Ed Richardson - Chairman of the Board, President, Chief Executive Officer, Chief Operating Officer Kathy Dvorak - Executive Vice President, Chief Financial Officer and Chief Strategy Officer Greg Peloquin - Executive Vice President of Electron Device Group Pat Fitzgerald - Executive Vice President and General Manager of Richardson Healthcare Wendy Diddell - Executive Vice President of Corporate Development, General Manager of Canvys Business.

Mark Zinski - 21st Century Equity Research Steve Bush - Southpaw Investments.

[ABRUPT START] Earnings conference call. I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]. I would now like to turn the call over to your host for today, Ed Richardson, CEO of Richardson Electronics. Sir, you may please proceed..

Good morning and welcome to our third quarter 2015 conference call.

Joining me today are Kathy Dvorak, Chief Financial Officer, Wendy Diddell, Executive Vice President of Corporate Development and General Manager of Canvys; Greg Peloquin, Executive Vice President and General Manager of EDG; and Pat Fitzgerald, Executive Vice President and General Manager of Richardson Healthcare.

As a reminder, this call is being recorded and will be available for audio playback on our website. Before we get started, I would like to remind you that we will be making forward-looking statements and they are based on current expectations and involve risks and uncertainties. Therefore, our actual results could differ materially.

Please refer to our press release and SEC filings for an explanation of our risk factors. In our last quarter conference call, we shared our plans to focus on three business units, EDG, Canvys and the new business unit, Richardson Healthcare.

We also introduced key additions to our management team, Greg Peloquin, who is responsible for EDG, and Pat Fitzgerald, who is General Manager of Richardson Healthcare. Throughout the third quarter, we continued to make investments in our healthcare business, and EDP continued to outperform last year.

Momentum is building as we introduce new people and new ideas through the organization. Our performance is helped by economic recovery in key markets and strong growth in our manufactured products. The weakened Euro is challenging us but demand for our products and services is growing, which helps offset the impact of currency exchange.

Greg and Pat will share more details with you later in the call. On March 1, we implemented our new IT system, Microsoft Dynamics XRM and Great Plains. I am pleased to report that based on early indications, the implementation is going well, and we are able to serve our customers and suppliers in our typical high level fashion.

The amount of work leading up to this implementation was incredible. Many people worked tirelessly seven days a week per month to ensure this success. We continue to encourage significant incremental expense to operate on both the legacy and the new system.

We anticipate this expense will begin to decline later in the fourth quarter and throughout the next fiscal year as we automate more functions and make improvements to workflow. Third quarter revenues were $33.5 million, a 1.8% increase compared to net sales of $32.9 million in the prior year.

Sales for EDG's business increased 4.2% over the prior year. Canvys revenue decreased 7.4% from the prior year and healthcare sales increased 3.5% above prior year's third quarter.

Before we provide details about the business unit performance in the third quarter of fiscal year 2015, I will turn the call over to Kathy Dvorak to present financial details..

Thank you Ed and good morning everyone. I am pleased to announce that as of March 1, we went live on our new global IT platform. Prior to March 1, we were operating under the terms of a transition services agreement for IT.

Expenses related to the transition services agreement as well as the implementation of the new IT system were $1.5 million in the quarter. We have made great progress, but as with any systems project, there is still much to do. In the upcoming months, we will continue to enhance functionality and automate processes.

Needless to say, the systems implementation devoted time and attention from all areas of the business and required involvement from every employee. It was time well spent to ensure we designed and developed an IT platform that will be able to support our initiatives in engineered solutions, manufacturing, and global distribution.

Sales for the third quarter were $33.5 million, up 1.8%. Gross margin was flat at 29.3%. Operating expenses were $12.6 million for the quarter. The $2.1 million increase in operating expenses reflects the significant investments in training and deployment costs as well as $1.2 million to fund our engineered solutions and healthcare initiatives.

With these additional expenses, our operating loss for the third quarter of fiscal 2015 was $2.8 million. Interest income for the quarter was about $239,000. We also had an FX gain of $275,000 due to revaluation of our cash and investments overseas. Loss from continuing operations before and after tax was $2.2 million.

Cash and investments at quarter-end were $113.8 million. Cash used by operating activities during the first nine months was $8 million. Working capital was a use of cash of $7.4 million, removing the effects of FX.

As we prepared for our go-live, we accelerated payments to our suppliers to more effectively cut over to the new system, and at the same time we are not as diligent on collections.

In addition, we increased our investment in inventory to ensure our ability to service our customers, particularly as our fourth quarter is typically our highest sales quarter. Currency volatility has had a dramatic impact on our business this year.

For the first nine months of fiscal 2015, currency translation has had a $4.7 million impact on cash and cash equivalents. This reflects the significant amount of cash that we hold overseas in local currency that is necessary to transact our business. When we translate these balances back to U.S. dollars, our U.S. dollar cash balance declines.

Capital spending for the third quarter was $1.3 million and $3.3 million through the first nine months. Approximately $1.7 million our fiscal 2015 capital spending relates to our systems implementation and $1.6 million relates to machinery and equipment, which support our growth initiatives. Depreciation and amortization were $418,000 for the quarter.

With the foundation of our IT platform in place, our focus in the upcoming months will be to introduce standard functionality that will help accelerate our growth initiatives. Now, I will turn the call over to Greg, who will discuss the operating performance of EDG..

Thanks, Kathy. Good morning, everyone. EDG again performed well in Q3 with improvements over prior year in revenue and margin. This is a direct result of strong bookings and market share gains throughout the fiscal year.

While the overall market for tubes is turning flat to down, we continued to gain market share with tubes and engineered solutions in the quarter. This increase in new engineered solution sales and market share gains allowed us to grow 4.2% over prior year. In addition, gross margin was up 100 basis points, mainly due to product and regional sales mix.

We continued to show improvements in our manufacturing efficiency and we are managing expenses to support our growth initiatives. We also continued to carefully monitor our working capital requirements to support the business.

We remain confident that revenue growth will continue as we add new technologies and capabilities to expand key power and microwave markets and applications. Regional sales growth in the quarter was led by North America and in Asia-Pacific regions, which were up 14.5% and 11.1% respectively over prior year.

Europe was down to prior year mainly due to the weakening Euro. In North America, our growth continues to be led by key engineered solutions programs and the semiconductor capital equipment market.

Through investments in the product development group combined with our expertise in high power RFs, we have vertically integrated our manufacturing capability to give us unique skill sets to design and manufacture custom equipment for various applications. This is an area where we will continue to gain market share at key OEMs throughout the world.

Asia's growth was led by our China team where we realized great market share gains in marine applications with one of our key suppliers. Our engineered solutions business, including our micro generators remains strong with significant growth year-over-year.

Our demand creation strategy takes advantage of our highly trained experienced sales force, who are backed by a growing sales and design engineering team that specializes in microwave power technologies and manufacturing resources focused on niche products and technologies.

We have been able to win business opportunities that require a specialized manufacturing and global distribution organization like Richardson Electronics. We provide a significant amount of engineering support and a global infrastructure to support the customer.

In our previous analyst calls this fiscal year, we discussed various applications such as special processes and microwave equipment for creating thermal containers and tobacco stem drawing, which take advantage of our engineered solutions product capabilities.

We are starting to ship these systems for the customers while we continue to uncover more opportunities for different microwave generators and systems. We also continue to be contacted by key technology suppliers wanting to work with us to bring their products and technologies to market.

Needless to say, after few quarters of growth, our demand creation, sales, and engineering strategy is producing new opportunities for our company that now can tell us apart from the competitors but will position us for long-term profitable growth.

As I mentioned earlier, EDG sales growth over prior year is driven by sales of our engineered solutions products. We gained market share with several key OEMS for electron devices and our cathode ray tube business is seeing a resurgence in the quarter.

Our industrial consumable business for laser applications as well as our marine business was also up over prior year.

Industrial product sales were slow this quarter mainly in the dielectric heating and industrial heating applications, however we will generate revenue from new technologies in near future that will offset these declines in our tube business.

We are also adding programs which will keep us engaged with our customers at all levels of the organization and it sets us as a key extension of the engineering departments.

Our with our key power grid tube vendors are stronger than ever and will probably our demand creation strategy into expanding tube lights and finding new opportunities to use tubes. Our backlog remains strong as we push the sales team to focus on demand creation for our engineered solutions.

We are doing this without sacrificing the levels of support we provide our MRO customers. The team has done an excellent job adding capabilities, new products and technologies to complement and leverage our existing product lines in MRO business.

Our number of organizational process changes in the future will help us become more efficient while increasing our capabilities to service our customers engineering and global logistics needs. With that, I will turn it over to Pat Fitzgerald to discuss Richardson Healthcare performance in the quarter..

Thank you, Greg and good morning to everyone. Healthcare sales which consist today primarily of our Image Systems brand displays for Picture Archiving and Communication Systems or PACS and related equipment for operating rooms were up 3.5% over prior year's sales.

While the quarter was relatively strong, hospitals continued to delay many PACS display replacement products due to tight capital budgets and they are also looking hard at lower cost alternatives. Healthcare providers are under extreme pressure to reduce costs while gearing up to provide services to more patients.

Capital spending and maintenance budgets remained tight as hospitals adjust to changes in reimbursement rates. Price is increasingly one of the leading factors behind purchasing decisions. 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 $7 billion and $8 billion annually. In January we began on-site demonstrations of the Thales Artpix EZ2GO digital radiography solution in hospitals.

We have an agreement with Thales to distribute their digital flat panel detectors as replacements, retrofits and upgrades into existing diagnostic imaging equipments. The Artpix EZ2GO features a wireless detector paired with a rugged tablet that interfaces with the hospital's information systems.

Average selling price is in the $70,000 to $100,000 range depending on options. The Artpix EZ2GO produces digital images in seconds rather than minutes allowing hospitals to perform more patient exams in less time using their existing radiology equipment.

Flat panel detectors represent an immediate opportunity to sell additional high value products to healthcare providers and independent service organizations. On-site demonstrations of EZ2GO have gone well and we booked our first system orders in the third quarter which we expect to deliver in the fourth quarter.

Other hospital customers have given us feedback that they liked the system and are putting it into their capital budgets for future periods. Our challenge in the CR to DR conversion space is that there are many computing solutions and claims.

Our advantage is that of the quality and experience of Thales in this space with more than 60,000 flat panel detectors installed globally together with the fact that EZ2GO delivers quite well on its promise of supportability, flexibility and improved work flow.

Feedback from customers is that our system works very well compared to competitive products. We believe our success will come from increasing awareness of the EZ2GO product through on-site demonstrations at customer sites.

Richardson sells power grid tubes for replacement in MRI amplifiers to third-party service organizations that support a growing number of hospitals on a global basis. Sales of these products are currently reported in EDG.

We are in the process of transitioning account responsibility for healthcare service providers and will include them in healthcare results beginning in FY 2016. Between our PACS displays and power grid tubes, we have excellent relationships with hospitals and independent service organizations on a global basis.

This will provide the springboard and infrastructure to sell other replacement parts. Significant internal investments in CT and X-ray tubes manufacturing continued in the third quarter. Specialized equipment is beginning to arrive and construction of test phase is underway. We are also adding experienced engineers to our team.

We expect to have the capability to certify and sell pre-owned CT tubes by the end of the year. We are pursuing a number of partnerships with companies that have products that would be complementary to our healthcare product portfolio and where we believe we can add value through Richardson's distribution.

This would be similar to our partnership with Thales for the flat panel detectors and power grid tubes. We also continue to meet with companies who manufacture and supply replacement parts for CT and MRI equipment.

We are considering several acquisitions in this market and are focusing on companies with models that can be expanded internationally to take advantage of the growing demand for alternative replacement part sources in Europe, Asia, the Middle East and parts of Latin America.

With the investment in capital equipment resources and the groundwork currently being laid through Richardson Healthcare, we anticipate sales will ramp up in the next fiscal year. I will now turn the call over to Wendy Diddell to discuss Canvys third quarter results..

Thanks, Pat. Good morning, everyone. Canvys which includes the engineering, manufacture and sale of custom displays to original equipment manufactures in the industrial and medical market performs on par with expectations during the third quarter of fiscal year 2015.

Sales of $6.2 million were down 7.4% from $6.7 million in the third quarter of last year. Sales were below prior year due to variability in customer demand as well as some delays in manufacturing with one of our key suppliers. We are continuing to feel price pressures from off-the-shelf solutions and low cost providers.

Our focus continues to be on applications requiring a high level of engineering support and customization. Gross margin in the quarter was 26% versus 28.9% during the third quarter of fiscal 2014. Margin was impacted by the strengthening of dollar versus the Euro as well as a mix of product sold in the quarter.

Freight cost were high in the quarter but we anticipate at least partial reimbursement in the fourth quarter to offset the incremental expense. We are pleased to announce that our Boston facility became ISO 13485 certified in March.

ISO 13485 is an International Organization for Standardization or ISO standard published in 2003 that provides requirements for a comprehensive quality management system for the design and manufacture of medical devices. The certification sets us further ahead of our competition and is a requirement to win new medical display programs.

We are currently exploring how we can use the Marlborough facility to support Richardson Healthcare in some of its manufacturing requirements. We continued to win new programs in the quarter including several applications for eye surgery and other medical requirements such as blood titration monitors.

We are seeing increased interest in the 4-K, 2-K displays for the medical market as the formats gains momentum through consumer market channels. This shift in technology could lead to new programs. We are currently working on a range of platform products to address this demand.

On the industrial side, we won new programs for displays to be used in applications such as self-service lottery terminals and manufacturing facilities. During the quarter, book-to-bill was 1.14 and order backlog increased to 15.2 million due to new program wins as well as renewed blanket orders from existing customers.

In the fourth quarter, we anticipate business will be stable. We will continue to focus on ways to improve efficiency within Canvys without sacrificing our ability to deliver custom displays. I will now turn the call back over to Ed..

Thanks, Wendy. We have a lot going on in the business. Our investment in new product development is improving our ability to engineer, manufacture and sell proprietary solutions.

Our investments in the healthcare market will position us well to diversify our revenue stream and become a global provider of diagnostic imaging parts and equipment helping to reduce medical costs.

Our strategy is hinged on developing profitable technologies and products for high-growth markets which are long-term in nature and take advantage of our global infrastructure. We remain committed to use our cash to make strategic acquisitions and invest in our growth strategy.

We have identified several excellent acquisition candidates in the healthcare market and we hope to announce one or more purchase agreements in the near future. Our new IT system will add a level of sophistication to our customer service and global supply chain. We will also continue to repurchase stock and pay dividends.

We spent $60.4 million on our stock buyback program which has reduced the number of shares outstanding to 13.7 million. We believe fourth quarter sales will be in the range of $37 million to $39 million.

It's an exciting time at Richardson Electronics and we look forward to discussing our future plans in more detail with you after the close of the fourth quarter. At this point, Kathy, Wendy, Greg, Pat and I will be happy to answer your questions.

Antoinette, may we open up the line now for questions?.

[Operator Instructions]. Your first question comes from the line of Mark Zinski. Please proceed..

Yes. Good morning, everyone..

Good morning, Mark..

I guess this question is for Ed and Greg in terms of the CO2 laser space. I have seen some industry news that suggested that there are some new verticals that are engaging this technology like smart phones, apparel, food, and beverage, et cetera.

I am wondering -- I understand you are obviously doing the replacement side, but are you at all more bullish, let's say, two years down the road that you are going to see some incremental lift from those new verticals?.

Really, the majority of our CO2 laser business, the products are used for cutting steel parts, and so it's heavy gauge steel for the automotive industry and the appliance industry. The applications that you are speaking about are primarily solid-state and it isn't an application that we sell into.

Majority of the market that we sell into is an aftermarket. We forecast or estimate that there are close to 20,000 systems installed over all the world with several different manufacturers. We are getting more market share for the replacement tubes and consumables in that equipment, and our business is growing about 20% a year in the CO2 laser market.

So we are pretty happy with that business..

Okay and then --.

That business is even growing faster than that..

Okay.

Is there any threat from fiber lasers? Or are those still a very small percentage?.

They are used in applications for cutting smaller material where it doesn't require much high power, but there is no question that solid-state lasers are being installed taking market share from tube type equipment..

Okay. I just wanted to confirm on the acquisition front.

You are pretty optimistic that you are going to close at least one deal by the end of the fiscal year?.

First, it will take a willing buyer and a willing seller, and we are only half of that equation, so we are working on them and we are sort of cautiously optimistic, but it remains to be seen..

Okay. And then switching gears over to Canvys. Wendy, the gross margin decline, you mentioned it was a function of both product mix and FX.

Can you pin it down, was it more FX than product mix?.

Yes. I think it was more of the FX than the product mix. About 50% of our revenues are generated in Europe. Some of the products we buy in dollars, some of them we buy in Euro, so FX has a strong impact on our business..

Okay. And then last quarter you had indicated that you felt you would you have better visibility on the business with the backlog.

Are you feeling that way now?.

We reported again an increase in backlog up to $15.2 million. With the new IT system, we are now able to really look deep into what the backlog is. We have also been able to make it very consistent between Europe and North America, something we hadn't focused on before.

So, I think our backlog numbers will continues to be much more relevant to the business in good solid numbers..

Okay. And then lastly, this is for Kathy.

Assuming profitability in fiscal 2016, would you have any ballpark tax rate?.

Ballpark tax rate, well at this point, we have an operating loss, so hopefully our effective tax rate really doesn't make sense. What I suggest you do is, we will be filing our 10-Q this afternoon and take a look at that. We are really impacted by kind of discrete events. So U.S. tax will be low..

Okay. That's fine. Thanks a lot..

Thanks, Mark..

Your next question comes from the line of Thomas Segalla [ph]. Please proceed..

Yes. Excuse me. I have a few questions on the valuation of your stock. I think you have about close to 80% of your market cap in cash. You are selling below tangible book and if we take working capital minus debt, that's significantly higher than your market cap.

What do you think management needs to do, because I think the market is essentially putting no value or negative value on your businesses? What do you think management has to accomplish to get the market to take a closer look at your company and put a more of a reasonable valuation on it?.

Well, it's obvious. We have to get some traction on some of the new initiatives, particularly in the healthcare space which we are really optimistic about. We had hoped to do some major acquisitions in that space and weren't successful. So we have chosen to do a major portion of it, greenfield.

I know it's slower but it's less expensive and has less risk. So I think you will see revenue and earnings growth in the medical space on a perpetual basis. It's going to take us a while to get some traction. And then on top of that, if we can complete one or two of these acquisitions that we are working on, that would help us a lot too.

So we need additional revenue and earnings. It's not rocket science. We know what the problem is, but it takes a while to get there..

Okay. Thank you very much..

Your next question comes from the line of Steve Bush. Please proceed..

Hi, Ed and Kathleen. Thank you for taking my call..

Good morning, Steve..

So maybe you could just comment and maybe Kathleen on what's our quarterly breakeven levels for cash flow on revenues?.

Well, our entire -- well, we have a couple of issues here right now. So obviously it's topline sales and we have significant extraordinary expense layered into SG&A. So we have always said we needed to be a net add in SG&A level at around $10 million, $10.5 million per quarter relative to the business that we are at right now..

Okay, but what level of sales then we need to get to, basically is what I am asking? Because at $39 million, are we breakeven? Or is that still below breakeven?.

Well, it would be breakeven if we had a normalized SG&A line..

All right and I understand.

But that's supposed to normalize over the next nine months, right?.

Well, you are still going to have the investments that Ed described in growing the healthcare initiatives and other growth initiatives. So you are going to have investments ending within the SG&A line which is going to keep it higher. So you have got to get the two lines moving together..

All right. I understand. I am just trying to guesstimate about where it is we start to breakeven.

Your SG&A isn't going incrementally up with revenues, is it? Is it as fast a revenues or faster? If all the same you get big orders in Europe at $43 million, is your expense line going up at the same rate?.

No..

So somewhere along there is a number out there that should be breakeven. Okay. But we are not going to reach that in the next nine months basically. No, I understand that. I am just trying to gauge it..

Well, it just depends on how fast we can get traction in some of the new initiatives and if we are successful in some of these acquisitions..

Right. So I guess that brings me to my next question is, the website is very nice. You can see the history of the company going way back. And it seems like most of our growth over the years has been via acquisition.

Are we able to grow organically more than 10%? Or do we really need acquisitions to grow revenue at greater than 10% clip?.

I think it's a combination of both. We think there's an amazing opportunity in the healthcare space and right now we are adding a lot of engineers to address that opportunity and we should see substantially better growth in healthcare once we can get all this infrastructure in place. But it's a combination of both, acquisitions and internal growth..

All right. Okay. So the answer would be, to get over 10% we need acquisitions, really, which is fine. I am just trying to gauge that as well..

Yes. And that's certainly part of our strategy. While we are speaking, we are probably looking at three or four acquisition simultaneously..

Okay.

Currency was $2.27 million hit this quarter?.

To cash? %4.7 million to the cash balance alone..

Okay. All right.

And that's just the conversion of what it would be, because its held in Euros or something?.

50% of the cash is overseas. So yes, it's held in --.

All right.

But I guess what currency is the one that's hurting us the most?.

Euros..

Euros. Okay.

So if Euros started going up, you would be able to reverse that valuation?.

Yes..

Okay. All right. We had a lot of volume over the last month, especially going into the end of the quarter.

I know you bought back shares through February, but that where you a big buyer of shares under nine recently?.

No. We are restricted in how much we can buy. I think it's right now because the volume is less than 7,000 shares a day, if we were buying the maximum that we can buy..

All right.

And there is no way to infuse some sort of plan where you buy shares blindly even within the windows of quarterly reporting?.

We are limited by volume as to how much we can buy..

All right. Okay.

Do we have any kind of mandatory Board and management ownership, because the Board has extremely, other than yourself, Ed, obviously has basically no ownership of actual shares? Is there a plan in place to make a mandatory quarterly purchases of shares by the Board and top management?.

Not really. We have a stock option program and they all participate in that..

Yes. But that's free. In order to focus the Board, I really think, a lot of companies have plans where you must buy shares in the open market every quarter.

It certainly would help to focus the Board, given the fact that some people have been there so long and have basically no shares, which doesn't instill a lot of confidence at price below our net current assets if our own insiders aren't buying..

I understand. We will certainly bring it up. That hasn't been a topic of discussion. That will be a good topic..

Okay. Well, I guess that's about all I have for now and good luck..

Thanks, Steve..

There are no further questions in the queue. I would now like to turn the call back over to Mr. Ed Richardson for closing remarks..

Thanks, Antoinette. Thank you again for joining us and for your ongoing support of Richardson Electronics. We look forward to discussing our fiscal 2015 fourth quarter and year-end results with you in July. Thanks a lot..

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect..