Richardson Electronics Ltd (RELL) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fiscal Year 2017 Fourth Quarter Earnings Call for Richardson Electronics. (Operator Instructions) Also 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, Mr. Ed Richardson. Please proceed.

Good morning, and welcome to Richardson Electronics' Conference Call for the Fourth Quarter and Fiscal Year 2017. Joining me today are Robert Ben, Chief Financial Officer; Wendy Diddell, Chief Operating Officer; Greg Peloquin, General Manager of our Power & Microwave Technologies group; Pat Fitzgerald, General Manager of Richardson Healthcare; and Jens Ruppert, General Manager of Canvys. As a reminder, this call is being recorded and will be available for audio playback.

I'd like to remind you that we're making forward-looking statements, and they're based on current expectations and involve risks and uncertainties. Therefore, our actual results could be materially different. Please refer to our press release and SEC filings for an explanation of our risk factors.

I'm pleased to announce that we achieved our objective of breaking-even in the fourth quarter. We made $39,000 in operating income in the quarter versus a $1.3 million loss in the third quarter and a $300,000 operating loss in Q4 of last year.

Sales in the quarter were slightly below prior year's fourth quarter sales due to the multimillion dollar government shipment in the Power & Microwave Technology group that didn't repeat this year.

PMT however, did extremely well, closing the gap both in the fourth quarter and on a full-year basis with increased revenues from our new technology suppliers.

Overall, I'm happy with the progress the company has made in FY '17. We still have a ways to go to return to profitability on an annual basis.

While totaled FY '17 sales were down slightly versus prior year, our investments in health care and in niche technologies helped us improve gross margin. Expenses for the year were down nearly $2 million including the large, onetime severance expense. The entire organization participated in various initiatives to take cost out and improve cash flow and they deserve credit for helping achieve a break-even milestone in the fourth quarter as well as reducing operating losses on a full-year basis.

Releasing high-quality CT tubes is critical to our profitability. I know it's been even much slower than any of us anticipated, but we're making significant progress. We've learned many lessons that will be applied to our ongoing manufacturing efforts and I'm optimistic that FY '18 will be a breakout year for us in the health care market. Most of the large investments in capital equipment, people and time have now been made. We're adjusting processes and procedures and continuing life tests to ensure that CT tubes to be released to the market will meet or exceed the expectations of our customers.

I'll now turn the call over to Bob Ben, who will share the details of our fourth quarter and fiscal year performance. Pat, Greg and Jens will then provide highlights on business unit performance as well as update you on our growth initiatives for FY '18.

Thank you, Ed, and good morning, everyone. I will review our financial results for our fourth quarter in fiscal 2017 followed by a review of our cash position.

Net sales for the fourth quarter of our fiscal year 2017 were $37.4 million compared to the prior year's fourth quarter of $39.6 million. Net sales decreased $1.3 million for PMT and $0.9 million for Richardson Healthcare. Net sales for Canvys were approximately the same as compared to the fourth quarter of fiscal 2016.

Gross margin decreased to 32.1% of net sales from 33.8% of net sales in last year's fourth quarter, primarily due to an unfavorable product mix in both PMT and Richardson Healthcare.

Operating expenses were $12.2 million for the quarter compared to $13.7 million for last year's fourth quarter. This substantial decrease was due to reduced salaries, benefits and incentive compensation expenses. In addition, IT expenses were lower at this quarter than in the fourth quarter of fiscal 2016. These decreases were partially offset by an increase of $0.2 million in R&D expenses for Richardson Healthcare.

In addition, there was a $0.2 million gain on the divestiture of the PACS Displays business completed in May 2017. As a result, the company reported a $39,000 operating income for the fourth quarter of fiscal 2017, compared to a $0.3 million operating loss in the fourth quarter of fiscal 2016. This improvement was accomplished with lower net sales and gross margin.

Other expense for the fourth quarter of fiscal 2017, primarily foreign exchange was $0.2 million compared to less than $0.1 million for the fourth quarter of fiscal 2016.

We had an income tax benefit for the quarter of less than $0.1 million, which reflected an adjustment to a tax reserve due to an expired statute of limitations, an adjustment to the provision for foreign income taxes and no U.S. tax benefit due to the valuation allowance recorded against the net operating loss.

Overall, we had a net loss of $0.1 million for the fourth quarter of fiscal 2017 as compared to a net loss of $0.2 million in the fourth quarter of fiscal 2016.

Turning to a review of our fiscal year 2017 results. Net sales for the fiscal year 2017 were $136.9 million, a decrease of 3.6% from fiscal year 2016 net sales of $142 million. Canvys net sales decreased by $2.9 million, PMT net sales decreased by $1.3 million and Richardson Healthcare net sales decreased by $0.9 million. Greg, Pat and Jens will be commenting on these results shortly.

Gross margin increased to 32.1% from 31.6%, primarily reflecting an improved product mix in both PMT and Canvys on an annualized basis.

Operating expenses were $49.9 million for fiscal 2017, which represented a decrease of $1.7 million from the last fiscal year. Fiscal 2017 included $1.3 million in severance expense associated with the reduction in workforce during the second quarter, which was more than offset by reduced salaries and incentive compensation expenses.

In addition, IT expenses were nearly $0.9 million lower than fiscal 2016. These reductions were partially offset by $0.5 million higher research and development expenses for Richardson Healthcare. Our operating loss for fiscal year 2017 was $5.8 million as compared to an operating loss of $6.6 million for fiscal year 2017. After excluding the severance expense of $1.3 million, the operating loss would have been $4.5 million for fiscal year 2017. Other expense for fiscal 2017, including foreign exchange, was $0.4 million compared to other income of $0.3 million for fiscal year 2016.

We had a cash provision of $0.8 million for fiscal 2017, which primarily reflected a provision for foreign income taxes and no U.S. tax benefit due to the valuation allowance recorded against the net operating loss. Overall, we had a net loss of $6.9 million for fiscal 2017 as compared to a net loss of $6.8 million for fiscal 2016.

Turning to a review of our cash position, cash and investments as of May 27, 2017, were $64.2 million, which was an increase of $4.0 million from February 25, 2017, and a decrease of $6.3 million from May 28, 2016. Tax generated from operating activities in the fourth quarter of fiscal year 2017 was $5.0 million compared to $1.0 million in the fourth quarter of fiscal year 2016. During fiscal 2017, cash provided by operating activities was $1.8 million as compared to cash used in operating activities of $13.6 million in fiscal 2016.

We had capital expenditures of $1.2 million for the fourth quarter of fiscal year 2017 compared to $1.8 million in the fourth quarter of fiscal year 2016. Approximately $0.7 million relates to our investments in our healthcare growth strategy, approximately $0.2 million relates to our IT platform and another $0.3 million was for other projects. During the full fiscal year 2017, capital expenditures totaled $5.2 million as compared to $4.8 million in fiscal 2016.

Lastly, during the fourth quarter, $0.8 million was paid out in dividends and $3.0 million was paid out in fiscal 2017.

A few final comments. Ed asked me to read key company initiatives focused on improving profitability and increasing our cash flow worldwide. Some of these key initiatives included reducing travel and entertainment expenses, reducing facility related expenses, reviewing our legal structure for profitability and potentially rationalizing unprofitable locations and reducing inventory and accounts receivable balances. Results of these key initiatives in fiscal 2017 were very successful. GE expenses were down $0.6 million from fiscal 2016. Also, facility related expenses were $0.5 million lower than in fiscal 2016.

Finally, inventory ended the fiscal year at $42.8 million compared to $45.4 million at the beginning of our fiscal year. Each of these key initiatives has created changes in our processes to ensure we continue to realize the benefit in the long term. Many of the teams established in fiscal 2017 will continue to operate in fiscal 2018 and beyond.

Now, I will turn the call over to Greg Peloquin who will discuss the results and plans for our Power & Microwave Technologies group.

Thank you, Bob, and good morning, everyone. In the fourth quarter, PMT sales were $28.9 million versus $30.2 million in Q4 FY '16. In Q4 FY '16, PMT had a onetime $3.8 million government order that did not repeat. Excluding this onetime order, our base business was up 9.5% and strong bookings throughout the year, ending with a book-to-bill of 1.15% in Q4. These improvements were driven by growth in our engineered solutions business and new technology partners. Margin did decrease from 34.1% to 33.2% mainly due to product mix.

Going into FY '15 with another strong quarter in bookings, we're also seeing strong growth in many of our major markets. The semi fab equipment business, which is growing at nearly 20% with a market in which we are very strong in both engineered solutions and components. Our largest customers such as Lam, MKS and Comdel are major suppliers to this market. In addition to the semi fab equipment market, we are experiencing growth in RF and power products in several of our key markets including the industrial and radar markets with our key suppliers like CTI, Thales and in Milky Way. In the industrial market, applications in laser, welding and industrial heating are becoming quite active. With our new technology partners, millimeter wave application supporting the 5G fixed and mobile networks is in a growth's stage. As development base increases test systems and fix mobile are the key applications in the near term. We do anticipate some growth in our business related to 5G infrastructure in FY '18 and major growth in calendar year 2019.

In both EDG and PMT, we're seeing growth in numerous applications even GaN technology. GaN is a technology of choice for markets such as weather, radar, Marine and phased array systems. We have global distribution agreements with MACOM and Qorvo, the world leaders in these technologies. We're taking numerous measures in the quarter and throughout the year to improve our cost structure, reduce our inventory, increase our margins and improve our overall profitability for top line growth. These measures will continue in FY '18 and beyond. We are excited about our continued strong bookings trends and new technology supplier relationships. Our backlog in engineered solutions was up double digits and will continue to gain market share in our legacy tube business.

In looking at our growth and design wins, as you know, we track on a global basis, it's clear our team has done a good job identifying key suppliers, niche markets and applications for tough resources in the field to support this growth. There is no question that we have an unparalleled capability and global go-to-market strategy that is unique to the RF and power industries. That continues to be confirmed by our customers and technology partners, our world leading position in manufacturing and distribution of electronics devices supports legacy equipment as well as new equipment which shall seek to not replace tubes. The markets we address need Richardson's capabilities for electronic devices, solid-state new technology and design manufacturing solutions. We enter FY '18 with a positive booking trend for all of our products, we have long-term relationships with our key customers in growth markets such as the semi fab market, related RF and power applications. We have key suppliers in place and global field engineers and infrastructure to support our customers' needs throughout the world. We have adjusted our cost model while still investing in key growth areas. The combination of these factors put us in excellent position to improve profitability and top line growth in FY '18 and beyond.

I'll now turn the call over to Pat Fitzgerald, GM Richardson Healthcare.

Thank you, Greg, and good morning, everyone. Our strategy in healthcare is to play a significant role in the development and sale of diagnostic imaging replacement parts around the world. Healthcare providers globally are under intense pressure to reduce costs and in the U.S. there is considerable uncertainty about what will happen with health care coverage, particularly to those who gained access to coverage under the Obamacare law. In this environment, hospitals continue to seek ways to reduce equipment maintenance costs, exploring alternatives to OEM service. As a result, there is a growing demand for an alternative source to the OEMs for replacement parts and service on a global basis. We estimate the global market for diagnostic imaging replacement parts and service to be between USD 7 billion and USD 8 million annually.

Our strategy ties in well with Richardson Electronics' ability to serve thousands of end customers throughout the world, helping them to lower the total cost of healthcare delivery. We are taking advantage of the company's infrastructure, including the use of our global supply chain, our manufacturing capabilities and our worldwide local sales offices.

The IMES acquisition provided us with a good foundation in this market and an excellent model for expansion. The investments we are making in the refurbishment and development of CT tubes and other high-value components are the key to the long-term success of this strategy.

In fiscal '17, we made significant progress in CT tube refurbishment and production and we continue to expand our replacement parts, product range, service rating and global reach. While we felt increased competitive pressure as prices for new CT systems declined, we believe most of these competitors typically do not have the capabilities or capital to invest in quality assurance testing, training and supporting sufficient inventory to link customers for the long term.

Throughout the year, we also saw demands for our Image Systems brand displays for Picture Archiving and Communication Systems or PACS and related accessories and equipment for operating rooms continue to decline. Hospitals no longer buy all-new displays in a single refresh project but instead replace displays in a big sale. We repeatedly found ourselves competing with large IT distributors willing to trade off customers' support and accept slow margins.

At the end of the fourth quarter, we made the decision to divest our PACS Display business. The sale allowed us to focus our energies on our core replacement parts and tubes business and we are able to exit a declining market while transferring our 5-year warranty and technical support obligations to the buyer. The transition has been smooth so far with no negative impact on our customers. We will continue to partner with the new owner to take advantage of any cross-selling opportunities.

Healthcare sales in the fourth quarter of fiscal 2017 were $2.9 million, down 22.8% from prior year sales of $3.7 million, primarily due to lower sales in our PACS Display business.

Gross margin as a percentage of net sales decreased to 30.8% during the fourth quarter of fiscal 2017 as compared to 41% in the same period last year. On a full-year basis, sales were $12.1 million, down 6.9% from $13.0 million in fiscal year 2016. Gross margin declined 39.2% versus 44% in the prior year.

The year-over-year decline came primarily through lower PACS Display sales, a mix that favored lower-margin equipment sales as well as pricing pressure on replacement parts. Our replacement part sales were down in the fourth quarter compared to the prior year, but up in the full year. Part sales are cyclical, and there can be significant variations from one quarter to another. Sales in Europe were up for the quarter and for the full year. We expect strong growth in Europe to continue into fiscal '18 as our European service partners are taking on the digital CT scanners and sending engineers for service training with our parts and training center in Amsterdam.

Our product line expansion sales including Siemens, and Thales CT parts and key components for MRI systems were up for both the quarter and the year.

CT equipment sales were up again in the fourth quarter compared to the prior year, which combined with lower part sales, contributed to lower gross margin. We also saw pricing pressure on replacement parts in the quarter, primarily from smaller competitors who are buying equipment on the cheap and liquidating them for parts. Sales of CT tubes were up in the fourth quarter but down for the full year with variation from quarter-to-quarter driven almost entirely by availability of preowned CT tubes of certain items in sale. We continue to make significant investments in our CT and X-ray tube development and manufacturing capabilities and we shipped to our stores Richardson refurbished CT tubes in the fourth quarter. We expect to continue to refine our refurbishment processes over the next several quarters and plan to ship our first Richardson manufactured CT tubes before the end of fiscal '18.

Creating a sustainable supply of CT tubes will ultimately lead to more rapid sales growth in replacement parts and tubes as alternative service providers are able to take on more equipment away from the OEM.

In the fourth quarter, we launched several new products designed to leverage the pending release of refurbished CT tubes. Our T3 or third-parts partnership's agreement, offer T3 advantage and T3 protect postures. The T3 advantage is an exclusive supply agreement and the T3 protect is designed for customers who want replacement parts and tubes' coverage in exchange for a 6-month leasing. Our T3 customers will gain preferred access to what will initially be a limited supply of CT tubes. We expect T3 protect contracts to create a recurring revenue source for our parts business while allowing our customers to budget and have predictable replacement part and tube costs. With replacement parts, CT and X-ray tubes, service rating, wireless VR upgrade solutions as well as power grid tubes, coil repairs and cryogenic solutions for MRI systems, Richardson Healthcare has established excellent relationships with hospitals and independent service organizations on a global basis. Over the past 2 years, we have significantly strengthened our value proposition for healthcare providers looking to lower their costs and increase efficiency. We remain open to additional acquisitions in this market and are focusing on companies with models that can be expanded internationally. We are also evaluating additional partnerships in organic investment and product line expansion in segments where we're zero or under served.

I'll now turn the call over to Jens Ruppert to discuss Canvys' fourth quarter results.

Thanks, Pat, and good morning, everyone. Canvys, which includes the engineering, manufacturer and sale of custom disks and storage. Regional equipment manufacturers in industrial and medical markets have paid a $5.7 million during the fourth quarter of fiscal year 2017, so that's for the same period last year. However, this quarter was our strongest quarter in terms of the revenue and margin in the fiscal year. We increased our backdrop and we are optimistic that the upcoming year will be a good year for us, bearing any unknown delays in new program rollouts or push outs from all customers.

Gross margin decreased slightly as a percentage of sales to 27.1% from 27.8% for the same period last year. The year-over-year gross margin decrease was related to product mix. For this reason, we're just controlling costs and we continue to work closely with our Asian partners to deliver the highest quality solutions as competitive prices to our customers.

For the fiscal year 2017, net sales appended decreased 12% to $20.5 million from $23.5 million during fiscal year 2016. Sales in North America were down due to commercial acquisitions, adjustments for day-to-day business in our customer base and delayed any progress. But you know we have the evaluation at the year-end of credit accounts has worked against us. Gross margin as a percentage of net sales increased to 28% during fiscal year 2017 as compared to 25.7% during fiscal 2016, mainly due to ongoing cost improvement programs and product mix.

Last quarter, we continued our marketing outreach to excel our new set of reaching out capabilities. Our value-add capabilities were highlighted in the last 2 issues. We focus on our experience and know-how and the benefit of working with global companies but still act very local. I also wanted to highlight that we are very proud of receiving several industry awards last quarter including the "Best of" awards in various categories for our TÜV startup apps and (inaudible) products used that are recently released.

These awards were issued by independent jury of experts in different industries. The TÜV SÜD apps units is typically used to prep the information systems on buses and trains and assuming achievements in industrial applications for any sort of delay controlling heavy machinery is not acceptable. The TÜV (inaudible) is specifically designed to meet the higher climates in medical sectors and typically used for clinical and patient information systems. In fact, operating theaters to control medical devices and in oncology centers.

During the quarter, we won several new programs from existing and new customers in the medical space for application versus computer-assisted surgical navigation, corneal cross-linking, radiofrequency therapy, medical device controlled and customized displays for backpack monitors and central nurse stations. We also won accolades within nonmedical areas for applications including air traffic control and the railway control centers. It is clear we offer our customers outstanding products and service.

In fiscal year '18, I will continue to rethink and test our business strategy with the goal of improving operating performance of the division. Maximizing cash flow is an ongoing priority. We will continue to work with our partners to have a vigorous inventory while being able to meet the demands of our customers.

I will now turn the call back over to Ed.

Thanks, gentlemen. FY '18 will be an exciting year for Richardson Electronics, our employees and our shareholders. Our backlog as we start the new year is strong, supported by growth in demand for our new technologies as well as large orders received from our custom OEM display customers. Backlog has also been helped by increased demand for our manufactured products from customers in the semiconductor or wafer fabrication equipment market, which has expanded rapidly right now.

We'll continue to be the market leader in the power grid tubes and we're excited meeting earlier predictions is still a very profitable and strategic portion of our business. We remain committed to our growth initiatives.

Revenues generated by PMT will continue to grow as projects come to fruition and our harrow of new design wins expands. Healthcare sales will also grow as our product line and geographic expansion initiatives gain traction and will grow even more as we improve availability of CT tubes.

Improved availability of high-quality replacement CT tubes means more CT systems can be serviced by third-party companies or by hospitals themselves. This has been an added benefit while increasing our profitable replacement parts sales while reducing healthcare costs.

With respect to our current capital allocation strategy, we don't anticipate major changes in FY '18. We'll continue to operate conservatively and make thorough use of our existing infrastructure to support our profitable power grid tube business as well as our Power & Microwave Technologies and healthcare businesses. We'll use cash to pay dividends and make additional strategic investments in our key initiatives, which we believe will offer our shareholders the best long-term return.

We'll continue to look at acquisitions on an opportunistic basis. Currently, we've not identified any businesses that meet our requirements, primarily due to unrealistic valuation expectations. There's a tremendous amount of pride within Richardson Electronics. Every one of our employees made sacrifices during this year and I'm confident they will continue to see this level of commitment and efforts in the new fiscal year.

At this point, we'll be happy to answer a few questions. Diane, may we open up the line for questions please?

(Operator Instructions) Mark, your line is now open. You may proceed.

Can you guys hear me?

Yes.

Sorry, we can't (inaudible).

Congratulations on reaching operating income profitability. And I'm going to try to pin you down in some form of guidance for fiscal '18 if you don't mind. In the -- can you speak in generalities, perhaps. in terms of do you expect to be GAAP EPS positive? And do you expect overall sales growth?

Well, certainly we'll see overall sales growth. I don't think there's any question about that. There's so many variables in what we're doing and as you know particularly in the medical area with CT tubes if we're [skipped], it's win. We had a successful manufacturing CT tubes and will be probably about the fifth company in the world to be able to actually accomplish that. So there are lots of unknowns with what we're looking at and we just really don't want to forecast more specifically than that.

Okay. Do you expect to be operating cash flow positive?

Bob, do you want to address that?

Sure, I would say that we'll be similar to what we were this year. If you're looking at cash flow from operations for the year, we have $1.8 million of cash generated in operations, so I would expect something similar in fiscal '17.

Okay. And then what was the revenue from PACS again for fiscal '17?

Fiscal '17 sales for PACS Displays were about $4.5 million.

Okay. I guess, this question is for Greg. You mentioned the CO2 laser business continues to be fairly strong, but are you seeing any increasing competition from fiber lasers? Or is that just kind of always going to be there and is not a significant threat to CO2 laser at this point?

Yes. We're seeing various competition, it's not a major threat as of yet, but as it does go to fiber, we will be in place to have other products to support that. The growth in lasers, I mean, the product marketing team, with the same format that we used with the other groups, has done a good job getting other products in terms of associated selling. So we have the laser tube business, which is receiving competition from the OEMs, but it always has. But they've also added a lot of niche consumables to sell along with the tubes that are going to the same system. That business grew both in revenue and in bookings over prior year in FY '17. So we're grabbing market share with new products sold to the same customer base and, in most cases, in applications. That's why we grew.

Okay, great. And then Ed, you mentioned that -- do you know the valuations continue to be kind of frothy on the acquisition front. In terms of the divestiture side, do you think you've pretty much divested what you can strategically and you're pretty content with what you have now?

Well, we're always open. Anything is for sale at a price and we've proven that in the past, I guess. And now we're back into some of those businesses, thanks to Greg. But I don't see anything in the near future. No, there isn't anything that we're actively marketing.

You next question comes from the line of Eric Landry.

So Greg, I'm trying to figure out how much of the 9.5% growth ex the one-timer is due to the semi wafer cycle. Can you give me some help with that?

Yes, the semi wafer fab products that we sell, that market, the growth is led by products going into that market, both products we make here in LaFox, that business was up 25% in terms of the products that we sell into that market. But also, Eric, in the last 18 months we've added new technologies and also those component on a component level are very, very active. One of them was a major design win at a company called Comdel, that actually is largest customer is Lam. So we're kind of done a good job getting our sales into this niche market and these are very niche applications and products, and that market is growing across the world. So that's for the most part where the growth came from. But the good news is it came from numerous product lines.

Okay, so if I'm clear on this, most -- I guess, about all of the growth was from semi wafers but not all of it was from legacy products. Is that a good way of saying it?

Yes, I would say if had to get a percent, Eric. And I wish I had a better number for you, I'd say about 80% of the growth was products sold in the semiconductor wafer fab market. But of that, not all of it was the legacy products that we've had in the past.

Okay. In last call, you mentioned that your customers indicated to you that the cycle would be going strong, at least through, I believe it was your second quarter FY '18. Is that still the case?

Yes. It's unique. I mean, the semiconductor fabrication market has gone through cyclical trends for as long as I've been doing this. And it's usually because there's a wafer fab buildout. And that wafer fab buildout is somebody building a new wafer fab until the equipment is supplied. The customers, our customers' end customers are people like Intel and Samsung that are producing semiconductors that go into this IoT, Internet of Things, going into the cloud. This cycle, I think, is going to be a little bit longer than normal. So based on the forecasts from our customers and our customers' customers, they should continue to our fiscal year, which is the middle of FY '18 -- of calendar year.

Okay. So that's -- so you're basically indicating it's going to last longer than what you indicated in April?

Yes. And that's based on some good meetings I've had with information from our customers' customer. They have qualified and I was being conservative because of historical trends. But now, there seems to be more indication that the products that the semiconductor fabs are now building, that consumer market is going to be booming and it's going to be booming a long time, I mean they just can't get enough data on these mobile applications and these semiconductors like field-programmable arrays and microprocessors, that's going to continue a little bit longer than we've seen in the past than simply building out a wafer fab to produce more semiconductors.

Okay, great. So a good portion of that is legacy which is, if I remember correctly, a higher-margin product, correct?

Yes. Most of this business -- a lot of this business is a higher-margin, engineered solutions product.

Okay, the reason I asked is because that would indicate we can look forward to decent gross margins out of this segment probably for most of FY '18?

That's correct, Eric. That is what we're forecasting and all the trends, including our look at the backlog. We'll show that.

Okay, great. Okay. Moving on. Ed, you said a few moments ago that you expected FY '18 to be a breakout year in healthcare. What does that mean?

I think we'll certainly be the market with CT tubes. We're already refurbishing CT tubes, we're very conservative in what we've allowed to go to market. We're doing a lot more life test protocols before we release any product to market. But I think there is no question that in FY '18, we'll be selling CT tubes into the market and to us, that's a breakout year.

You said that there are some out there now?

Yes, but they're beta sites basically in their -- we've been successful in refurbishing tubes and there's no question about that. Not the quantity that we'd like to and for that reason, we're still very cautious to see what life's going to be on these products.

I got you. So these are with customers that are giving you feedback in...

That's correct, yes.

Okay. I got you. So Pat, have you done any type of work into how much you think the healthcare business will be a subscription business versus how much of it will be just a straight sales business? I mean, is this a -- are you going to go completely to the subscription model? Or will it be some sort of a hybrid? How is that going to work?

So -- definitely, it will be a hybrid because even in my past life where we had a very strong subscription business, it's not a product for everybody. A lot of our customers, depending on the length of time that they have on their contracts with their customers, they just may not be able to go that way. But today, we're just about 100% transactional and I think we will progressively move towards subscription again in what I was doing before when we launched a similar model, domestic sales got to about 25% subscription.

That was the max at -- in your prior life?

That's what we got to with those replacement tube products.

Okay. Speaking of your prior life. What is the impact on Richardson of the closure of your prior life, I guess, for lack of a better term?

Well, I think it's -- for us we see it as an opportunity to pick up some good people and maybe some equipment and what have you. We're certainly sad to see it happen and -- but there's no direct competitive impact because we don't have any products that are up against those products. But I think it represents an opportunity for us.

Okay. And with the refurbished tubes, Ed mentioned that it's indeed going slower than you thought. Is that because there's been some unforeseen issues in the bench testing? In other words, that some of them failed prematurely?

Yes, I would say that we haven't seen the longevity that we would have liked to have had from some of the refurbishment processes and that's moving us, in some cases, to move towards new tube production more rapidly.

So the -- okay, I guess, that's kind of discouraging, if I'm interpreting you correctly.

Well, I don't know that I'd be discouraged by it because everything that we've had to do in that refurbishment process, we are having a level of success. We are getting a certain amount of yield in those tubes that are lasting a certain quality. But I had hoped to be able to take refurbished tubes during this phase and offer them with a 12-month warranty, and I don't think we're seeing that kind of longevity. So we're not going to do it. But everything that we've learned in this phase sets us quite well for the next phase, which is new tube production.

Okay. So this is for Bob. Bob, how much do the OpEx expenses flex with sales? So this year it was $48.5 million. If by chance sales do grow by a decent margin in FY '18, is that $48.5 million likely to go up substantially? Or how fixed is that?

Much of it is fixed because most of our SG&A expense is people and associated benefits. However, 1 flex item is the incentives expense both for sales and management and that is variable, of course, based on forecasted profitability. But I can tell you that SG&A expense for 2018, I would expect, when you exclude the severance expense, it will be similar. Should be similar.

Which is $48.5 million roughly?

Roughly. Yes. Again, these are approximate numbers so that's -- we're worried. For the full year, I don't have a crystal ball but that's what I would say based on what I know today.

Okay. All right. So, Ed, I have to bring this up. So we just had the first operating profit you've had since 2013. PMT grew 9% ex the onetimer, healthcare system's on the verge of what we all hope is significant growth, you mentioned it was a breakout. And balance sheet is very, very strong, yet your stock sits the full $2 below what your company would bring if you just shut the thing down next week, and sold off all of your liquid assets, not even counting your building. And importantly, there's a very consistent seller who's been in the name for months now. I'm wondering have you talked to any of your shareholders about your capital allocation strategy? To me, it doesn't make much sense to pay out $3 million a year in a dividend when you can be shrinking your share base significantly. I mean, just take 10% of your cash flow dividend, you can take your share base down considerably. I know you called it conservative, but I've got to say it sounds to me like it's unsophisticated.

Well, we certainly know your opinion in that regard, Eric. I think we've had a discussion on this point in the past. I think that things that are happening in the market and probably the closure of Dunlee is pointed out better than any other, we want to have our cash available to us if opportunities like this become available. As you know, we spent 2 years trying to buy Dunlee for a very substantial amount of money. And now we're going to be in a position to buy equipment and employ good people and at far less cost for the company. And those are the kinds of things that we're reserving the cash for.

Okay. Again though, I mean, if you -- there's $3 million in the dividend, that would make more sense to me if you would be just be buying back stock. I was wondering if you even had any type of conversation with any of your shareholders. In fact, I know a large shareholder who's been urging you to do that, which would be me of course.

Well, we certainly are open to discussions like that all the time and we're happy to discuss it. At this point, we see more opportunity to spend our cash wisely, investment in the business rather than buying stock.

You next question comes from the line of Kevin Rendino.

Of 180 Degree Capital, thanks. I wanted to add that last question if you don't mind, Ed. You talked a lot about long-term returns in your call. I just -- look at the facts here, since '89, the stock is down, dividends reinvested minus 3% versus a broad market that's up 880%. I actually calculated if you turn the lights out, the stock is 50% upside, vis-à-vis the working capital. And if you argue that the environment is frothy, I'm not sure I understand why we're not sellers of the entire business rather than buyers. The problem is for all shareholders, the B shares prevent any proper Corporate Governance, any checks and balances. ISS would laugh at the Corporate Governance. And I guess, at the end of the day, it doesn't matter what you ask shareholders or what shareholders think. Why do you do these calls? We don't have a vote, you're going to do what you want to do, you've been doing what you wanted to do for a long period of time. You don't respect shareholders, you're running this business for yourself. What's the point? Why are you public? Thanks.

Well, we certainly appreciate your opinion and as usual, we listen intently. Our -- as we've told you, our intent is to take the cash we have in the business and to build the business to a very substantial return on investment, which we think is possible and that's our goal and it's certainly far and away more opportunity for the future than turning the lights off.

Well, you've been saying the same things for 30 years and it's been -- you haven't achieved your goals. I don't know why anybody would think you can, including yourself. Very disappointing that you're running this business for yourself and not the public shareholders. And I ask the board to contemplate that as you think about your dual class structure. It's ridiculous.

Thank you very much.

(Operator Instructions) There are no calls in the queue. I will now turn over to Ed Richardson.

Okay. Well, thank you again -- thank you again for joining us and for your ongoing support of Richardson Electronics. We look forward to discussing our fiscal 2018 first quarter results with you in October.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, you may now disconnect and have a wonderful day. Thank you.