Richardson Electronics Ltd (RELL) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Richardson Electronics FY 2011 third-quarter earnings call. My name is Steve and I will be your operator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of today's call. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mister Ed Richardson, Chairman, President, and CEO. Please proceed, sir.

Good morning and thank you for joining our third-quarter conference call for fiscal 2011. With me on the call today are Kathy Dvorak, Chief Financial Officer and Wendy Diddell, Executive Vice President of 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 SEC filings for a full description of these risk factors.

As previously announced, we completed the sale of our RF, Wireless & Power Division or RFPD to Arrow Electronics on March 1, 2011, which was just after our third quarter ended on February 26. As a result, the gain in the sale and related expenses will be recorded as fourth-quarter events.

So for today, our third-quarter results reflect RFPD as a discontinued operation. Our discussion, outlook and growth strategy will focus only on the Electron Device Group or EDG and Canvys.

Sales for EDG and Canvys were $39.7 million, up 18.7% compared to the prior year's third quarter. For the combined businesses, we have been experiencing a modest decline in gross margin. This decline was anticipated for EDG as we entered into a strategic distribution agreement with a supplier where we gained incremental sales although at lower margins.

We are now working to transition our customer base from OEM, the aftermarket business which carries higher margins. As a result, we believe we should start to see our margin rates hold at the current level and then begin to trend up as we enter our fiscal 2012.

For Canvys, we saw an improvement in our gross margin percentage as margins rebounded in Europe, and inbound freight costs came down as a percentage of sales. A recovery in healthcare sales also helped to improve margins.

As you can see in our third-quarter results, our operating expenses are too high, relative to the current sales base. Now that the transaction is complete, we have begun the process of restructuring.

Because RFPD is shown as a discontinued operation, the majority of our support function costs remain with EDG and Canvys. While we show positive operating income, we clearly need to reduce our cost structure for the remaining businesses. Our goal is to reach our target of achieving a 5% operating margin for fiscal 2012.

Sales for the Electron Device Group were up 31.9% in the quarter. So while the market for tubes is forecasted to decline, our share of the overall market continues to grow. This is a direct reflection of the market's recognition of our capabilities as the finest global channel to market.

Sales for Canvys declined 4.3% in the quarter. As we reported back in January, we are shifting our focus to the OEM market, which has been a significant part of our display business and has proven [meaty] for a level design and customization that we provide.

While it often takes longer to close a new OEM project, once won, the business tends to be relatively long term and stable. Today, EDG sells to many OEMs in the industrial, medical, marine, and aviation markets. . Many use displays as part of equipment they manufacture. We have not capitalized on these relationships until they offer opportunities for growth within Canvys.

Looking ahead, we believe that sales for Canvys and EDG for our fourth quarter of fiscal 2011 will be somewhere around $39 million to $40 million. Now I will turn the call over to Kathy to present further details of our financial performance.

Thank you, Ed, and good morning. With the closing of the Arrow transaction behind us, our next challenge begins as we reposition our Company for the future.

Before we discuss our future plans, I would like to discuss the highlights of our results from continuing operations that we reported last night. Please keep in mind that the financial results of RFPD are reported as a discontinued operation.

Due to the timing of the closing, which was March 1, the gain on sale and cash proceeds will be included in our fourth-quarter results.

For our third quarter ended February 26, 2011, sales were $39.7 million, up 18.7% over the prior year. Gross margin declined to 29.1% compared to 31.1% in last year's third quarter. Our gross margin rate reflects the impact of a strategic distribution agreement for EDG, which we entered into about a year ago. This distribution agreement has contributed significantly to our topline growth, but hasn't provided the levels of margin that EDG typically achieved.

Our expenses were 27.1% of sales compared to 31.8% of sales in the third quarter of fiscal 2010. In terms of dollars, our SG&A is up slightly from last year's third quarter, in spite of incurring approximately $400,000 of the incremental costs associated with our strategic distribution agreement. These costs will continue into the fourth quarter and then will wind down as we enter fiscal 2012.

Operating income for the quarter was $823,000 or 2.1% of net sales compared to a loss from continuing operations of $272,000 in the third quarter of fiscal 2010. This leaves us short of reaching our 5% operating margin goal for the quarter by approximately $1.2 million. We believe we will reach our target for fiscal 2012 through a combination of margin improvement initiatives and cost reductions.

Income from continuing operations before income tax was $753,000. Our tax provision was $523,000 for the quarter, representing a 69.5% tax rate. This primarily reflects a retroactive disallowance of the use of net operating loss carryforwards for Illinois State tax liability as well as the allocation of the various components of the tax provision between continuing and discontinued operations.

Given the mix of our business between US and foreign and the change in Illinois tax regulations, we now anticipate that our tax rate for the remaining businesses for fiscal 2012 will be a GAAP tax rate of 37% and a cash tax rate of 35%. Our current total share count is 18.3 million shares.

Our third-quarter balance sheet reflects short-term debt of $22 million and cash of $29.9 million. Therefore, we ended the quarter in a net cash position of approximately $7.9 million. Subsequent to quarter end, we paid off our short-term debt and terminated our revolving credit agreement.

Our accounts receivable balance as of February 26 was $25 million versus $19.8 million at the beginning of our fiscal year. Our receivables increased by about $5 million since the beginning of the year, partially reflecting the double-digit sales growth that we are experiencing within our EDG business.

Our DSO has also increased since the beginning of our fiscal year, primarily within specific regions of our Canvys business. We are renewing our focus in this area and expect to bring down our DSO prior to year end.

Our inventory was approximately $28 million compared to approximately $27 million at the start of our fiscal year. Although inventory has increased slightly, we are maintaining our churns at about five times.

Our accounts payable balance was approximately $17.8 million compared to $18.1 million at the start of our fiscal year. We continue to focus on negotiating payment terms with our suppliers.

Cash flow used in operating activities for the quarter was about $9.8 million, including cash flows associated with discontinued operations. This use of cash reflects a growing investment in working capital to fund a significant sales growth during the quarter.

Capital spending for Q3 was $22,000 and we anticipate modest capital spending for the balance of this year.

We are committed to achieving continuous improvement in our overall profitability. Our objective is to do everything possible to exit fiscal 2011 with a cost structure that enables the remaining businesses to hit our operating margin target of 5%.

During the fourth quarter, we will be recording the gain on the sale of $85 million to $90 million which is net of approximately $30 million of tax.

From the balance sheet perspective during the fourth quarter, we will record cash proceeds from the sale. In addition, we will be recording accruals related to income taxes and other expenses that relate to the transaction.

We are committed to returning value to our shareholders. As you read in our press release, we increased the quarterly dividend and we announced an initial share repurchase authorization of $25 million. We are also positioning the Company for future growth, which will potentially require modest investment in the range of $2 million to $5 million. Our current outlook for sales growth for the fourth quarter is for sales of approximately $39 million to $40 million for EDG and Canvys.

In summary, we are realigning our cost structure for the remaining businesses and are confident that our initiatives will allow us to grow the business while delivering 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. 10% of the third quarter of fiscal 2011 was $34 million in sales compared to $36. (technical difficulties) million during the same period a year ago. Third-quarter sales were $11.7 million or slightly below what we reported during the third quarter of fiscal year 2010.

We are pleased to report that bookings continue to exceed billings in the third quarter indicating demand for our customized display solutions continues to grow. In January of this year, we announced our intent to exit the digital signage market and to focus our resources on the OEM base of business.

In North America and in Europe, we have begun the process of identifying existing OEM customers who have purchased products in Richardson Electronics' other divisions and also require displays. One key area of focus [for the team] is marine radar. Through discussions with our current marine radar OEMs, we have learned that these companies purchase tens of thousands of displays each year. The majority require custom display design.

This presents an excellent opportunity for Canvys and highlights the growth potential for the division by focusing on customers that Richardson has had excellent relationships with for years. We have initiated a series of training for EDG salespeople to recognize and prequalify OEMs with display opportunities. And we've put in place an incentive program to compensate cross-selling within the Company.

In the third quarter, the OEM segment of our display business was relatively flat versus [the same day] a year ago. Growth in this segment relative to the new focus will take several months to implement. Consistent with our strategy to focus on the OEM business, sales from digital signage were down quarter over quarter.

As we mentioned in our last call, we are seeing more quote activity within the healthcare market as hospitals ramp up for increased activity related to healthcare reform. Sales in the third quarter improved over the same period last year.

Total gross margin for Canvys for the third quarter was 27% versus 27.2% in the prior year. This brought year-to-date gross margin up to 24.5% versus 26.5% a year ago.

As we discussed last quarter, the year-to-date decline is primarily due to competitive price pressure, the weakening US dollar and rising inbound freight costs. However, the third-quarter gross margin was significantly higher than the first two quarters and we believe this trend will continue in the fourth quarter.

During the third quarter, we were able to find ways to improve efficiency within Canvys by realigning the business segments and consolidating resources. Headcount is down from 101 at the end of the second quarter to 92 in early March. We intend to add key sales positions to support the OEM strategy but we anticipate that the annualized run rate expense will continue to decrease.

Year-to-date our SG&A is running considerably below prior year. Both third quarter and year-to-date expense includes severance costs associated with the restructuring.

As we wrap up our fiscal year, we anticipate sales to be flat in the fourth quarter, but margins will continue to be on par with third-quarter performance. Real performance improvements will occur gradually with our focus on the OEM market, particularly the OEMs that currently purchase products from Richardson Electronics.

One cautionary note. The natural disaster in Japan may have an impact on the supply of display components. The extent of this impact is not known at this time.

Therefore the guidance I am providing excludes the impact of potential supply disruptions. Our hearts and prayers go out to our friends, our coworkers, and our supply partners in Japan.

We are excited about the involvement of EDG sales and the opportunity to work as one team. We feel we are well-positioned to deliver improved results in Full year 2012.

Thanks, Wendy. Let's turn to our outlook and strategy for the Electron Device Group or EDG.

Sales for EDG remained strong in the third quarter. Sales increased by 31.9% compared to the third quarter last year. This reflects market recovery combined with market share gains related to a strategic distribution agreement.

Margins declined in the quarter to 32.9% from 33.3% as the result of the mix of OEM versus aftermarket business currently associated with the agreement. We are looking to convert this business from OEM to aftermarket customers, which will improve our gross margins.

Operating expenses in the quarter included some one-time expenses for start-up costs related to our strategic distribution agreement. We anticipate that these expenses will continue into the fourth quarter and then should be reduced significantly in fiscal 2012.

We continue to see new opportunities in the EDG business. For example, we are in the process of expanding our product offering to include other investor components, which we refer to as consumables, and include products such as lenses, mirrors, nozzles that we can sell to our existing customer base. We are also working to expand our customer base by providing technical service needed to support the sale and distribution of microwave tubes.

The market for microwave tubes is estimated to be in excess of $1 billion. Our plans include opening six to eight technical service centers in key locations throughout the world. We will capitalize on our existing location and resources to the extent possible, but the actual locations are dependent upon growth areas in medical, military and satellite communications.

Today we have relationships with the key microwave tube manufacturers as well as the OEMs who use the tubes. And with their help, we will identify strategic service center locations.

To establish these technical service centers will require some investment in test equipment and technical engineers. We estimate this cost will be between $2 million and $3 million.

With this global network of technical centers in place, our suppliers have committed their support as we'll be positioned to provide cost-effective distribution and installation of microwave tubes for their industrial customers. These service centers will also enable us to gain market share within the industrial power grid to market as we'll be able to provide technical assistance to customers that do not have the capability to service their own equipment today.

In summary, we are pleased to have completed the sale of RFPD to Arrow and remain convinced this transaction will provide a bright future for RFPD, Arrow, and Richardson Electronics.

As announced in our press release, we are committed to returning value to our shareholders. We just announced an increase in the quarterly dividend as well as a significant share repurchase authorization.

In addition, we are committed to accelerating growth in the core business. As I discussed earlier, we have many growth opportunities that we are exploring which will take advantage of our existing infrastructure, engineering and technical background and which will drive profitable sales growth. These opportunities clearly align with our commitment to do what we do best, delivering both engineered and integration 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). Christian Schwab with Craig-Hallum Capital Group.

A few quick questions. On the cash position, after tax -- I had to jump on a few minutes late -- did you discuss what -- how much cash post the transaction cost, etc., taxes you'll have?

I guess I'll take that one then. As we said in the press release, upon the closing of the transaction with Arrow, we received $238.9 million and that really equates -- you have to add to that the net cash that is already on the Q3 ending balance sheet which is $7 million to $8 million. And then you are looking at a cash tax position of $30 million to $35 million. So you are going to end up somewhere around $210 million to $215 million.

Perfect. And as we discussed about a significant [bank's reduction], I'm just trying to get to the 5% operating margins in the math. So what is the absolute dollar amount that is the Op -- clearly OpEx target? And what do you think gross margins can improve from to get to 5% operating margin? I was just trying to -- you know from the way you guys phrased it, it kind of talked about you're pretty confident you can get to a 5% operating margin goal even if revenues stay at roughly $40 million. Did I hear that correctly?

Yes. That is correct. I mean, that is based upon about $160 million annual sales. And we think that margins will improve as sales increase through some of our new initiatives that -- better than 5%, but 5% is the benchmark for the near term and we hope to get there in FY 2012.

Okay, but you don't have a stated gross margin target or a stated quarterly OpEx run rate that we should be thinking about?

I think it's a conservative number and we said -- you know, the 5% should be -- we should be able to get there at an exit rate and that is really not anticipating much growth next year anything we get with the incremental, which would help improve that 5% operating margin.

Perfect. And then, can you -- as far as looking at strategic bolt-on acquisitions, is there any update of --? Are we looking at things every day or every month or is there any update there?

Sure. Well, we are looking at a number of small bolt-on acquisitions. One of our initiatives that we talked about was opening six or eight technical service centers around the world and that can either be done greenfield by employing some engineers and adding test equipment or quite possibly look at some small service companies that are in that business already. So nothing large out there, they are all small, but we are looking at numerous opportunities. We probably have more opportunities on our plate at the moment than we can give justice to. But you know, they're all small. We don't see anything out there that's really of a size. They're just how to leverage our existing infrastructure to grow the business with the tools we have in place.

Great and then lastly on that, just if we are going to add six to eight different technical service centers and engineers, etc., where is the low-hanging fruit on the operating expenses on a quarterly basis to reduce?

Kathy.

Well, again, when you look at our operating expenses, we transfer it with the sales 70% of the cost. We are in the process of restructuring the business. A lot of expense has just gone away.

For example, the warehouse, people who are here, that business was transferred with the Arrow business and we have eliminated those positions. So it is a combination of total cost and a lot of it is people cost, other is consulting costs and then we will be reviewing the legal entity and infrastructure of the business to see if we can further simplify to bring down the costs. And we are pretty confident we can get there.

Great. Sounds perfect. Thank you.

Al Tobia with Sidus.

Question. How did you pick the dividend rate? I mean, the Company has got a lot of cash. How is it that the dividend rate or the dividend hike selected?

I think to begin with we wanted to get back to the normal dividend that we had in the past. You may recall a number of years ago we cut the dividend from $0.04 a quarter to $0.02 a quarter at the time of the economic crisis. And so, we basically looked at it and said, Okay, we would like to do something a little better than where we were before and to start out with. And so, that is where we came up with $0.05 a quarter rather than $0.04.

So it's -- right now, we would like to get comfortable with the cash position. It is a nice feeling to have, but we have only had it here for a few weeks. And so, both on the share repurchase and the dividend, their first approach and we want to show everyone that we intend to buy stock back and we want to increase the dividend, but we are going to walk before we run.

Right. Okay. Regarding the dividend -- I'm sorry, regarding the buyback number, without going officially to a tender, how did you look at the amount of stock? How can we look at the amount of stock that you theoretically can buy back? I mean obviously the trading volume is sort of sporadic here. How did you -- how do you look at it in terms of the ability to actually retire shares?

Well, when we studied the 10b-18 regulation -- Kathy, you spent a lot more time on it than I did. Do you want to comment there, please?

We looked at the volume limitations and obviously we had some help on getting the trading statistics. We made an assumption on stock price and, fundamentally, it is going to take a couple of months to get -- execute through a $25 million authorization.

Right. So you think that could be done within a couple of months?

Yes and without including any lock volume which would be additive to our ability to get that done.

Okay, good. Can you -- I just want to get to those housekeeping things. From an operational standpoint, since we are dealing now with the two groups that are restructured here, how do we look at your seasonal pattern? And as I look at the two businesses, what should be the seasonality of these businesses now? Or of the new Richardson?

I think it will be very similar to the pattern that we have had in the past. You know, we are a heavily international base. You still see that over 60% of our business comes from international markets. That may change somewhat because Canvys's focus is not too much in Asia yet, but they are -- half of their business is in Europe.

So what happens in Europe in particular for two or to three weeks in the August/July time frame, people take holidays, so we end up looking at the first quarter being our weakest. And then, the second quarter is usually a very strong quarter. In the third quarter, we end up with two or three weeks of Christmas holiday, and so that tends to be a bit weak. And then, we always close with our fourth quarter being the strongest of the year. And that historically has been the case and I think you will see it continue.

Right. Okay, so -- and so, in terms of managing the business then, when you say fourth quarter being the strongest quarter, you are also, I assume, going to manage the business to have some visibility into the first quarter. So probably positive book to bill in the fourth quarter going into the first quarter in order to not have a real hole in terms of August in Europe?

As you can see, we are seeing very positive results. The combined business -- even though Canvys was down slightly, the combined business was up 18.7% in the quarter. And so, that certainly is producing a positive book to bill and we think that will continue.

Right. And from the standpoint of the businesses being -- you being able to sort of grow the businesses, I mean, two things sort of stand out here. One is if the first quarter is the weak quarter you guys are guiding to sequentially flat, which is good. I'm assuming that that has to do with some impact of the efforts that you made to grow the business now that you are focused on EDG and Canvys. So you are kind of, you are growing within that marketplace, or gaining share, I guess?

Absolutely. I mean, EDG has been gaining share all year long in a market that is flat in the tubes side. So we continue to gain market share, and we think we have a strategy in place for that to continue a couple of years, for sure.

And as Wendy mentioned, we have had a lot more time to focus on Canvys, running a $150 million to $160 million business is far different than running a $500 million business. And so, both Wendy and I have spent a lot of time on Canvys lately and we have refocused the strategy around the OEM business, which is the business that we have always focused on as far as EDG and RFPD are concerned. There are 25,000 customers all over the world that we have relationships with.

So we are now going to work hard to leverage the relationships that EDG has had in the past, and RFPD as well, to sell Canvys displays to OEMs. And it takes a while to get that business in place. We think -- in the design phase it's six to 18 months lots of times.

But once you are in and you've got projects approved at these OEMs, it is very repeatable business and many times the projects run three to five years. It's a business that we are used to doing, there are customers we have relationships with and we think you will see improved performance out of Canvys here going forward, for sure.

And did you look at these [tube] businesses? Do you see them having enough synergy or synergies improving down the road or not? Meaning, as you grow -- if you are successful with the OEM strategy in growing Canvys, are there more synergies between the tube businesses, or is it more likely that this is a business that then -- or is restructured also the way the security business and the wireless business was?

Well, first of all, the profile of what Canvys does in being a technology business with customized solutions, driven by user requests is exactly where we want to be. I mean, that is where the tube business came from. We started out manufacturing tubes sort of as a manufacture or a last resort concept because the customers still required the products, and then in the RFPD strategy came out of the tube business when the customers wanted to convert technology.

And Canvys represents a very similar opportunity. Unfortunately, we have been chasing the digital signage business for a number of years. Very project-oriented, very, very competitive business, and instead of really focusing on our sweet spot, if you will, which is the OEM business, it has always been the markets that are produced for RFPD and EDG as well.

So, I think as we can prove this OEM strategy works that Canvys is exactly the kind of business we want to be in. And it is going to take as a long time to leverage 25,000 OEMs all over the world on all of the products that Canvys could supply to those customers.

So I see a great amount of synergy and I think it's a type of business that we want to be in going forward.

Thanks, Ed.

Mark Zinski with 21st Century Equity Research.

Good morning, everyone. Just wanted to touch on the acquisition, possible acquisition strategy. Do you still have an enthusiasm for the alternative energy market which you had discussed in the last call?

Yes. We are looking at a couple of opportunities. We've had some success in manufacturing inverters and converters and battery chargers. We are currently doing a contract in manufacturing a -- battery chargers which ultimately go into the Leaf -- for the Leaf automobile. So we want to leverage some of that IT going further and to see if there are other opportunities for us in that niche.

We have looked at some opportunities in the solar field and we are currently working with the University of California. They have some very interesting technology that we may work with them to develop in the solar field.

At this point, it is pretty much all very much in the R&D stage, but we have a number of initiatives going in that direction and we are really very interested in it.

Well, given that the inverter market is growing pretty nicely, particularly in Asia, and given your prior distribution relationships in the alt energy area, it would seem possible that you could do a fairly sizable acquisition in that space and ramp it up fairly quickly. So that is still kind of on the table then?

I don't know. You know, Wendy and I visited a number of the inverter manufacturers both in the solar space and the wind space who have been very successful in China. And although we were interested in these companies and their technology, the kinds of multiples that they are commanding, especially in the Chinese public market, is something that I have no interest in paying those kinds of prices for a company. I don't know how anyone ever gets a return on investment.

And I think we have probably come to the realization that we are better off to make investments in the US where companies are regulated under all the wonderful rules and regulations that we all have to comply with and invest in companies in the US that are doing business in these foreign countries rather than trying to invest there. I can't honestly tell you that I see any sizable acquisition opportunities that interest me at the moment in that space.

Okay, great. And just lastly, in terms of the EDG business, it continues to grow pretty impressively and it appears you are committing more working capital to this segment.

I'm just wondering, do you feel pretty comfortable about the visibility of EDG going forward here, particularly -- you know, the recovery in the industrial market in the US and with the new distribution agreement?

Yes. I think the most predictable business we have, fortunately or unfortunately, is EDG. It's the new agreements that we have with our suppliers are allowing us to increase our market share, as you've seen, and we are really pleased with that. We have very good visibility into the increases coming into those agreements over the next year or two. And so, we are well aware that that should produce substantial increase in the businesses just with the agreements we have in place. And that primarily deals with the power grid tube business, which has always been a larger share of our EDG business. We do about $80 million a year, expect $110 million or so in FY 2011 for EDG in power grid.

There's still room for expansion there and that strategy is in place and we will continue to see growth. But in the microwave tube business, as I mentioned earlier, it is a $1 billion market. It's projected to remain flat at these high frequency, high power levels. Semiconductors have made very little inroads into that business for traveling wave tubes and klystrons and magnetrons.

Always had an interest in that market. We have relationships with these key suppliers, but what really you were required to have is the technical capability to install the traveling wave tubes in the equipment. And we are developing that and so there is a big opportunity for us to participate in that $1 billion market with the same suppliers in the same infrastructure that we already have in place and it doesn't require a huge investment. So, we are very comfortable that the EDG and the tube business is going to produce a nice return for many years to come.

And then just lastly, I wasn't sure if I misread the press release, where you mentioned operating margin and an exit rate of 5%. I thought that said fiscal 2011. Is that correct? If you were to assume the RFPD business for the first two quarters --?

No. That is going to be -- if you get to the end of Q4 fiscal 2011, we should have enough costs identified and taken out of the business so that we can exit fiscal 2011 at -- so anything we have to do gets done in Q4 so we exit fiscal 2011 so we could adjust to a 5% operating margin. So we would be there for fiscal 2012.

Okay, great. Thanks for the clarification. That's it for me.

(Operator Instructions). Roman Kuznetsov with Gates Capital Management.

Yes, it's actually Dax Vlassis. I was just wondering in the microwave tubes business, of that $1 billion, how much is a reasonable amount of market share you think you can grab over the next couple of years? And is it at similar margins to your existing business?

I wish we had all those answers. The first area that we are going to look at is satellite communications, because our main vendor is Talus and CPI are the largest vendors in that industry. We have an excellent relationship and they have agreed to support us if we can develop this technical capability.

So the satellite communications portion of that business, Talus does about $265 million annually in traveling wave tubes for that business and CPI is somewhere around $225 million. Then you have other players like L3 and NEC that are major players.

But the satellite communications business itself is about $300 million. A large portion of that is new equipment, which we won't participate in. So we are focusing on the aftermarket or replacement business.

But I can't give you a projection, but at the size of that market, the growth opportunities are pretty substantial. And I guess we will know a lot more as we -- how fast we can get these six or eight technical service centers up and running. Once we have that structure in place, we can probably give you a little better idea of what growth might be. But (technical difficulties) we get that size to market, there's a major opportunity and at the moment I can't quantify it for you.

Okay and then, with respect to the asset sale, it seems very unusual for a public company to sell such a large asset. It seems like, from the start of acquisition opportunities and internal growth opportunities that are required for the ongoing businesses seemed very, very small relative to the total cash pile.

And I was just wondering if you look at that -- I was just wondering your personal ideas on that and your personal motivations with respect to any substantial return of that cash to shareholders? Would you expect to participate in that? What is your ideas as far as the business going forward in its -- with the total size of the business and your participation in it? Because you are such a large shareholder I was just curious if you could comment on that.

Well, first of all, we really like the RFPD business and it's a great team. I think it is an absolute win-win both for Arrow and the RFPD team as well as Richardson Electronics.

Arrow, as you know, is a commodity distributor and this specialization in the RF business gives them a major opportunity for growth. It takes a lot of capital to fund that growth and RFPD has become very much a commodity distribution business over the years, and then the margins in that business are down into the low 20s, which we really weren't used to and a very large portion of the growth was in China at margins of 15%, 16%.

My objective was to return the Company more to a technology profile doing engineering and custom manufacturing integration work, rather than commodity distribution. And what I really want to do now is to invest at least a good portion of the proceeds (technical difficulties) Company to reinvent ourselves around our original roots which is technology, engineering, and manufacturing.

So that is where we're going. And as far as I am personally concerned, as you well know, I haven't sold any shares at all and I want to continue to be the largest shareholder in this business and no one has more to lose or gain than I do and we are really looking forward to building the business again to $300 million, $400 million in revenue, and we're hopeful at a much higher TE ratio going forward as a technology company which is really our roots.

So I'm looking forward to new mountains to climb and rebuilding this business around a model that I know very well.

But what sort of capital requirements does it take to get to $300 million and $400 million of revenues?

At the moment I think it is modest, but I don't have all those answers. And we've just had the proceeds from this transaction for two or three weeks. And again, I am going to walk before -- we are going to walk before we run.

But I want to make sure that we do what we've always done and be very, very careful about acquisitions and to make bolt-on acquisitions that can leverage our infrastructure and technologies we know something about, and at prices that make some sense and can give shareholders a return on their investments.

Right, but, I mean, as far as the size of the cash goes comparatively to the requirements of the business, you are still intending or should I expect as a shareholder from now that a lot of that cash balance is going to be returned to us? Or should I expect that you think that that -- what sort of -- in some sort of proportion, what sort of requirements do you think are needed versus that you expect to return?

At this juncture, I couldn't answer that. As we start to look at acquisition opportunities, try to understand how many shares of stock we can buy back, at these kinds of levels, as we get further into that, then we will be able to answer questions going forward. But again it is going to take us a little time.

It took us three years to sell this division and I don't intend to do anything with the money in the first month I've got it back.

Yes, this is Jeff Gates. I just had a question -- in the $25 million share authorization, do you personally have a deal with the Company to participate pro rata in that with your shares or will you just see your stake in the Company increase?

I have not agreed to sell any of my shares and I just personally want to see my participation in shareholding in the Company increase.

Okay.

Harper Stephens with Thompson Davis Asset Management.

Good morning. I was wondering if you all could comment a little bit on your plans to reintroduce the new Richardson to the investment community? Do you have any plans to try and educate potential shareholders on how the Company looks going forward?

I think the answer is yes. The first thing we want to do is to get our cost structure down to where we can reach our goal of 5% operating income and that should be at the start of FY 2012. We want to get a little more visibility in some of the bolt-on acquisitions and opportunities we are working on. Maybe as we get these microwave service centers installed, we will get a better idea and be able to forecast how much of that microwave business we can participate in.

And so, once we have those plans where we really feel comfortable in disclosing some of that information, then we will get back out there and spend more time with shareholders and try to tell the story and what we are going to be when we grow up.

Okay. And then the guidance for 5% operating margin is around this sort of $160 million run rate, but the business is growing 18%, 19% year over year. At least it did this quarter. What is a reasonable growth rate we could assume for FY 2012?

Well, I think we want to be conservative. Kathy has taught me to underpromise and overperform and I think that strategy works pretty well. You know, I think if you looked at 10%, 11%, 12% topline growth this year, we would be not satisfied, but that's a good forecasted number. I think that growth will be higher for EDG, but it is going to take us a while to get traction on the new OEM strategy for Canvys. So those are the kinds of numbers that we are projecting.

Okay, and if you experience that 10%, 11%, 12% or better percent growth in the topline, do you think there is some upside to that 5% operating margin? Maybe 6%, 7%?

Well, there's some upside. I guess we have quantified it yet, but the 5% operating margin is based on a cost structure at $160 million company and we are certainly going to outgrow that number pretty quickly.

Great. Thank you.

John Curti with Singular Research.

Good morning. I had a question regarding the entrance into the microwave tube business. I am not familiar with how the industry operates.

So once you acquire your technical expertise and are certified, you have the support of these vendors, do you end up becoming just another distributor/installation vendor for them? Or are you going to be displacing people? And you know, somebody else loses a contract, you gain the contract. Are you just kind of being additive -- added to the pot, so to speak?

Well, we spent a fair amount of time in the early stages visiting with the manufacturers of satellite amplifiers, for example, where these traveling wave tubes are used in new equipment. And what is a necessary requirement to sell satellite amplifiers is to have local service locations in strategic locations all over the world. It's very difficult to sell the amplifier to a news network for example that is using them for satellite communications to broadcast news if there isn't local service to service that amplifier when it goes down.

So all of the manufacturers that we talked to that build satellite amplifiers feel that to have a global network of technical service centers is a requirement for their business. And so, we will be working those manufacturers to try to become authorized warranty in non warranty service centers for them in partnership with them. Almost all of them use independent companies to do that service and we have relationships with all of the tube manufacturers and some of these satellite amplifier manufacturers that know that we have the resources and the capability and the global supply chain to service this business and probably can be pretty effective at it.

So, our first goal will be to work out authorized service agreements with the amplifier manufacturers themselves.

Okay. Would you say that the level of technical expertise and amount of service centers and capabilities for the microwave business are equivalent to that of your existing tube business? And if it's more so, does that means better margins for the microwave tube business?

I don't -- let's address it in two stages. First, the microwave technology as such and it's pretty obvious most of the power grid tube business today in the microwave -- the power grid tube business is about 75%, 80% after market.

Most users can replace the tubes without too much difficulty. There is a percentage of the industrial tube business where the customer cannot replace the power grid tubes. And we hope to participate in that business, which we don't address today, through this service center as well.

But in the microwave area, practically none of the end user customers can repair the amplifiers themselves. Almost all of them have to be sent back to be serviced by microwave engineers who are trained by both the tube companies and the amplifier manufacturers. A very sophisticated business.

After having said that, the microwave engineers are perfectly capable of servicing RF equipment where power grid tubes are used. (technical difficulties) trying to leverage the increased technical capability not only for the microwave business but also the power grid business that we don't participate in, because we need technical capability to help the customers install the tubes.

So to answer your question, a long-winded answer, but it takes a higher level of capable capability than we have on a global basis. We have individual engineers who can do this today, but we need to add one or two engineers or technicians in each of these six or eight locations. So it is going to be employing another 12 to 16 engineers and technicians in the microwave field.

The margin issue is quite different. It depends upon the application. In the medical business where klystrons, for instance, are used in linear accelerators, the price of these tubes by the way are very expensive. In a linear accelerator, the klystron could run $75,000 to $100,000. In a satellite amplifier, one third of the cost of the amplifier is the TWT, the traveling wave tube, and they start at about $10,000 to $11,000 amplifier and they go up to $75,000 plus in the amplifiers that are $300,000, $400,000, $500,000.

In -- the margins in that area I think would be similar, maybe while we get hold of the business better than we do today. But I would look at the margins at around 30%, something like that. And it is much higher than that in the medical business.

So overall as you get into that business and you're growing that part of the business with your existing business then, I believe on the last call you had talked about -- correct me if I'm wrong -- but I think you had thought that the margins in the EDG business could get up to 35%, the gross margins?

Yes. In the existing power grid business, for sure.

Okay. So, the microwave business might tend to bring that down a little bit as it ramps up?

It is on the mix between application such as satcoms, satellite communications and medical applications, some of the industrial business that we think we will gain because of the technical capability. It has to do with the mix. And I don't think we are far enough along yet to predict that mix.

Okay. Thank you very much.

Ethan Steinberg with Friess Associates.

I'm a little confused on something. The 5% that you hopefully can exit May running, it is that mostly or all of because the costs you'll be able to pull out from the divested business at the outback's level and then also the investment in the strategic agreement will be -- will have run its course?

That's a true statement. We get some benefit because those costs go away, which is why I adjusted for those numbers in my commentary. So we are ready -- without doing too much right now, we are 2.5% operating margin on a run rate, adjusted run rate basis. So I think (multiple speakers) we can (multiple speakers) pretty easily.

And this is what I really want to make sure I understand, it's so, Ed, if let's just take the 10% to 12% blended next year. If you -- this is on a theoretical $1 million you might add in revenue you know putting in a slightly higher growth rate for EDG, how much of that would hit the operating profit line? I'm trying to better understand what the incremental margins might be. You know we can plug in our own revenue growth rate, but I am curious how quickly that accrues to the operating line and equity holders? Does that makes sense?

Yes, it makes sense. I don't know, Kathy, if we could have enough information to really project that at the moment. The 10% or 12% growth within EDG -- .

It --

I think anyway our investment in these technical service centers will pretty much self-liquidate over a period of a year or so. There is going to be some start-up investment and then we are hopeful we can bring in enough business right away to support the cost. I don't see a lot of incremental SG&A costs.

And pretty much, when we look at structuring, we end up with a fixed cost structure. So, your question is how much margin, gross margin falls through.

You've seen what Richardson has produced in the last year. I mean, we pretty much locked down our cost structure. So, when we do get growth in leverage, a disproportionate amount fall through to the bottom line. I just want to at this juncture stay conservative, make sure we get to our 5%. Ed will get the EDG topline moving and get the margin going and the combination of those things does produce better than a 5% operating margin, but we didn't want to set that out as a target at this point.

Sure. That makes sense. I just wanted to make sure I understand. The OpEx number should be pretty fixed and so whatever we think hits at the gross profit line should almost entirely or mostly drop to the EBIT line?

Ultimately, yes. There will be some investment to get it going, but yes. That is a true statement.

Are those service centers? Are those capitalized or experienced?

Everything will be expensed other than the test equipment, for sure. There is a couple hundred thousand dollars worth of test equipment in each one of those locations and that, obviously, would be capitalized.

But the rest of it is salaries for technicians and additional rented space. We are hoping to leverage the infrastructure we already have in place. We are in 25 locations around the world, so wherever we -- wherever we can, we will use those locations rather than trying to lease new space. But, we will probably have to have --. They are not huge. I mean we have looked at some of these. There are a couple of thousand square feet up to 5,000 in a major location.

And you said that $2 million to $3 million over what time period you would spend on those?

To get the six or eight locations up and running that's our -- it's probably a year. We are going to try and have this infrastructure in place within FY 2012, by the end of FY 2012. It's a bit of a dartboard. You have got to be able to hire people and we've started to do that and we've made some contacts and we think we've got good traction, but I can't tell you that we have an absolute crystal ball and when we can get it all done.

Okay. But just -- so that is an extra $2 million to $3 million that we should think about coming through in expenses most likely over the next 12 months after May?

Well, some of it will be capitalized. So if you look at $200,000 worth of test equipment at each location and multiply that by six or eight you know that would be capitalized and the rest would be additional expense. But we think, anyway, as these get up and running that we can pretty much self-liquidate over the first year.

Okay. I missed the comments, the bookings sounded like they were up or positive book to bill. Is that -- is this the you are looking now drive the Q1 revenues?

It certainly does in Canvys. Canvys is very much OEM-focused. And so, as they get a design in, you know, the bookings are scheduled out over a long period of time and that is true to some extent in EDG. But EDG is a much more an aftermarket business where the customers require immediate shipment and local currency from local stock. And so, that -- turns in the EDG business are much more rapid. You don't have as much visibility in a long-term project.

Okay but based on what you can and cannot see, you think the revenues will be down sequentially in Q1?

Yes, you've got seasonality because Europe is going to close up. You know, our large distribution agreement that we've been talking about, 60% of that is in Europe. So you have got two or three weeks of vacation in the August/July timeframe which always has an impact.

I wouldn't predict it is going to be down at this juncture, but right now we are [entering] our fourth quarter. We will talk about first quarter of FY 2012 later on.

Thanks a lot for taking the questions. Congrats. Thanks.

Thank you.

Al Tobia with Sidus.

I know I don't want to ask lots of forward-looking questions because I know you guys are dealing with a lot and have sort of been moving along at a pace that seems reasonable here. But my question really has to do with if you're going to increase your ownership through the concept of not selling into a buyback, and you are making -- going to be making changes to the capital structure, is it necessary to have the structure in A and B shares for any reason other than the obvious reason of super voting? Meaning, is there a tax implication to you or is there any reason not to remove the B shares?

There is certainly no tax issue and obviously the B shares, they don't get the same dividend that the common shares do.

But at this juncture, especially when you are doing transactions like the RFPD transaction and so forth, it -- obviously it makes it easier when somebody knows that one person can make a decision or not. Certainly you have to, and we did in this case, we got the support of all of the shareholders in the transaction. In Ohio there or somewhere, you could comment on it we had like 98% or 99% of the shareholders approved the transaction.

I just can't see changing that in the near term. I haven't thought about it much lately. That hasn't been a priority, for sure.

Right. I mean I -- listen. I understand it, but I think just from the standpoint of what you seem to be doing here, if I take a step back, is that you seem to be driving shareholder value right? You are focusing on --.

We're trying hard. (multiple speakers) have more to lose or gain than I do.

No, and I think that you -- and you sold your two biggest subsidiaries and you seem to be moving from what has been a small complicated company to a small focused company and growing focused company.

And having the B shares does complicate things a little bit from a capital structure standpoint. And the -- achieving the super voting side of it, yes, you're doing everything right for the shareholders, so it doesn't make any sense to need super voting, particularly when you are going to own as much of the Company as you will. You are voting with your dollars and you can block whatever you want to block with that level of shares.

It just doesn't make sense to me to have them. And the reason I say that is because as you raise your dividend, you are probably going to be able to appeal to more, a wider institutional audience. That was when I asked why you [thought] of a dividend rate, I thought that that would have been the answer. That you are looking at sort of appealing to a larger audience of investors. And if that is the case, there is an audience of small cap investors that just won't buy things with B shares.

So as you look at trying to raise returns in the business and raise the PE of the business, it's just something to point out. And I'm just not -- I don't really see the point of the B shares over time. Typically when you own as much as you do and you guys are doing all things right for the shareholders. That's all.

No, I appreciate your point of view and there certainly may be a point there and at some juncture if I thought it was restricting the value of the stock and the shareholders and (technical difficulties) buyback program as we are, we would certainly consider it.

Thanks.

Dan Weston with WestCap Management.

Thanks, good morning. Congratulations on the sale of the RF division. Just some math here. Kathy, I think maybe for you first is I think you mentioned that at this level you are about $1.2 million short of reaching your 5% operating margin goal now. Just checking my math here. It was 400 -- it was about $400,000 in costs relating to the start-up cost for the strategic agreement. Is that correct?

Correct.

And then D&A stock-based compensation about $300,000?

Each? Yes.

I was actually doing it by aggregate. (multiple speakers) about $300,000. I think that is what I saw in the cash flow statement. So in short, you are roughly -- just checking my math -- about really $500,000 short on a cash basis. Is that about right for you?

That's true, but my target included those other things. So --.

Okay, good. And then, Ed, on your side, you mentioned that we've gone over some of the expenses you might have to fork out this year in terms of the $2 million to $3 million for the microwave business. And you also mentioned that you didn't see any real material acquisitions on near term to medium term just due to multiples that you would have to pay.

Given those comments, looking out a year from now when you have got everything stabilized and on a normalized operating pattern for you, where would you think that cash balances would be in an appropriate level for this business?

That is a good question. I wish I had a crystal ball for that. I think what's really going to tell the story is how successful we are with the stock buyback.

Try to understand it's obvious there is nothing we can do that is more accretive today than buying the shares back. That is through this program, spend the first $25 million, maybe go back to the Board for another authorization. We will have a much clearer vision whether the shareholders puts some value in the stock of the Company over and above its cash value. That will probably tell us more clearly what kind of cash we need in the Company a year from now.

Fair enough. And then lastly, just on the seasonality that you talked about going from Q4 to Q1. Your fiscal Q1, just if you look back on an apples to apples basis with the continuing operations, what was last year's seasonality going from Q4 to Q1 for you guys?

Kathy, can you --? I don't remember exactly, but I think we actually showed a pretty positive Q1 last year versus Q4 as we were coming out of the economic downturn. But I don't have the numbers in front of me.

Yes that's what I thought too, but I just wanted to clarify.

That is true. The thing that was different was we started to see improvement in the overall business starting in the third quarter of 2010. So part of what's getting missed in seasonality is because of the timing of the economic recovery.

Understood. Okay, we will catch up more as we get closer there. I am running into a train station so I may lose you, but again congratulations on the sale and I look forward to catching up soon.

Thank you very much.

Roman Kuznetsov with Gates Capital Management.

Yes, it's actually Jeff Gates. Two questions. First, what is your level of NOLs pro forma and secondly, do you expect any material working capital adjustment on the sale or is $239 million going to be pretty close to the gross cash proceeds?

Kathy, I will let you take that.

The NOL is being used in -- when we talk about the tax impact of $30 million, that is how we got there, was the use of the NOLs. So on a pro forma basis going forward, we will have used all of our NOLs.

Kathy, what about the state of Illinois?

Oh, you have to bring them up. We do have an NOL in Illinois, but because NOL has this -- suspended the use of the NOL, we wouldn't be able to use it until 2014. And who knows if they will allow us to use it?

So, we do have some state NOLs, particularly, Illinois and California, but at this point we can't use them. And your other question was --?

Do you expect any significant working capital adjustments?

That we'd would have to return to Arrow?

Or that you would receive?

Right now it looks like we'd probably have to return about $3 million.

Okay.

I mean, there's all kinds -- that is a very fluid number back and forth. There are a lot of true-ups that we have to get to, so we anticipate it being a relatively small number. Either way.

Okay and can you confirm the current employee count and confirm that -- I'm not showing that you have any union employees. Is that correct?

Correct.

And what is the current headcount on the Company?

Just shy of 300.

300. Okay. Thank you very much.

And declining.

Walter Winnitzki with Nicusa Capital.

Yes. Thank you. That is Nicusa Capital. Two questions. One of financial and one a market question. Just want to confirm if I heard correctly. The 10% to 12% growth goal for next year, is that the corporate goal or is that just for EDG? And then the 5% operating margin goal, does that include the investments for the service centers?

The 10% or 12% goal is corporate. And the 5% operating number would --.

Includes the investments.

Thank you. Now the industry question. Given your goals for growing market share and the Talus agreement kind of anniversarying, maybe you can provide a little bit of a color, relative to the competitive landscape as to who you have been gaining market share from, who's losing it, what the -- what you'll need to grow that market share?

And maybe if you can kind of ballpark where your market share is right now. Is it going to come from products like satellite and some others and is there an opportunity, relative to an acquisition of doing something and rolling up the industry a little bit more in your favor?

Well, the increase in market share that has really occurred through the distribution agreement has to do within the past -- [40 of the business] went through the orig -- in the power grid tube business which is what we are speaking of as far as the distribution agreement is concerned. The majority of that business went through the original equipment manufacturers who built the induction heating, dielectric heating, CO2 laser equipment. And they service their own aftermarket.

Our strategy which has always been this way is to service users directly. What's occurring here through the new distribution agreement is we are converting the business from its historic roots as an OEM business to an aftermarket business. That business is going through us whereas in the past it went through the OEMs. That is what is creating our additional growth in the market. A complicated answer, but that is where it comes from.

And a lot of that has to do with the new distribution agreement where in the past that business, that product was sold directly from that manufacturer to the OEMs. It did not go through us. And now it goes through us and we are selling it primarily to the users and, to some extent, to the OEMs. And the second part of your question?

Going forward, the -- what is it going to take to continue to do that now that the Talus agreement is kind of anniversarying? I think you talked about getting into the satellite business. That's -- wonder if there are there other opportunities from a product perspective that you need to do that or can you continue to gain share just what we talked about so far? And then, final question has to do with is there any opportunities to far anyone on a competitive space there and move towards rolling up the industry a little bit?

Right. Okay, on the distribution agreement, when we took on the agreement and the customer base was turned over to us, there were some very large OEM customers who had long-term agreements, two- or three-year agreements. One of those -- and so those continue to be serviced by the manufacturer because of the contractual obligation. And one of those agreements is just being turned over to us now which is about EUR6 million at last year's business level.

And there is another one that turned over to us in about a year and a half which is about another EUR5 million or thereabouts. So we are pretty well -- were -- that that business is going to increase -- and I'm working with euros, because that is what it has been sold in in the past. That business over the next couple of years is going to increase another EUR10 million or so and if we are successful in selling the users directly, it may be even higher.

That on the power grid side will continue to drive increased market share and increased revenue for EDG. That we know. That is in place. The contracts are firm and that is going to happen.

On the microwave side, again we only do about $20 million in revenue in the microwave side in a market that totally is about $1 billion. Now the dynamics are much different. Because in that 41 billion market, it's still highly OEM, much more so than the power grid business which, again, is 75%, 80% after market. But it's all upside for us over the $20 million which we have today.

We think -- and we haven't and I mentioned earlier, we really can't forecast yet until we get our network of technical locations in place and we try to get some authorized warranty repair centers with the satcom manufacturers and other manufacturers in place. We are not in a position to forecast how much that growth could be. But if you just look at the total market (technical difficulties). Am I with you?

I can hear it now. You were out for a little bit.

Okay. I'm sorry. Okay, I faded out. So we are really not able to forecast what that growth's likely to be until we have this infrastructure in place on the microwave side. We are able to forecast the additional growth in power grids pretty definitively.

Okay. And then possible acquisition question?

We are looking at some acquisitions. I would think -- one of the things we are going to do in the industrial services group, which is the technical services center, is we are going to add a menu of parts to sell to our existing customers. So as I mentioned earlier, for every customer that buys a power grid tube, or CO2 laser application, they also buy (technical difficulties) nozzles, all of what we call consumable parts.

And so, we intend to add a whole menu of other parts where we can be more of a one-stop source for these OEMs. Besides buying tubes they buy all these products as well. We think that will increase the business somewhat.

And there may be some companies that are vendors to that business, suppliers to that business that we would look at acquiring. We are investigating that.

In the tube business, it's possible there are some small acquisitions that could be done there. Particularly in the microwave side, it might help us hit the ground running faster. So we are looking at some small acquisitions there too. But nothing that is really large that we have identified that's interesting at this point.

Thank you. That's been helpful.

That concludes the Q&A portion of today's conference. I would like to turn the presentation back over to Mister Ed Richardson for closing remarks.

Thanks, Steve. Thank you again for joining us for the call today. We appreciate your continued support and the entire Richardson Electronics team is committed to building the business and increasing shareholder value going forward. And we look forward to reporting on our progress again in July. Thank you very much.

And thank you for your participation in the conference today. This concludes the presentation. You may now disconnect. Good day.