Richardson Electronics Limited (RELL)

Q2 2011 Earnings Call

January 6, 2011 10:00 am ET

Executives

Edward Richardson – President, Chief Executive Officer

Kathleen Dvorak – Chief Financial Officer

Wendy Diddell – Executive Vice President – Corporate Development

Analysts

Robert Moses – RGM Capital

Al Tobia – Sidus Investments

Mark Zinski – 21 st Century Equities

Ethan Steinberg – Freiss Associates

Presentation

Operator

Welcome to the Fiscal 2011 Second Quarter Earnings conference call. My name is Veronica and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be conducting a Q&A session towards the end of today’s conference. If at any time during the call you require assistance, please press star followed by zero and the coordinator will be happy to assist you.

I would now like to turn the conference over to your host for today’s call, Mr. Ed Richardson. Please proceed.

Edward Richardson

Good morning and thank you for joining our second quarter conference call for fiscal 2011. Joining me on the call today are Kathy Dvorak, Chief Financial Officer, and Wendy Diddell, Executive Vice President – Corporate Development and General Manager – Canvys.

This call will include forward-looking statements that involve risks and uncertainties that could cause our results to differ materially from management’s expectations and plans. We encourage you to review the Safe Harbor statement found in our press release and also to review our most recent regulatory filings for a full description of these risk factors.

As you may know, we are diligently working to complete the sale of our RF, Wireless and Power division, or RFP, to Arrow Electronics. The transaction is expected to close in the next 60 days. I’d like to begin by providing a summary of the transaction and then move on to discuss the operational, financial and strategic outlook for our remaining businesses. Following that, we’ll be happy to take your questions.

In reference to the transaction, the proceeds from the sale will be $210 million with an incremental purchase price adjustment related to a working capital target. Needless to say, this transaction is complex is the sense that we’re separating a large division from a consolidated operating company. Immediately following the closing, we will move into a transition phase where both parties will be providing transitional services to each other. This transition phase will likely take several months. Once this period has ended, we can turn our attention to realigning our cost structure to fit the remaining business units. Our objective is to do everything possible to exit fiscal 2011 with a support function cost structure that enables the remaining business to hit our near-term operating margin target of 5%.

Now let’s get back to our second quarter performance. From a financial statement perspective, RFPD is now shown as a discontinued operation. We achieved strong double-digit growth for the remaining businesses with sales of 23.7% compared to the prior year’s second quarter. Backlog continues to strengthen for the Electron Device Group, or EDG, and Canvys, our display group, which is a very positive sign for the future.

For the combined businesses, we’ve experienced some margin decline. For EDG, this decline is somewhat misleading as it reflects the impact of a strategic alliance with a supplier where we gained incremental sales, although at lower margins. We’re in the process of transitioning our customer base over the next few months to include a greater percentage of aftermarket business that typically comes at higher margins. This should enable us to return to historical margin levels for EDG in fiscal 2012. For Canvys, our gross margin has been affected by the decline in our healthcare business, which traditionally carried higher margins, as well as rising air freight costs and competitive pressures.

With sales increasing by 23.7%, we held our operating expenses on a consolidated basis. Unfortunately, because of accounting for RFPD as a discontinued operation, the only expenses that we can attribute to RFPD are those that are transferring or directly being eliminated as a result of the transaction. The balance of our support function costs are then allocated to EDG and Canvys.

While we show positive operating income, we need to restructure our cost base for the remaining businesses. Cash from operating activities was also positive but our working capital investment also grew, which was necessary to support our growth.

As I mentioned, sales for EDG and Canvys were 41 million in the second quarter. This was stronger than what we’d anticipated and backlog remains solid. Sales for EDG were up 42.4% in the quarter. The continuing sales strength reflects the market’s recognition of our capabilities of the global channel to market. Canvys was down about 5%, due primarily to a significant but non-recurring healthcare project in the first half of FY10. Customers have also been slower and more conservative in resuming prerecession levels of capital spending.

We’re refocusing the business on the OEM market, which has a longer sales cycle but carries higher margins and is a better long-term model for our business. We believe our niche and our strength in the display market is helping our customer design customized displays to projects that will be recurring in nature.

Looking ahead, we believe that our sales for our third quarter of fiscal 2011 will be in the range of 38 million to 40 million, representing a continuation of the double-digit growth that we’ve enjoyed so far this year.

Now I’ll turn the call over to Kathy to present our financial highlights.

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