Richardson Electronics Ltd (RELL) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the FY 2011 first quarter earnings conference call. My name is Veronica and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be conducting a Q&A session towards the end of today's conference. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. Ed Richardson, Chairman, CEO, and President of Richardson Electronics. Please proceed.

Thank you, and welcome to our first quarter conference call for fiscal 2011. Joining me on the call today are Kathy Dvorak, Chief Financial Officer, Greg Peloquin, Executive Vice President and General Manager of the RF, Wireless and Power Division, and Wendy Diddell, Executive Vice President, Corporate Development, and General Manager of Canvys. During this conference call, we'll be making forward-looking statements, including those regarding the current outlook for our business. These statements are based on forecasts and assumptions involving risks and uncertainties. Therefore, we encourage you to review the Safe Harbor Statement found in our press release and to review the detailed description of risk factors in our SEC filings.

I will begin with commentary on the transaction that was announced last Friday and then I'll discuss our first quarter, followed by Kathy's discussion regarding the details of our financial performance. Greg and Wendy will then provide comments on RFPD and Canvys, and finally, I'll conclude with a few comments on EDG and our outlook for the second quarter. After that, we'll be happy to take your questions. Last Friday, we announced that we signed a definitive agreement to sell our RF, Wireless and Power Division, or RFPD, to Arrow Electronics for $210 million. Obviously this was not an easy decision for a number of reasons. I have tremendous respect for Greg and the RFPD team. They've built a remarkable niche business in an increasingly competitive industry. RFPD has been one of the growth engines of the Company.

The Company's financial performance is at its highest level in history, reflecting the contributions of all three strategic business units, combined with the efforts of support functions. The purchase price provides us with an excellent return on our investment for the RFPD business. This transaction aligns RFPD with an organization that's better positioned to accelerate RFPD's growth and increase its market share within the RF, Wireless and Power conversion markets. Our first priority is to complete the transaction, which is targeted for completion in January 2011. We will then address the strategy of the remaining business for the future. We're considering all options with the proceeds including strategic acquisitions, dividends, and share repurchases.

Now, let's get back to our current performance. Our first quarter represents the best financial performance in the Company's history. We've achieved strong double-digit growth with sales up over 25% compared to the prior year's first quarter. Backlog continues to strengthen for all three businesses and there are many positive indicators showing excellent growth for the future. We're experiencing some margin pressure. This margin decline reflects both our mix of business, as well as some strategic alliances that are contributing to our top-line growth with sales increasing by 25%.

We held our operating expenses and achieved a 17% operating expense ratio in the quarter. While cash from operations was modestly positive, it reflects the fact that our working capital investment grew to support our growth. Sales are $137.1 million in the first quarter. This was stronger than we anticipated. The focus of our senior management team continues to be on improving our operating leverage. We're working to increase our margin dollars, while continuing to reduce our cost structure. SG&A for the quarter was down as a percent of sales compared to the first quarter of fiscal 2010. Pursuing operating efficiencies and reducing our cost structure has become a way of life for this Company, and a mindset that will help us in the future.

Greg's business, which serves the RF, Wireless and Power conversion market is experiencing extremely strong growth. RFPD achieved just under $100 million of net sales during the first quarter, up 25% when compared to the prior year's first quarter. The business outlook is solid, and our near-term visibility based on backlog indicates that the market is improving. The real question is whether or not we're in a sustainable recovery. At this point, we're experiencing renewed optimism as potential opportunities turn into orders. The Electron Device Group was up 43.6% in the quarter. This strong growth reflects both the market recovery, as well as increased sales volume, resulting from a new distribution agreement that capitalizes on our capability as a global channel to market. This agreement is providing incremental volume, although at lower margins.

In addition, overall demand is improving in the semiconductor wafer fabrication industry. We're strategically positioned as a growing channel to market in the tube industry. Canvys continues to struggle, as customers have been slow to resume capital spending. Sales in the quarter were down about 10.7%. Recently, we've seen our backlog grow and are now more encouraged that the market recovery for Canvys is under way. Now, I'll turn the call over to Kathy to present our financial highlights.

Thank you, Ed. And good morning. Our first quarter results truly reflect the strong financial and operational foundation established last year. Our operating margin reached a record 6.8%, reflecting the tremendous expense leverage in our business model. Highlights of our first quarter include sales of $137.1 million, up 25.3% from the prior year. This represents another strong quarter that was above the upper end of our range of guidance. Gross margin was 23.8% this quarter compared to 24.2% in last year's first quarter. Our gross margin rate was impacted by a number of factors, which include the mix of business between business units and the mix of business by geographic region.

SG&A was $23.3 million, or 17% of sales compared to 21% of sales in the first quarter of fiscal 2010. In terms of dollars, our SG&A is up very modestly from last year's first quarter. Our [people] and related costs are flat, and headcount is holding relatively steady, as we continue to automate, simplify, and reduce our cost structure. Operating income for the first quarter was $9.3 million, or 6.8% of net sales. This represents a 300% increase over the prior year's performance. Foreign currency translation continues to impact our results. In the quarter, we saw the dollar weaken slightly relative to foreign currencies.

Therefore, this year's first quarter earnings were impacted by $824,000 foreign currency loss compared to about $818,000 foreign currency loss we experienced during last year's first quarter. We continue to monitor our risk with respect to foreign currencies and mitigate this risk whenever we can. During the first quarter of 2011, net income was $8.4 million and EPS was $0.47 per diluted common share compared to net income of $1.9 million and EPS of $0.11 in the first quarter of fiscal 2010. Our current share count is approximately 17.7 million shares.

We continue to focus on our balance sheet, which includes cautiously investing in working capital and minimizing our debt levels. Consequently, our only borrowings outstanding were $22 million under our revolving credit facility at the end of the first quarter. We had a cash balance of $32 million. Therefore, we ended the quarter in a net cash position of approximately $10 million. Our accounts receivable balance as of August 28 was $101.9 million versus $98.7 million at the beginning of our fiscal year. Excluding the impact of foreign exchange, our receivables increased by about $1.5 million during the year.

Year-over-year, our DSO continued to improve. Our inventory was approximately $85.6 million compared to $78.7 million at year end. Excluding the effects of FX, our inventory increased by $6.5 million from year end. Although inventory has grown, we have maintained our turns at about six times. Cash flow generated by operating activities for the quarter was about $400,000. This modest cash flow figure reflects the increase in our working capital investment in the quarter, which was necessary to support our strong sales growth. Capital spending for the first quarter was $400,000 and we anticipate modest capital spending for the balance of the year. We are committed to achieving continuous improvement in our overall profitability. Our first quarter results have certainly reflected our cost control efforts, as well as demonstrated expense leverage.

From a balance sheet perspective, we will continue to cautiously invest in inventory so that we are able to take advantage of opportunities. Sales momentum clearly continues to build. Therefore, our current outlook for sales growth for the second quarter is for year-over-year sales growth of approximately 10% to 15% for EDG and Canvys. When we report our second quarter results, our RFPD will be reflected in discontinued operations. To clarify, discontinued operations will only reflect the direct costs of rfpd and not costs related to corporate overhead and support functions. As a result of the transaction, we will be releasing a significant portion of our valuation allowance in the third quarter, simultaneous with the close of the transaction. This will result in a significant tax benefit, which will be reflected in discontinued operations.

In summary, our current focus is on closing the transaction. In the meantime, we are working on a plan to realign our cost structure for the remaining businesses, with the goal of maintaining our current level of profitability. Post transaction, we are confident that we will be able to deliver strong financial and operational performance. And now, I will turn the call over to Greg to discuss RFPD performance.

Thank you, Kathy. Good morning, everyone. Well, we continued to produce improved profitability with top line growth. As top line sales were up 25.4% over prior year, at $99.6 million. RFPD continues to keep the momentum developed in the second half of our previous fiscal year with another record quarter. Our backlog remained strong with a book-to-bill well over one, which is always a good indicator of the health of the business. Currently our backlog is at a record high, exceeding $150 million.

Our strong backlog continues to be a reflection of a number of underlying market factors. Earlier in the year, which was our market experienced the inventory adjustment period as our customers depleted their inventories to extremely low levels in 2009. We began to see orders booked to replenish inventory stock levels. This increase in demand caused capacity issues with our suppliers and extended lead times. Because of our global engineered focus strategy, we were able to optimize our business position and take market share from our competitors, as our suppliers continue to add technology-leading products. And finally, we did see some market growth in various pockets of the world, in our two key business units, RF Wireless and Energy Management. Gross margin for RFPD was 21.3% in Q1, up slightly and reflecting some business recovery in our stronger margin areas, North America and Europe.

On the expense side, RFPD expenses for the first quarter were in line with plan, as RFPD continues to focus on managing costs, while reinvesting in target growth initiatives. SG&A as a percent of gross margin shows a year-over-year improvement from 49.2% to 43.6%. Following a strong finish in the second half of FY 2010, RFPD continued its solid performance in Q1 FY 2011 results, reflecting top line growth and improved profitability. These two factors in the midst of a global recession are a true testament to the focus and commitment of our team.

Now let's turn to our two key markets -- RF Wireless and Energy Management. RF and Wireless experienced market share in each of its major areas -- infrastructure, broadband networks, ISM, and defense. Looking ahead into the next two quarters, our backlog indicates strength in these areas. In the first half of FY 2011, we have seen this growth continue. With the growing popularity of cell phones, smartphones, along with the introduction of new products, like the iPad, wireless data traffic continues to grow at a tremendous pace, increasing the demand for repeaters, microcells and other products that improve coverage and for enhanced backhaul to get the data to the network. The rollout of LTE, our 4G networks, will give us continued growth here. The increased effort into customer markets has resulted in market share gains, which given the long lifecycles for the products, should give us a good return on the time invested.

With long-term revenue growth in this area, and we believe increase in the range of the parts we offer and broadcast with ongoing conversion worldwide to digital, and industrial markets like laser and plasma generation can generate strong growth in the next three years. Our second key growth market is energy and power management group. In Q4, we saw major uptick in the role of wind in solar applications, primarily in North America, China and India. Going into FY 2011, demand for products is outpacing availability. Therefore, one of our main goals will be to stay ahead of the curve in product delivery for power [capacitors] and ultracapacitors.

Our Engineered Solutions Group is continually winning projects in electric motor drives, inverters and Assembly contracts have recently been awarded to this group and on numerous renewable [MB] programs. Most recently, we were awarded a contract to design, assemble and test the power stage of a Level 3 fast charging battery charger for the electric vehicle deployment in North America. In conjunction with the Department of Energy, this will be the largest deployment of electric vehicles and charging infrastructure involving 16 major cities and the deployment of 5,700 Nissan Leafs and 2,600 Chevy Volts in the calendar year.

Overall, we are extremely pleased with RFPD sales and operational execution in 2010. We continue to proceed with caution, yet remain very confident in our ability to achieve our sales and income targets for the fiscal year. We are committed to sustaining our cost redeployment strategy within RFPD. This strategy will continue to provide opportunities for increased profitability with continued top line growth. We are by far the leading RF Wireless and Energy Management distributor, design, and support Company in the industry. With that distinction, we are committed to bringing continued growth opportunities to our customers and suppliers, while providing the highest level of technical service and support.

We know our global engineered focus distribution model works and is valued by our customers and suppliers. Our global sales engineers and product marketing managers are working every day to help in gaining market share and maintaining our position as a world leader in this marketplace. We remain deeply involved in two key growth markets -- mobile communication, and energy management. These markets are growing and continuing to be investment opportunities. In closing, I would like to take this opportunity to thank all of you for your support and confidence in me and RFPD over the years. Now, I would like to turn the call over to Wendy.

Thank you, Greg. Sales for Canvys, our visual technology division, were $10 million in Q1 versus $11.2 million in Q1 of last year. Sales continued to be soft due to economic constraints, particularly in the healthcare-related markets. As a result, margins declined to 29% from 30.7% a year earlier, as competitors bide for fewer projects in the market. Foreign exchange fluctuations also had a negative impact on margins as we buy in dollar and sell in Euro. Expenses were down year-over-year. In Q1 FY 2011, expenses were $2.35 million versus $2.56 million in Q1 of FY 2010. Working capital efficiency remains strong for the division.

In spite of the slow start to the fiscal year, we are enthusiastic about the near term. During the quarter, we hired a seasoned operations manager to run our manufacturing facility in Boston, Massachusetts, and to help us further improve efficiencies in our production processes. In all three sectors of the business -- OEM, digital signage, and healthcare, and in all geographies that we serve, North America and Europe, momentum is building. We are also starting to see increased sales activity from our channel partners. Backlog is building and for the past four months, our book-to-bill ratio has averaged over 1.2. And now, I will turn it back over to Ed.

Thanks, Wendy. Now I'll conclude with a brief discussion of the Electron Device Group or EDG. Sales for EDG were extremely strong during the first quarter. Sales increased by 46% compared to the prior year's first quarter. This reflects the market recovery, combined with market share gains related to a significant distribution agreement. Margins declined in the quarter to 32.9% from 33.3%, as a result of pricing commitments associated with this agreement. Bookings in total for EDG continue to grow, and are at record levels in October.

In summary, I'm very proud of our accomplishments this quarter. We will continue to focus on the future and what we do best, delivering both engineered and integrated solutions. I would like to thank you for your support of Richardson Electronics. Let me provide you with one point of clarification. While I realize many of you will have questions regarding the recently announced transaction, I must ask you to limit your questions to the current business outlook. We'll be happy to provide further insight on the transaction after the proxy statement is filed, which should be in the next few days. With that, Kathy, Greg, Wendy and I will be happy to take your questions.

(Operator Instructions) Your first question comes from the line of Al Tobia from Sidus. Please proceed.

Hi, Ed.

Good morning.

I have just a clarification, then a question. The first, on the clarification, just regarding you mentioned the use of cash, in order, you said strategic acquisition, dividend, share repurchase. Is there any significance to the order in which you made these three priorities?

Not really. We do not have any acquisitions identified for the near term. We're certainly going to look at some small bolt-on type of acquisitions that are related technology to what we do today, but we don't have anything identified. Probably in the near term, share repurchase and dividends will be first consideration, but we're considering all those options, plus investing in the core business.

Okay. So just along that, can you talk about the -- what you believe the secular growth rate is, if there is one, for the remaining businesses and then maybe Kathy could talk about as you look at the businesses, how much shared overhead is and what kind of a time line for getting the corporate level of efficiencies up to where you would like them? And just along that line, maybe you could talk about as it relates to strategic acquisitions, should we let history be our guide in terms of the size and expense of the deals that you would be looking at?

Well, first of all, as far as the growth of the two business, it's interesting. When I started in the tube businesses 40 years ago, they told me in five years that the tube industry wouldn't exist. I saw a report recently that said the microwave tube industry alone is still $1 billion. As you saw, our tube businesses in the first quarter was up 46%, so we're still doing quite well in a market that is flat to declining and we see some opportunities in that area going forward. At the same time, Canvys focuses on digital signage in the healthcare market. And although the economy has affected those markets probably more than any other area of the business, certainly the size of the market and the opportunity for growth is amazing. So it would be hard for me to put a percentage on what we think the growth would be. Our plan this year for the two businesses is in total about $150 million in revenue.

Okay, and as you look at the tube business, obviously vacuum tubes are legacy, but how can you take your expertise there into areas and maybe offset some of what should be a secular declining business?

Well, obviously we're doing that now. We think we're the most important channel to market in the tube business globally, and even though with the sale of RFPD, sales is a major portion of our business. We still have maintained a global infrastructure, where we can move products from anyplace in the world to anyplace in the world in three to five days. And we have a team of engineers, probably the best now as it exists in the tube business, but we think as consolidation continues in the tube business there will be more opportunities for us to add distribution agreements and distribute other products and gain market share going forward.

Maybe if Kathy could just touch on the overhead. I mean, obviously there's a big business going on here. I know you don't want to deal with the -- talk about the deal specifics, but maybe just give us a look at the businesses going forward and what kind of a restructuring time line we're going to see.

First of all, a good percentage of the corporate overhead does in fact transfer with the Arrow transaction. We are working on a plan for the remaining businesses and our goal is to align the costs relative to returning the remaining businesses to the current level of profitability as quickly as possible. I mean, our goal would be to get close to that prior to year end fiscal 2011.

Okay.

Al, do you want to address the type of acquisitions that we might be looking at? Was that one of your questions?

Well, when you said the first statement was strategic acquisitions and you have a giant pile of cash coming in. Maybe we could just talk about the kind of things that you would like to look at and maybe some, give us the parameters around how you view pricing and things like that when it comes to deals.

Sure. I think the best way to look at it is maybe through some of our past history. And in my career we've done 25 or 30 acquisitions over the years. And all of them have been what we would call bolt-on acquisitions where we're capitalizing on an existing technology that we may already have and just adding size and scope to it and the ability to take it through our global organization. Everything started with the tube business. RFPD, for example, was a home-grown strategy that was really taught to us by the customers. As solid state began to develop, and we had tube technology, our customers wanted to convert in many instances from tube technology to solid state technology.

And we had a team of RF engineers based around manufacturing and distributing power grid tubes, but those same engineers knew the technology and helped us get into the RF and Wireless space and that started in the late 1980s. And obviously, we've built the business into a $350 million organization. At the same time, the other SBUs, their origin started the same way. A good example was the Security Systems division. Originally we were selling camera tubes and monitor tubes for closed circuit TV applications. And the customers taught us that they wanted to buy systems. They wanted to buy cameras and monitors and time lapse recorders, all of these components that go into security systems. And so we built the business around that.

And then we bought a company in Canada called Burtek that had a good market share in the Canadian market. In 1997, Burtek, we paid CAD2.5 million to CAD3 million for that business and using that as a core and building off our own SSD resources, we built the business to over $100 million in revenue and we sold it to Honeywell for $80 million in 2007. So it's not too different from what we're doing with RFPD. What we've seen with RFPD is a great business. And again, I have all the respect for Greg and his team and what they have done. But as the business builds, it becomes more and more a commodity business and we've watched the margins drop just about a full point every year, and commodity distribution is not what this Company does.

We're basically an engineering assembly and manufacturing Company, and that's the core business from the tube industry. And that's what we want to follow in the future. So basically the type of acquisitions we would look at would be small bolt-on acquisitions to capitalize on IP or technology that we already have. As Greg mentioned, on the manufacturing side, we've had some success in the alternative energy space. We've been building the products and Greg's group distributes the products.

And so we would like to capitalize on that and possibly go further into the inverter and converter market. These are products that convert DC to AC and wind turbines and solar fields. We've been doing some of that at the contract manufacturer. We would like to add design engineers and possibly do some acquisitions, bolt-on acquisitions to build on that IP, where we see an opportunity. But if you would look at our history of the 25 or 30 acquisitions that we've done over the years, the majority of them have been done for asset value. We have no history of going out and buying stand-alone public companies at high multiples.

Everything we've done has been start-ups or companies where we could buy close to asset value and bolt them onto an existing technology. And I don't think after 40 years, I'm going to change that very much. So that's really our strategy going forward. We're certainly going to look at investing in the core business. If the stock continues to trade at cash value or below a share repurchase, the Board just authorized a share repurchase. So we're going to look at all those alternatives, including dividends, and small bolt-on acquisitions.

Ed, can I ask one other question on the -- you mentioned share repurchase. Would that also -- would you also consider a tender to be more effective in terms of removing shares? Because given your trading volume, except for recent volume, you guys would be limited as to how much you could buy back relative to the cash forward that you have.

Yes, that's certainly something we would consider.

Okay, thanks.

Thanks, Al.

Your next question comes from the line of Christian Schwab from Craig-Hallum. Please proceed, sir.

Hi, this is Brian Yurinich on behalf of Christian. I was just wondering if we could get some clarity on how the operating expenses would have shaped out this quarter for the electronic device and Canvys groups or how we could look at that going forward to see how that progression might work out over the year?

Again, we have not disclosed those numbers. We are working on our plan. We will, and we truly believe we can get the remaining businesses to be profitable. Once we fill some of these numbers, we'll be happy to go into the details as we develop the plan.

Would it be fair to assume that expenses are proportional to revenue contribution?

I think that's a good assumption to get to the goal that we have to return to.

All right. And then when you guys sold the RFPD division, was the rest of the business for sale, too, or how did that work out? How did it end up just being part of it sold?

Well, we had discussed the potential sale of RFPD for some time with Arrow, and they basically had no interest in the tube business at all. So this was their mandate basically.

All right, thank you.

Sure.

Your next question comes from the line of Mark Zinski from 21st Century Equity Research. Please proceed.

Yes, congratulations on the quarter.

Thanks, Mark.

Just had a few quick questions regarding the EDG business. Firstly, are you selling into any particular -- well, I understand that going to the semiconductor equipment, but are those manufacturers selling into any particular end user markets, whether it be PCs or the automotive market or consumer electronics? Or is it pretty much across the Board?

Well, first of all, the tube business today is about 80% aftermarket. And our main focus is selling directly to users of existing equipment, replacement tubes, and that's how we maintain the high margins that we do. We do sell tubes into the semiconductor wafer fab industry and we also assemble microwave generators that use either magnetron tubes or power grid tubes as their power source for curing silicon or for plasma, things of that nature. So we sell directly to the OEMs that manufacture that equipment and then we sell directly thereafter to the users, like TI, Intel, all the semiconductor manufacturers that use replacement tubes. These tubes basically fail about once a year, and it's a very predictable aftermarket.

So the largest industries that we sell to as far as the Electron Device Group is concerned, probably broadcast is the easiest one to recognize. We sell about $15 million or $20 million a year to radio and TV stations all over the world. Power grid tubes are still used in the final transmitter where the power levels are 30 to 50 kilowatts and over, and, again, they last about a year in constant service. So it's a very predictable aftermarket. Then in the industrial tube side, certainly in the laser cutting area is a very substantial market. They're industrial markets where high power and high frequency are required. The textile market, the used tubes for laminating plastics and vulcanizing rubber and heat treating steel parts. I can go on for hours, if you like.

No, that's helpful. And then so the gross margin decline for EDG was expected due to the distribution agreements. Do you expect that to continue going down for the foreseeable future?

No, I think you'll see it start to go up. Part of the business that we assumed as part of the agreement were selling tubes to OEMs who were servicing their own aftermarket. And we're converting that business as quickly as we can direct to the users. And as we do that, the margin goes up substantially. I think going forward, you'll see the margin in EDG 35% plus.

Okay, and then just finally, what percentage of the EDG sales are international, or is it predominantly domestic?

No, no, it's very much a global business. I don't have those numbers in front of me, but I think you could look at it just about the way the Company is broken out. International business is probably 65% of the business right now.

65%, okay. Very good. Thank you very much.

Thank you.

Your next question comes from the line of Marcel Herbst from Herbst Capital. Please proceed.

Good morning. Thank you for taking my question. Yesterday, you announced the release of CFS WebSuite. Can you give some detail on the sales model and what annual revenue potential this product might have?

I'll let Wendy address that. She manages the Canvys division.

Hi, thank you. CFS WebSuite is a software package that we use with our PACS system. PACS is our Picture Archiving and Communications Systems, and they are sold primarily to the hospital market. What this does is it allows the radiologist to access data from a remote site. So they can -- from home, they can be looking at very sensitive type images and get the proper level of what we call gray scale in order to really help diagnose different ailments.

So from a revenue perspective, again, what it does is it gives us advantage over other companies out there that we compete with, and our revenue stream right now, the plan for this year is about $10 million to $15 million, in that particular product line. So we anticipate that, that will help us achieve that goal, as well as to keep our margins in the sub -- not sub, but I would say within the 30% or higher range.

Okay. Now, a follow-up, question, Wendy, on your overall operation. Canvys had quite a weak quarter and on the shareholder meeting it was mentioned that you are looking for improvements in Canvys going forward. Can you talk about what you're doing with Canvys to get back to past revenue levels and what initiatives you're running?

The main thing that we're focusing on right now within Canvys is the larger OEM customer base. If you look at our mix of customers, we spend a lot of time with customers that require custom display solutions, but it doesn't necessarily materialize into significant volumes. And so to create a specific display for a customer that's going to buy five to ten takes us the same amount of time as it takes to serve a customer who is ultimately going to need 500 or 1,000 or more over an annualized basis. So our focus is really pushing more towards the larger OEM market, where we do quite well. We serve a significant portion of, for example, medical OEM manufacturers that require custom touch screen integrated displays. And we want to make sure that our sales force is dedicating its time towards those type of opportunities.

Okay.

On the digital signage side Ed mentioned that we also feel that, again, there's a tremendous amount of opportunity. It's been an industry with a lot of hype. What we want to be careful of is to, again, focus on opportunities where it's a substantial footprint. So it's not just a single outlet. We want to try to move more of those opportunities through our channel partners. And as I mentioned in the little update on Canvys, our channel partners are becoming quite relevant to us. Channel partners would be companies like Tech Data, Ingram Micros, other distributors like that, that can serve the smaller customer market better than we can, which will then allow us on the digital signage area to really, again, go after opportunities that result in, A, a larger initial quantity, and, B, a recurring display requirement. Those are our two catch phrases that we're looking for as we go out and focus on new opportunities.

Okay. A quick follow-up also on the financials. You mentioned that you will use a large portion of the NOLs in the asset sale. Would it be correct to assume that for 2011, most of your earnings will be fully taxed on a cash basis going forward?

In fiscal 2012, yes, that would be a true statement.

Okay, and by when can we expect to hear more details about your planned use of cash and operating model going forward for the remaining division?

I think after the January Board meeting and once we are able to close this transaction, we'll be able to discuss our plans in more detail for the future.

Okay. One of the things I was listening for is how big a portion of the sales proceeds you intend to use are earmarked for potential acquisitions. And based on what you talked about on the call so far, it sounds like that you're not looking to use a large amount for acquisitions. Did I hear this right?

Yes. You heard it correctly, but we really haven't determined the exact proportion of the funds we've used in each area yet.

Okay, thank you very much.

Thank you.

Your next question comes from the line of Kim Arthur from Main Management. Please proceed.

Good morning, guys. Hope everything's going well. I have a couple questions. The first is regarding the capital structure and the A/B shares. You guys had talked about at some point here that you could take the cash and begin buying back shares. Can you explain, A, why the two share class structure, and then I guess the second follow-on to that would just be, wouldn't it make sense just to go out and extinguish tender for the B shares, the 3 million plus shares and get those out of the way?

Okay. Well, the B shares have 10 times the voting rights as the common shares. And I personally own probably 95%, 98% of the B shares and I have no interest in selling them. That's for one. So we would be tendering probably for the common stock.

Okay. And another, Kathy, an earlier question from Al was dealing with the existing -- the businesses that will be left and the possibility to work on getting those operating margins up. I guess -- do you foresee that given the right sizing that will happen going forward and some of these potential acquisitions that are out there, that we should expect to see those operating margins finish declining here and start to hook back up?

That would be a true statement. That is contingent on -- obviously, we first have to get the cost structure in line and then through acquisitions or whatever, we would benefit from expense leverage from our existing cost structure. And if that's the case, just like we did in the current consolidated environment, we did enjoy operating leverage.

Go ahead, sorry.

Just to add on to that, the management -- I'm convinced that the management team we have in place is the strongest in the Company's history. And that same management team that took $30 million out of SG&A in the last two, two and a half years, is going to be in place to build this Company further and it's the same management team that just produced the finest quarter in the Company's history as well. So if you have confidence in what's been done in the last year, year and a half, that same team is going to build the Company from here.

That's a great point. And does that same team, do they need cash or maybe Kathy this is for you, do you need cash to run those businesses that are remaining, or are they able to generate cash on their own with no further capital commitments?

The goal certainly is that we would not need to make any significant capital commitments. They have both been improving their working capital efficiency ratios. So hopefully we can hold these levels or improve further from where we are and generate some cash by bringing down our working capital investments. And then, of course, getting the cost structure in line, they should be covering their costs.

Right, okay. And one last piece there is, of the -- is any of the cash going to be trapped overseas, or is most of the cash going to be here domestically?

We are going -- we are in the process of working through that. We will have some trapped cash, particularly in China. But there are different strategies and we're evaluating different things. But the dominant portion will be in the US.

So I mean, if I just roughly looked, would it be 80% of the cash is domestic and 20% overseas? Is that a rough guess, or is it--?

Anyway, 80% plus, yes.

Okay, 80% plus domestic, perfect. Okay. Great. Well, thank you guys very much for your time. Appreciate that.

Thank you.

Your next question comes from the line of Ethan Steinberg from Friess Associates. Please proceed.

Hey, guys, nice -- congrats on the quarter. I'm sorry if some of this was covered. I jumped on late. But I guess first to understand how -- given the stock's below arguably what the book value is going to be looking like, when can you start to either tender or buyback? And I missed the answer on would you do a tender instead of the buyback based on the volume?

Okay. We said we would possibly do a tender or a standard buyback. We have Board approval to buy shares back as soon as the proxy finishes.

And when do you expect it to be issued?

Probably in the next week.

Okay. And can you talk maybe a little bit about how -- does the value on the equity play a very big or small role in how you look at using that capital, as far as if you want to dedicate a certain percentage to tendering or buying the stock back versus acquisitions?

Well, certainly. I mean, depending upon the price of the stock, we would be weighing all the time, the investment in buying the stock back versus the return on the investment by doing bolt-on acquisitions.

Okay, and on the EDG, you said that the margin can go to 35% plus?

Yes.

And that's -- does it have to be at higher revenues, or do you have to work through some of the volume agreements?

It's just basically transferring the business from an OEM structure to a user structure, and that's something that we have done for years. So this is just a new distribution agreement that we've assumed in the last nine months and we're working through that process now.

And then what do you think then the margins on Canvys can look like?

Margins on Canvys will stay in, I would say in the same range that we've been in. Again, we're constantly looking for efficiency improvements. As I mentioned, we hired a new person for our main integration facility in Boston. And one of the primary goals there, again, is to continue to push that up.

Okay, and you mentioned the backlog or orders for Canvys have started to show some positive signs. Are you assuming growth in that, or can you talk about what kind of growth rate you're assuming just in the quarter guidance you gave?

Yes, we are assuming some growth. We are maintaining a conservative estimate. We're looking at $1 million to $2 million increase over Q1. But the backlog, as I mentioned, is growing quite nicely. It's been as high as 1.4 on the book-to-bill ratio, but it is every month so far since the beginning of our fiscal year has been well over 1.2. So we are seeing now -- it's a combination of things. Part of it is dealing with large projects that have been in the works for a significant amount of time that are just now going into production. Part of that really related to the healthcare industry and people feeling confident enough to come out with new equipment, new machinery, new investments. And then the other part of that is really, again, focusing on our OEM business in general and closing some new opportunities.

Okay. So that's good. We're going to start to grow nicely. Then I know you don't want to get pinned down on exact targets, but this is something I think is very important to the shareholders is what margin do you think EDG and Canvys on a combined basis or businesses like that should run at, just so we have a sense? I don't cover the industry that closely, so I don't know what kind of operating margin those types of businesses would normally run at.

Well, the forecast for this year is approximately 30%, but it should go up sequentially going forward.

Operating margin.

Operating, yes.

Our target initially is to get us back to a 5% operating margin.

Okay, and you said you're hoping by year end?

We are going to work very hard, yes.

Okay. That's great. Okay, thanks for the time.

Your next question comes from the line of [Dee Makin] from Courtside Capital. Please proceed.

Good morning, guys. My questions have largely been answered, but I have a couple details I would just like you to clarify, please.

Sure.

First, on the share count, Kathy, 17.7 million, I just want to make sure I understand, that is the total shares, A and B, or is that just the A?

That is the total shares, A and B, shares outstanding, 17.7 million.

Great, so that's the equity capital structure is just that simple.

Right. 3 million are the B shares and then the balance are the A.

Okay, great. And the cost structure, if I looked at the operating expenses of the Company, looking backward maybe just at this last quarter, if you were to think about just how much of those costs in dollar terms are the public Company expenses, the expenses that doesn't matter if you guys have a $1 in revenue or $1 billion in revenue. How much of it is just public Company, things like your folks' salaries and stuff like that, the rent, that's minimally required? How much of it goes into things that won't change regardless of revenue?

Actually that's a funny question since Ed and I would answer differently. I would tell you--.

Don't ask her how many people she has in finance.

Anyhow, it -- is a relatively small number that is tied to public Company expense.

Okay. So does the fixed part of that $23 million or so that you just spent in the last quarter, so to speak, is, I don't know, less than $1 million per quarter?

Per quarter, absolutely.

Okay. And then a question for you and for the Board, and without encouraging it, I guess to what degree are you guys willing to think outside the box, so to speak? What I mean by that more specifically is either, one, do an acquisition that's outside of your historical competence because it makes financial sense or business sense? Or alternatively, to at least explore putting the other two divisions up for auction or sale to determine at least whether that might be a more productive or efficient thing to do than to do a bolt-on acquisitions?

Well, first of all, in my history and I'm not going anywhere, we have never done an acquisition outside of the box. And it's always been a bolt-on or something related to a technology that we know and have some experience in. So we have some idea where we're going. And I don't think that's going to change. And other than that, certainly that's what we're in business for. I will tell you, selling RFPD was a very tough decision, after building the business for 20 some odd years, but the economics worked and we think anyway that it was a good decision both for the RFPD staff and also the economics for the remaining Company. So if something like that would come along for either one of the other two divisions we would consider it. That's what we're in business for.

Fair enough. In terms of that, you mentioned a few times the valuation, that you got a good price for RFPD. Can you help me understand how you think about it? You clearly have a view on what that business might look like in a year or two or three without the help of Arrow. What -- as much as you can talk about it, what might that have been, to what degree did that prompt your view on what fair value is, more than just multiple salesor multiple EBITDA?

Okay. Well, first of all, I guess my concern, again, I have all the respect in the world for Greg and the business. But what we continued to watch was more and more of the business go to Asia, where the margins are quite low. We've watched three or four Chinese companies come up as competitors that are over $100 million today, companies that can work on margins at 5% or 6%, people like the World Peace Group that work on 6% or 7%. You look at Arrow and Avnet, their margins are 11% or 12%, and our model cannot compete with those kinds of margins. And in my opinion going forward, the business is going to become more and more commodity business, taken over by companies that can afford to work at those kinds of margins. So that was part of the thinking process that we were going through.

And on the other side of it, when you look at the sale of the distribution companies, you realize the return here was excellent. First of all, with the NOLs that we have in place, the after-tax proceeds from this sale will be somewhere around $180 million or $185 million. The gain on the sale is about $110 million, and in my mind, those kinds of returns for a distribution business are practically unheard of.

Great. And just as a comment, I'm sure you're boxed in a little bit by not willing to take on -- not wanting to take on a lot of debt before the deal closes. But obviously if a tender is something that you would consider, it would make sense to do it sooner than later as much as your spares stay where they are.

We understand. The difficulty is if they have any kind of crystal ball and what's going to happen with taxes and things like that and I think it would really be a risk to shareholders and to the Company if we were to invest proceeds before this transaction were to close. We think that there is very, very little possibility that it won't close, but we've seen some other transactions recently of companies we're quite familiar with that didn't close.

Well, I appreciate all the time. Good luck.

Thank you.

Your next question comes from the line of Robert Moses from RGM Capital. Please proceed.

Good morning.

Good morning.

Just a question on the latter part of your comment about the risk. Could you just highlight things, I guess there's probably going to be more detail in the proxy, but as it relates to potential closing issues? I mean, just given the size, there's probably not FTC issues or anything else, but just talk about a couple of the things that could kill this or potentially extend this transaction?

Well, we have a Hart-Scott-Rodino filing, so we have to get government approval on the transaction. We don't think there's any issue there at all. Certainly, there are government regulations that we have to comply with, and because this sale has assets, and you got to help me, Kyle, 25 locations in the world -- 28 locations in the world, we have various issues in each country where we're present where those assets are. So there's -- it's a complicated transaction. But we really don't see anything at this juncture that could sidetrack it.

Are there things related to the business performance between now and the January close that if there was a deviation in terms of business plan or some type of revenue, EBIT levels that need to be maintained, that if things went bump in the night, could cause some delay or maybe not closing?

No, this transaction is based upon the performance of the Company on history, not going forward. There's no multiple targets that we're shooting towards, nothing like that.

Okay. Just a couple other things then. I mean, you mention I guess a 5% operating margin target goal. Could you give just a sense to the extent you can look at your corporate expense, et cetera, and just give us an understanding of the businesses? I mean, I would guess one of the businesses is a little bit more cyclical, selling into capital equipment space, but I mean were these in the heyday, an 8% operating margin business and maybe you lose some money in downturns? Not exact numbers, but just kind of a range, maybe even history or perspective going forward.

Rob, this is Kathy. I think--.

Hi, Kathy.

That's a difficult question to answer, because I think you've seen it in the last couple years. The reason from an operating margin perspective that the businesses have not been as high as they should have been is because the support function costs relative to the overall consolidated business was too high. And that's what we worked on for the last couple years. So when I say our target is 5%, can we do better over time? We certainly hope to. But historical margins in those businesses at an operating margin standpoint have not been above 5%.

Okay. One last question, then, just I'm relatively new to the Company. Are there any -- and I need to go through the K, but are there any environmental liabilities or legal liabilities or lawsuits pending, unrelated to this transaction, just generally in the business, that maybe you could bring to my attention, if there are things out there, relative to the risk factors?

There are a couple of lawsuits pending with Canvys, which are fairly new. Kyle, do you want to comment on that at all?

I think you'll find disclosure in the 10-K and the 10-Q to be filed today with respect to those lawsuits, which is probably all we're going to say about those.

Okay, great. Thanks so much.

Thank you.

Your next question comes from -- a reprompt question from Al Tobia from Sidus. Please proceed.

Hi, Ed. Just regarding the question before on the B shares, I -- just from my own standpoint, I can understand now, having the B shares is helpful because you've got a lot of cash coming in and it would be obviously not in people's long-term best interest to have someone come in and throw a low ball bid and then try to take the cash from you guys. But if I look out and this is a smaller Company from revenue standpoint and possibly from a share count standpoint, at some point the B shares end up causing a discount here for the average shareholder.

And my assumption is that there is some level of protection in having the B shares because you can't be taken over. But there may be other ways to achieve that, that are less depressing on PEs over time. Is that something that you would consider after this -- after we go through this period? Because I do think that the protection they offer makes some sense now, but down the road, you guys are making good decisions. I would hate to see that the multiple suffers because of that after you've made a lot of positive structural changes.

Well, I understand, and it's a question that's been brought up a few times. I guess my answer to that is in my mind, everything in the business is driven by economics, and if I can draw a case that that's holding a lid on the stock, we might consider something like that in the future.

Okay, thanks.

Ladies and gentlemen, this does conclude the Q&A portion of the call. I would like to turn the call over to Mr. Richardson for closing remarks. Please proceed, sir.

Well, thank you very much. We really appreciate your support and I'm confident that we'll continue to earn your confidence in the future. And we look forward to reporting on our progress in January and sharing some of our thoughts for the future with you. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.