Richardson Electronics Ltd (RELL) 2011 Q4 法說會逐字稿

My name is Veronica and I will be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. (Operator Instructions).

I would now like to turn the conference over to your host for today's call, Mr. Ed Richardson, Chairman, CEO and President. Please proceed.

Good morning. Welcome to our fiscal 2011 earnings call. Joining me in the call today are Jackie Dvorak, Chief Financial Officer, and Wendy Diddell, Executive Vice President Corporate Development and General Manager of Canvys. This call is being recorded and will be posted for audio playback on our Website.

During this call we'll be making forward-looking statements including those regarding the anticipated outlook for our business. These statements involve risks and uncertainties that could cause actual results to differ materially from our expectations. Please review the Safe Harbor Statement found in our press release as well as our most recent SEC filings for our full description of these risk factors.

We completed the sale of our RF Wireless and Power Division, or RFPD, to Arrow Electronics at the beginning of our fourth quarter. The transaction closed on March 1st. Our fourth quarter results reflect a pretax gain on the sale of approximately $111.4 million.

In addition, we concluded the transition period relating to our strategic distribution agreement and finalized the expenses associated with this agreement. This transition took place during fiscal 2011 and the expenses are now behind us. We expect further top line growth and improved operating margin in fiscal 2012 as our relationship continues to expand and our sales and marketing efforts have time to generate results.

We concluded fiscal 2011 with sales of $158.9 million, up 17.4% over the prior year. Gross margin declined to 29% compared to 30.5% in fiscal 2010. The gross margin decline represents a number of factors that should be behind us. These include inventory positions as well as lower margin pricing commitments that expire, which related to the strategic distribution agreements.

On an adjusted basis gross margin for fiscal was 29.7%. Operating expenses for the year were relatively flat at $43.3 million despite the non-reoccurring costs. Operating income for fiscal 2011 was $2.8 million, or 1.8% of sales, compared to operating loss of $1.9 million in the prior year. Net income for fiscal 2011 was $90.1 million, or $4.95 per diluted common share.

Sales for the Electronic Device Group were up 31.4% for the year. This demonstrates our successful strategy. Our goal is to continue to grow our market share by being the finest global channel to market in the industries we serve.

Sales for Canvys declined 7.5% for the year. As Wendy has been discussing in our previous calls, we've shifted our primary focus to the OEM market. This segment has been a significant part of our display business and has proven need for the level of design and customization that we provide.

Before we discuss our growth opportunities, I'll turn the call over to Kathy to present further details of our financial performance.

Thank you, Ed, and good morning. As Ed mentioned, we completed the sale of RFPD on March 1st and recorded a pretax gain on sale of $111.4 million. As a result of the sale, our cash and investments at the end of May were $239.7 million. During the fourth quarter we used approximately $8.7 million of cash to repurchase our common shares.

Since Ed has reviewed the highlights of our fiscal 2011 results, I will focus more specifically on our fourth quarter performance. For our fourth quarter ended May 28th, 2011 sales were $40.7 million, up 4.9% over the prior year. Gross margin was 27.9% compared to 28.2% during prior year's fourth quarter.

As we have previously mentioned, our gross margin reached during fiscal 2011 has been lower compared to the prior year's quarter as a result of EDG strategic distribution agreements. Moving forward, we expect EDG's gross margin to improve.

In addition, the fourth quarter includes about $1 million of expense related to additional inventory provisions. Excluding the additional inventory provisions on an adjusted basis, gross margin during the fourth quarter was 30.3%.

Our fourth quarter operating expenses include $950,000 of non-recurring and final transition costs associated with the agreement. We have now concluded the transition period and do not anticipate any additional expenses associated with this agreement. Reported operating expenses were 26.5% of sales. Adjusting for the non-recurring expense, operating expenses were 24.1% of sales.

Operating income for the fourth quarter of fiscal 2011 was $580,000, or 1.4% of net sales, compared to a loss from continuing operations of $272,000 during the fourth quarter of the prior year. Adjusting for the non-recurring items, we are on track to exceed our 5% operating margin target.

Net interest income for the quarter was $373,000, as we begin to realize income from our investments. CapEx was an overall loss of $264,000, which relates to the US dollar currency we hold in foreign bank accounts. Income from continuing operations before income tax was $667,000.

To understand our tax liability we need to look at the full year. Our total GAAP tax was $45.8 million of which $45.3 million relates to discontinued operations and approximately $0.5 million relates to continuing operations. Our cash tax liability for federal, state and foreign tax obligations will be approximately $35 million, which will be paid over the next 10 months.

Our accounts receivables balance increased as we progressed through the year reflecting our increase in sales. As of May 28th, AR was $22.4 million versus $19.8 million at the beginning of our fiscal year. We continue to manage our DSO, which remains relatively stable at 47 days.

Our inventory was $30.9 million compared to approximately $27 million at year-end for fiscal 2010. Although inventory has increased by 10% this increase tracks well given our 17.4% year-over-year sales increase. We are maintaining our inventory turns at about five times.

During fiscal 2011 we invested approximately $6.9 million to fund growth in working capital. Working capital management continues to be a high focus throughout all levels of our organization. We are committed to achieving continuous improvement in our overall profitability. Our goal is to continue to grow our operating margins by increasing sales and leveraging our fixed cost base.

We are committed to returning value to our shareholders and have repurchased about 1.2 million shares to date using approximately $16 million of cash. As of today, there are 17.2 million shares outstanding. Recently our Board increased our share repurchase authorization by an additional $25 million. This brings our total authorization remaining to $34 million.

We are also positioning this Company for future growth, which will potentially require modest investments in the range of $2 million to $3 million. Our goal is to return value to our shareholders through a combination of cash dividends, share repurchases and investments in growth initiatives.

Sales momentum continues to build. Therefore, our outlook for sales growth for the first quarter of fiscal 2012 is for sales of approximately $41 million to $43 million, up 9% to 15%, and for annual sales in the range of $170 million to $175 million, or a 7% to 10% increase over the prior year.

Capital spending and depreciation expense for fiscal 2012 will be about $1 million. Our tax rate will be approximately 35% for cash tax and 37% for GAAP.

In summary, we believe we have taken the appropriate steps to right size our cost structure and believe we are on track to exceed our operating margin target of 5%. Our long-term objective is to grow the business allowing us to leverage our support function costs and ultimately further improve our operating margins.

Now I would like to turn the call over to Wendy to discuss Canvys.

Thank you, Kathy. Canvys ended fiscal year 2011 with $45.2 million in sales compared to $48.8 million during the same period a year ago. Fourth quarter sales were $11.2 million versus $12.4 million during the fourth quarter of fiscal year 2010. These results were anticipated as we indicated on our last call, given our changing focus to OEM customers and away from one-off project based business.

It is important to note that the revenue from our core OEM customer base improved over prior year. In the last two conference calls we discussed our plans to focus our resources on the OEM base of business. During the fourth quarter we realigned Canvys North America custom OEM sales team under the direction of Bob Prince, EVP for EDG Global Sales.

We identified and began the process of time casting our OEM customers who purchase products from Richardson Electronics' other divisions. We also identified and began negotiating with key marine display manufacturers so we can begin making sales calls on the many marine radar manufacturers worldwide who currently buy microwave components from Richardson Electronics.

We feel our timing is excellent to enter the marine display market as there have been new ITU regulations, which will require marine radar OEMs to change their current designs, making it an opportune time to explore new custom design displays from Canvys. ITU incidentally stands for the International Telecommunication Union and regulate all RF and microwave frequencies worldwide.

During fourth quarter our healthcare sales were up over prior year. We are encouraged as many of the [PAX] systems are now reaching the age that they much be replaced and we are seeing an increased level of capital spending. However, we remain cautious in our growth projections as electronics medical records, or EMR, which require other hardware and software, will take precedence over PAX hardware purchases.

Total Canvys gross margin for the fourth quarter was 24.7% versus 23.4% in Q4 last year. This brought year-to-date growth margin up to 24.6% versus 25.7% a year ago. Our challenge continues to be inbound freight costs, which remain higher on a full-year basis than prior year, causing the majority of the decline in the gross margin. We are exploring different ways to bring the cost of inbound freight to a more manageable level.

During the fourth quarter we continued to streamline the organization. Headcount was down from 92 at the end of the third quarter to 90 full-time employees. We plan to add several key sales and management positions to support geographical expansion and further capitalize on our OEM strategy in Europe and Asia where Richardson Electronics has a strong base of OEM customers.

Year-to-date our SG&A was below prior year and we anticipate that even with these additions our year-over-year expense will be down again in FY '12.

As we start the new fiscal year, we are encouraged by Canvys sales and booking activity. Early feedback from our OEM prospecting efforts indicate that there is solid demand for custom displays within the Richardson Electronics OEM customer base. Without a doubt Canvys is and continues to be an important part of our growth strategy. We believe the focus on the OEMs is the right long-term answer for this business.

We are now organized to execute on this strategy and are confident in our ability to achieve our conservative growth goals for Canvys in FY '12.

Thanks, Wendy. Let's turn to our outlook and strategy for the Electron Device Group, or EDG. Sales remained strong during the fourth quarter. Sales increased by 12% compared to a good fourth quarter last quarter. This reflects underlying economic strength combined with market share gains related to the strategic distribution agreements.

Margins declined in the fourth quarter to 29.1% from 30.4% during the prior year's fourth quarter, as a result of the mix of OEM versus after market business currently associated with the distribution agreements. With the expiration of the pricing commitments, we're focusing on converting the business from OEM to after market customers. We expect improved gross margins for EDG as a result.

The power of the EDG sales team is [shown] in the strength of its relationships with our customers. We're capitalizing on these relationships in a number of ways. First, we're in the process of expanding our product offering to include other industrial components that are required by our global customer base. These industrial components are primarily consumables and include products such as mirrors, lenses and nozzles. We're currently bringing in inventory to support this initiative and expect to see sales activity ramp up throughout the year.

Secondly, the EDG sales team is helping Canvys reach more OEMs. EDG has long-term relationships with many OEMs and a significant percentage of these customers require displays as a key component in the products they manufacture. The EDG team has been training to identify opportunities that are best served by Canvys and their incentivized to introduce these opportunities to Canvys who in turn will work with the customers to design and integrate the custom displays.

Finally, we believe we can significantly expand our customer base by providing value added technical service. This is something we've not historically pursued. We plan to open six to eight technical service centers in key locations throughout the world. We will use our existing locations and resources to the extent possible. Actual locations, however, are dependent upon growth areas for military and satellite communications. We're capitalizing our relationships with key manufacturers of microwave tubes as well as the OEMs who use these tubes to identify strategic locations. These technical service centers require an estimated total investment between $2 million to $3 million primarily for test equipment and technical engineers.

Once we have this global network of technical service centers in place, we'll be well positioned to provide cost effective distribution and installation of microwave tubes to communications and industrial users around the world. In addition, these service centers will help us increase power grid tube sales. We'll be able to provide technical assistance to customers that do not have the capability to service their own equipment today.

Looking ahead, we believe that sales for Canvys and EDG for the first quarter of fiscal 2012 will be between $41 million to $43 million, up 9% to 15% and sales for fiscal 2012 to be in the range of $170 million to $175 million.

As Kathy discussed, we're confident that we'll be able to achieve our operating margin target for the year of 5%. We're committed to returning value to our shareholders through cash dividends and share repurchases. We just announced an incremental $25 million increase in our share repurchase authorization.

In addition, we're committed to accelerating the growth of our business. As I discussed earlier, we're considering bolt-on acquisitions opportunities that capitalize on our existing global infrastructure in strong engineering or technical resources. These opportunities clearly align with our commitment to do what we do best, deliver both engineered and integrated solutions.

I'd like to thank you for your support of Richardson Electronics and now Kathy, Wendy and I will be happy to answer your questions.

(Operator Instructions). Your first question comes from the line of [Richard Whitman] from Benchmark Capital.

The net cash position after the buybacks, is that $171 million?

Kathy, you want to answer that please?

What do you mean after the buybacks?

Well, if you go to page two of your release you say cash and investment at fiscal year-end 239.7. Then when you go to the balance sheet as of May 28th, it's $171 million.

Because there are three buckets of cash you need to add the invested cash to the cash investments, the cash and cash equivalents on the balance sheet.

Right.

So you have $171 million of cash and cash equivalents. You have current investments of $52 million and you have non-current investments of $16.7 million. Add those three together to get to the total cash.

So the number then is $239.7 million, correct?

Is your cash, total cash yes.

Okay thank you.

Harper Stephens, Thompson Davis Asset Management.

I'm just wondering; you spoke about on the last conference call and then again on this one about the 5% operating margin but if -- maybe I am making a mistake in the math but if I back out sort of the one-time items in the gross margin and OpEx from last quarter you're already at a 6.5% operating margin so can you help me understand that a little bit more and is just the 5% being conservative?

Harper, at this point we still have a lot of moving parts, so yes we want to stay conservative at the 5% operating margin and we're going to do our best to keep it at the kind of run rate level but we are going to make some investments going forward.

Okay great. Now you did outline in the call maybe spending $2 million to $3 million to help fund growth. Can you expand on what that is a little bit more and then also are you looking for any attractive accretive opportunities or what's sort of the thinking at this point on the rest of the cash? Thank you.

Sure. First, the $2 million to $3 million is to support the technical service centers. Again, we're -- our objective in this fiscal year to roll out six or eight technical service centers throughout the world and it requires $200,000 or $300,000 worth of test equipment in each location to support the satellite communications and industrial service that we'll be doing in those locations plus we'll be adding engineers, microwave engineers and technicians, to actually do the work in each location so that's pretty much the need for the expenditure.

Yes we're looking at several bolt-on acquisitions. I can't tell you there's anything very large out there but what we're attempting to do is to add products and in customers to our existing infrastructure. As you know, even with the sale of RFPD we sold assets to Arrow but we kept our global infrastructure so we still have subsidiaries in approximately 25 countries of the world. We have offices in 35 or 40 locations and we have a global infrastructure where we can move product from anywhere in the world to anywhere in the world in three to five days.

So we want to leverage that infrastructure to sell more products as we possibly can like the consumables to the existing customers' base and we're looking at acquisitions that possibly could give us more products to sell to that customer base and also to support our technical service center rollout as we go forward with that. In some instances it's we can get into the service business faster by acquiring companies that are already in the business than building our own infrastructure.

Okay, all right great. Thank you so much.

Roman Kuznetsov, Gates Capital Management.

Yes it's actually Dax Vlassis. I was wondering on the taxes you said, did I hear you correctly in saying you expect $35 million of cash taxes over the next 10 months?

Correct.

Okay and how much of that is attributable to the RFPD sale?

Probably about $30 million plus in total.

So the taxes came in at the high end of your estimates as far as--

The gain on sale, it will be around $30 million.

$30 million and then what's the other $5 million? Is that associated with operations for the next 10 months or is that--

That's associated with the operating performance in the last year.

So you owe -- so you're going to owe $5 million additional taxes on past earnings or is that on future earnings?

Past.

Past earnings, okay so total of $35 million, got it. And then on the gross margin how much of an impact did the distribution agreement that you mentioned that hurt margins, how much did that have an impact on the fourth quarter?

It was just about one point. I think we -- there was like $900,000 worth of expense associated with that agreement and it was about one point impact on margins.

One end point on the consolidated margin.

Right.

Okay so if it was -- okay. And the margin excluding the charge was around 30.3 is that correct?

That's about right.

Okay and then on your run rate I got SG&A was $9.8 million in the quarter and I am just wondering what's the ongoing run rate for that? Is it going to be under $10 million a quarter? Is there more cost to cut? Are we going to see lower numbers than that for the 2011 time frame period? Can you update us on that?

Kathy, do you want to comment on that please?

Sure. It will actually be higher than that. I mean we are going to make some investments as we go into fiscal 2012 so we're not going to be below the $10 million number.

Would $10 million even be a reasonable estimate going forward?

No I think at this point it will be higher than $10 million. I mean we're going to do our best. We're looking at opportunities of things we can do but we still have some carryover taxes that will occur in fiscal 2012 that will actually go away as we go into 2013 but for right now I'd say we're going to be just over 10.3, 10.4.

Okay and then on the technical service centers the $2 million to $3 million that you mentioned for those, that's for the six to eight centers. You've stuck that on the -- you expect that to install all those this year?

Well, we'll try for sure. It will probably be a stretch to get them all installed but it will be pretty much on a linear basis and so the capital expenditure will be linear as well. It may spill over into next year. We'll just -- we'll do them as fast as we can but we want to do them right.

Right. Edward, what's the ultimate opportunity that you see? I mean, six to eight, what do you see on a longer term scale? Is that -- is it another six to eight is where you're headed or is there like lots of opportunities at these service centers if they work out well?

No I think six or eight will cover global activity. I mean we might add one or two more in the future but we've wanted to add this technical service piece for the business for a long time, even in the industrial side other than microwave there are customers who cannot service their own equipment and so they go back to the original equipment manufacturers to get the equipment serviced so there has been a portion of the business we haven't been able to access in the industrial and power grid side as well. So with this capability we can cover that and the microwave business, the microwave 2 business alone is $1 billion market and is expected to remain flat over the next five years.

The difficulty and we're really having trouble understanding with technical service how much of that we can access. It's not huge, the after market in microwave is much smaller than it is in power grid for example but when you look at a market that's of that size we certainly want to participate. Today we only in EDG we only sell about $15 million, $20 million into the microwave market so when you look at a market that's $1 billion we've got a long way to go.

Right and on the balance sheet what are the investments in short-term and long-term on the balance sheet? What are you investing in?

Kathy?

We're on CDs and time deposits going out to 18 months.

Okay so that's all basically cash equivalent type investments.

Yes.

Okay and it doesn't sound like the acquisitions are -- that there's anything large from your comments earlier that you would potentially do. Would you -- I mean just I am trying to get a sense of the cash and I've asked this question before but your stock is up today around $15 and I am just wondering how you think about your ability to employ the cash in the business in a way that's accretive to shareholders versus share repurchase program with the stock moving up a bit.

Can you talk about your ability to -- I mean I've got there's $240 million of cash. You have $35 million of taxes so there's still $200 million-ish of free cash to do something with. I am just kind of -- it's a huge number for the size of the Company. I am just kind of wondering your current thoughts on that if they've changed at all from last quarter.

No they really haven't changed much. Everybody is impatient but on the other hand we want to be very opportunistic. I can tell you we're probably looking at four or five acquisitions in parallel and it doesn't make a lot of difference the size. You know that it takes just as much work to do a little one as it does a big one and so we're working seven days a week trying to get through strategic bolt-on acquisitions and how they can be accretive to what we're doing and at the same time we watch the price of the stock everyday and we've got to do buyback in for another $25 million and we still have $7 million or $8 million from the last one so if the stock dips we'll be opportunistic and we'll continue to buy it back. I wouldn't want to give you specific levels but you can see what we've done in the past.

And in the meantime we continue. The dividend is up a little bit so we're going to do all those things. We're going to continue to issue dividends. We're going to do stock buyback and we're going to grow the business as fast as we can. We have an objective to try to get the business back up to $300 million or $400 million in revenue in the next four or five years and I think we can get there without going out and spending a lot of money at high multiples for companies. I've been around a long time and we've never done anything like that and I don't intend to do it now.

Okay and than what's left in discontinued operations? I see there's some things on the balance sheet that's still left in discontinued after the sale. What is that?

Those are in discontinued assets. Those are bank drafts and in discontinued liabilities primarily that's related to the working capital adjustments and cash collected on behalf of Arrow.

The working capital and capital adjustment in cash collected, does that -- but that -- is that in addition to cash required? Will that be cash required in addition to the $35 million-ish for taxes that you'll have to pay out to Arrow after this quarter?

There are a lot of looping parts here. There are other items that come back to us but when you sort through all of that you end up with about $210 million in cash.

So if I -- okay.

It's the bank drafts which are in discontinued ops assets actually become cash to us as well.

Oh okay.

In the prepaid it's a note receivable.

Oh that's why the prepaid about -- that's why prepaid went up in the quarter.

Yes.

Okay so if I look across this whole structure you're saying basically there's $30 million of cash that's going to have to go out the door that kind of brings you up to speed on all the transactions and gets you to a point where the taxes and everything else on a go forward basis would just be the operations of the business, is that fair?

Yes.

Okay I appreciate it. Thank you.

Mark Zinski, 21st Century Equity.

Good morning and congrats on the quarter. Ed, can you comment on how business is in Europe as well as the semiconductor vertical for EDG?

Yes now we continue to see very strong business. Actually June was very encouraging. Normally we've got sort of a slow start in the summer time and June happened to be one of the better months we've ever had in the business and was particularly encouraging to see Canvys start to get some traction with the OEM strategy. EDG is doing extremely well so I guess what we're seeing out there the numbers are good and I think the -- when we talk to customers everybody is sort of nervous.

It's like they anticipate and think they're going to continue we'll but there's a lot of uncertainty with the -- certainly what's going on Europe. In the meantime, and particularly the after market business stays very strong so the two things don't seem to reflect each other exactly. It's the characteristic of our business because we're so highly in the after market side of the business, particularly in EDG. We sort of have gentle rolling curves following the economy rather than the peaks and valleys that the OEM business has. I don't know if that answers your question but at least in our business is strong at the moment. We're just nervous about how long that's going to continue.

okay in terms of the microwave business do you currently have any significant government contracts in the satellite vertical?

No we don't have anything in the government business at this time. It's an opportunity but we do very little military business. We see that as an opportunity for the future.

Okay and then, Kathy, just in terms of working capital going forward with the divestiture, is it fair to say I mean working capital is going to kind of follow historical trends just in terms of DSOs and inventory turns? It's not going to change too dramatically?

That's correct.

Okay and then just last question, are you revisiting the ERP software issue? I believe you had put that on hold a couple quarters back does that make any sense to revisit that?

I'm not quite sure what you're talking about. As part of the--

Yes I think you had talked about I think upgrading your ERP software several quarters ago. You were investing in it and then when the economy kind of turned you decided to stop investing in it.

Mark, that's kind of behind us because it's part of the transaction. The IT systems were transferred to Arrow.

Oh okay. Okay that's it for me. Thank you.

[Andrew Fineberg], [CJH Partners].

Good morning and congratulations on the quarter. Not to beat the buyback issue completely to death but if you close on let's say two-thirds of the bolt-on acquisitions that you're considering would you anticipate there's more money for buybacks or is -- how contingent is it on how much cash you have versus what exactly what the stock price is?

Well, I think it's a combination of both factors. At the moment we have excess cash for any over and above any acquisitions that we are currently looking at for sure so again we just want to be opportunistic. I can't tell you we haven't seen a $15 stock in years and I don't think we're going run out and pay $15 for the stock so -- but we were buying in the $13s and we'll continue to look at that. In the meantime we're just really working hard to run the business. It's a lot of fun and we're looking at a lot of opportunities and there are opportunities to build the business off the current infrastructure without doing anything that's really risky and that's what we're going to do.

Okay but one could imagine then in six months the stock price could be $15 but the value of the Company would have increased $1 or $2 or something per share.

You'd obviously -- you know, we'd obviously follow it up. If that's true then we'll raise our sights on what we'll pay for the stock.

Okay thank you.

Ethan Steinberg, Friess Associates.

Sorry if I missed a couple of these but on the top line guidance for the quarter and the year can you give us some rough sense of if the growth rates between the two divisions will be much different or some sort of breakdown?

Yes what we're really looking at is probably 11% or 12% for EDG, which is very conservative. We pretty much know what those numbers are but Kathy has taught us well. It's under promise and over perform so we're going to continue along that strategy and in Canvys the OEM strategy that we're working on for Canvys is in OEM applications the design cycle is quite long and it sometimes can be six to 12 months at a minimum and it can be 18 to 24 months on the outside.

The nice part about that is once you've got these custom displays into OEM applications and where they're in control panels for very large piece of equipment it's very repeatable business and it lasts for three to five years so that's the kinds of market that we're shooting at. But it takes a while to get up to speed in that area so we're forecasting an increase for Canvys for this year but it's single-digits for sure.

Okay and then I guess, Ed, and I might have missed it but what would that imply about sort of a blended gross margin? Do you think they look a lot different than they -- it sounds like they'll look higher than they were in the quarter even per adjusted or pro forma but can you give us some indication in how to think about gross margin if you end up being right about those top line assumptions?

Yes I think you'll see overall blended gross margin over 30%. EDG is a very profitable business and, as we convert this OEM business to a user strategy from the new distribution agreements, you'll see the margin increase on a linear basis. We have a similar agreement with another manufacturer that we've had in place for years and we've really moved to the user strategy for that manufacturer and that piece of business runs at about 35% or 36% margin. And we think that the other distribution agreement that's now been in place for about a year, that when it's -- the user strategy is fully implemented that we can at least get up into 33%, 34% so you'll see the margin come up on a linear basis as we do that. But the answer for you this year is blended margins overall for the Company will be over 30%.

Okay and then the $35 million you'll owe in taxes, the $30 million gain and the $5 million on operating, was that included in the 35% cash tax rate going forward or will that be in addition to whatever we see you pay in cash?

No the cash tax rate is the prospective look, the fiscal 2012 cash tax going forward.

Okay so there are you've got two; there are two different things.

Yes one is the historical primarily related to the gain on sale and past operations and then I am king of giving you a look of -- I mean we will be a taxpayer going forward unfortunately.

A good problem to have. And so then as of today since the end of May what have you bought back or can you tell us what today's share count is and what today's cash balance is?

17.2 million is the current share count and can I tell you today's cash balance? I can't because we have cash all over the world.

Do you think it's higher or lower than the 239?

You know, it's going to fluctuate constantly because some of those other items and until we settle with Arrow it will stay between 230 and 240 for a while.

Okay and, Ed, you mentioned 15; I guess I am curious how you think not wanting buy the stock there. I guess I am curious the dollar amount doesn't -- isn't that significant, especially relative to historical periods because of the cash balance. If you think that's sort of an expensive use of capital can you help us understand how you're thinking about valuation, given when you net out the cash it still looks like you're getting a [diminuous] multiple on the earnings stream?

Oh I guess the way I look at it more than the accretive portion of it is opportunistic. It's when we've been able to buy the stock in 13s all of a sudden to pay 15 it just takes a while to get used to that so we're not in a hurry. It's a really comfortable position to be in is to have the cash and to run the business and have the opportunity to do some strategic acquisitions and bolt-on acquisitions and in the meantime if there are some ups and downs in the stock we'll move in and buy it. We're just we're not in a hurry.

Okay and when you say bolt on does that -- and I know it's not as black and white as we want to make it but does that mean you'd only do something that's GAAP accretive?

Well, certainly GAAP accretive over a period of time. If you've watched my history over the years, we very seldom pay a big premium for companies. We've bought lots of companies at asset value or slightly over and I don't think we've ever bought a public company -- correct me if I am wrong, Kathy, but I can't remember ever buying a public company. So yes certainly they'd be accretive in a 12-month period of time. We're not going to go out and invest in something on a long-term basis. It's just not something we've ever done.

Okay and then I -- and the SG&A, Kathy, you said 10.3, 10.4-ish. Does that include the $2 million to $3 million in investments and is there anything capitalized that's associated with those centers?

There may be since we're just looking at this. At this point I am kind of looking at 10.3, 10.4 as kind of a run rate of SG&A and then depending on what we do and what investments we need to make in terms of whether it's people cost or other investments, it will be on top of that.

But do you mean other investments in addition to the $2 million to $3 million?

Well, there will be some normal investments in operating expenses. I mean there are cost increases that go in January one and at the same time we're working to take costs out but I am going to continue to try to stay conservative here and hopefully we can bring in operating expenses lower than what we anticipated but we know going into Q1. I mean, we've got some lingering tax expense and that just to clean up some of the stuff that's occurred during 2011.

Okay and then I haven't done the math but the smarter gentleman than me earlier asked about it but is that adjusted operating margin for the quarter [65], is that accurate?

Yes.

Okay is there anything that you know of right now that would pull that down? It would seem you just doing the logic on the gross margin going up and then even with that OpEx you obviously get to a higher than that [65] run rate operating margin. Is there anything that we're missing that will pull that down other than the investment that you talked about?

There will be expenses, particularly in Q1 that will pull that down.

What are those expenses?

I mean we're doing tax filings all over in 25 some countries that we can't accrue that will be part of continuing operations that will be filed in Q1 and these are very complex transactions at this point. Now, once we get out of FY '12 and you get into next year those expenses will decrease significantly.

Okay but and don't you think of those expenses carry on beyond the Q1 level, period?

Again, we have some flexibility. We've built some investments, some operating expense investments in terms of new people to roll out some of the business in different areas and the Industrial Services Group that Ed has talked about building so we've built them in. I don't want to tell you that we can do better at this point. I mean we're going to do everything we can but I want to hold to my 5% and hopefully we'll pleasantly surprise you.

Sure and, Ed, I also wanted to ask, you've shown a very good alignment with shareholder interest in a lot of these decisions. I do think that the equity valuation is still very much penalized by that structure. That's one of the only things I can point to. What are your thoughts on collapsing the structure, given that it doesn't seem to be doing you any good by having more control?

You're talking about the B stock are you?

Yes.

Well, as we continue to buy stock in obviously my share or interest in the Company goes up all the time and if that would get to a point where I thought I had a large enough share that I didn't need the B stock we'd consider it but at this moment I can tell you when you're trying to do a transaction of the size of RFPD that it's very comforting to know that we can get it done and so the answer is if I thought it was hurting shareholder value at some point we'd certainly consider it. At the moment I am not spending a lot of time thinking about it.

Okay thanks for taking the questions, guys, and congrats on a great job.

John Curti, Singular Research.

I had a question on Canvys going forward with the switch to the OEM focus business probably gets a little -- maybe a little lumpier but as you get orders it begins to have a repeatable stream. What does that -- what do the gross margins look like going forward as you begin to hit your stride there? How much margin improvement from current levels is achievable over say a three to five-year period?

Okay I'll let Wendy address that.

We believe with the OEM strategy that the margins will continue to improve. It is the display business and so we are somewhat conservative in saying it's going to be at the same level as say EDG but for example in our FY '12 planning we are looking at a healthy improvement in the gross margin looking at it going up almost 2% in the current or in our FY '12 fiscal year. So we see gradual improvement I would say comfortably over the next couple years up into the high 20%s, near 30%, as Ed had talked about earlier.

And then also, as a result of the switch to the OEM strategy, does that also mean likely going forward less write offs, less inventory write offs?

Absolutely. Absolutely, it's a really good point in question. What we do now is that we pretty much buy to demand so, as we have the orders and the commitments from the OEM customers, that's when we bring the product in and finish building it, much more contractual as well, meaning we have commitments and agreements in place with the OEM customers that if we bring in safety stock for example because to help them manage some of the fluctuations in their demand, they're obligated to take that inventory.

So when you're doing some of the one-off stuff you were taking some of the risk there.

Yes it was much more speculative.

Okay and then this is a question for Kathy. I just wanted to double check, CapEx and D&A are basically about $1 million for the year each?

Yes.

Okay thank you very much.

Your last question comes from the line of Austin Hopper from AWH Capital.

Actually this is [Chip Selutrade] of VH Capital. Hello, Ed, Kathy and Wendy. I wanted to say congratulations on delivering what you said you would do in the last quarter or two so thanks for that.

The only question I have concerns the -- you talked about the bolt-on acquisitions and a look at the $200 million in cash. Are we talking -- can you talk about the size of the acquisitions that you consider? Would these be in total $25 million worth of acquisitions spread out over say five acquisitions or would it be one larger acquisition of say $40 million, $50 million? Can you talk about what bolt-on means in terms of size?

I can tell you what we're looking at today but we continue. This is an ongoing process and some of them we have in a due diligence stage and others we're just starting so it's pretty hard but I don't think we have anything that we're looking at at the moment where we'd spend more than $25 million. We've looked at some larger ones and backed away. We're pretty not a lot larger. I am just if you followed my history I am really conservative what I do in this area so I mean I can't tell you that we're seeing anything right now that would over that $25 million area.

But would that be--

We'd look if there's something that makes a lot of sense.

Would that be one acquisition of $25 million or several totaling that or I think you're saying it would be one acquisition of that size potentially.

Well, there's one that we're looking at that might be of that size but I think in all reality anything we would do would be cumulative at this moment below $25 million.

Okay, like I said, I appreciate that really gives us a good sense of the excess cash and what you're planning to do with it. Thank you.

There are no further questions at this time. This does conclude the question and answer portion of the call. I will now turn the call back over to Ed Richardson for closing remarks.

Okay well thank you again for joining us for the call today. We appreciate your continued support. The Richardson Electronics' team is really committed to building the business and increasing shareholder value and we look forward to reporting on our progress again in October. Thanks very much.

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