Richardson Electronics Ltd (RELL) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the FY '12 first quarter earnings conference call. 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)

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's call, Mr. Ed Richardson, Chairman, CEO and President. Please proceed.

Good morning. And welcome to the Richardson Electronics first quarter conference call for fiscal 2012. Thanks to all of you for taking the time to join us today. With me on the call are Kathy Dvorak, Chief Financial Officer; and Wendy Diddell, Executive Vice President of Corporate Development and General Manager of Canvys.

This call is being recorded and will be posted for audio play back on our website. Before we get started, I'd like review our Safe Harbor statement. Some of the comments we'll be making on today's call include forward-looking statements as to our future outlook. These statements are subject to risks and uncertainties that could cause actual results to different materially from our expectations. A full description of our risk factors can be found in our press release and SEC filings.

Our first quarter was in line with our expectations. We reported sales of $41.5 million, an increase of 10.7% over the prior year. Gross margin improved slightly to 30.6%. Factors and expenses were $10.8 million or 25.9% of sales. Operating income for the first quarter of fiscal 2012 was $2 million or 4.8% of sales compared to operating income of $800,000 in the prior year's quarter. Income from continuing operations was $1 million, compared to income from continuing operations of $500,000 in the first quarter of last year.

During the quarter, we completed the purchase of Power Link. Power Link is a well established and successful UK based technical service company with locations in London and Dubai. They service traveling wave tube amplifiers and related equipment for satellite communications markets throughout Europe and the Middle East. Over the next few weeks, we'll have also 2 microwave tube engineers joining us who have experience in the industrial and medical markets.

The acquisition of Power Link and the expansion of the management team creates the foundation for our expansion into technical service centers, which allows us to expand our share of the $1 billion microwave tube market. The first priority of the Power Link management team is to research, plan and implement the super service center concept, which will ultimately provide service for satellite communications, military, industrial, and medical markets. We'll start with what we know best, expanding serve to cover the power grid tube market and the military sat com markets. We anticipate that medical will take a bit linger. It's difficult to determine just how long it will take to validate the concept before we're ready to expand into additional geographies.

We're already uncovering demand for industrial power grid tube service in countries such as China where growth is high and end user are not trained to replace tubes or service their equipment. We'll proceed cautiously ensuring that we meet with customers and fully understand their requirements. Once we have the model right, we'll duplicate the model in new geographies. This technical service group will enable us to generate additional microwave and power grid tube sales as well as aftermarket parts and service revenue. More importantly, this service capability further differentiates Richardson within the industry. Before we discuss EDG and Canvys, I'll turn the call over to Kathy to present the details of our first quarter performance.

Thank you, Ed, and good morning. Overall, we are pleased to report a relatively strong beginning for a new fiscal year. Sales for our first quarter ended September 3, 2011, were $41.5 million, up 10.7% over the prior year's first quarter. Gross margin improved to 30.6% from 30.4% during the prior year's first quarter, primarily related to a significant improvement in Canvys' gross margin rate as we continue to focus on the more profitable OEM business. Conversely, EDG's growth margin rate was down due to sales mix between OEM and aftermarket customers.

First quarter operating expenses were $10.8 million, up from $10.5 million in the prior year's first quarter. Operating income for the first quarter of fiscal 2012 was $2 million or 4.8% of sales, up from $846,000 or 2.3% of sales during the first quarter of fiscal 2011. Interest income for the quarter was $364,000, reflecting the low interest rate environment we are in.

FX was a loss of $781,000. This relates to US dollars we hold in foreign bank accounts as well as the significant cash movements we had between our subsidiaries within the first quarter. We continue to monitor our cash positions daily and take appropriate steps where we can to mitigate our foreign exchange risk. Unfortunately with the volatility in the market, we may continue to see these types of swings in FX. Income from continuing operations was $1.6 million before tax and $1 million after tax.

Our tax provision from continuing operations was $574,000, representing a 35.8% tax rate. We also reported a tax benefit of approximately $2.1 million from income from discontinued operations. This reflects an adjustment in our tax liability related to unrepatriated earnings in our foreign subsidiaries. We were conservative from a cash tax perspective and made estimated tax payments for federal, state, and foreign tax obligations of approximately $34 million during the first quarter, which includes the income tax receivable of approximately $8.3 million. As we progress through the remainder of our fiscal year, the income tax receivable will go down.

So let me do a quick reconciliation of the cash balance for you. Our cash and investments at the start of our fiscal year was $239.7 million. Our cash and investments at the end of the our first quarter was $184.7 million, reflecting a $55 million use of cash. During the first quarter, we made the estimated tax payment that I just mentioned of $34 million. We spent approximately $8 million on share re-purchases in the quarter and also invested about $7 million in working capital. The remaining $6 million is a combination of miscellaneous items including payouts of incentives and severance related to the RFPD transactions.

Even with a 10.7% increase in sales, we were able to maintain our accounts receivable balance. As of quarter end, accounts receivable was $22.7 million, versus $22.4 million at the end of our fiscal year. Our DSO improved by over 5 days during the quarter due to our significant cash collection efforts. Our inventory was $33.8 million compared to approximately $30.9 million at the start of our fiscal year. Although inventory has increased, this increase reflects approximately $3 million in strategic inventory investments that we made to support sales into the CO2 laser market as well as to support our consumables initiatives.

In addition Canvys increased its inventory in support of specific customer contracts. As a result, our inventory turns have fallen to about 4 times. I would like to assure you, however, that working capital management continues to be a high focus throughout all levels of our organizations. 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.

Through this very choppy economic environment, we're being opportunistic with our share repurchases. We have repurchased about 1.4 million shares per date using approximately $19 million of cash. As of today, there are 17 million shares outstanding. Our total share repurchase authorization remaining is $31 million. Our goal is to return value to our shareholders through a combination of cash dividends, share re-purchases, and investments in our growth initiatives.

Our conservative outlook for sales for the second quarter of fiscal 2012 is approximately $42 million to $44 million, representing sales growth in the range of 2% to 7% for the quarter. We expect sales for our fiscal year to be 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 for fiscal 2012 will be approximately 35% for cash tax and 37% for GAAP.

In summary, we continue to find ways to right size our cost structure and believe that with our expected sales volume, we are on track to exceed our operating margin target of 5%. Our long-term objective is to grow the business allowing us to further leverage our support function costs and ultimately improve our operating margin beyond 5%. Now, I would like to turn the call over to Wendy to provide an update on our Canvys business.

Thank you, Kathy. I'm pleased to report that Canvys enjoyed a strong first quarter and finished with sales of $10.8 million, up 7.6% compared to $10 million during the same period a year ago. Gross margin was 28.1%, which represents a significant improvement over gross margin of 23.3% in the first quarter of last year. This margin improvement reflects the fact that the Canvys team has done an excellent job of selecting, sourcing, and pricing the right opportunities in controlling expedited inbound freight requirements.

Both in North America and Europe, custom business segments exceeded our expectations in the quarter. The sales teams have settled in nicely with the new OEM strategy and organizational structure. As we mentioned last quarter, we identified and began the process of contacting our OEM customers who purchased products from Richardson Electronics' other divisions. To date, we have 40 plus opportunities identified from existing real relationships that, while still in their early exploration and development stage show promise for long-term repeat sales.

We have an incentive program in place to keep Canvys and EDG working closely together to win new business. We also making good progress securing an exclusive line of certified Marine displays and developing interest within Richardson Electronics' customer base of Marine radar manufacturers. We are seeing many new opportunities in our healthcare segment, but the business was hampered in the first quarter by delays in order approval. We anticipate several large projects will ship in the second quarter. We are investing more in marketing to capitalize on demand created by aging fixture archiving communication systems.

On the last call, we mentioned our intent to add several key sales and management positions to support geographical expansion. In mid-October, a new Vice President and General Manager for Canvys Europe will be joining us. His experience includes working for several large international companies, including LG Electronics as well as spending several years in Asia. In addition, his work experience has been heavily geared toward IT, which we think will bring additional insights to our traditional display business.

Also joining the Canvys team will be a new global sourcing director based in Taiwan. These 2 individuals will introduce world class ideas and practices into the organization. While we are adding key positions, we are continuing to carefully manage our expenses in line with our revenue and margin attainment. Right now we remain cautiously optimistic about the upcoming quarter. We believe gross margin will continue to improve.

In addition, backlog is steady with new OEM projects on the horizon. Looking out a little further, we're a bit cautious about Q3 and Q4 given the negative global economic forecast and the impact this may have on capital spending. We will stay focused on the OEM business and continue our constant search for ways to improve efficiencies. Ed?

Thanks, Wendy. Let's discuss the first quarter performance for our Electronic Device Group, or EDG, as well as our outlook and our strategy. Sales remained strong during the first quarter and increased 11.8%. This increase primarily reflects market share gains.

Gross margin declined slightly from 32.9% in the last year's first quarter to 31.5% for the first quarter this fiscal year. This decline resulted from a shift in mix between OEM and aftermarket sales. The power of the EDG sales team is found in the strength of its relationships with our customers and vendors worldwide. We're capitalizing on these relationships in a number of ways.

As I mentioned earlier on the call, we recently concluded the acquisition of Power Link, which allows us to provide technical assistance to our power grid 2 customers, that do not have the capability to service their own equipment today. This will help us increase power grid 2 in related electronic component sales as well as microwave tubes. We're also 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 a mirrors, lenses, and nozzles.

The benefit of this initiative is that it gives us the ability to service more of our customer's replacement parts requirement. We're currently bringing in inventory to support this initiative and expect to see sales activity ramp up throughout the year. Finally, as Wendy discussed, the EDG sales team is helping Canvys reach more OEMs. EDG has a long term relationship 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 trained to identify opportunities that are best served by Canvys. And they are incented to induce these opportunities to Canvys who in turn will work with the customers to design and integrate the displays.

In summary, we're pleased with our results for the first quarter. We're well positioned to achieve our overall fiscal 2012 goals. Much of the success of Richardson Electronics has been based on listening and responding to the needs of our customers and finding ways to deliver solutions for our customer's unique requirements. We believe we are the strongest player serving the aftermarket for tubes and related components with excellent inventory depth, technical knowledge, and increasing capabilities. Our goal is to take these capabilities and to diversifying to new geographies and new markets.

Looking ahead, we believe that sales for Canvys and EDG for the second quarter of fiscal 2012 will be in the range of $42 million to $44 million. Sales for fiscal 2012 should 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'll continue to invest in our growth initiatives such as our technical service centers while opportunistically returning cash to shareholders through a share repurchase program.

I'd like to take this opportunity to announce the addition of Paul Plant to our board of directors. Paul will replace John Peterson, who is retired from the board. Paul has provided business consulting services to the electronics industry since 2008. Prior to that, he served in executive management positions including President and Chief Executive Officer and a member of the board of directors of Retron Electronics a publicly held distributor of electronic components and a provider of electronic manufacturing services with a focus on the medical industry.

We believe that Paul's significant experience in the electronics industry, his experience managing electronics manufacturing companies, and his extensive financial knowledge will be a tremendous asset to the Company. I'd like thank you for your support of Richardson Electronics. And now, Kathy, Wendy, and I will be happy to take your questions.

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

Yes. Kathy, could you just flush out a little under the balance sheet the following items which had significant jumps from last year, the deferred income taxes, the income tax receivable, the accrued liabilities, and the long-term income tax liabilities; if you can just run through how they evolved?

Okay. The tax receivable as I mentioned, we made an estimated tax payment that ultimately ended up too high. So we have a tax receivable, which will be applied against cash tax related to fiscal 2012 earnings. So at this point that's an overpayment of an estimated tax.

Okay.

Accrued liabilities, the significant decline is related to the estimated tax payment. What other line?

The deferred income taxes and the long-term income tax liability?

Okay. All of those are also just transferences related to the estimated tax payments that we made, so a lot of these things are just re-classes of the buckets that they were in previously. So I can walk you through that, if you want.

No, that's okay. So it's basically a reclassification of the --

Yes.

-- past items that you had on the balance sheet?

Yes.

Thank you.

Your next question comes from the line of Al Tobia from Sidus.

Yes. Hi. Ed, what -- or Kathy, can you tell me what are the non-current investments, now they've gone up, what's the money in and what is the, also the large increase in current investments? What are you doing with the cash?

The non-current is just CDs and time deposits that are beyond one year.

Right.

And the current are short-term CDs that are under one year.

Okay. And, Ed, you use the word opportunistically buy stock back, but from the standpoint, as I look at -- at least, the average price paid was around $13.30 or so.

That's approximately right.

Right. And if I take, if I take your current liquid assets plus your non-current investments, meaning I'll remove the pre-paid expenses and your discontinued operation assets; and I net out all your liabilities and I'm not sure if all your liabilities on the other non-current are going to be cash expenses, but let's say I treat them as cash expenses, I end up with about $12.80 of cash, which then would be valuing your business pretty low and by the end of this year, if you hit your numbers you'll be at your cash level. So I'm kind of wondering why you didn't buy more shares in the quarter given it was trading down around this level pretty readily and sort of what levels are you looking at for buyback opportunities?

Okay. Well, as you probably know, we're regulated on how much we can buy every day, and the price of the stock has had some pretty good swings as you're well aware, and so what we're trying to do is to catch the bottom, and we've been pretty good at it.

But if you catch the bottom with a thimble does it do you any good?

Kathy, what's our -- it's about 25,000 shares a day we can buy, something like that? So that's our limitation, and unfortunately with the stock swinging up and down -- I think we're pretty happy. We've spent in total about $20 million buying stock back and it's -- it took us a long time to get in this position. The deal's only been done about 6 months and so we are going to continue to be opportunistic.

On your buyback, are you able to -- are you not blacked out because you've got a plan in place? Are there any blackout dates or no?

There are not blackout dates. If you put a 10B5 plan in place.

Right. And I assume you have one in place, right?

I would assume.

Yes.

I mean, is there a level where you just say tender for stock? I mean, what is -- regarding a tender, what is the thought process in terms of where the stock would be for you to actually tender?

Well, at this juncture at these kinds of levels we don't intend to tender so we've had some discussions about it. I don't think I'd want to go public with what our thinking is at what price we would tender at.

Okay.

(Operator Instructions) Your next question comes from the line of Mark Zinski from 21st Century Equity. Please proceed.

Hi, Mark.

Hi, good morning. Congrats on the quarter. My first question deals with some industry discussion about a possible supply bottleneck for the traveling wave tubes. Just curious if you're seeing any evidence of that? And is that impacting your growth plans for the -- for the microwave market?

No. We really haven't seen any, any bottleneck in supply. There are delays in delivery, but so far that's not restricting us at all.

Okay. And then of course, I'll ask my question about Europe in terms of what you're seeing there and any difference in attitudes and perceptions there versus last quarter?

Well, it varies between Canvys and EDG. I'll let Wendy comment on Canvys. But EDG as you know is about 80% aftermarket business; and although if the economy is in a decline long enough, the aftermarket is impacted as well. But currently our aftermarket business as you can see, is pretty strong. We have seen some, I would call it nervousness in the OEM where they're building new equipment; but I guess we're cautiously optimistic. Backlog is sort of flat, but I think probably the media has a bigger impact than anything else. If you preach doom and gloom long enough, it has a ripple effect. But, so far at least in EDG we're fine. We don't see any major impact. And a large portion of our business is in Europe as well, so --

Yes. Right. Right.

Wendy, do you want to comment about Canvys, are you seeing any push outs or --?

In Canvys the majority of our business in Europe is in Germany, and the economy in Germany is doing better overall than the economy in Europe in total is doing. So no, we really haven't seen any push outs today that are due to economic concerns.

Okay. Great. Ed when you mentioned EDG's growth being primarily due to market share gains, is that -- any color you could provide on that would be great, whether it's in market gains in certain verticals or is it due to the new distribution agreements, or is it due to the, the bigger push into microwave?

Yes. Well, it's a combination of both, but most of the growth that we saw in the first quarter had to do with the power grid tube business. The market for power grid tubes is approximately flat. We see it in units. It's declining perpetually as semiconductors reach higher power levels; but the unit prices go up, which pretty much offset the unit declines. So obviously with a flat market and our sales going up, we're getting a bigger market share. And a lot of that has to do with the distribution agreements that we have in place, you're correct. And we see that continuing this year. The microwave side of the business, again, the tube business is about a billion dollar market and currently we only do about $20 million in that market --

Right.

And the acquisition of Power Link was our first forte into the service business. It's very technical, high voltage equipment. The majority of the user cannot replace the traveling wave tubes themselves, and so you have to be able to service the equipment to access that business. And Power Link and that acquisition is the foundation of our moving into that business, so we see increased market share there as well.

How important is geography for your acquisition strategy in the microwave market? Are you conscientiously looking to kind of enter more of the emerging markets, or is it the quality of the business first, kind of criteria?

Well, originally we intended to open 6 or 8 technical service centers in various geographies of the world in this fiscal year. I think you've probably heard us talk about that. As we really studied the market, what we want to do is this super service center concept where we not only service satellite communications equipment, but we also service industrial, medical, and defense equipment. And it takes different expertise, different engineers, different technicians. Satellite service for the most part is done on the bench where the amplifiers come back in house and are serviced in our facility.

And it's just the reverse in industrial applications. In medical applications the engineers have to visit the customer site and service the equipment on site. So what we're doing first, we changed our strategy a little bit, we're going to build this hybrid model in Power Link; and as I mentioned, we're adding a couple of microwave engineers who have power grid and industrial experience. They're just joining us this month, as a matter of fact, and they're going to help us build Power Link into this hybrid structure that can do industrial, medical services as well as sat com. And sort of roll that out in the EC and in Dubai where Power Link is located today. Once we have that in place and we've sort of proven out the model, then we'll take it into other geographies of the world.

Probably the first will be in Asia. As I mentioned, there's lots of equipment particularly in China and the users at this point are not familiar enough with the equipment to repair it. So there's a fair demand for repair services in Asia, and I think that will be the next market we go into once we've proven out the strategy.

Okay. And then last question, Kathy, are there any material acquisition related expenses for the quarter or that you anticipate next quarter?

No.

No. Okay. That, that's it for me. Thanks.

Thanks.

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

Hi, guys, this is Brian on behalf of Christian. Just a quick question. It looks like Power Link did about a couple million dollars last year. What do we kind of expect from that over the rest of this year and then looking into next year?

I think that's pretty hard to forecast. It depends how quickly we can get traction in some of these other markets. I think in their sat com business, they've done very well in the Europe and in the Mid-East and I don't think we'll expect a lot of growth in the sat com portion of their business.

The first growth will be in the industrial and medical side, and that's going to take some time. We know there's service required but we want to out and visit with the main customers and find out exactly what type of service they're looking for and to what extent, so I don't see a lot of major growth in the first year or so. We have a plan for it.

The growth will be not so much in service revenue, but in tube sales. These traveling wave tubes that go into the amplifiers, they start at about $10,000 a piece and go up to $50,000 a piece. So it's a high unit value, and of course, that's why we've entered the service business is to sell more tubes and also power grid tubes for industrial applications.

Okay. And then as we look at additional acquisitions that you guys might be looking to add, should we think of them about the same sort of size as Power Link?

We've looked at some larger acquisitions. I can't tell you that we've seen anything that really excites us at this moment. Probably what we'll look at first are additional companies that could be in medical service or they could be in industrial service in other geographies of the world to help us sort of jump start that strategy.

Perfect. Thanks a lot.

Thank you.

You have a follow-up question coming from the line of Al Tobia. Please proceed.

Hi, Al.

Hi, Ed. Wendy mentioned, I think -- I don't know if I heard this right, but that she was concerned about the third and fourth quarters for Canvys slowing down; and I just wondered is that just a response to what is happening in Europe in the sense that there's going to be some kind of a bank issue going on over there and because of their business in Germany that it would slow it down.

I think, we're just concerned in general that if the economy, whether it's in Germany or in the US slows, we tend to see it more quickly in Canvys than we do, for example, in EDG. As Ed explained with the aftermarket focus of the EDG sales team, people are constantly going need to refresh those tubes; but where we are in Canvys in terms of capital spending, we could feel any down turn in the economy a little bit sooner. So we don't have -- there's no, like, red flag or glaring issues for us, we're just taking a little bit more cautionary approach to what our forecast is for Q3 and Q4.

I understand. I guess what I'm asking is this isn't something that's manifest itself in your order book.

No.

This is conservative forecasting based on global macro?

Absolutely.

Okay. Thanks.

You're welcome.

Ladies and gentlemen, this conclude the question-and-answer session. I will now turn the call back over to Mr. Ed Richardson for closing remarks.

Thanks, Veronica. Thank you again for joining us for the call today. We appreciate your continued support. Our team is committed to strengthening our competitive position, building the business, improving our financial performance, and executing on our strategy to create shareholder value going forward. We look forward to reporting on our progress again in January. Thanks very much.

Ladies and gentlemen, that concludes today's conference. Thank you for our participation, you may now disconnect. Have a great day.