Good day, ladies and gentlemen, and welcome to the FY17 Third Quarter Earnings Call for Richardson Electronics Conference Call. My name is Christine and I will be your operator for today. At this time, I would like to turn the call over to your host, CEO, Edward Richardson. Please proceed.

Good morning. And welcome to Richardson Electronics’ conference call for the third quarter of 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 would like to remind you that we'll 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. The third quarter marks the first quarter this fiscal year that our sales exceeded prior year. Sales were $32.3 million versus $31.3 million last year. Sales in the Power & Microwave Technologies group were up $2 million on growth in the semiconductor wafer fab market, as well as continued growth with our new technology partners. This growth was partially offset by declines in both Canvys and Healthcare. Gross margin improved again this quarter to 33.1% of sales versus 31.2% last year. We continue to maintain tight control over expenses, and we're engaged in initiatives that remove cost permanently from our organization. As a result, our operating income in the quarter was a loss of $1.3 million, which was a significant improvement over the prior year's loss of $2.7 million. Everyone in the organization continues to be focused on sales growth while maximizing our existing infrastructure. I'll now turn the call over to Bob Ben to share more details regarding our third quarter financial performance. After Bob reviews the numbers, Pat, Greg and Jens will discuss our business unit performance, including updates on our growth initiatives.

Thank you, Ed and good morning. I will review our financial results for our third quarter and first nine months of fiscal 2017, followed by a review of our cash position. Net sales for the third quarter of fiscal year 2017 were $32.3 million compared to the prior year’s third quarter of $31.3 million. Net sales increased $1.8 million for PMT, partially offset by decreases of $0.4 million in both Canvys and Richardson Healthcare. Gross margin increased to 33.1% of net sales from 31.2% of net sales in last year's third quarter, primarily due to higher PMT and Canvys margins as a result of an improved product mix. Operating expenses were $12 million for the quarter compared to $12.5 million for last year's third quarter. The decrease was due to reduced salaries, benefits and incentive compensation expenses. In addition, IT expenses were lower than in the third quarter of fiscal 2016. These decreases were partially offset by an increase of $0.3 million in R&D expenses for Richardson Healthcare. As a result, our operating loss for the third quarter of fiscal 2017 was $1.3 million compared to a $2.7 million operating loss in the third quarter of fiscal 2016. Other expense for both the third quarter of fiscal 2017 and fiscal 2016, including foreign exchange, was $0.1 million. We had an income tax benefit for the quarter of less than $0.1 million, which reflected 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 $1.4 million for the third quarter of fiscal 2017 as compared to a net loss of $2.9 million in the third quarter of fiscal 2016. Now turning to a review of the first nine months…

Thanks, Bob and good morning, everyone. In the third quarter, PMT sales were up 7.6% versus prior year. Sales were $24.8 million versus $23 million in Q3 FY16. Gross margin improved to 32.6% from 31% last year. The increase in third quarter sales was driven by continued growth in our new technology partners. Sales of key EDG pipelines also increased in industrial applications, laser consumables, broadcast electron devices, power capacitors, and engineered solution products for the semiconductor wafer fabrication market. This growth was offset by a decline in tube sales into the avionics and marine market, as well as the decline in tube sales into industrial microwave applications. While the overall tube market is declining, we continue to create new opportunities and capture market share by staying close to the OEMs and end users with our experienced local sales engineers, new technology partners, focused marketing programs, and capitalizing on our global infrastructure. Even though we are experiencing headwinds each quarter, we are seeing positive signs that we believe will contribute to year-over-year growth in PMT. During the quarter, PMT’s overall book-to-bill was a positive 1.17. As we review our booking trends in depth, we can see that our growth initiatives focusing on new products and technologies and increasing market share in electron devices, are helping us get designed into programs with both current and new customers. Demand for our manufacturing and engineered solution product lines, which include magnetrons, microwave generators, and custom RF power solutions continues to improve as we invest in new capabilities while improving our cost structure. The manufacturing and field engineering teams have become an integral part of our sales efforts to support new opportunities at existing customers and new customer applications. We track our design opportunities on a global basis, and the number of opportunities we…

Thank you, Greg and good morning, everyone. Healthcare sales in the third quarter of fiscal 2017 were $2.7 million, down 11.9% compared with prior-year sales of $3.1 million. The sales decrease was driven primarily by lower sales of diagnostic displays and CT tubes, offset partly by an increase in sales of IMES parts and equipment. Gross margin, as a percentage of net sales, increased to 47.2% during the third quarter as compared to 45.5% in the same period last year due to a product mix that favoured replacement parts sales, which generally carry higher margins. Healthcare providers continue to face intense pressure to reduce cost. We see hospitals deferring capital projects to future periods or breaking projects down into smaller investments over longer periods of time. In some cases, hospitals are waiting to see if mandates to upgrade equipment instituted under the Obama administration will be reversed under the Trump administration. In this environment, healthcare providers continue to seek ways to reduce equipment maintenance costs, exploring alternatives to OEM service contracts. 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. Our strategy is to play a significant role in the development and sale of diagnostic imaging replacement parts around the world. The IMES business has provided us with a good foundation in this market and an excellent model for expansion. The investments we are making in the repair and development of CT tubes and in other high-value components are the key to the long-term success of this strategy. IMES part sales were up in the third quarter compared to prior year. All of our…

Thanks Pat and good morning, everyone. Canvys, which includes the engineering, manufacture, and sale of custom displays to original equipment manufacturers in industrial and medical markets, had sales of $4.8 million during the third quarter of fiscal 2017, down from $5.2 million for the same period last year. Sales decreased year-over-year primarily due to decrease in customer demand in our North American market, where we continued to be challenged by customer consolidation and lower than anticipated demand in our healthcare segments. Third quarter sales in Europe were up year-over-year. Gross margin increased as a percentage of sales to 27.6% from 23.2% the same period last year. The year-over-year gross margin increase was related to product mix, cost improvement, and lower inventory reserves. The division did a good job controlling costs and we continue to work closely with our Asian partners to deliver the highest quality solutions at comparative prices for our customers. Last quarter, Canvys released the new True Flat G Series, a modern-looking, customizable display series featuring a slim housing design without a bezel and a flat front surface. There are many customization possibilities for the G Series, including an all-in-one version with an integrated PC. The panel PCs feature a state-of-the-art CPU and graphics processing unit technology. The computers come with a sixth generation standard Intel Core i5 processor. The housing does not require ventilation slots and includes a rear metal cooling plate, allowing for more power efficiency. These solutions are ideal for customers that having space restrictions, and are currently being evaluated by several OEMs. During the quarter, we won several new programs from existing and new customers in the medical space applications such as radio frequency generators, laser eye surgery equipment, and customized displays for dental treatment chairs. We also won projects in non-medical areas for applications such as product dispensers in retail stores, where we closed our first important deal with our relatively new All-In-One product series. It is clear we offer our customers outstanding products and service. We continue to focus on improving the operating performance of the division. Maximizing cash flow and managing inventory closely is an ongoing priority. I will now turn the call back over to Ed.

Thank you, Greg, Pat, and Jens. Each of these business unit leaders is committed to leveraging their current resources to generate growth and improve profitability. We must accomplish this while working through political and economic challenges on a global basis. Greg and his team's ability to create demand using new technologies and our in-house engineering and manufacturing resources are increasing revenue and helping offset market declines in our tube business. Pat’s team is dedicated to releasing quality refurbished CT tubes early in the next fiscal year. We’ve had tubes on scanners going through extended life testing and the results are promising. Our investment in tube repair puts us in an excellent position to expand our product range with new CT tubes. We’re convinced that the parts and the glassware contract program is the best option for our customers to cap the replacement parts risk and costs, and contribute to lower overall healthcare costs. Jens continues to look for products and services to expand our display business. While the business units are working hard to implement growth plans, Bob and his team are ensuring that this growth is profitable and that we maximize the use of our cash. We are currently exploring actions to bring international cash back to U.S. How we bring the cash back will be determined primarily by the Trump administration’s success on lowering taxes on foreign trapped cash. We will continue to evaluate capital expenditures, acquisitions, and other uses of cash on a very conservative basis. The third quarter is historically our lowest sales quarter of the year due to holidays in December and January. The fourth quarter is typically our strongest sales quarter. Based on increasing demand in several of our key markets and the impact of our cost control measures, we anticipate meeting our objective to make a profit in the fourth quarter. At this point, we’ll be happy to answer a few questions. Christine, may we open up the line for questions?

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

Yes, good morning, everyone. Ed, I wanted to just dive into gross margin, right off the bat. I mean, it’s been a pretty bright spot in the story, and I don’t recall this kind of level of gross margin for Q3 in quite some time. Do you have—I mean is there more upside to the gross margin story, I guess is my question.

Well, it depends a lot on product mix. Certainly, in our tube business we have a very large share of the remaining market and the other side is our manufacturing sales, and business is up substantially this year. And the margins are quite good there as well. And also the Healthcare space with the parts business, as Pat mentioned, the margins are quite high there, so that’s the mix. I think if you see the Healthcare business starts to get traction and as the CT tubes come online, there will be more and more parts sold. So that really gives us an opportunity to increase margin on that side. The flipside of that is Greg is doing quite well with his PMG products with new vendors and that’s primarily semi-conductor base for OEMs, and that business tends to have a lower margin. So there is quite a mix there. I think you should see it stabilize somewhere in this area that we’d like to see 34%, 35%, but that’s probably what you can expect from a max going forward.

Okay, great. Thank you, that’s helpful. And Greg, looking at PMT sales, I guess I was going to try to pin you down on how much of it was related to new technologies versus the recovery in the semiconductor wafer fabrication protocol.

You know it’s interesting, it’s a combination of both. The growth in the third quarter was driven primarily by our engineered solutions products coming out of LaFox for the wafer fab fabrication market. But some of the largest bookings that happened in the first and second quarter were actually new technologies going in to products also used in that market. So that market really was a strong market for us in Q3. So it's kind of a combination of both in terms of the growth in Q3. Those are the two key markets and those were the two key products lines that generated the growth.

Can you say that there is some kind of a secular recovery in that semi-space? I mean do you see some kind of bottoming out and upward recovery?

The numbers we see from our key OEMs, they’re up 30%, 40%, and we consider that will go to the end of this fiscal year. So that will be a very strong market for us, finishing out the year and for most of next year. But that market, I mean it’s a rollercoaster. It's been that way for 15 years. It goes up crazy and then it drops pretty fast, and it's just your ability to manage that drop more than manage the growth. So we’re now at the bottom of it. We think we’ll see double-digit growth in that until probably till the end of the year.

And then, Bob, you had mentioned on the cost reduction, the methods you’ve been employing here. You’ve indicated that those aren’t finished yet. Would you say you’re the majority of the way through those various cost-saving methods or is there still some more room in there?

I would say that we’re getting towards the end. But I think the thing to keep in mind is that many of these initiatives were ongoing during the fiscal year, so you haven’t seen the full impact of the expense reduction or improvement in cash flow as of yet. So there is a bit of a lag there. So I think you’ll see continued improvement next quarter and probably into the first quarter of the next fiscal year.

Then lastly, Ed, is there any way you can comment on the possible U.S trade policy scenarios in terms of potentially increased protectionism and how that would impact your business, or would you be able to counter punch anything that happens there?

Well, about 50% of our business is international. But we're sole source on so much of the product, at least in the tube portion of the business, it doesn’t have a great impact. I think it's probably a balance. We’d like to see things really strong in the United States, and I think bringing jobs and industry back here is a priority for all of us. So we're pleased what the administration is planning in that area.

Okay, great. That’s it for me, thank you.

Your next question comes from the line of Eric Landry. Please proceed.

Greg, 1.17 book-to-bill, I'm curious as to how that compares to your historical book-to-bill. I mean, since I’ve been following the company, it seems rather high. I would like your opinion on that please.

Well, the bookings are driven very strongly by the new technology suppliers. Our backlog quarter-over-quarter was up 16%. So what makes up the strong bookings number is the new technologies group. And as I think I mentioned, Eric, in the past, we have a global design opportunity tracking system, and that tracks every design that we're working on. These design cycles are long, some longer than others. But that funnel is growing, I'll have to say, beyond my expectations. It’s going very, very strong. And so as those designs go to bookings, that book-to-bill ratio, 1.17, for example, the new technologies group, had a book-to-bill of nearly 2. I don’t see that slowing down much. Again, number much smaller than with the tube business, but I don’t see that slowing down here going into FY18.

So you mentioned that the semiconductor market will grow double digits until the end of the year. I just want to make sure, are you talking about until May or are you talking until calendar year of December?

The forecast we're getting from our OEMs so we can make sure we have the right products built and everything else, is that strong growth, and we deal with all the major ones, the LAMs, MKSs till the end of the calendar year, Eric, calendar year; so till December-January.

So that’s well into year 2018?

Yes, halfway.

Greg, of the, I don’t know what it is, a dozen and half new deals that you’ve signed over the past year and half, two years?

Yes, close to 20.

So what percentage of those are right now contributing to revenue, just roughly?

All of them, all of them are producing revenue. However, if you look at the RF and microwave part of that, two key suppliers and these are the world leaders, they’re both—one is a billion dollar company in terms of Macom. The other one, Qorvo, we just signed a new partnership with them as they’ve shortened or lessened their distribution partners is Qorvo, which used to be Triquint. Those two are really the highest number of design wins, design opportunities on revenue. On the power semiconductor side, Star Power and a company called USCi, United Silicon Carbide, they are leading from the power applications, power supplies, and ultra-capacitors, et cetera. So those four are really leading the revenue and the growth in terms of backlog.

The strategy is to sign technology leaders and a lot of these are smaller start-ups that need a global infrastructure to bring that technology to market. And that’s where Richardson’s always beat the competition and always done an excellent job. We have an amazing technology group led by our CTO who finds these niche suppliers and these niche applications that are world leading in terms of technology and we sign them to exclusive deals. That’s a very unique model in terms of the distribution world. Arrow and Avnet, I don’t think they have any exclusive suppliers, we have nine. So, again, they’re smaller but it’s a high technology, high designing, very technical sales strategy.

So, I'm assuming we should look forward to a slowdown in a number of these deals that are announced going forward. Correct?

The whole deal is, when you start one of these, a source of supply, if you don’t have the source of supply, you’re shot. So the teams done an amazing job getting the key people. We made a list before we started this, and we’ve been very good at getting all of them. And we haven't added any supplier in probably, I don’t think this fiscal year. So, we’re set for a while.

So, Bob, SG&A run rate around $12 million. Is that somewhat likely to—is that what we can look forward to going the next few quarters or is there more to look forward to as far as cost cuts go?

Well, I like to look out in the short-term. Certainly, in the fourth quarter I think will be close to that figure. Going forward, the next fiscal year, we’re working on our plans for that. So I really don’t want to comment further out than that. But yes, the fourth quarter will be relatively close to what we show in the third quarter.

And the CapEx cycle as far as the tube businesses goes. Is that—are we about through with that or is that still—are we still looking at increased spending for that? I noticed that CapEx was down in the quarter from prior quarter?

I think we were at $4.1 million in total CapEx for the year-to-date, and I think I said, of that, $2.6 million was for Healthcare. So I would expect another $1 million to $1.5 million next quarter, most of that being Healthcare and then some continuation into fiscal 2018, only because some of their expenditures have been delayed. They’re more focused on the repair tube than on the new tube at the moment. But they’re linked together, so, anyways.

And, Pat is there anything you can mention about the bench testing of the repair tubes as far as, I don’t know, anything you can mention about hours or slices or anything like that? How far long are you in that process?

We continue to accumulate simulated clinical use on in-house scanners, and we’ve had several tubes now go up to a year, which is when we pull them off. So we’re beginning to accumulate product that when we’re ready to release, we’ll have available for sale. But we’re still in the middle of that process. And I think we’re cautiously optimistic of being able to release that very soon, but we’re also not going to do it until we’re ready, and until we have the right reliability level.

And have you been thrown any curveballs in the process that you want to [indiscernible – 37:26]?

There always are. You always find, as you're—especially around process development as you're beginning to actually process more tubes. You find things that you have to address and develop. But really not major surprises, I guess, I would say.

So, it's going about as expected right now?

I would say, yes.

I'm interested as to how are you going to price your new subscription business. Without any experience doing a subscription model, how are you going to make sure that you price it appropriately?

Well, we actually have some experience from our past lives in how to price out tube subscriptions or capitated risk contracts with, in particular, with tubes. That was a major business for me in my past life. And so the main thing that you have to do, you’ll come out with a contract, I think you need to be able to show the customer value for money, but at the same time the customer sees value in having a capitation of that risk and predictable cost. And so we’re really excited about that product, because I think it’s going to be a win-win both for us and for them. We do have quite a few customers who, from a parts perspective, are already exclusive to us or have been buying, if not exclusively, the vast majority of their components. So we can estimate what consumption of parts is per scanner, for instance. And then we have some pretty good ideas on how to price the tube portion of that as well.

Is this something that your customers came to you, saying we really prefer to have this? Or is this something that you introduced to your customers and said, what do you think of this?

I would say it’s a little of both. There is a trend towards people wanting to have some predictability. They may be wanting to break away from the OEM, but they’d still like to know what their predictability—or how to budget those costs. And as I said, I think that’s—my past experience is that product ends up getting a lot of traction because they look at it, they can have a predictable cost basis, and at the same time save money versus what they were paying for the OEM.

Ed, last one, I was wondering if there has been any developers inquiring about your excess land there in La Fox?

Well, every once in a while they inquire. We sold 220 acres a number of years ago, at $55,000 an acre and the Board has it in their mind that our land is worth $55,000 an acre or more. And every time I tell that to the developers and the current land prices, you can hear them scream from here to Chicago. So we haven’t gotten anybody to bite yet, but they inquire. We have nothing under contract, let's put it that way.

Your next question comes from the line of Bruce Baughman. Please proceed.

I have two questions. The first was I had trouble hearing the conversation about Canvys and what’s affecting the end markets there. Can you go back over that please?

I think the stuff that we could see in third quarter for Canvys was mainly driven by a decrease in marginal [ph] customers in North America and in the healthcare sector, [indiscernible]. So in Europe, we’re doing well. We actually increased our revenue to prior year. So backlog is increasing nicely in the third quarter, book-to-bill is up significant end of Q3, so we’re looking forward to a better future.

Is the book-to-bill up in North America?

It's up in both.

Okay, thank you. And my other question was how much cash is trapped overseas at this point?

As I said, we have a total of approximately $60 million in cash and investments at the end of the third quarter, and about $15 million of that’s in the United States and the rest is overseas. So that will be $45 million between Europe, Latin America, and Asia. And the bulk of that’s in Asia, Hong Kong and Korea and Japan. So we were working on some plans on that as I’ve noted. And of course we’re watching anxiously what’s happening with the tax reform and looking forward to potentially lower tax rates on repatriations of foreign earnings and cash.

And as for over several quarters now, the company has been burning cash, in effect. If the cash is going down, is that the cash North America or are you able to tap some of that foreign cash for your activities?

We are able to tap some of the foreign cash. For example, there is inter-company balance between the foreign subsidiaries, and so we’re able to do some of that. I think I noted in my comments that if you look at the cash position today, at the end of the third quarter, $60.2 million, at the beginning of the fiscal year, it was $70.5 million. So there was a net change of approximately $10 million. That’s down significantly from the last fiscal year. In fact I was looking at this last night, even if you—and I’m referring to a change between fiscal '15 and '16, which is the year before this one. There we blew through $38 million of cash but that included the $12 million purchase of IMES. So even if I took that out, we're down significantly in cash burn this year, again $10 million year-to-date as compared to approximately $26 million last year at this time. And again that includes the acquisition of IMES. So we’ve really reduced that burn rate. And some of that, the decrease in inventory that I noted in other improvements in working capital.

And that $10 million, year-to-date reduction in cash, how much of that was in North America?

I would say most of that, probably $7 million of the $10 million.

Was that also true in the prior year?

Yes, most of our cash is in the U.S. that we need to operate the company. But again, we have—the cash overseas can be utilized for each subsidiary that’s located there. And by the way if I didn’t mentioned it, I know I talked about it in general, but we do have strategies in place that we feel very good about to bring the cash back even today. So we're just trying to review the tax rates and situation to maximize that for the company’s benefit. But today, we could bring that cash back.

[Operator Instructions]. There are no more questions in queue. I'll turn the call back over to Ed Richardson. Please proceed.

Well, thank you again for joining us and for your ongoing support of Richardson Electronics. We look forward to discussing our fiscal 2017 fourth quarter results with you in July. Thanks. Have a good day.

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