Richardson Electronics Ltd (RELL) 2018 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the FY '18 second quarter earnings call hosted by Edward Richardson, CEO. My name is Cathy, and I'm your event manager today. (Operator Instructions) I would like to advise all parties that this conference is being recorded for replay purposes.

And now I'd like to hand over to Edward Richardson, CEO for Richardson Electronics.

Happy New Year, and welcome to Richardson Electronics' Conference Call for the Second Quarter of Fiscal Year 2018. 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; Jens Ruppert, General Manager of Canvys. As a reminder, this call is being recorded and will be available for audio playback.

I would also like to remind you that we'll be 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.

After realizing a small operating profit in Q4 of FY '17 and again in our first quarter of FY '18, I'm pleased to tell you that we continued our improved profitability trend for the fourth straight quarter. Our FY '18 second quarter revenues were $39.1 million, a 15.5% increase over last year, and gross margin improved to 34.2%. Operating income was $800,000. We also received a long-awaited income tax return from the State of Illinois, raising our net income to $1.7 million in Q2.

All 3 of our business units, CMT, Richardson Healthcare and Canvys, had year-over-year sales gains, excluding the sale of our PACS Display business late in fiscal year 2017. We've also seen continued growth in all geographic areas of the business. The investments we're making in the Power & Microwave and Healthcare markets are generating new revenue. Improving global economic conditions, increased customer demand and focused sales efforts are driving strong sales in EDG and Canvys. We're raising the bar each quarter and the entire organization is committed to ongoing improvement.

Bob Ben will now share more of the second quarter financial details. And then Greg, Pat and Jens will provide a business update for the 3 business units.

Thank you, Ed, and good morning. I will review our financial results for our second quarter of fiscal year 2018, followed by a review of our cash position.

Net sales for the second quarter of fiscal year 2018 were $39.1 million compared to the prior year second quarter of $33.8 million, which was an increase of $5.3 million. Net sales increased $4.8 million for PMT and $1.3 million for Canvys, partially offset by a decrease of $0.8 million for Richardson Healthcare due to the sale of the PACS Display business at the end of fiscal 2017.

Gross margin increased to 34.2% of net sales from 32.4% of net sales in last year's second quarter, primarily due to a favorable product mix in both PMT and Canvys. Richardson Healthcare gross margin also increased due to the divestiture of its lower-margin PACS Display business at the end of fiscal 2017.

Operating expenses were $12.6 million for the quarter compared to $13.4 million in the second quarter of fiscal 2017. The second quarter of fiscal 2017 included $1.3 million severance expense from a reduction in force. After excluding the severance expense from the second quarter of fiscal 2017, operating expenses increased due to the higher research and development expenses for Richardson Healthcare and additional expenses relating to the increase in net sales. Operating expenses as a percent of net sales, however, decreased to 32.2% in the current quarter from 35.7% last year when excluding the severance expense from the second quarter of fiscal 2017.

As a result, the company reported a $0.8 million operating income for the second quarter of fiscal 2018 compared to a $2.4 million operating loss in the second quarter of fiscal 2017. Other expense for the second quarter of fiscal 2018, primarily a foreign exchange loss, was $0.1 million compared to other income of $0.2 million, primarily a foreign exchange gain, for the second quarter of fiscal 2017.

There was an income tax provision for the quarter of $0.5 million, which reflected a provision for foreign income taxes, additional tax due from an audit in Germany and no U.S. tax benefit due to the valuation allowance recorded against the net operating loss. The tax provision of $0.3 million second quarter of fiscal 2017 included a provision for foreign income taxes and no U.S. tax benefit due to the valuation allowance recorded against the net operating loss. Although there is no tax benefit shown on our financial statements from U.S. net operating losses, we can use our net operating losses to offset any cash tax liability that is reported in our U.S. federal income tax return.

Income from continuing operations for the second quarter of fiscal 2018 was $0.2 million compared to a loss from continuing operations of $2.5 million in the second quarter of 2017. In addition, during the second quarter, the company received an income tax refund from the State of Illinois, inclusive of interest and net of professional fees, of $1.5 million. This refund was a result of the conclusion of the Illinois amended return related to the sale of the RF Wireless & Power division in 2011 and was therefore classified as income from discontinued operations.

Overall, we had a net income of $1.7 million for the second quarter of fiscal 2018 as compared to a net loss of $2.5 million in the second quarter of fiscal 2017.

Turning to a review of the results for the first 6 months of fiscal year 2018. Net sales for the first 6 months were $76.1 million, an increase of 13.2% from the first 6 months of fiscal year 2017 net sales of $67.2 million. PMT and Canvys net sales increased by $8.6 million and $2.4 million, respectively. These increases were partially offset by a $2.1 million decrease for Richardson Healthcare, which was due to the sale of the PACS Display business.

Gross margin increased to 33.5% from 31.6%, primarily reflecting an improved product mix. Operating expenses were $24.9 million for the first 6 months of the fiscal year, which represented a decrease of $0.8 million from the first 6 months of the last fiscal year. The decrease was due to the $1.3 million severance expense associated with the reduction in workforce during the second quarter of fiscal 2017, partially offset by higher research and development expenses for Richardson Healthcare.

As a result, our operating income for the first 6 months of fiscal year 2018 was $0.8 million as compared to an operating loss of $4.5 million for the first 6 months of fiscal year 2017. Other expense for the first 6 months of fiscal 2018, including foreign exchange, was $0.1 million, the same as for the first 6 months of fiscal 2017.

The tax provision of $0.6 million primarily reflect the provision for foreign income taxes, additional tax due from an audit in Germany and no U.S. tax benefit. Income from continuing operations for the first 6 months of fiscal 2018 was $0.1 million compared to a loss from continuing operations of $5.4 million in the first 6 months of 2017.

Overall, including the $1.5 million state income tax refund, we had a net income of $1.6 million for the first 6 months of fiscal year 2018 as compared to a net loss of $5.4 million in the first 6 months of fiscal year 2017.

Turning to a review of our cash position. Cash and investments as of December 2, 2017, were $59.3 million, which was a decrease of $2.1 million from September 2, 2017. Cash and investments were $62.8 million at November 26, 2016.

We had capital expenditures of $1.7 million in the second quarter of fiscal 2018 compared to $1.2 million in the second quarter of fiscal 2017. Approximately $0.6 million related to our investments in our Healthcare growth strategy, $0.3 million to our IT system, $0.2 million to our manufacturing business and another $0.7 million for our facility projects in the second quarter of fiscal 2018.

On a year-to-date basis, capital expenditures totaled $2.7 million as compared to $3.3 million in the first 6 months of fiscal 2017. Lastly, during the second quarter, we paid $0.8 million in dividends.

Some final comments. On December 22, 2017, which was subsequent to the end of our second quarter, the Tax Cuts and Jobs Act or TCJA enacted significant changes to the U.S. Federal Internal Revenue Code. Due to the recent enactment of the TCJA and expected further rule-making and regulatory guidance, a comprehensive estimate of the overall tax impact to the company cannot be made at this time.

However, we anticipate that in our third quarter, the TCJA will result in a discrete tax impact related to revaluing our U.S. federal deferred tax assets and liabilities, a discrete tax impact associated with including incremental earnings from our non-U.S. entities in the U.S. federal income tax base and a change to the company's fiscal 2018 estimated annual tax rate due to the tax rate reduction.

These changes will impact our third quarter deferred income tax and other noncurrent liability line items in our consolidated balance sheet. Certain adjustments, but not all, will be offset by an adjustment to the valuation allowance. The impact on the company's cash flow from operations cannot be reasonably determined at this time.

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

Thank you, Bob, and good morning, everyone. In the second quarter of FY '18, PMT sales were $30.1 million versus $25.2 million in Q1 of FY '17. Based on the continued strong bookings throughout FY '17, our business grew 19.2% over prior year, and we ended the quarter with a healthy 1.15 book-to-bill ratio.

In addition, our margin improved to 34.1% compared to 32.8% in Q1 of last year. Our improvement in performance is driven by sales growth within our core electronic device business, including engineered solutions as well as growth from our new technology partners added over the past couple of years. We are taking advantage of our long-term customer relationships as well as also forming new ones with our expanded product range. Favorable market conditions in the semi fab market and internal actions to improve margins, efficiency and inventory turns have also contributed to our profit improvement.

We're experiencing market share gains in revenue growth for both products in both our business units driven by demand in the industrial, telecom, radar defense and new energies markets, with key suppliers like CPI, Qorvo, Thales, MACOM and the Milky Way.

More specifically, in the industrial market, applications including lasers, welding and microwave heating are contributing to our growth. 5G is in development, and we're starting to see production orders for new test equipment and antenna development to support this infrastructure rollout. Design wins at major Chinese telecom OEMs will help launch our market share gains with new technology partners.

The semiconductor wafer fab equipment market continues to grow. This growth is driven by both engineered solutions and components. We're also excited about our continued strong bookings trends for our new technology partner relationships in engineered solutions products for the wafer fab market. And looking at our growth and design wins as we track these on a global basis, it is clear that our team has done a great job identifying key suppliers, niche markets and applications with the top resources in the field to support this growth. We're adding many new customers each quarter, which, when combined with our backlog, makes us confident our growth in revenue and backlog will continue.

In addition to focusing on profitable growth through targeted sales and marketing programs, we continue to maximize the use of our existing infrastructure, concentrating our sales efforts on a limited number of supplier partnerships for electron devices and solid-state suppliers with disruptive technology. We know them and their technology well, and we are finding new opportunities for them every day.

There is no question that we have an unparalleled capability and a go-to-market strategy that is unique to the RF and power industry. We can support this fact by our continued growing list of customers and technology partners who choose Richardson Electronics.

Our world-leading position in the manufacturing and distribution of electron devices supports legacy equipment as well as new equipment where solid-state cannot replace tubes. The market we address need Richardson's capabilities for electron devices, but also solid-state technology and our design and manufacturing solutions. We have key suppliers in place as well as a global field sales engineering group and the infrastructure to support our customer needs throughout the world.

And with that, I'll turn it over to Pat Fitzgerald and Richardson Healthcare.

Thank you, Greg, and good morning, everyone. I am pleased to report that we produced our first new Richardson-manufactured CT tubes in the quarter. These tubes are performing well so far on our accelerated life test on in-house CT scanners. We are following a very rigorous testing protocol to ensure the tubes are ready to release to customers.

Due to the sale of our PACS Display business late in FY '17, Healthcare sales in the second quarter of 2018 were $2.3 million, down 26.8% from prior year sales of $3.2 million.

Service training and sales at Richardson-certified and refurbished CT tubes in the second quarter were up compared to prior year, which helped to offset some of the lost display revenue. We believe that creating a sustainable supply of CT tubes will ultimately lead to more rapid sales growth in both CT tubes and replacement parts as alternative service providers are able to take system maintenance away from the OEM.

Gross margin as a percentage of net sales increased to 42.6% in the second quarter of fiscal 2018 as compared to 36.3% in the same period last year, primarily due to the sale of the PACS Display business, which generated lower margins.

We continue to see strong demand for service training, and we remain on a pace to train twice the number of engineers on how to maintain CT scanners as we did last year. We believe the increase in training is an early indicator that more hospitals and service companies are interested in servicing CT equipment as we near the release of our new CT tube. We are investing now in training programs for additional brands of CT scanners and also in newer platforms to support future growth.

Sales in Europe and Latin America were both up in the quarter. We expect strong growth in Europe to continue as our European service partners are taking on additional CT scanners. In Latin America, we see increasing demand for parts and tubes to support the growing installed base of equipment we have sold there over the past several years.

Our P3 parts contracts are also beginning to gain traction. The P3 Advantage is an exclusive supply agreement, and the P3 Protect is designed for customers who want replacement parts and tubes coverage in exchange for a fixed monthly fee. We signed our first P3 Advantage contract in the quarter with a significant OEM multi-vendor service provider. We have additional P3 contracts pending, including our first P3 Protect agreements.

P3 customers will gain preferred access to what will initially be a limited supply of CT tubes. We expect P3 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.

Our strategy in health care has not changed. We will play a significant role in the development and sale of diagnostic imaging replacement parts around the world. Health care providers globally are under intense pressure to reduce equipment maintenance costs and are increasingly exploring alternatives to expensive OEM service contracts. As a result, there's a growing demand for an alternative source to the OEMs for replacement parts and service. We estimate the global market for diagnostic imaging replacement parts and service to be between USD 7 billion and USD 8 billion annually.

We entered the parts space in 2015 with our acquisition of IMES and have since been able to leverage the company's infrastructure, including the use of our global supply chain, our manufacturing capabilities and worldwide local sales offices. The investments we are making in the production of new CT tubes and other high-value components, including the addition of experienced engineers and specialized manufacturing equipment, are the key to the long-term success of this strategy.

With replacement parts, CT and X-ray tubes, service training, wireless DR 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 several years, we have significantly strengthened our value proposition for health care 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 and organic investment in product line expansion in segments that we feel are underserved.

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

Thanks, Pat, and good morning, everyone. Canvys, which includes the engineering, manufacture and sale of custom displays to original equipment manufacturers in the industrial and medical markets, had sales of $6.7 million during the second quarter of fiscal 2018, an increase of 23.3% over the same period last year. Our improvement in performance is primarily driven by sales growth in our European market.

I am also pleased to report that gross margin increased as a percentage of sales to 31.7% from 28.4% in the same period last year. The year-over-year gross margin increase was related to a favorable product mix and lower cost of selected products sold. We are excited about continued strong customer demand globally. The division did a good job controlling expenses as we continue to work closely with our Asian partners to deliver the highest-quality solutions at competitive prices for our customers.

The second quarter of fiscal year '18 was very successful quarter for us. During the quarter, we won several new programs from existing as well as new customers in the medical space. Applications include cell analyzer to provide powerful metabolic data from live cells in real time, radiofrequency generators for pain management and neurosurgery and patient monitoring systems that help enhance patient care and improve clinical performance.

We also won projects in nonmedical areas, applications including human machine interfaces, (inaudible) processing machines, food processing machines and packaging machines, teleprompter displays for well-known news stations and displays for passenger information systems installed in buses. From the variety of products and applications and the value of order from existing as well as new customers, it is certainly clear we offer our customers outstanding products and service.

While our sales organizations stays focused on new opportunities, I will continue to reissue and adjust our business strategy with a goal of improving the operating performance of the division. Maximizing cash flow is an ongoing priority. We will continue to work with our partners to help us reduce inventory while being able to meet the demand of our customers.

I will now turn the call back over to Ed.

Thanks, gentlemen. You and your teams have done an excellent job during the first quarter of FY '18. We are counting on you to continue the quarter-over-quarter revenue and profit improvement.

The third quarter is off to a good start. With strong backlog and new demand generated by both our key initiatives and core businesses, we are optimistic will show continued revenue growth. The Healthcare team is fervently on target to launch new CT tubes later this fiscal year. Having a sustainable supply of CT tubes will generate new revenues, increase our sales of replacement parts and systems and position Richardson Electronics as a major player in the health care market.

We're controlling the expenses to ensure we are leveraging our infrastructure and closely monitoring cash flow. With tax reform behind us, we will repatriate cash and use it responsibly to take advantage of business opportunities and further overall growth. We're not currently concerting any acquisition targets, although we remain open to doing so in an opportunistic basis. We do not anticipate any change to our dividend or share repurchase strategy.

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

(Operator Instructions) The first question comes from the line of Mark Zinski.

I'll start with Greg. The PMT growth was more robust than I had forecasted. So I just kind of wanted to dissect some of what's going on there. Is it a combination of vertical strength and new products? Or are new products contributing more than the verticals, I guess?

I was -- the combination of 3 main things. One is the semiconductor wafer fab market continued to grow very strong for us. And that includes both engineered solutions and also the new technology partners. And so that continued to grow very strongly in the quarter. The second part of it is if you look at our book-to-bills over the past 2 quarters, those came to revenue, gladly, a little bit stronger in the second quarter than we had expected. And the last part of it is, we're adding -- so far this fiscal year, we've added over 1,000 new customers and just a various number of new applications and niche markets that the new technologies group supports. So we're seeing good traction with that. And I guess, I'll add a fourth one, across the board, every one of our product lines, except for one, our broadcast tube business, outgrew in the quarter. So yes, the majority of that growth was semiconductor manufacturing market, but that includes both new technology partners and our existing legacy capabilities, if you will. But also, we're seeing good traction on the new technology partners in various applications.

Okay. And I think you mentioned last quarter that the semi wafer fab business grew up like, I think, over 20%, 25%-ish. Is that the same rate of growth you had this quarter, roughly?

Yes. Of the incremental dollars, of that, about 25% to 30% of it was in the semi wafer fab market. That market overall grew 35% to 40% in 2017.

Okay. And then, the laser, the CO2 laser business also continued -- is that -- you're seeing some growth there as well?

Yes. It's very similar to the strategy of the other product lines. We're associated selling, and we're seeing that in both laser products, but also consumables, all the products that go around the tube itself. Not huge growth, but strong high single-digit growth quarter-over-quarter, year-over-year, so...

Okay. I also just wanted to touch on the potential for the 5G business in China. I recall years ago, when you had the RF business, you saw some very nice growth in China related to telecom. Are you expecting something somewhat similar to that? Or if -- any kind of color on what the potential upside might be on the 5G in China would be helpful.

Yes. That was based on right before the Olympics when China decided to put in their own protocol and infrastructure, and it was the TD-SCDMA infrastructure. And the group at that time had done a great job aligning the resources. And that infrastructure business, the base stations, picocells, microcells, was dominated by LDMOS. So what we're seeing now with 5G that China is taking the lead in terms of the first to get that number of cities or prototype cities in place, and we'll see that towards the end of 2018. However, that technology will be based on GaN technology. So you're right, it was tens and tens of millions of dollars that we grew that business in China based on infrastructure rollout. I right now don't know those kind of numbers will exist this time. The potential is definitely there. But one of the things that we've done, like we did before, we aligned ourselves with GaN technology, which will be the technology of choice for that, and also some niche suppliers. So when this does roll out and the designs do happen, we'll participate and it will be a major growth area for us from end of 2018 to 2020. And one thing I want to add is, we are the only company in the world that has both the leading GaN suppliers, in this case, MACOM and Qorvo, we have global partnerships with them, many of the parts are exclusive. And we do have one major design in -- at a major Chinese -- as I mentioned in my opening, with a major Chinese OEM for their antenna for these systems. When that will come into production? We have a very large prototype order. It should be sometime in 2019.

Okay, great. That's all very helpful. And then just wanted to go over to Healthcare and Pat. Do you have a growth number -- a sales year-over-year growth number minus the PACS divestiture?

Yes, it's mid-single digit.

Okay, mid-single digit. And are you -- so the CT tubes, the replacement tubes are still kind of undergoing a certification process? Is that right? Or have you registered any sales in that business yet?

Yes. So what we sell today, Mark, are the certified and the refurbished tubes. And what I announced in my blurb was that we're probably began the production of the first newly manufactured Richardson CT tubes. But we haven't...

And are you seeing any progress on those education efforts to educate the community about using manufactured replacement tubes versus the OEM tubes?

Well, yes. So what we see is, we see, I think, some excitement in the marketplace for the tube that's coming. And we see people are both training additional engineers and taking contracts -- systems that they might have had under contract with the OEM, they're beginning to release those from contract and put them at risk in anticipation of our releasing the new tube. Of course, we haven't released the new tube for sale yet. We hope to do so later in the fiscal year.

The next question comes from Eric Landry.

Ed, I think there's really some reason to be proud there in LaFox. And I hope everybody is proud of what you've been able to do over the next -- over the past couple of quarters and then of course, going forward. So good work.

Thanks, Eric. It took the whole team to make that happen, and we are really excited at the moment and everything seems to be going the right way.

Yes, let's keep it that way. So based upon Pat's comment about the mid-single-digit growth, I gather the tax was just under $1 million last year in the quarter?

Yes.

Correct.

Okay. So that makes your overall growth somewhere around 19% if we ex the PACS?

Is that percent or dollars, Eric? I'm sorry (inaudible).

Somewhere around 19% is what I get on my sheet.

I have to calculate it, but that sounds about right because it was 15.5% without it. Then yes, that sounds about right.

Great, okay. So Greg, you mentioned that China is an opportunity that you're looking forward to at the end of '18. Is that calendar or fiscal '18?

Calendar.

Got you, okay. And so you keep mentioning China. What about the States? I noticed that Verizon has already named some suppliers, and I think they are rolling it out in Sacramento, if I read the article correctly, and then somewhere on the East Coast. Is Richardson going to have any participation in that rollout?

Yes. We'll have participation in the -- each area of the world. North America, the one that we are working with directly is AT&T, has announced that they're going to roll out, at the end of 2018, 6 prototype cities to roll out their 5G capabilities. So the companies we're working on, we're working with them on GaN and all kinds of other components. We have a couple of small design wins, but we'll participate in that. I think they'll be about 3 months after China. And if China gets things going the early part of 2019, I think the middle part of 2019, we'll see the rollout in a number of cities in North America.

Okay, great. So then, how much of that business is going to be produced in a value-added manner there in LaFox? And how much of it will be your new technology partners? Just a ballpark, if you could.

Yes. Well, 90% of it will be new technology partners. It'll be engineering, but it'll be design-ins working with the customers' engineers designing in -- at a component level. Right now, we're looking at different modular solutions that we could do for a supplier. But most of it will be component design-in at the actual OEM amplifier manufacturer.

Okay, I got you. And then, your comments about China, I -- so you're implying that you're already on the platform there, correct, your design-in already?

Yes. So in China, what they do is they assign -- the government assigns who gets what percent of the rollout. And so they've given 40% approximately to Huawei, they've given 40% to ZTE, and the balance of it, 20%-ish, to Datang. Of those 3, 2 of the major ones I just mentioned, we have a very large design-in at that customer, and we are an improved Tier 1 supplier now to that customer. So our hope is we'll bring in other products through the design win of this component that goes into their pico and microcell systems.

Okay. So you are an approved supplier to 1 or 2 of the 3?

One right now. We are design registered, approved supplier. It is (inaudible).

Okay. Are you talking to the other 2? And do they have a -- another -- is there somebody else who could win that business with the other 2?

Well, I mean, we're so niche and so focused. I mean, we're on -- obviously just on the infrastructure side, not on the mobile side. We're on the amplifier side. And so we're talking to the -- all 3 of them about GaN technology today, Eric. That's all I can say due to NDAs. But we are talking to 3 about GaN technology.

Got you. Great, okay. And also wafer grew -- wafer fab equipment grew significantly in the quarter. I think last we talked, you thought it would go through calendar year-end '18. Is that still your best guess?

Well, I'm very, very confident it'll continue through our fiscal year. We meet with them weekly. We talk to them daily. Again, if you look at a lot of the reports, and -- but it's going to slow down in 2018, grew 30% to 40%. It'll still be double-digit growth. But like I said before, Eric, I think our customers, our key customer is gaining market share. So we'll -- I think we'll see growth in 2018, but I don't think it'll be as near as the growth we saw in 2017.

Okay. But has that -- would be -- sorry?

But still stronger.

I got you, great. Okay, great. Jens, last quarter, your backlog was up 40%. Is that -- I mean, is it up any -- it is down now from there? Or can you mention anything about that?

Actually -- so yes, it is slightly down because we had a huge shipment, as you could see on -- in what I spoke about just earlier. So it declined a little bit, but it's still substantially up from last year, so we are very optimistic.

Got you, okay. And so what -- is there any way you can mention what percent of the new business are these multiyear frame contracts? Is that a large percent of your wins?

I think most of our business is getting frame contracts that have a duration of 12 to 24 months. So we had a large part of bookings last quarter. That's why the backlog was 40% up for those -- for one of the big customers there, that made up quite a bit. However, we see increased demand on all ends, so it's all good.

The current gross margin level in that business, is that sustainable? Or were there some onetimers in there?

Yes. As I said before, it's based on product mix, so there were a couple of -- I wouldn't say onetimers because they are scheduled shipments. We had one just in the last quarter, but we will have some more to come. So I think generally speaking, the gross margin in the display business is lower than we just have it right now, but we have very specific products that have good margins.

Okay, great. Pat, I want to second your comment that there's some excitement in the field about the new tube. I'm seeing exactly the same thing.

Thanks, Eric. Good to hear.

So are there any tubes in beta right now out there being tested other than on the bench in LaFox?

All the tubes that we've built, which are newly constructed tubes, are still in either here or Charlotte on -- and they're on OEM CT scanners, so they're not quite on the bench, but they're still in-house. Our next phase will be to take one or several of those tubes to clinical sites and go to beta.

Okay. And is -- are there any milestones you have to meet in-house before those can go out to a third party?

Yes. We really like to get through a certain amount of quality data accumulated, although we're accumulating quite a bit now. So I don't think it will be long, but we do like to hit certain milestones before we go to a clinical site.

Okay. So is it possible that those milestones could be met this quarter?

It's possible. But I think it's more likely we will -- well, let me back up on that. You mean would we go to beta this quarter?

Right.

So I -- let me -- I didn't understand your question to begin with. Yes, it's entirely possible to go to beta this quarter. And then, we'll want the tubes to perform at a clinical site for a good period of time and then we'll release. So I thought you were saying was it possible, would we sell this quarter, and I think it's more likely we would have a release in sales in the fourth quarter.

Got you, okay. And so is there anything you can mention about what your capacity is now for tubes? Is it -- I don't know, 10 a month, 12 a month, 50 a month? And what would that be?

I wish we could start with any one of those numbers, Eric. But probably, demand will start slower than that and our capacity won't be quite that. But we have a productive capacity that will initially probably be greater than the demand from the market, and then -- but we expect that demand will pick up then as tubes becomes available and people take more scanners off of OEM contracts.

Okay. All right, great. Bob, how much of the $500,000 increase in SG&A was due to R&D? Was it most of it or a little bit of it?

I would say it was -- for the quarter, it was about $300,000 in R&D, and the other $200,000 was, as I said in the press release, expenses related to the increase in sales, supplies, freight, sales incentives, things like that, due to the substantial increase in sales.

Okay. So you really -- you leveraged SG&A pretty well in the quarter, all things considered?

I would say so.

Yes. Okay. Last question, you've got $48 million sitting overseas. Any thoughts on that?

Yes. We're -- now that the Tax Reform Act has been passed, we don't feel that there's any significant impediments to bringing the cash back. So we're actively working on it. I might say that it's not a simple process. It's not overly hard, but in many of these countries, we have to work legally to do so to bring the money back because most of our cash, you might recall, as a result of the sale of our PD back in 2011. So it's not in a dividend form, which is much easier to repatriate. So we have to do things like capital reductions primarily, and that takes -- it just takes time. So yes, we're actively working on all that.

So the -- I guess, the headline number would be that it would cost you somewhere around $7 million to $8 million based upon the statutory rates that exist today. Is it likely you'll have to pay less than that because of your NOLs and whatnot?

While we're working on it, right, we're working on those calculations as we speak, and as I said in my remarks, it's quite complicated. So I hesitate to give out any numbers. But yes, we have to come up with a gross number, as you mentioned, which could be higher than you said. But we'll, of course, look at our foreign tax credits, which will be somewhat limited due to the reduction in the tax rate from 35% to 21%. Same thing with our NOLs, we're going to have to write those down from the current 35% federal rate to 21%. So they'll still be available for use to offset the tax liability that we are calculating but at a lesser amount. So that's why it's hard to give out numbers and we haven't done so because again, this was implemented subsequent to our second quarter end, not during the quarter, so -- but we'll certainly be reporting on that in our third quarter results, so...

The next question comes from [Sam Erbachs].

The 65 million that you bought over the number of years, could you indicate what the high and low price you paid for the stock? And how many shares you bought and when was the last time you about some stock?

I think the average price is $10 or just $10 and change. I don't know what the high and the low was. Bob, how many shares did we buy back in total?

Well, again, it was 65 million. And so if it's an average of either $10 a share, that would be about $7 million to $10 million. (inaudible)

Okay, yes. So unfortunately, this -- when the stock was lower, it would have been desirable to add to the position, but it would see -- as soon as you could get more cash, is that feasible to -- with -- even though the stock has been moving up and because of your good performance, it's trading a little higher. Would you be open to buying stock? Is there an open to buy right now if you wanted to buy?

We do have an open to buy, but it's fairly low, admittedly. But the reality is, is that, yes, it's easier for us to bring the cash back. But as we mentioned before, we're managing the company conservatively from a cash perspective. And using it to invest in our Healthcare and PMT growth strategies primarily, which we're starting to see the results of, and we expect that with the CT tube coming that we're going to see even better results in the quarters ahead. So I wouldn't say that, as Ed said in his remarks, we're not planning any changes to our dividend or stock buyback strategy. But we are going to continue the dividend, which is what we've been doing, subject, of course, to current market conditions.

Okay. And as far as acquisitions, are you seeing things in the $10 million, $20 million, $30 million? What kind of size acquisitions would you be looking at that would come across your table?

Well, as I mentioned, we're not currently negotiating any acquisitions. I would say that the majority of the acquisitions we've looked at have been in the health care space. Most of those are fairly small, $10 million to $20 million in size. But frankly, the multiples that are being paid for those companies, we're not prepared to pay. So I don't see anything in the foreseeable future, but we're always open. So if something comes along that looks good, we'd certainly look at it.

Okay, great. Hopefully, you could continue the forward improvement. Good luck.

Thanks very much, Sam.

(Operator Instructions) We do have another question. It comes from the line of [Peter Abrahams].

I just had a question on CapEx in the quarter and going forward. CapEx is around $1.7 million, and it's recently been a lot higher than depreciation and amortization. Could you talk about where the CapEx dollars are going into, which division and where you expect CapEx to be in this fiscal year?

Well, let me start with the answer where I expect it to be for the year. It was $2.7 million for the first 6 months and as you noted, $1.7 million in the second quarter. For the year, I expect it to be in the $6 million to $6.5 million range, the reason being that we do have a facilities project in the second half of the year we're going to have to do that we've been putting off. In terms of where the money is going, much of it is going into our health care strategy. And of course, to build tubes, we have to purchase equipment and machines and things like that. We continue to build our capabilities in our -- with our new IT platform. In addition to that, we have some smaller amounts that go to our manufacturing business, equipment needed for that. So that's where we spend the money. I -- so again, I expect the number to pick up in the second half a little bit simply due to the facilities project.

Okay. Is it...

Does that help?

Yes. Is this a 2018 CapEx story? Or are you -- do you think you're in the beginning of a multiyear kind of capital investment phase?

I think if you look at our -- yes, if you look at our CapEx numbers over the last couple years, they've been pretty consistent in the $6 million range. And I would say, going forward, I would expect something similar. We might -- we're in the midst of reviewing our plans fairly soon for fiscal '19, and it depends on the capacity requirements, particularly in Healthcare. So I -- really, it's possible it could go up next year. But we don't have anything concrete that we've decided yet.

Thank you for your questions. I would now like to turn the call over to Edward Richardson for closing remarks.

Okay. Well, thank you, again, for joining us and for your ongoing support of Richardson Electronics. We look forward to discussing our fiscal 2018 third quarter results with you in April. Thanks very much.

Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining. Have a good day.