Good morning, ladies and gentlemen, and welcome to the FY18 Second Quarter Earnings Call hosted by Edward Richardson, CEO. My name is Cassie, and I'm your Event Manager today. During the presentation, your lines will remain on listen-only mode. [Operator Instructions] I would like to advice all parties that this conference is being recorded for replay purposes. And now I would 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 and 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 will be making forward-looking statements and they are 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 FY17 and again in our first quarter of FY18, I am pleased to tell you that we continued our improved profitability trend for the fourth straight quarter. Our FY18 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 three of our business units; PMT, Richardson Healthcare, and Canvys had year-over-year sales gains excluding the sale of our PACS Display business late in fiscal year 2017. We have also seen continued growth in all geographic areas of the business. The investments we are making in the power and 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 three 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's 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 of 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…

Thank you, Bob, and good morning, everyone. In the second quarter of FY18 PMT sales were $30.1 million versus $25.2 million in Q1 of FY17. Based on the continued strong bookings throughout FY17, 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 electron device business including engineered solutions as well as growth from our technology partners added over the past couple of years. We are taking advantage of our long-term customer relationships as well as 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 are experiencing market share gains and 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 Anokiwave. More specifically in the industrial market, applications include 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 are also excited about our continued strong booking trends for our new technology partner relationships and engineered solutions products for the wafer fab market. And looking at our growth and design wins we track these on a global…

Thank you, Greg and good morning everyone. I'm pleased to report that we produced our first new Richardson manufactured CT tubes in the quarter. These tubes are performing well so far in 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 FY17, healthcare sales in the second quarter of fiscal 2018 were $2.3 million, down 26.8% from prior year sales of $3.2 million. Service training and sales of 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 brand CT scanners and also in newer platforms to support future growth. Sales in Europe and Latin America were both up in the…

Thanks, Pat and good morning, everyone. Canvys, which includes the engineering, manufacturing and sales of custom displays to original equipment manufacturers and 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 was 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% the same period last year. The year-over-year gross margin increase was related to a favorable product mix and lower cost on selected products sold. We are excited about continued strong customer demands 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 a 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 of live cells in real time, radio frequency generators for pain management and neurosurgery and patient monitoring systems that help in turn patient care and improved clinical performance. We also won project in non-medical areas. Applications including human machine interfaces, the wood processing machine, food processing machines, and packaging machines. Teleprompter displays for well-known new stations and displays for passenger information systems installed in buses. From the variety of product and applications and the value of orders from existing as well as new customers, it is certainly clear we offer our customers outstanding products and service. While our sales organization stays focused on new opportunities we continue to refine and adjust our business strategy with the 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 FY18. 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're optimistic we'll show continued revenue growth. The healthcare team is firmly on target to launch new CT tubes later this fiscal year. Having the 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 healthcare market. We're controlling 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 considering any acquisition targets, although we remain open to doing so on 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.

Yes. Good morning.

Hi, Mark.

Congratulations on the quarter, and I guess also congratulations on getting some money back from the State of Illinois.

Yes, the second part of that was a miracle, getting money back from the State of Illinois.

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.

It's a combination of three 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 two 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 have 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. I guess, I'll add a fourth one across the board, every one of our product lines except for one, our broadcast tube [ph] business outgrew in the quarter. So, yes a majority of that growth was the semiconductor manufacturing market, but that includes both new technology partners and our existing legacy capabilities, if you will. But also we are 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 are 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 are 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 any kind of color on what the potential upside might be on the 5G in China, would be helpful?

Yeah, that was based on -- I read 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 are 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 will 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 have done, like we did before, we aligned ourselves with GaN technology, which would be the technology of choice for that and also some niche suppliers. So when this does roll out, and the designs do happen, we will participate and it will be a major growth area for us from end of 2018 to 2020.

Okay.

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'll 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'll probably begin the production of the first newly manufactured Richardson CT tube, but we haven’t --.

Okay. 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 are 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.

Okay, great. Okay, that's it for me. Thank you.

Thanks, Mark.

Thanks, Mark.

The next question comes from Eric Landry.

Good morning.

Good morning.

Hey, Ed. I think there is really some reason to be proud there in LaFox and I hope everybody is proud of what's 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 take that all team to make that happen and we are really excited at that moment. 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 that tax was just under $1 million last year in the quarter?

Yes, correct.

Okay. So that make your overall growth somewhere around 19 if we ex-PACS?

Is that percent or dollars Eric, I'm sorry.

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% [ph] without it and yes, but it sounds about right.

Great, okay. So, Greg, you mentioned that China is an opportunity that you 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 participate in that rollout?

Yes, we'll have participation in each area of the world. North America one that we are working with directly is AT&T has announced that they are going to rollout it end of 2018 six prototype cities to rollout their 5G capabilities. So the companies we're working on -- we're working with them on GaN and all kinds of other components. We've a couple of small design wins, but we'll participate in that. I think there will be about three months after China and if China gets things going their 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 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 will be engineering, but it will be design in working with the customers engineers designing at a component level. Right now we're looking at different modular solutions that we could do for a supplier, but most of the component designing at the actual OEM amplifier manufacturer.

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

Yeah, so in China, what they do is they have signed, the government assigns who gets what percent of the rollout. And so they've given 40% approximately to Huawei, they have given 40% to ZTE and the balance of it 20%ish to Datang [ph]. Of those three to the major ones I just mentioned, we have a very large design in at that customer and we are an approved 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 one or two of the three?

One right now, we are design registered, approved supplier, it is part…

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

Well, I mean, we are so niche and so focused, I think we're on obviously just on the infrastructure side not on the mobile side, we're on the amplifier side. And so we are talking to the all three of them about GaN technology today, Eric that's all I can say to you. We are talking to all three about GaN technology.

Got you, great, thanks okay. And then so wafer grew -- wafer fab equipment grew significantly in the quarter. I think last we talked you thought it would go through calendar year end 2018 is that still your best guess?

Well, I am very, very confident, it will continue throughout fiscal year. We meet with them weekly, we talk to them daily. Again if you look at rather reports and input it's going to slowdown in 2018, grew 30% to 40%, it will still be double-digit growth. But like I said before Eric, I think our customers -- our key customers gaining market share. So, 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, has that between, sorry.

It's still strong growth.

Thank you, okay, great. Okay, thanks Greg. Hey Jens, last quarter your backlog was up 40%, is that -- I mean, is it up -- is it down now from there or can you mention anything about that?

Actually, hi Eric, first of all. So yes, it is slightly down because we had huge shipments, as you could see 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 is there any way you could mention what percent of the new business are these multiyear frame contract, 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 sort of made up quite a bit. However, we see increased demand in all end. So it's all good.

The current gross margin level in that business is that sustainable, or is there someone-timers in there?

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

Okay, great. Hey Pat, I want to second your comment that there is 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 and there are OEM CT scanners so they are 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 the 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 let me -- I didn't understand your question to begin with. Yes, it's entirely possible go to beta this quarter and then we 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 would be…

I wish we could start with anyone 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 the tube becomes available and people take more scanners off of OEM contract.

Okay. All right, great. Hey 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 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, freights, sales incentives things like that due to the substantial increase in sales.

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

Let's say so.

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

Yes, now that the tax reform act has been passed we don't feel that there is 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's takes -- it just takes time. So, yes we're actively working on all that.

So I guess the headline number would be that it would cost you somewhere around $7 million to $8 million based upon the statutory rate as they exist today, is it likely you'll have to pay less than that because of your NOLs and what not?

Well, we're working on it right -- we're working on those calculation as we speak and as I said in my remarks it's quick 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…

Okay, thank you, that's it.

Thanks, Eric.

The next question comes from Sam Robosky.

Yes, good morning gentlemen. Good quarter, thanks for taking my call. The $65 million that you have 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 have bought and when was the last time you bought 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, how many shares did we buyback in total...

Well again it was $65 million and so it's on average of $8 or $10 a share and that would be about $7 million to $10 million.

Okay. So unfortunately when the stock was lower 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 which 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 an 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 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 are not planning any changes to our dividend or stock buyback strategy, but we are going to continue the dividend, which is what we have been doing, subject of course to current market conditions.

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

As I mentioned, we are not currently negotiating any acquisitions, I would say that the majority of the acquisitions we have looked that have been in the healthcare 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 is that we're not prepared to pay. So, I don't see anything in the foreseeable future, but we are always open. So if something comes along that looks good, we'd certainly look at it.

Okay great, hopefully you can continue the forward improvement. Good luck.

Thanks very much.

Thank you. [Operator Instructions] We do have another question, it comes from the line of Peter Abrahamson [ph].

Thanks guys, thanks for taking my call. Nice improvement. 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 of where expect it to be for the year. It was $2.7 million for the first six 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 its going into our healthcare strategy and of course the build tubes we have to purchase equipment and machines and things like that. We continue to build our capabilities 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. So again I expect the number to pick up in the second half a little bit simply due to the facilities project.

Okay, thanks. Yes, is this a 2018 CapEx story or do you think you're in the beginning of a multiyear kind of capital investment phase or…

I think if you look at our CapEx numbers over the last couple of years they have been pretty consistent in the $6 million range. And I would say going forward I would expect something similar. We might -- we are in the midst of reviewing our plans fairly soon for our 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 decided yet.

Okay, thanks.

Thanks, Peter.

Thank you for your question. 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 discount. Thank you for your joining. Have a good day.