Good day ladies and gentlemen, and welcome to the FY2016 Fourth Quarter Earnings Call for Richardson Electronics. My name is Shelly and I will be your operator for today. At this time, all participants are in a listen-only mode. And later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Ed Richardson, CEO. Please proceed.

Thank you, Shelly. Good morning and welcome to Richardson Electronics conference call for the fourth quarter fiscal year 2016. Joining me today are; Robert Ben, Chief Financial Officer; Wendy Diddell, Chief Operating Officer; Greg Peloquin, General Manager of our Power & Microwave Technologies Group; Pat Fitzgerald, General Manager of Richardson Healthcare; and Jens Ruppert, General Manager of Canvys. As a reminder, this call is being recorded and will be available for audio playback. I'd like to remind you that we’ll be making forward-looking statements and they are based on current expectations that 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. FY2016 was a very busy but rewarding year as we push forward with Richardson Healthcare and the launch of PMT. During the year, we invested in our manufacturing capabilities, added sales and engineering resources and acquired IMES to position the company as the leader in replacement parts for diagnostic imaging equipment. We added many new suppliers and technology experts to support our growth in new solid-state technologies. We also made significant improvements to our new IT system, but the year was not without its difficulties, currency fluctuations negatively impacted our sales particularly in Europe and the economic challenges in countries such as Brazil also had a negative effect on revenue. Our fourth quarter was the highest quarter in revenue in the past four years. As a result, we finished the year with revenues ahead of prior year. Strong margins in our healthcare business drove year-over-year gross margin improvement. Our quarterly use of cash is trending down and we put plans in place to reduce cost and improve operational efficiency, so we can continue to invest in our key initiatives. Bottom line performance is not where we wanted to be, but we remain encouraged that our strategic initiatives are gaining traction and are well received in the markets we serve. I will now turn the call over to Bob to present Q4 and FY2016 financial performance and then Pat, Greg and Jens will share more details on our business unit performance.

Thank you, Ed, and good morning. I will review our financial results for our fourth quarter and fiscal year 2016 followed by a review of our cash position. Net sales for the fourth quarter of fiscal year 2016 were $39.6 million, up 13.2% increase, compared to the prior year’s fourth quarter of $35.0 million. Net sales increased $3.9 million for PMT, or 14.7%, and $1.6 million for Richardson Healthcare, partially offset by a $0.9 million decrease in Canvys. Gross margin increased to 33.8% from 29.2% in last year’s fourth quarter, reflecting primarily the sales of significantly higher margin IMES products. Operating expenses were $13.7 million for the quarter, which represented an increase of $0.8 million from last year’s fourth quarter. This increase reflected $1.1 million for IMES and additional investments in Richardson Healthcare, $0.8 million in PMT partially offset by $1.1 million in reductions of multi-support function cost for IT and severance expense. Operating expense as a percent of net sales decreased to 34.6% from 36.8% in the fourth quarter of fiscal 2015. As a result, our operating loss for the fourth quarter of fiscal 2016 was $0.3 million compared to a $2.6 million operating loss in the fourth quarter of fiscal 2015. Other expense for the fourth quarter of fiscal 2016 including foreign exchange was less than $0.1 million compared to other income of less than $0.1 million in the prior year’s fourth quarter. Loss from continuing operations before tax was $0.4 million as compared to $2.6 million in the fourth quarter of fiscal 2015. We have tax benefit for the quarter of $0.2 million, which primarily reflected adjustments to our estimated foreign income tax expense recorded earlier in fiscal year 2016. Overall, we had a net loss of $0.2 million for the fourth quarter of fiscal 2016 as…

Thanks, Bob, good morning everyone. Fourth quarter was a good one for our Power and Microwave Technologies Group. As Ed mentioned in the past PMT includes our historical EDG business, plus new technologies to partners for the RF, Microwave, and Power markets. We entered the fourth quarter with strong bookings from our investments in various opportunities within the Power and Microwave Technologies Group. These strong bookings allowed us to exceed prior year’s sales in our fourth quarter FY2016. The growth in Q4 was led by a large government order in Electron Device business unit and by strong shipments in our Power and Microwave business unit. We are pleased to see that the new technology partners, we added at the beginning of this fiscal year by creating strong growth in backlog each quarter. We also continue to drive market share with our legacy products. We expanded our distribution agreements with several vendors to create additional market coverage and sales opportunities for both parties, particularly in the foreign markets using our global infrastructure. In the fourth quarter, revenue for PMT was up 14.7% over prior year. Sales were $30.3 versus $26.3 million in Q4 2015. This was the strong sales quarter even as we continue to deal with headwinds in the Latin American market, FX, wafer fab market declines and some supply delays in the quarter. Gross margin in the quarter was down slightly to 30.9% versus 31.1% in the prior year. We had some nice increases in demand for our products and services, specifically in the industrial tube market as the textile business remains strong. Our laser consumable business, which includes products such as lenses and bellows for our CO2 laser equipment, increased 15% over prior year. Demand for our growing capacitor lines, driven by strengthening our relationship with these two…

Thank you, Greg, and good morning everyone. Healthcare sales in the fourth quarter of fiscal 2016 were US$3.7 million, up 76.6% over prior year sales of US$2.1 million. Sales increased primarily from the acquisition of International Medical Equipment and Service, or IMES, which occurred in June 2015. Sales in our PACS display business were down compared to prior year as more hospitals choose to replace displays on an as needed basis versus a total refresh. Gross margin as a percentage of net sales increased to 41% during the fourth quarter of fiscal 2016 as compared to 23.7% in the same period last year due to product mix. IMES products, which consists primarily of high-value CT and MRI replacement parts typically bring higher margins than PACS displays. On a full-year basis, sales were US$13 million versus US$6.6 million in fiscal year 2015. Gross margin was 44% versus 24.1% in the prior year. Year-over-year improvements in sales and margins came from the addition of IMES as well as Richardson certified CT tubes, while sales in our PACS display business were down year-over-year. We see of course from healthcare providers the lower service maintenance cost and challenge capital expenditures. As a result, there is a growing demand for an alternative source to the OEMs for replacement parts and service. We estimate the global markets for diagnostic imaging replacement parts and service to be between US$7 billion and US$8 billion annually. Our strategy is to play a significant role in the development and sale of diagnostic imaging replacement parts on a global basis. The acquisition of IMES provided us with a good foundation in this market and an excellent model for expansion. The investments we are making locally in repair and development for CT tubes and other high-value components by high voltage power units…

Thanks, Pat, and good morning everyone. Canvys, which includes the engineering, manufacturer and set of custom displays to original equipment manufacturers in industrial medical markets had sales of $5.7 million during the fourth quarter of fiscal 2016, down from $6.5 million to the same period last year, but up by $500,000 from the previous quarter. Sales were up quarter-over-quarter due to high demand from our customers. Gross margin increased as a percentage of sales to 27.8% from 23.4% in the same period last year and 23.2% in the previous quarter. The division did a good job in controlling costs and we continue to work closely with our agent partners to deliver the highest quality at competitive pricing for our customers. We closed several new selling contracts that help to increase our order backlog quarter-over-quarter, which is a good sign. For the fiscal year 2016, net sales for Canvys decreased 12.8% to $23.5 million from $24.6 million during fiscal 2015. Sales in the North American OEM markets were down due to merger and acquisitions that disrupted the day-to-day business in our customer base and delays in new programs. Sales in Europe were slightly above prior year. Gross margin as a percentage of net sales declined to 25.7% during fiscal 2016 as compared to 26.2% during fiscal 2015, mainly due to the devaluation of the euro. We focused in the fourth quarter of fiscal 2016 on research and development. We finalized our 4K 2K ultra high-definition product offering, which is an ideal solution for the medical imaging market. The investigated newer technologies such as HDBaseT, a connectivity standard for transmission of uncompressed ultra-high definition video, audio, power, Ethernet, USB and consulting of our common category Cat5e cable. Our plan is to utilize those technologies into our next generation product. We continue offering our customers state-of-the-art product. We also repute our sales opportunities and strategize to establish an achievable plan for fiscal year 2017 that will eventually create value for our shareholders. During the quarter, we won several new programs from existing and new customers. In the medical space for applications such as bedside monitors and LCD displays, customized touch screen to control medical device and wardroom equipment and lasers for eye surgery. We also won several projects in the public transportation market, which continue to be an area of growth for us. It is clear we have our customers’ outstanding products and service. In FY2017, I was continued to refuel and adjust our business strategy with the goal of improving operating performance of the division. We are exploring options for minimizing the impact of the currency fluctuations given the recent promos in Great Britain and the potential impact for more business issues throughout Europe. Maximizing cash flow is also our priority. We 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.

Thank you, Jens. As I mentioned earlier, we’re not out of the woods yet, but we have a solid plan to get there. We remain committed to EDG and increasing market share in the industrial tube markets, while we can offset some volume declines with price increases, ultimately we need new sources of revenue to improve profitability. Wherever we go, people are excited and we tell them about our healthcare strategy. We’re on track to begin manufacturing replacement CT tubes in calendar year 2017, which will not only supplement that drive increased replacement parts sales. PMT with its disruptive technologies is gaining momentum. I see it every day in the number of quotes we’re issuing in the share magnitude of several of the projects that are in process. We're concerned about the instability in the world markets. The impact from recent activities such as Greg said and our global economies and issue becoming more than half of our businesses outside the U.S. Certainly, we have our issues within the U.S. as well. To help counteract this uncertainty, as Pat, Bob and his team to lead the company through a series of initiatives to permanently take cost out of the organization and to improve cash flow. We did this back in 2008 and 2009 timeframe with a very high level of success. This includes looking at our legal and organizational structure, supplier agreements to products and services, benefits cost, facilities costs and more. Since the sale of RFPD in March 2011, we have used cash to support the launch and growth of Richardson Healthcare and the expansion of EDG into the Power and Microwave Technologies Group. Our goals were to drive growth and improve profitability and increase shareholder value over the long-term. We did this knowing that there would be a…

Ladies and gentlemen your question-and-answer session will now being. [Operator Instructions] First question comes from the line of [indiscernible].

Good morning.

Good morning, Eric.

I’m a little bit confused Greg did you mention that gross margin was down in PMT for the quarter? I don’t think I heard that correctly.

Yes, down slightly 20 basis points.

In the fourth quarter?

Yes.

The release says it was 34.1% of them 31.1%.

I think what’s in the press release is correct.

Okay, good, all right. So if I combine the third quarter and fourth quarter and take that relative to the second half last year I get about a 200 basis points increase in the gross margin, is that something we should look forward to in the future or is – are there’s some special things in that second half number.

Well the combination of these based on the product mix, in FY’17 the large dollar growth business will be these new technology partners is that that backlog is increasing greatly every quarter. However, large government order was at high margins as we increase our manufacturing business, that’s at a higher margin. And the end user focus is also higher margin. So the goal is to increase margin slightly, but if there’s any affect it’s just really how fast the new technology partners grow, because that’s slightly under a 30% margin business.

The new technology under 30%, did I get that correctly?

Yes.

Okay, all right. And then in Healthcare, the gross margin went down by roughly 450 basis points sequentially. So should we be looking more at a low-40 run rate or a mid-40s type of run rate in Healthcare?

I – this is Pat, I would say that that may well fluctuate from quarter-to-quarter it completely depends on mix, because we’ve got a variety of products. But the core parts business is higher than that with the PACS displays and when we have things like system sales and some of the other things that it’s less. But I think that’s on the lower side of what we experienced this past year and I would think that’s going to be true in the coming year, as well.

Excellent. Okay, great. Greg, in PMT you mentioned in the last call, or at least my recollection was that you were fairly excited about the book-to-bill ratio, if I take out the $3.8 million in that government shipment, PMT didn’t grow. Were there some other issues during the quarter or did I just understand it – did I misunderstand your optimism in the last call?

No the book-to-bill in the fourth quarter was over $1 million. And the exciting part about that is we had record growth of over 14%. So if you have 14% growth in the quarter with the book-to-bill over one that’s exciting. The exciting part is, like I mention before, that booking increase was generated mainly by the new technology partners. So that’s really the overall strategy of PMT has the tube markets decline slightly, we’ll look at expanding supplier relationships, focusing on gaining market share. But to grow the business overall from a profit dollar point of view and from a profit percent point of view this new technology business and the backlog is growing very, very fast. So we’re going into the fourth quarter. I mean the first quarter of FY’17 with the fourth quarter of 14.7% growth and book-to-bill over $1 million. And that will be continued in June.

That has continued. So the book-to-bill in this quarter is the same as it was in the fourth quarter you’re saying.

Our book-to-bill is over $1 million so far in Q1.

Okay, great. Ed, do you seem to have [indiscernible] on share buybacks whereas in prior quarter, as you mentioned you would “opportunistically”. I’m just wondering if there’s been some new investment opportunities that weren’t there prior or why you decided to change the language.

We want to make sure that we have adequate cash to implement our strategy and the growth both in Healthcare and with PMT. The unfortunate part is that this cash is in a dozen different locations all over the world and it’s very difficult to bring back. I’ll let Bob come in around it. But we spent several months trying to work out a formula to bring the cash back from China. And we’ve been able to do that, the cash is not officially here yet, but it should be here momentarily. But we get to use our NOLs to do that. What happens basically is once we return the cash that U.S., its tax is deemed dividend, which is basically ordinary income at 39%. We do get a foreign tax credit, so the end-all is approximately 20% tax on the money [ph], but we had to use this substantial amount of our NOLs to bring about $10 million debt churn.

Hi, Eric, this is Bob Ben. Yes, it’s correct, we are bringing back about a total of $11.3 million from China. And I think the key point is and we do disclose this in our upcoming 10-K, our U.S. cash at the end of the year was approximately $18 million. So when I had this $11.3 million, we’re close to $30 million. And we do have other cash around the world, as Ed stated, but it is in some cases we have to look at a proper tax strategy. So we’re really using our cash in the U.S. for operations and we’re focusing on investing in our long-term growth strategies, particularly healthcare as you heard Pat mentioned. And with margins in the 40s and going up, we believe that the compelling strategy as we discussed on our last call.

I understand. My only question was I thought maybe since you decided to sort of [indiscernible] close the door on stock repurchase that perhaps you saw some increased investment opportunities in the business that maybe you weren’t there when you mentioned it in the prior quarter.

Well, I think, we want to maintain additional flexibility for that. I mean, I think, you heard, Pat say it in his presentation and Ed stated our past position on acquisitions, we want to maintain some money if we find a transaction that’s attractive and accretive and helpful to our earnings. We want to have that flexibility as well. So, yes, we are using the cash for our long-term strategies. And I think we’ll start seeing some of that towards the end of this year and certainly in the next year in terms of returns.

Okay, thanks, Bob. So, the investment cycle sort of I think it was in 2015 you’re on $10 million in working capital in CapEx. Last year, it looks closer to $15 million if we exclude the IMES acquisition. Just sort of big picture, where do you think you are in that cycle? Are we looking at another increment of that size coming up this year as far as investments go or is that likely to be tapered, just some thoughts about that please.

Yes, sure. Well, as you know, we did use significant cash with our working capital in fiscal 2016. I see that. Well, I still see some increases in inventory for next year. I do think you’ll see some lower increases than prior years from quarter-to-quarter. In addition accounts receivable while it’s been fairly steady, I think, you’re going to see that as well abate in terms of increases. So, overall, I see less of an increase in use of working capital or cash from working capital in fiscal 2017, but you’re still going to have some increases, particularly in inventory, because as we’ve stated we have some growth businesses namely IMES and also some great business as well with PMG. And so, you have to consider that in order to grow those businesses, they need a certain level of inventory. And so, that's a big part of what’s happening.

How about CapEx?

CapEx, we spent $4.8 million, as I stated, this year. I think you're going to see some increase as we get into later in the fiscal year – this fiscal year coming up here that we're in. Manufacturing CT tubes, we still have some investment to do there. So, I think, you're going to see some increase in CapEx for fiscal 2017.

So higher than $5 million?

Higher than $5 million. Yes, sir.

Okay, thank you.

Thanks, Eric.

Thank you for your question. The next question comes from the line of Mark Zinski [21st Century Equity Research].

Good morning, everyone, and congrats on the revenue growth.

Thanks, Mark.

Ed, I want to start with the FED order for $3.8 million. Is that any kind of sort of watershed event in terms of potential future orders? And do you see some repeat business potentially from there?

Well in the coming year we will. When we built out this contract, we built an additional quantity of the tubes. We're building those in France. And we're relocating that equipment. So, we wanted to build additional inventory. There is also a fairly large foreign military demand for that product. So, we think we'll see increased sales at least in the coming year on that product.

Okay, great. Some of the announcements you made over the last month or so with the new distribution agreement, new franchise agreement, are you seeing any material revenue impact from those agreements and any color on those would be good?

Yes, this is Greg. So, as I mentioned, when we announced the PMT and adding the new technology partners, we took pretty much most of Q1 and Q2 to identify the technologies, sign the agreements, get the people in place to sell it, et cetera. And we were pleasantly surprised on the amount of design opportunities. We have a very large bank of global design opportunities that will turn into revenue in FY2017. However, we were able to have a very strong quarter in terms of shipments, in terms of revenue. So, the $3.8 million of the government order helped us in the quarter, but we also had declines in other areas of the two businesses that this along with the increased shipments, obviously 100% over prior year of the new PMG suppliers helped us get to 14.7%. We will find some more of this type of businesses as I’ve mentioned with the building of more tubes to support that market, which still need them. However, the strong bookings of the new technologies to partners in Q3 and Q4 will elevate us to have increased sales with an increased profitability in FY2017. That’s kind of how it works. As the declines happen in EDG, we combat those with extending EDG suppliers, focusing on the end-users. But these new technology partners, that's where the high dollar growth is going to be. And the combination of the two really showed up in Q4 where we had a book-to-bill of over one mainly by the bookings of the new technology suppliers that increased the sales of 14.7%, mainly based on the entrepreneurial opportunistic $3.8 million government order, that won’t completely repeat in FY2017.

Okay. And then, thanks for that. And then Ed, if I were to kind of summarize the game plan for fiscal 2017, in general terms it looks like you're going to be, I mean you're going to be doing some restructuring, continued investment in new initiatives but perhaps not as robust of investments as in fiscal 2016 and probably it’s an expectation for some revenue growth. Is that a fair assessment?

No, it’s pretty close. We continue to look at acquisitions, but I can't tell you that we see anything at the moment that will happen in 2017. And of course we did IMES at the beginning of 2016, so that won't reoccur. But we're continuing to invest in the CT tube strategy. There’s more capital equipment there. We’re right on line, as Pat said, to start delivering CT tubes at the end of the year and in the meantime we have a pre-owned tubes that we're selling every day. So, I think, you're just about right on. It's more of the same execute what we've invested in and start turning some profit.

Okay. And then last question you referred internally, can you comment at all about what your – how the return on these investments is going based on your sort of internal evaluations? I know you sort of indicated it’s taking a little longer than you had expected, but just in terms of return on investment perspective, are you kind of seeing the numbers that you had anticipated?

I guess what we’re encouraged is the future opportunity. The IMES model, for example, as Pat mentioned, the margins are well up into the forties. And we think there's an opportunity to expand that business substantially on a global basis, particularly when we can deliver CT tubes to augment their parts business, which is critical. And we really think there’s an opportunity to grow that substantially. And then also with the PMG products at one time Greg was running, when we saw that $370 million business and he’s got a strategy and a performance record of being able to do that, so we’re counting on him to grow the business as well.

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

Thank you.

Thank you for your questions. [Operator Instructions]