Richardson Electronics Ltd (RELL) 2011 Q2 法說會逐字稿

Welcome to the FY 2011 second 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'll 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's call, Mr. Ed Richardson. Please proceed.

Good morning, and thank you for joining our second quarter conference call for fiscal 2011. Joining me on the call today are Kathy Dvorak, Chief Financial Officer, and Wendy Diddell, Executive Vice President Corporate Development, and General Manager of Canvys.

This call will include forward-looking statements that involve risks and uncertainties that could cause our results to differ materially from management's expectations and plans. We encourage you to review the Safe Harbor statement found in our press release, and also to review our most recent regulatory filings for a full discussion of these risk factors.

As you may know, we are diligently working to complete the sale of our RF, Wireless & Power Division, or RFPD, to Arrow Electronics. The transaction is expected to close in the next 60 days. I'd like to begin by providing a summary of the transaction, and then move on to discuss the operational, financial and strategic outlook for our remaining businesses. Following that, we'll be happy to take your questions.

In reference to the transaction, the proceeds from the sale will be $210 million, with an incremental purchase price adjustment related to a working capital target. Needless to say, this transaction is complex in the sense that we're separating a large division from a consolidated operating company. Immediately following the closing, we will move into a transition phase where both parties will be providing transitional services to each other. This transition phase will likely take several months. Once this period has ended, we can turn our attention to realigning our cost structure to fit the remaining business units. Our objective is to do everything possible to exit fiscal 2011 with a support function cost structure that enables the remaining business to hit our near term operating margin target of 5%.

Now, let's get back to our second quarter performance. From a financial statement perspective, RFPD is now shown as a discontinued operation. We achieved strong double digit growth for the remaining businesses with sales of 23.7% compared to the prior year's second quarter. Backlog continues to strengthen for the Electron Device Group, or EDG, and Canvys, our display group, which is a very positive sign for the future.

For the combined businesses, we've experienced some margin decline. For EDG, this decline is somewhat misleading as it reflects the impact of a strategic alliance with a supplier, where we gained incremental sales, although at lower margins. We're in the process of transitioning our customer base over the next few months to include a greater percentage of aftermarket business, that typically comes at higher margins. This should enable us to return to historical margin levels for EDG in fiscal 2012.

For Canvys, our gross margin has been affected by the decline in our healthcare business, which traditionally carries higher margins as well as rising air freight costs and competitive pressures. With sales increasing by 23.7%, we held our operating expenses on a consolidated basis. Unfortunately, because of our accounting for RFPD as a discontinued operation, the only expenses that we can attribute to RFPD are those that are transferring or directly being eliminated as a result of the transaction. The balance of our support function costs are then allocated to EDG and Canvys. While we show positive operating income, we need to restructure our cost base for the remaining businesses. Cash from operating activities was also positive. But our working capital investment also grew, which was necessary to support our growth.

As I mentioned, sales for EDG and Canvys were $41 million in the second quarter. This was stronger than what we'd anticipated, and backlog remains solid. Sales for EDG were up 42.4% in the quarter. The continuing sales strength reflects the market's recognition of our capabilities as a global channel to market. Canvys was down about 5% due primarily to a significant but non-recurring healthcare project in the first half of FY 2010. Customers have also been slower and more conservative in resuming pre-recession levels of capital spending. We're refocusing the business on the OEM market, which is a longer sales cycle but carries higher margins, and is a better long-term model for our business.

We believe our niche, and our strength in the display market is helping our customers design customized displays to projects that will be reoccurring in nature. Looking ahead, we believe that our sales for our third quarter of fiscal 2011 will be in the range of $38 million to $40 million, representing a continuation of the double digit growth that we've enjoyed so far this year.

Now, I'll turn the call over to Kathy to present our financial highlights.

Thank you, Ed, and good morning. Our second quarter results reflect RFPD as a discontinued operation. All prior periods, as well as our fiscal 2010 balance sheet, have been restated to reflect our discontinued operations activity. Highlights of our continuing operations during the second quarter include sales of $41 million, up 23.7% from the prior year. Gross margin was 28.8% this quarter, compared to 32.9% in last year's second quarter.

As Ed described, our decreased gross margin rate reflects reduced margins in Canvys, related to the decline in the healthcare business, as well as the impact of a strategic alliance with an EDG supplier, which has contributed significantly to the top line although at lower margins. SG&A was 27.3% of sales, compared to 32% of sales in the second quarter of fiscal 2010. In terms of dollars, our SG&A is up about $600,000 from last year's second quarter. This increase is primarily the result of incremental start-up costs related to our distribution agreement. We will be incurring these incremental expenses for the third and fourth quarters, and then should see lower expenses combined with more favorable margins starting in fiscal 2012.

Operating income for the second quarter was $595,000, or 1.5% of net sales. We believe that we will be able to get to a 5% operating margin in a relatively short period of time through a combination of margin improvement and cost reductions. Interest expense during the quarter was $39,000, compared to $325,000 in the prior year's quarter. This lower interest expense reflects the retirement of our convertible bonds. Our current borrowing rate is approximately 1.5%.

In the quarter, we saw the dollar weaken slightly, relative to foreign currencies. Therefore, this year's second quarter earnings were impacted by a $197,000 foreign currency loss compared to the $700,000 foreign currency loss we experienced during last year's second quarter. Our FX translation primarily relates to our US cash held in overseas bank accounts where the functional currency is not the US dollar. Once we complete the transaction, we will temporarily have higher FX exposure, as we work to repatriate the cash proceeds.

During the second quarter of 2011, income from continuing operations was $168,000, and EPS was $0.01 per diluted common share, compared to a loss from continuing operations of $262,000 in the second quarter of fiscal 2010. Our diluted share count is approximately 18.1 million shares. For modelling purposes, you can use between 18.1 million and 18.5 million shares for fiscal 2012.

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 $18 million under our revolving credit facility at the end of the second quarter, and we had a cash balance of $33 million. Therefore, we ended the quarter in a net cash position of approximately $15 million.

Our accounts receivable balance as of November 27, was $22 million, versus $19.8 million at the beginning of our fiscal year. This increase reflects the double digit growth in sales from our continuing operations. And our DSO improved slightly. Our inventory was approximately $26.5 million compared to $26.8 million at year-end. Inventory remained relatively flat, with an almost 24% increase in sales, reflecting our focus on inventory turns, and effective inventory management.

Cash flow generated by operating activities, including RFPD, for the quarter was about $2.8 million. This modest cash flow figure reflects strong income, offset by a growing investment in working capital during the quarter. Capital spending for the second quarter was $100,000, and we anticipate minimal capital spending for the balance of the year. Our tax rate for the remaining businesses for fiscal 2012 should be in the range of 32% to 34%.

Sales momentum continues to build. Therefore, our current outlook for sales growth for the third quarter is for year-over-year growth of approximately 10% for our remaining business. 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 a goal of attaining a 5% operating margin. Post transaction, we are confident that we will be able to deliver strong financial and operational performance.

Now, I would like to turn the call over to Wendy to discuss the performance and outlook for Canvys.

Thank you, Kathy. Canvys ended the first half of fiscal 2011 with $22.3 million in sales compared to $24.2 million during the same period a year ago. Second quarter sales of $12.3 million represented a significant improvement over our first quarter sales of $10 million. Also on a positive note is the fact that bookings have exceeded billings every month since the beginning of the fiscal year, driving our backlog higher than it has been in more than two years.

Canvys OEM business in both North America and Europe is up slightly over the prior year. The OEM business includes display solutions sold to medical and industrial equipment manufacturers. These displays often require touch integration, or other customizations such as special housings, electrical or mechanical changes, which preclude the ability to use off-the-shelf solutions. OEM's also require longer panel life to avoid costly rework, certifications, and retrofits. OEM projects typically take longer to close, but result in recurring business for three to five years or more.

In this segment, our business growth is coming from both existing customers in the medical market, as well as relatively new customers, including 3M and Varian. Today, OEM business accounts for nearly 65% of Canvys business.

Our healthcare business, which includes sales of displays for picture archiving and communication systems, or PACs, operating room displays, and related medical equipment directly to hospitals and medical facilities is project based. In addition to several well-known brands, we offer our own private label monitors which incorporate our proprietary DICOM calibration software under the Image Systems brand. DICOM, which stands for Digital Image and Communications in Medicine, is the universal format for PACs image storage and transfer.

Canvys business in the healthcare segment is down year to date versus prior year, due to a significant non-recurring order from Phillips which was completed during the first half of fiscal year 2010. We are seeing more quote activity within the healthcare market, as hospitals ramp up for increased activity related to healthcare reform. Sales in the healthcare segment account for approximately 20% of Canvys revenue.

Our digital signage business is also project based. The effectiveness of digital signage is becoming widely recognized, and drawing more interest in the industry. While digital signage has significant market size, we have found this to be a highly competitive market influenced heavily by the IT players, including companies like IBM, and often dominated by the large display companies, including Samsung and NEC. At the end of the quarter, our digital signage business was up 26% over prior year. Digital signage sales account for 15% of Canvys revenue.

Total Canvys gross margin for the second quarter was 23.1% versus 27.2% in the prior year. Year to date gross margin was 23.2%, versus 26.2% a year ago. The decline is primary due to competitive price pressures, the weakening US dollar, and rising inbound freight cost. However, November gross margin was significantly higher, and we believe this strength will continue in the third quarter.

Expense control is an area of ongoing focus for Canvys. Headcount is down to 101 from 103 at the end of the first quarter, and 109 during the same period last year. Another area of focus for Canvys is working capital management. Our working capital efficiency ratio is at the lowest point ever at 17.9%. We are very proud of this achievement, as inventory turns have improved to 7.7 times, DSO continues to decline and remains under 40 days, and accounts payable to inventory has increased to over 70% during the quarter.

Over the past three years, we took significant costs out of the Canvys organization. We reduced inventory, and improved working capital efficiency. We narrowed our focus in Europe to countries with strong OEM potential, and selectively walked away from customers on a global basis that did not provide sufficient return.

In the third quarter and beyond, we'll drive growth and long term stability by focusing exclusively on finding and developing new OEM opportunities. This will improve our ability to forecast, and enable us to improve our margins. We are identifying potential OEM targets, including those OEM customers currently served by EDG, and reviewing our field sales organizations to ensure we have adequate coverage. We are also making changes to our operations team to ensure we can properly serve the OEMs while keeping the salespeople free to find new OEM opportunities.

Today we have a significant number of customers that fall outside the OEM scope. We will continue to work with a limited number of these customers, provided they meet minimum buy requirements, and ultimately drive recurring revenue. We will pursue other non-OEM projects that are brought to us by our vendors, or referred to us by other sources on a case-by-case basis.

Our healthcare strategy remains unchanged. We will continue to focus on Image System brand sales direct to hospitals. We are exploring new technologies, as well as new applications using our existing technologies.

Canvys recently attended the RS&A show in November with Hewlett Packard. Collectively, we demonstrated the world's first known DICOM 3.14 calibrated laptop. The 15-inch and 17-inch HP mobile workstations are ideal for both clinical and diagnostic review of medical images. Radiologists, doctors, and clinicians now have the benefit of a mobile workstation without the performance limitations of a typical laptop display.

Other priorities include continued cost reductions and efficiency gains. Our engineering teams will work closely with our vendor partners to redesign displays and improve margins. Through better forecasting, customer supplier management, we will reduce our inbound freight cost, and further improve margins and inventory turns. We look forward to becoming a growing part of Richardson Electronics technology based future.

Thanks, Wendy. Now, I'll conclude with a brief discussion of the Electron Device Group, or EDG. Sales for EDG were extremely stronger during the second quarter. Sales increased by 42.4% compared to the prior year's second quarter. This reflects market recovery combined with market share gains related to a major distribution agreement. Margins declined in the quarter to 32.9% from 33.3% as a result of the mix of sales to OEMs versus end users currently associated with this agreement.

As I mentioned earlier, we're working to transition this business to include a greater percentage of end user customers, which should improve our gross margins from current levels. Operating expenses included some one time start-up costs that are also associated with the distribution agreement. These expenses will continue to be incurred for the balance of fiscal 2011. Bookings in total for EDG continue to grow. Backlog is currently over $25 million in January.

In summary, I'm very proud of our accomplishments this quarter, and the organization's dedication and focus on the core business while completing the RFPD transaction. Going forward, we're committed to building the business based upon our strategy of engineered and integrated solutions.

I would like to thank you for your support of Richardson Electronics. And now Kathy, Wendy and I will be happy to take your questions.

(Operator Instructions) And our first question comes from the line of Robert Moses from RGM Capital.

Good morning. Just two pretty simple questions. Or more housekeeping. Could you talk about expected depreciation amortization for maybe the remaining entity as we think about 2012? And I think, Kathy, you mentioned limited CapEx, but could you just give us some, at least estimates for perhaps 2012 on the ongoing business?

Yes. Depreciation and amortization should be somewhere around $1 million on a go forward basis. What was the other piece you wanted?

Just CapEx. Is CapEx similar then?

CapEx will be much less than that. Right now in the quarter it was $100,000, so I'd say definitely under $1 million.

Okay. And I think you mentioned last call, you mentioned the tax rate today of 32% to 34%. Will cash tax and accrued tax be about the same in 2012 do you think, or do you still benefit from any tax loss carry forwards?

We will use the majority of that related to the proceeds from the gain on sale, so the taxes will be pretty similar, 32% to 34%.

Okay. Secondly, could you just talk a little bit about the timing, I think you said the next 60 days, just the remaining hurdles. I think the shareholder vote is maybe January 13th or so next week. Could you talk about any remaining hurdles and just maybe narrow in that timing a little bit?

Sure. Most of the remaining hurdles have to do with foreign governments' approval of the transaction. We're selling assets in some 25 countries of the world, and every country requires a filing and approval of the transaction. The remaining hurdles right now are China and then some smaller ones, I think Taiwan and Brazil. We think it's just red tape. China for example takes at least 30 days after the filing, and we understand it was actually filed the 29th of December, so that's some of the holdup. But we really don't see any other major issues. It's just going through the process of getting approval from each one of these countries.

Okay. And then last , I guess we should expect to hear something regarding the deployment of the cash. We'll need to wait until this closes sometime within the next 60 days. Would you expect to give a sense as to cash utilization whether it's earmarked for acquisition, dividends, buy back, et cetera, at that point?

I think it's all of the above. At this juncture, we have just in general said it would be a combination of dividends, stock buyback depending upon the stock price, and we're looking at some small bolt-on acquisitions to grow the business going forward. But the combination of those three.

Great. Thanks so much.

And our next question comes from the line of [Hal Tobia] from Citi.

Hi Ed, how are you? Nice quarter, Ed. Since we talked about the cash can I just have some housekeeping facts? Do you know how much of the cash will be, quote, trapped overseas?

Kathy, do you want to take that?

Yes. When you're talking about trapped, you're talking about, my answer will talk about long-term trapped and there's really only about $15 million that will be trapped overseas long-term. The rest is just a timing issue of how fast we can move it back to the US.

Okay. So logically, Ed as you look at acquisitions, is overseas a good place to think about where you would do acquisitions and therefore that cash could be used without having to repatriate it with a penalty?

To some extent. We're certainly interested in some acquisitions in China. We've already been traveling there talking to some companies in the alternative energy space, but I don't see anything really major. They're, as I look at it, small bolt-on acquisitions, and we'd certainly take advantage of the trapped cash in the foreign subsidiaries where we could.

Okay. And then, just if I run through, if I run through the balance sheet, it looks like you have about $30 million of positive working capital post the deal, is that about right?

Kathy?

Yes.

Okay. And I assume that you're probably a little working capital heavy right now? Or no?

That's a fair statement. As both Ed and Wendy described working capital efficiency has improved for both businesses.

So now we pick up about $180 million to $185 million worth of cash after the deal closes right?

Yes.

Add that to the $30 million that I just mentioned so we're at about $210 million or $215 million. How much cash would go out in the restructuring of the existing businesses?

I's small. Kathy, can you estimate that?

Again, I'd say under $1 million, $2 million.

Okay. So using $210 million to $215 million minus $1 million or $2 million is a range of net cash is probably pretty good. And 18-and-very-small-change million shares is the right share number, correct?

Yes.

So I'll put that aside, so put the balance sheet aside now. For the remaining businesses, the 5% operating margin target, I assume, is that an interim target you're looking at, meaning that's where you hope to get post a restructuring but any growth should come at margins that are above that? Is there leverageable growth as you look forward beyond the 5% or is that a stretch goal?

No.

No, no. That's based upon the current business without bolt-on acquisitions or the growth that we envision. Kathy, I'll let you comment on it but that's really working with the core business as it is today with the restructuring going into FY '12.

Yes, that truly is our near term goal. Longer term we certainly hope to do much better than that.

We think there's a major opportunity to grow the business. For example, the majority of EDG's business is in the power grid tube industry which today is about a $400 million market. And we do possibly $70 million, $80 million in that market. But there is also a microwave tube market that's about $1 billion, which we have very small participation in, and that market, the major vendors are the same vendors that supply power grid tubes to us. They're Talus, who's probably the largest player, around $250 million in revenue in that business. And then CPI, which is also one of our largest vendors, if not the largest vendor, and they do approximately $225 million in the microwave side of the business. And then L-3, which is the Litton of the past, who is also a major vendor. By adding some technical resources we think we can participate in that business and these are the same vendors that we worked with for years. Very similar customer base. The same infrastructure we already have in place. So we think there's a major opportunity to grow there with a minimal investment.

Okay. So basically it's more of while this is not a secular growth market in terms of vacuum tubes, you're under represented in some key segments that you can identify and get to quickly. So this $160 million revenue run rate that we're at now could step up despite this not being a secular growing market?

Absolutely.

All right. Thanks a lot.

Our next question comes from the line of Mark Zinski from 21st Century Equities.

Hi, good morning, and congratulations on the quarter. Were there any transaction costs, material transaction costs for the quarter?

Kathy?

Yes, there were. And they are in the discontinued operations line.

Okay. In terms of EDG's geographic sales, are you seeing any softness in Europe, for instance?

No, not really. Actually we've seen the reversal. Europe has picked up nicely so far in FY '11 in the first six months. We've actually seen strong growth in Europe, North America and Asia. Some of that has to do with the new distribution agreement we have, but I think we're seeing strong growth across the board.

Okay. And then I just had a question about you'd mentioned the possibility of a bolt-on acquisition in the alternative energy space, and obviously you've built up some nice relationships in that space prior to the divestiture. I'm wondering, if you were to go into the manufacturing side, could you leverage those previous relationships? And how does that interplay with the non-compete clause with Arrow?

Okay, the answer is yes and yes. But let me give you some details behind it. First of all, we've had some success over the past few years in manufacturing inverters and converters for the alternative energy market and also the same market but for battery chargers. Currently we're working on a project to provide battery chargers for the Nissan Leaf automobile. And the answer to that is that those sales today are handled through RFPD but we have a manufacturing agreement with Arrow where going forward we can continue to manufacture those products and RFPD will do the distribution for us.

On the other hand, if there are new products that are not currently serviced by RFPD then we're free to develop those products and manufacture them for companies as well, particularly if RFPD doesn't want to distribute them. So we're going to continue with that technology. Some of the acquisitions that we're looking at, particularly in China, are bolt-on acquisitions in the alternative energy space and what we're particularly interested in is inverters and converters that would be used in wind and solar applications or battery chargers for electric cars. So those are some of the opportunities that we're going to look at. But we're completely aligned with RFPD and Arrow to go forward with that strategy.

Okay. Arguably then, that could ramp up fairly quickly because of some of these existing and prior relationships. Is that fair to say?

That remains to be seen? We're certainly hopeful that it could ramp up, yes.

Okay. And then just lastly in terms of the nuances of the new cost structure, for instance the EDG business, I think you've mentioned before has a pretty predictable reorder pattern to it. I'm just wondering in terms of how resources are allocated in terms of sales in engineering, how the new cost structure is going to be different than the previous?

I'm not sure I understand, but the areas where we can reduce cost structure are primarily corporate support areas. For instance, in the supply chain area, Arrow will be moving the inventory for RFPD from La Fox to their facility in Reno, Nevada. And so we've had -- Wendy, you've got to help me with this because of the supply chain -- but we've had about 35 employees in supply change in La Fox, something like that, to handle those shipments. And obviously going forward that means that 70% of the transactions that were handled in La Fox will be handled at Reno so we have the opportunity to reduce our supply chain personnel, and that's the kind of thing we're looking at.

Okay, great. That's it for me. Thank you.

And our next question comes from the line of [Dan Oakray], a private investor.

Thanks for taking my call. You've answered the majority of my questions that mostly had to do with the redeployment of the proceeds from the sale and more specifically the ramp up period after the deal closes. Like I'd mentioned, you mostly answered it. So I do appreciate your answers.

Okay. Thank you.

Our next question comes from the line of Ethan Steinberg from Friess Associates.

Hi. Thanks for taking the call. Just a couple questions. I missed the gross margin on Canvys for the quarter.

Gross margin for Canvys for the quarter was 23.1%. Year to date is 23.2%.

And what was it a year ago in the previous quarter, in the quarter a year ago?

A year ago was 27.2% for the quarter and 26.2% year to date.

Okay. And the near term target of 5%, is that mostly or entirely based on OpEx coming down once you re-align things for the run rate that will be going on the revenues?

Yes, it is.

Yes.

Okay. And then I think, Ed, on the last call you said you thought EDG should be a 35% gross margin. I think you said today it should be going up from that 32.9%. Are you still thinking 35% or higher or lower?

35% I think is a good benchmark. As we mentioned, in the new distribution agreement that we've taken on in this last year, we also took on a substantial amount of fairly low margin business or OEM business that had serviced their own aftermarket in the past. So our objective is to convert that business to the user aftermarket business which has really been our strategy for so many years. And as we do that, the margin will increase on a linear basis. So the 35% goal is something I think we can get to for EDG in the next couple of years.

Okay. And I don't know, maybe I'm just remembering this incorrectly but I thought, yes, the last quarter you said that the lower margin piece would continue this quarter and maybe into the quarter we're now in but then would pretty quickly move up to 35% or toward that. Am I remembering that correctly or incorrectly?

I think it will be linear. It won't move -- you probably look at a point or maybe a point or two a year, something like that. We'll move it as quickly as we can, but prior to what we've seen in this past quarter are some of the OEMs taking advantage of annual contracts and releasing products at the old price ahead of the price increase, and so that had some impact.

Okay. And then what do you think a reasonable gross margin rate for Canvys should be in a normal revenue environment?

I would say it should be back at where it was in the prior year. So in 26%, 27% range.

Okay. So when we think about where the leverage in the business can go, if you can get to that 5% pretty quickly just on SG&A you've got another, 300 to 400, or 300 basis points plus from gross margin in addition to that as those gross margins move up on top of the 5%, right? Am I thinking about that correctly?

You are. It's just a matter how fast we can get there.

Sure. And then do you have any idea of what you think SG&A should be as a percentage of sales or as a dollar amount?

Kathy, do you want to address that?

I think I prefer to just stick to my 5% target. I think you can pretty much do the math. We have about, right now in the current quarter, you have about $1.4 million you'd have to take out of the SG&A to get to the target. And if I look at that I would also say to you that embedded in that $1.4 million is some of the one-time costs that we've talked about relative to the exclusive distribution agreement. So, to get to the 5% is not that difficult. So right now, you're probably talking about SG&A of $10 million per quarter.

Okay. And then also, maybe somebody asked it and I didn't hear the answer, but as far as what you're thinking on the cash, and we talked last time about tendering for the stock just because the regular buy back could be pretty slow given liquidity, what are your latest opinions on that assuming the deal goes through as planned?

I think we've just left it open. We've said that we'll look at the possibility of dividends. Stock buyback obviously is about the most accretive thing that we can do depending upon the price of the stock. And then these bolt-on acquisitions although we haven't really identified anything that takes a lot of cash. But I'll tell you our focus right now is trying to conclude the transaction. We haven't spent a great deal of time trying to figure out what we do with the cash until we've got it in the bank.

Yes, okay. All right. Congrats, and thank you for what you've done for all of us, we appreciate it.

(Operator Instructions). We have a follow-up question from the line of Robert Moses from RGM Capital.

Just one question. I'm relatively new to the Company. But Ed or Kathy, could you give us just some sense as to if EDG's a $100 million business and Canvys is maybe $50 million, is there a way to break down either the end markets, customers, et cetera? You talked about the power grid side I think being $70 million, $80 million. Can you just fill in the blanks just to give me a better sense as to the industry exposure you have in the separate businesses? And maybe in Canvys it's largely healthcare but any other end markets of note?

Sure, I'll address EDG and then I'll let Wendy address Canvys. EDG today, about 80% of the business is aftermarket, selling replacement tubes and components to users. The other percent, about 20%, is OEM. And the largest portion of the OEM business is semiconductor wafer fabrication industry. And so we sell anything from tubes into equipment that's used for curing silicone, for example, all the way to doing microwave generators which uses a tube as a power source. So the semiconductor wafer fab portion of that business is around $18 million to $20 million, something like that. And the balance of the business is primarily aftermarket for replacement tubes that are going into industrial applications for dielectric heating, induction heating, CO2 laser cutting, all kinds of applications for welding plastics and laminating plywood and vulcanizing rubber, and heat treating steel parts. I could go on and on. But it's a very predictable aftermarket, 25,000 customers all over the world and a really broad base. So that should give you some kind of idea. We can even break it down more for you. We do some in avionics, some in Marine. Wendy, would you like to address the Canvys customers?

Sure. Within Canvys we primarily divide the business into the OEM digital signage and healthcare segments of the business. The OEM is about 65% of Canvys' total business. And that's about 60%, which would be more medical related applications, and 40% being more what we would call industrial applications. The digital signage business is about 15% of the total, and then the healthcare -- and we distinguish healthcare from medical in that the healthcare segment are those PACs displays that are sold directly to the end users, the hospitals themselves -- that's about 20% of the business.

That's very helpful. Thank you.

And we have a question from the line of Rick Weiner from Risk Management.

Hi, good morning. What are you looking at your tangible stockholders equity to be at the end of next quarter?

Kathy?

It could be an approximation.

You mean after we have the proceeds and everything?

Yes, exactly.

I think we've pretty much heard someone walk through the math on that. And so I haven't quite calculated where we're actually going to be. But you know where our cash balances are, and you know where everything else is, so I don't think there's going to be anything too surprising there.

Okay. Fair enough. I thought I would take a shortcut from doing the math myself.

You can almost work the cash. We're going to be somewhere with $180 million, $185 million as proceeds from the deal. We have an additional $15 million, $20 million worth of cash. So divide that by $18 million. And I guess you could add in -- Kathy, what's the net asset value of the residual business after the transaction?

It's exactly what we're showing right now. The total assets is the $264 million minus the discontinued, which is the $174 million.

Maybe one of these smart analysts on the call has already run through these numbers over the last 30 minutes and maybe they want to beep back in and give us their summary of what that number might be. If they do, I would welcome hearing that. Thank you.

Hal, are you still out there? I know you had worked a number that sounded pretty reasonable. Must have left us.

And we have Hal Tobia.

Hi, Ed. I had about $11.75 or so of net cash, meaning I took $30 million of your positive working capital and assumed that there was some conversion of cash, and then added that to the $180 million to $185 million coming in, and divided by $18 million and I got about $11.75 or so. And then I think that your long-term assets over your long-term liabilities are also a positive. You don't have really any long term liabilities.

That's right.

I'll check one second. If I look at that, you only have $8 million of long-term cash and $4 million in long-term liabilities, so let's call those a wash. So the balance sheet is pretty simple. It's all current, right?

Right.

So $11.75 to $12 is about a net tangible book number, I assume and you probably have some understated land and things like that, right?

Yes, absolutely.

Right. Maybe Ed's got some artwork in his office that's appreciating over time.

We've got land and buildings on the books that are almost fully depreciated. Not land but they are certainly worth a lot more than they're on the books for.

This is the simplest balance sheet to look at. You have a couple pre-paid expense and I assume your inventories are pretty much dollar good because you're turning them fast enough. 12 bucks. Good number.

That's good. Nice to be in that position.

Exactly.

Thanks, Hal.

And now, ladies and gentlemen, that does conclude our Q&A portion of the presentation. I would like to turn the call over to Mr. Richardson for further remarks.

Thanks Francine. Once, again, I'd like to thank you for your support. And I'm confident that we'll continue to earn your confidences going forward. We look forward to reporting on the closing of the RFPD transaction in the next few weeks and then on our ongoing progress on the core business, again in April. So thanks for your investment and your recognition of the Company. We look forward to talking to you soon.

Ladies and gentlemen, that concludes today's conference, we thank you for your participation. You may now disconnect and have a great day.