been in terms of this fiscal year.

And bookings in RWC again, January and February represented the two best booking months since December of a year ago. Some of the highlights first of all, the seven sisters subcontractor who we've been working with and had previously placed an order with us, a large order, for some of our RWC products placed the order on hold about nine months ago but during the quarter they released a million dollars in orders and there's more in the queue.

We also designed and booked a large order for fifth generation amplifier, a TRL and TRL is our Chicago-based North American design center. And , which is our Italian-based European design center is now delivering pallets to a Scandinavian customer for use in a cellular-based station application.

We also in fact as of yesterday signed a new franchise agreement with a major vendor and we're formally announcing this within the next two weeks. We also continue to invest in RWC. We hired two key individuals in the quarter. One is a 20-year experienced fiber optic manager to head up our growing light-weight business unit and we also hired a 10-year experienced manager to head up our TRL, sales in North America.

IN , sequentially down about 1 percent from the prior quarter but the February bookings that we achieved were the highest since May and the highlights for IPG were registered 114 design opportunities in February which established a new record in one particular month. We also saw an encouraging sign in that the industrial tube business in February achieved the strongest bookings, billings since May. We view this as an encouraging sign because this is one of the first units that we started seeing over a year ago in terms of the operating declines.

In security systems, as Ed had mentioned, we had a positive quarter, about 7.6 percent ahead of last year and our bookings in February once again were the best bookings we've had since November. The highlights of SSD as we were awarded a Federal supply contract to supply security products to the Federal government and we've already booked a rather substantial amount of business as a result of that.

Turning to display systems, display systems also had a positive billing quarter, 13.1 percent ahead of the prior year and sequentially up 7.4 percent. Once again here, February represented their best billing month ever and the highlights, we signed an agreement with NEC Mitsubishi which is the world's largest manufacturer of LCD and CRT monitors to become their selected integrator for the line of LCD displays. And under the agreement, NEC now relies on Richardson to provide the U.S. market with their LCD displays outfitted with touch screens.

In North America, we were down from last year 20.8 percent. As I mentioned, this has been, this has represented our biggest challenge during the fiscal year. However, an encouraging sign is that sequentially we were flat with the second quarter. Once again, the February for North America was the best billing month we've experienced since May and bookings, we now have a three-month positive trend, December, January and February and February also represented our best booking month since January of '01.

Asia Pac as Ed had mentioned, third quarter was very positive, 24.1 percent ahead of last year and the strong bookings and billing trend continues for Asia Pac and more and more of the orders we're receiving today are coming from Asia Pac. To just give you an example of how we operate geographically, we received a large RWC order in Taiwan recently for products that were designed in California by a U.S. multinational customer and the manufacturing was transferred to Taiwan. This was becoming more prevalent today, but because of our global infrastructure, the total process to both the customer as well as the vendor is seamless and we're very well organized to handle this business in the future.

And lastly, Latin America up 3.5 percent over the previous year and things look good there as well, specifically in the broadcast communications product area.

Thanks Bruce. Well, we've really taken advantage of the economic downturn. Obviously, we're not as happy as we could be with the sales and earnings. But in the past, we'd had a difficult time trying to recruit RS and microwave engineers in particular and other field sales engineers. During this economic downturn, a lot of excellent people have become available and we continue to recruit and employ people.

As Bruce mentioned, we've added a number of new franchises, very important to the future of the company. In the booming economy none of these franchises were available to us and most of these companies are now unhappy with their channel to market and we've been able to add and expand franchises with companies like NEC, IR, Tyco, , , geographic expansion, geographic expansion for Motorola and also NEC.

So we really, as far as the vendor associations and availability are in the best position the company's ever been in. In addition to that, as you know, we've made several strategic acquisitions that have added geographic coverage and also added RF and microwave engineers, companies like in Scandinavia, Aviv in Israel, in France and in Latin America. So we really think especially now with the refocus where we're concentrating all of our resources on four strategic business units with the sale of the medical glassware and all of the resources we put in place in the last 12 to 14 months we think we're in the strongest position that we've ever been in, unless this economy turns around, we think the growth will accelerate and will gain market share. We continue to gain market share even in a down economy, but we think that will accelerate substantially once this economy turns around.

So with that, I'll open it up for questions and all of us are available to answer any questions you may have.

Very good, thank you sir and ladies and gentlemen. As you just heard if you do have any questions or comments, we do have a full panel assembled for you, just queue up by pressing the 1 on your phone keypad. You'll hear a tone indicating that you've been placed in queue and just as a note, you may remove yourself from the queue by pressing the pound key. And once again, if there are questions or comments, please queue up at this time. Just press the 1 on your touch tone phone.

Representing Securities, our first question comes from the line of .

Please go ahead.

Good morning.

Hi Robert.

Hi Robert.

Just a question, this is probably for Greg. I think we talked about this a little bit on the last conference call but new opportunities for that cellular amplifier that has been so successful in the automotive industry. I think you talked about some new consumer opportunities or applications for that product on the last conference call. Just curious if you've made much headway in that area and you really truly see that that's a big opportunity for the company.

Yes, that could be coming more and more, a larger opportunity for us. We've made, have made good headway. We've actually hired an engineer specifically to work on that application. Our timing is for something to be, prototype this calendar year and that is on schedule. The fifth generation compensator that Bruce talked about is actually covers four protocols. It covers GSM, analog, TDMA and CDMA. We're using that technology which we are really the world leader in that type of compensator technology and using it also for this in home repeater which will compensate using the same title for homes or office buildings that cannot get any cellular or strong cellular signal for their cell phones.

So that is on schedule as we talked about in the last conference call. As I mentioned before, we've invested in the resources on that specifically and we hope to have a prototype this calendar year.

OK and then just one follow up question. In the security systems unit, I thought it was a great opportunity that you've now been approved as the government's contractor. Could you just describe what's kind of going on in the security systems business unit? I mean clearly it seems like that's going to be a big growth area for the company over the next 12 months or so and you know, what kind of opportunities are you seeing in that business?

Well, I think the government contracting thing of course is probably the most significant because what it does is it automatically qualifies us to supply the government under GSA with products which are previously quoted by us from that standpoint, but also opens the door for us to receive business on a non-quota basis only. So what's happening right now is that we're very aggressively, both from the standpoint of telemarketing as well as outside sales calls, calling on these various agencies to get as much of this business as we possibly can.

We're also working with our vendors who are obviously tied into the government as well in terms of new items that are becoming available for homeland security. That's been a very close relationship to make sure that once those items are available, we bring those in and have those in stock for immediate sale to whatever agency requires it.

I also might add that (inuadible) is this homeland security thing with USA is not unique to the USA. Our sales in Canada and Europe actually have exploded in the last three to six months or so. So there's a lot of things going on there as well and we're working on that to take advantage of those opportunities as they come up.

OK, thank you very much.

Thanks Rob.

Thanks Rob.

And thank you Mr. Next we go to the line of with Securities. Please go ahead.

Hi guys, good morning.

Hi

Good morning.

Actually the first question I guess is for Ed. If you could just walk us back through -- I mean we're taking it for granted that there's going to be some fixed costs going forward with the engineers, the (inuadible) engineers that have remained after the Philips sale.

Yes.

And if you could just walk us through because what we're hearing is you sold the unit itself but the sales engineers remain. What kind of opportunities do those guys have? Do you have agreements with Philips that are going to exclude them from selling items or are they going to be able to go into the same market to sell, which we would find hard to believe. Why would Philips not have taken them? Could you walk us through that first?

Sure.

OK. That's like 11 questions.

Right. Well, it was interesting. You know, in my estimation, at least in our level of experience, these businesses are all people and normally, if the relationship of the sales engineers with the customers, and their knowledge of the product and their relationship with the vendors, they make the businesses successful.

Philips took the position that they already had their own sales team in place. And for that reason they decided they didn't want our field sales engineers. So they took a few, left us with the majority, which we were very happy with.

The ...

These are not just regular sales guys. These are actually application-specific engineers, though.

Right. They're medical engineers. And we had asked, actually had them multi-tasking. We've had them selling glassware products, which go into diagnostic imaging applications in an x-ray room, if you will.

And then also, trying to sell medical monitors. They were having a lot of success with medical monitors, but we were trying to support this glassware business at the same time.

So it really allows us to take the engineers and have them focus on the monitor business, which is what they wanted to do all along.

To answer you other question, yes, there's -- probably Bruce could give you the exact details -- but there's probably $1 million or $1.25 million worth of SG&A costs, as costs, that now, instead of being split between glassware and monitors, is going to be put entirely on monitors.

But at the same time, we think that they'll overcome that and self-liquidate rather quickly, increasing the sales of medical monitors.

Further to that, our agreement with Philips is that any inventory that they did not take, obviously we have the right to sell And some of that inventory is x-ray tubes and x-ray image intensifiers.

But overall, our agreement and our intent is to go into the medical monitor and medical display business with these resources.

In the meantime, we certainly have the opportunity to dispose of this inventory, which we have retained.

Does that cover it, ? I can ...

Yeah. That -- I mean, that -- so, can we just -- can we make an assumption, then, that in the calendar year, not the fiscal year but this calendar year, we should be able to -- the company should be able to get back to a level where the sales cost is being offset by sales?

Yes. No question.

There's two issues. First, the glassware business was losing money. Not a huge number, $600,000-$700,000 a year. So that loss has obviously been eliminated.

Then we had two physical facilities which Philips has taken over, one in Texas and one in Virginia. And then they've taken all of the equipment out of the Amsterdam facility, as well. And all of the people in those facilities have gone with them.

So, to offset the additional, call it $1.25 million worth of sales costs, these other costs have been taken out, as well as the loss has been eliminated.

So I would think, six months out or so, we will have more than absorbed the additional sales costs, and increased sales and earnings from the monitor business.

Oh. It sounds like a win for Richardson. We're not quite sure about Philips. OK.

Can I -- one last question. I'd like to direct this to Greg. We -- you know, in your prepared comments, you know, while conditions remain challenging, you guys did reach the highest levels as far as bookings go in 14 months. Wireless led that. Greg, can you talk to us about where and what's going on as far as expectations?

Well, the bookings were across the board. Now, we read daily about Nokia's comments and Nortel's comments. But because our focus is on the RF and wireless market, with literally no focus to the end -- to the subscriber side, we're seeing orders in the laser market in terms of RF and wireless, from industrial side.

Our broadcast customer base is going very strong in implementation of DTV. With Ingenium, our design center in Italy, working on a couple of very strong orders for Europe.

Also our military customer base is growing because of a number of reasons. But we're also very, very active in that in terms of infrastructure type products -- power transistors, passive components.

And then, you look at the addition of some of these key lines, you know, our content on the board itself has increased. People like Toko and that, they wrap right around the current products we're selling.

So, you know, that's where the bookings are coming from.

Interior solutions, as we mentioned, some nice bookings in terms of the fifth generation, wireless Internet -- all kinds of unique applications that we're working on worldwide.

So, in terms of regionally, of course China and Korea are booming. We have a very, very strong team over there. China and Korea are up over 40 percent for wireless.

Nets -- they're actually implementing infrastructure over there. It's more or less 2.5 G, but we are very active and have a number of design wins with people like China Intercom and those type of key suppliers of these type of amplifiers.

Do you consider those two countries going forward, then, to represent 40 or better percent continuing for, like, the foreseeable future?

I see definitely this calendar year. I see China in the next three years being close to as large dollar-wise as North America, in terms of infrastructure products. That is a huge market for us, and as far as growth dollars, probably more than 40 percent.

OK. On that note, thank you very much.

Thank you, .

OK. We'll talk to you guys later.

OK.

And thank you, Mr. . Walter Liptak has our next question, with McDonald Investments. Please go ahead.

Hi. Good morning, guys.

Hi, Walter.

Good morning, Walter.

I guess, going into the wireless bookings, I just want to try and understand. Was there one large order that accounted for a big piece of this? Or is this a lot of components orders? Or a lot of customers simultaneously bringing in orders?

Or, and, you know, you talk about China and Korea being up 40 percent, is it one large order to one customer out there? Or is it kind of across the board?

Well, the good news is, is no. It's numerous, nice-sized orders.

That the -- specifically to your question of China and Korea, in Korea, they're building the majority of the amplifiers that are sold into China. So there's a dozen or so companies that we've done the design work in terms of the components, into these amplifiers that are then sold to these infrastructure companies in China that implement the base stations themselves.

And so in terms of North America, it goes back to, with in that, it's across the board. Industrial companies are coming back in terms of laser and medical. The military business is strong.

But the good news is, no large orders, you know, made that number and got us over the hump.

In addition to that, the orders are not 12-month orders. So we're hoping that the strong bookings show that we'll have a nice Q4, and also kick off into the new fiscal for us.

OK. And Bruce Johnson mentioned the fifth generation Telematics. Is -- was that a good-sized order?

It's a large order. Two years ago or a year-and-a-half ago, they gave us an order for 100,000 pieces. Now their releases -- our orders are a maximum of 10,000 pieces. So you can kind of see the way that companies like Motorola and others are purchasing.

They've shown us a two-year roadmap that this product is in. The good news about this, Walt, is the fact that we've also worked on cost reductions for them. The gross margin's the same. But the cost is decreased, so it'll be available for what I'll call lower cost vehicles.

And that's the really the hope for us. I mean, we're -- we were very active with Mercedes and BMW, but we need to get this into what I'll call the kind of cars you and I drive, right?

Right. So the cost per compensator goes down, and you can get more volume.

Exactly. And it becomes more cost effective for, you know, lower cost cars.

OK. I wanted to the numbers that were talked about. , I didn't hear about the accounts receivable. Was that 82.3 or 83.2?

Eighty-two point four.

Eighty-two -- OK. And accounts payable?

Payables were 31.5.

OK. And depreciation. Any amortization in the quarter and cap ex?

About $1.5 million each.

OK. And, you know the -- you guys aren't giving guidance on, you know, where revenue could end up. And, you know, you're talking positively about this order pickup in February.

I mean, how should we think about this? Have we hit a bottom, and now we're going to be getting, you know, back up to, you know, 15 or 20 cents a quarter? And, you know, moving towards a buck? I mean, how -- what kind of guidance can you give us on either the revenue line or on the EPS line?

Well, I think it's -- I'll give you a range. And it's sort of obvious when you watch. There's so much of our costs that's fixed. It's somewhere between $105 and $110 million in revenue at between 24 and 25.5 percent GM, we break even, which is obviously what we're looking at.

When we can push the sales to $125 or $130 million, we can make 20-25 cents.

And, you know, it -- with the bookings that we're looking at, we think that those are the historic numbers We think over a short period of time, here, we can get back into that kind of level.

OK. And -- OK. Thank you.

The dynamic cost control, Bruce, that you're working on -- because of the order uptick in February, it sounds like that you're adding people in the wireless space with these two new hires?

Is there more, you know, overhead or engineer sales people that you'll be adding?

Well, very definitely. I mentioned those two individuals, because I think they're very significant, you know, in terms of being the Telematics and also the fiber optics business.

But we've been doing this, to be honest with you, all year long, and this fiscal year. But we've been operating under a kind of operating principle of offsets, which means that we're going to bring somebody in. There's a great opportunity for us. It's going to cost us $100,000 or whatever it is.

And then the line management and working with me, we come up with an offset. So if somebody else goes somewhere else, we reduce some other expense or whatever it is.

So these are marginally -- these are marginally increases in terms of expenses. And I don't think you're going to see any blip as a part of that.

The other thing is, just picking up on Ed's comment about when things return to a more, higher level, we've got the cost structure down today very, very low in the company in terms of the support areas of the business.

And we've also been able to capitalize on technology in achieving that. So what this means is that when business picks up, I wouldn't expect a significant increase in expenses to handle the additional business.

We shouldn't -- a lot of it should just go right directly to the bottom line. And that's what our plans are.

OK. You're alluding to the PeopleSoft implementation.

That and other things we're doing with the even existing computer system we have called . The whole area of IS has played a big part in this, as well.

We're also right now, we're in process of centralizing our inventory in Europe. We're putting in different systems where we brought inventory back, moving it around -- doing a lot of simple things to just get the cost structure down.

OK. And I guess, nobody's asked about the PeopleSoft thing in a while. Is that complete now? And, you know, can you quantify the benefits from that?

Well, we're just now installing the purchasing inventory phase of this. And it's going in in pieces.

For example our purchase orders today that originate out of LaFox, the purchase orders are on the PeopleSoft system. We've got payables, receivables, cash application, HR, et cetera. And we hope to have this fairly well installed by the end of this quarter or the end of the first quarter of next fiscal year.

And then next up would be what we call, is order management. And order management is where we really get involved with a system, with the selling organization, in terms of the screens they see, customer relationship management programs, et cetera, et cetera.

So we're behind schedule, but we're doing it right. And I think it's going to have a positive impact on us.

OK. But the full implementation by the first quarter of '03 ...

Well, not full, because remember, we're looking at this as modules. It's going to go on, Walter, for some time.

We're going to be doing this, because we have other things we're going to install, like CRM. We'll be putting that into a number of modules there.

But the purchasing inventory, which is a big part of that, I think should be in by the -- by the end of the second -- of the first quarter of next fiscal year.

OK. Thanks.

Thanks, Walter.

And thank you, Mr. Liptak.

With three participants in queue, next we'll go to with Investments. Please go ahead.

Hi, .

Hi. Can you just comment about the bookings trend, March to-date, relative to where you were I the prior month?

It continues. March to-date we've seen the same type of thing that we saw in February, and it continues the same kind of sequential improvement.

So you don't think that this is just a, the earlier in the year -- calendar year performance was just an inventory blip that was only going to be short-lived?

Well, we don't think so. I think the one thing that our customers are learning, everyone there was a huge glut of inventory out there.

And particularly in the RF and microwave area, that's not true. So when the customers have come back in, they've found that delivery on some of this product is 12 to 14 weeks, and that they'd better get their orders in or they have a problem.

So there's been some realization in that area. But at the same time, again, we're seeing relief is only for orders that are placed to be shipped over the next 90 to 120 days.

OK. And is -- Bruce, I was curious. If you were to attain the kind of revenue production that you once did back in the '01 period, do you see the bottom line profitability being similar, less than or greater than today, relative to then, on a similar size of revenue?

Well, from the expense standpoint, I'd say it would be similar, possibly even a little better.

The only thing that's unknown right now has to do with the gross margin. And that's the one variable right now which we're working on from that standpoint. But based on the expenses and so forth, I could be -- it would definitely be similar to what it was a year or so ago.

OK. Thank you for your hard work.

Thank you, Mr. . We go to the line of with Capital Management. Please go ahead.

Morning. Could you give us the operating cash flow for the quarter and nine months, please?

Steve, I don't have a completed cash flow schedule yet. But with breakeven profitability for the quarter, the depreciation charge of $1.5 million, would be positive from operations by that.

Working capital, looks like it was about a push for the quarter. So I'd say cash flow for the quarter was about $1.5 million. But that's not a final number.

And, how about for nine months, then?

I don't have that number in front of me.

And how about capital expenditures for nine months?

Four-and-a-half million dollars.

OK. Do you expect to have operating cash flow for the whole year?

Yes.

OK, thank you.

Thanks.

Thanks.

Thank you, Mr. . We go to the line of David with Heartland Advisors. Please go ahead.

Hey, good morning.

Good morning.

Could you elaborate a little bit on the -- NEC on the Mr. agreement on the LCD displays? You know, what kind of applications might those go into?

And when you talk about being an integrator, what exactly does that mean for you?

Well, what it is, is NEC basically wants to just sell the hardware to the end customer base. And the end customer base, in many instances, requires something to be done to that piece of hardware.

And they're not geared up to do that. So, whereas we are. And we are specifically with the company that we acquired a couple of years ago called Pixelink in the Boston area.

And primarily it revolves around touch-screen applications. So things that you're using, like in restaurants, or you see them, you know, they punch up your bill as you leave out, or the waitress takes your order and goes to a touch screen, opportunity -- that type of thing.

So what we're doing is we're taking anything that is -- cannot be, lets' say, manufactured in a straight line. And NEC has set us up to handle these type of things.

So, we'll get orders as a referral from NEC, which is already starting to happen, for customization of various monitors and so forth for various applications. And, of course, we're also using this to develop business on our own, as well, from that standpoint.

So it's a great opportunity. We're very optimistic about it. And there's good margin in it, to be made as well.

So, it would not be a situation where you might identify an OEM that needs the NEC screen, and act as a middle man there. It really, truly is integrated into, I guess, lower volume or especially tight niches?

That's exactly right. And then the positive thing here is, with NEC's blessing.

So, sometime you can compete directly with your vendors or your manufacturers. But in this particular case, they've said, Richardson, you take that business. We can't handle it. And we'll support you 100 percent. And that's exactly what's happening.

We do things, for example, NEC -- a customer will want a custom chassis, a custom mount, for example. And so we'll buy a -- just a monitor with a chassis, with no plastic enclosure from NEC, and take it into Pixelink, and put on a custom enclosure for the customer.

At the same time, he wants touch-screen controls, and we'll add those touch-screen controls to their specifications. That kind of thing.

So we're actually taking their basic monitors and customizing them per the customer's requirements.

And how large a business do you think that might grow to be, say, in the next two or three years?

Well, you know, our guys have sort of blue-skied it. I've seen numbers up to $20 million. But it's strictly that blue-sky. We think next year it could be $4 or $5 million.

Great. On the disposition, just to try to get a little granularity on the disposition of the medical business, that was disposed of, I guess, February 22nd. So that the decrease in sales from Q3 over Q2 is in part because you didn't have those sales, which presumably, maybe are a little -- would have normally been a little backend-weighted?

Well, it certainly was weak. What happened is, we announced the Philips transaction well ahead of the close. I don't know what the exact date was, but a month ahead of the close.

And so you have, obviously, people walking around the coffee pot wondering whether they've got a job, versus out promoting the product. And it certainly had an impact.

OK. And then, to come back. I think you said there was about $1 million to $1.25 million of costs associated with the sales people that you are retaining.

That's right.

And, if you disposed of two factories, or two production locations, what -- and maybe a third, the people in it, wouldn't that almost offset right away? Or is that just not realistic?

Yeah. I think Ed mentioned that the number was somewhere around $600,000 of the loss to the glassware business.

.

That plus the reduction in debt as a result of the proceeds from the sale and liquidation of the investment in inventory and working capital, should be close to a .

So we really shouldn't see any dilution from those -- from retraining those sales people. In fact ...

... area, if they're successful in selling some of the monitors, we might even see some improvement.

There -- certainly we shouldn't be a big impact ...

Yeah. OK. Thank you very much.

Thank you.

And thank you, Mr. Fondry.

We do have a follow-up question from Walter Liptak once again, with McDonald Investments. Please go ahead.

Hi. Just to follow up on that, the glassware business. What was the cash inflow from the -- from that divestiture?

It was $1.3 million through the February 28th period. They're paying for the inventory in installments over the next 120 days. So we'll see the full proceeds not realized until June of next year.

You should quantify it, though, because you've got $3 million plus in receivables that's ...

Right.

... coming down.

Right. In the aggregate we'll get about, well $9 million plus whatever we can sell in the inventory that was not sold to Philips.

OK. So there's -- I'm sorry -- there's inventory and receivables is somewhere around $9 million?

No, no. In the aggregate, including the proceeds from the sales of Philips, we'll see around $9 million.

OK. All right. And $3 million of that is in receivables.

That's right.

And there's some portion of it left in your inventory. So, we'll see the cash inflow from your working capital accounts in the next quarter.

That's right.

OK. OK. And then, during the quarter, there were a couple of acquisitions that were still -- that are within the last 12 months. How much was the incremental acquisition revenue?

Wow. I'd have to get back to you on that, Walter. They ...

OK. That's fine.

Yeah. I -- it's not a big number.

OK. Thank you.

And thank you, Mr. Liptak. Mr. , I've noticed you've requeued. Did you have a follow-up question?

Yes, I do, please.

Sorry, just to follow up Walter's question, did you say that you're going to receive all the proceeds a year from now? Or this summer?

No, no. Next quarter.

OK. OK. Good. That's -- I was hoping that was what it was.

On the security side, you were having a fair amount of success with, I think a disk recorder. Can you kind of talk about -- is that continuing? And is it accelerating at all?

Well, yes and yes. It's continuing and it's accelerating. It's called a hard disk recorder. And it's a basic -- it's a digital unit versus an analog unit. So it's like taking a look at a VCR versus a digital DVD, that type of thing.

And it's computerized, obviously. So, it enables the end user to be much more flexible, do more things with it, retain data, go back easily, and that type of thing. And I guess that's probably the hottest thing right now, in terms of the security business.

And we're selling them, again, globally. So we're selling them in USA, Canada, Europe, all three of those. And I'd say a good share of the growth that we're experiencing is directly related to the HDR.

Are you seeing any competition? I mean, has anybody else come in with a similar type system?

There's competition out there, but we think we've got some unique features on ours that really help us close the sale, from that standpoint.

But the other -- I might want to add as well, and that is that over half of these that we sell, are also customized to some extent. So it's not just a matter of taking a black box and shipping it out, and getting our full resale.

We also do a lot of customization, as well, which of course improves our margin, and also makes us more important as far as the customer is concerned. Just the part of the engineered solutions, now, within security systems.

OK. So is it -- so in most cases -- I mean, is it the type of thing that you could go in and actually replace just that segment of the system today to upgrade it? And are people doing that?

Or is it typically sold as part of a new system, and part of a total package?

It's both.

OK.

Both upgrading, as well as new systems.

OK. Thanks.

Thank you.

Thanks, David.

OK, and thank you, then, Mr. . We go to the line of now with Barrington Research. Please go ahead.

Hi, .

Good morning, gentlemen.

You haven't spoken much about the industrial business. Could you give us flavor of what, if anything, is going on there?

Well, I mentioned in my opening remarks, first of all, sequentially, they were down only one percent from the second quarter, which is negative, being one percent. But we view that as a positive. Because remember, in there is a number of the vacuum tube products.

But the February bookings were the highest that we've achieved in that segment since May. And we're driven by a resurgence in bookings for the industrial tubes, which we haven't seen for some time.

So that's viewed as positive.

The other thing that's happening there is, when we evolved to the market focus selling strategy, what we did is, we took power semiconductors, which previously were in the RWC business unit, and we merged those in with the industrial tubes.

So if somebody buys a high power or a high frequency tube, they also now can buy a high frequency or a high power semiconductor device, as well.

And the semiconductor business, frankly, has been sort of overlooked in that area for a number of years. So what we've been doing is we've been working on obtaining new franchises, strategic franchises, which has been very, very successful. And also, expanding the franchises that we either had or have acquired since, globally.

And you can see how important global is to us, because of what we talked about with the Taiwan example.

That's happened. And International Rectifier, which was the line that we brought on at the end of the second quarter, is an example of that.

That's going to be very significant for us. That's running at a seven-digit annualized sales rate already, just after a few months.

So, if the market -- when the market comes back, and along with the tube business, I think the semi business will start to shine, and we think there'll be some good numbers going forward as far as that group is concerned.

It also represents our highest gross margin business unit, as well.

OK. Thank you.

And thank you Mr. .

We go to with Investment Corporation. Please go ahead.

Good morning.

Good morning, .

Good morning, .

I wanted to ask about, going back to engineered solutions as a key concept of your company, differentiating you from commodity-based type of companies.

Are there potentially some acquisitions that are of such size that would be significant to you as a company that are already doing the same kind of concept that you are, engineered solutions?

I know you've been making a number of acquisitions that are sort of tuck-in, that fit in with existing groups. And I have no objection, obviously, to that, and bringing them up to speed with the rest of Richardson.

But, are there potentially other companies competing with you out there that possibly you and they would together make a more, even stronger competitor in the field?

The answer is, there are a few.

They don't compete exactly the way we do. But there are a couple of companies, the largest of which is probably $150 million or so in sales, that has the same type of organization that we have.

However, they work their engineering, or engineered solutions concept around a very limited line of products and vendors.

And we've had ongoing discussions in this area for a couple of years. But it would be -- there's a couple out there that would be a perfect fit if we could ever get all parties to agree.

OK. Thank you.

But there are very few. That's one of the reasons why we've been as successful as we have.

Well, it gives you an opportunity to innovate and be the lead guy guy doing it, as you keep taking on different sectors of the field to apply your engineered solutions to.

That's absolutely true. We're really an extension of our customer's engineering department, as well as our vendor's engineering group.

Good. OK, well thank you.

All right.

Thank you, Mr. . We go back to Mr. for a follow-up question. Please go ahead.

One last question, and I'm not sure if you can answer it or not, but I'll ask it in any case.

As you look at your business, how much -- and maybe it's contrary to your idea of engineered solutions -- but how much of your business would you characterize as being straight distribution, i.e., that you take a product in from one of your franchise vendors and turn around and just sell it out, versus incorporating it into an end user or engineered solution?

That's an area that we track very closely, because we think our ultimate goal is in the engineered solution strategy. And since Bruce joined us, the content has gone from being about 40 percent engineered content solutions, anything that we'd manufacture from scratch, like vacuum tubes to amplifiers that we assemble, to monitors that we assemble -- till where today it's over 50 percent, probably closer to 55.

And we think we can probably push that to 65 percent of our sales going forward. That's our objective anyway.

And the encouraging part about that is that our gross margin on the engineered solution side of the business is 30 points plus. So we're hopeful, once we can move that ratio proportion up as far as engineered solutions is concerned, we can improve the gross margin, as well.

And as -- I mean, I think that's really key and I applaud that direction.

As you've looked at your bookings as they've occurred here in February and March, are you seeing a rebound in -- more on the engineered solution side? Or are you seeing strength on just the basic distribution side?

And I guess the essence of that question is part of, you know, what kind of a rebound are we potentially seeing out here?

Are we seeing, I mean, if the whole economy goes up and we see some rebound in the electronics portion of the economy, the technology portion, it may drive a more rapid increase in the, I think, the -- what do they call it -- commodity, or just the passthrough ...

Yeah.

... piece of your business.

Well, I think it's both. But I think it's more heavily weighted towards the engineered solutions concept.

What we've seen, and we've talked about in the past, is that our design activity, even through this economic downturn, was at the highest level we've ever seen.

And in the number of design wins and designs that we're working on, I don't know if we did a calculation this quarter, but at one point they were like 3,300 designs that we were working on that -- Bruce, you'll have to help me -- $90 million something like that? It was a ...

Over $100 million.

... over $100 million. It was a huge number. And what we're seeing now is customers actually placing orders for those designs.

So, yes, there's an element of commodity business there. And what we try to do is we align ourselves with vendors that can supply all the components that go into the circuit that we're working on, so that there's a certain amount of pullthrough commodity business that goes with the item that we're selling under the engineered solutions concept.

But certainly, the bookings are heavily weighted towards our design activity and engineered solutions.

Terrific. Thanks very much.

Thank you.

Thank you, Mr. . With that, Mr. Richardson, Mr. Garry, and our host panel, I'll turn the call back to you.

OK. Well, thank you all very much. If you have further questions, please give us a call at any time.

And again, although the numbers in the quarter didn't reflect it, we're very optimistic about the future. And we think the fourth quarter will show some marked improvement.

Thank you very much.

Ladies and gentleman, your host is making today's earnings release available for digitized replay for three months and 24 days, starting at 12:30 p.m. central standard time, March the 20th, through 11:59 p.m. July the 15th.

You may access AT&T's executive replay service by dialing 800-475-6701. At the voice prompt, enter today's conference ID of 630428.

And that does conclude our earnings release for this quarter.

Thank you very much for your participation, as well as for using AT&T's executive teleconference service.

You may now disconnect.

END