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Edited Transcript of RELL earnings conference call or presentation 6-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 Richardson Electronics Ltd Earnings Call

LA FOX Apr 6, 2017 (Thomson StreetEvents) -- Edited Transcript of Richardson Electronics Ltd earnings conference call or presentation Thursday, April 6, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edward J. Richardson

Richardson Electronics, Ltd. - Chairman, CEO and President

* Gregory J. Peloquin

Richardson Electronics, Ltd. - EVP of Power & Microwave Technologies Group

* Jens Ruppert

Richardson Electronics, Ltd. - EVP of Canvys and General Manager of Canvys

* Patrick Fitzgerald

Richardson Electronics, Ltd. - EVP and General Manager of Healthcare

* Robert J. Ben

Richardson Electronics, Ltd. - CFO, CAO, EVP and Corporate Secretary

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Conference Call Participants

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* Eric Landry

* Mark Zinski

21st Century Equity Research - MD

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the FY '17 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.

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Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO and President [2]

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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'd like to remind you that we'll be making forward-looking statements, and they're 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 beginning 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 to remove costs 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.

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Robert J. Ben, Richardson Electronics, Ltd. - CFO, CAO, EVP and Corporate Secretary [3]

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Thank you, Ed, and good morning. I will review our financial results for our third quarter and first 9 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 $12.0 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 9 months of fiscal year 2017 results. Net sales for the first 9 months of fiscal 2017 were $99.5 million, a decrease of 2.9% from the first 9 months of fiscal year 2016 sales of $102.4 million. Canvys net sales decreased by $2.9 million due to declines in demand from key customers relating to market conditions. Gross margin, however, increased to 32.1% from 30.7%, primarily reflecting an improved product mix in both PMT and Canvys. Operating expenses were $37.7 million for the first 9 months of the fiscal year, which represented a decrease of $0.2 million from the first 9 months of the last fiscal year.

The first 9 months of fiscal 2017 includes $1.3 million in severance expense associated with the reduction in workforce during the second quarter of fiscal 27 [sic][ 2017 ]. This was mostly offset by reduced salaries and incentive compensation expenses.

In addition, IT expenses were nearly $0.8 million lower than the first 9 months of fiscal 2016. Our operating loss for the first 9 months of fiscal year 2017 was $5.8 million as compared to an operating loss of $6.2 million for the first 9 months of fiscal year 2016.

After excluding the severance expense of $1.3 million incurred in the second quarter, the operating loss would have been $4.5 million for the first 9 months of fiscal 2017. Other expense for the first 9 months of fiscal 2017, including foreign exchange, was $0.2 million compared to other income of $0.4 million for the first 9 months of fiscal 2016.

We had a tax provision of $0.8 million for the first 9 months of fiscal 2017, which primarily reflected a 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 $6.8 million for the first 9 months of fiscal year 2017 as compared to a net loss of $6.6 million in the first 9 months of fiscal 2016.

Turning to a review of our cash position. Cash and investments as of February 25, 2017, were $60.2 million, which was a decrease of $2.6 million from November 26, 2016, and a decrease of $10.3 million from the end of fiscal 2016. Cash used in operating activities for the third quarter of fiscal year 2017 was $1.3 million compared to $5.7 million in the third quarter of fiscal 2016.

On a year-to-date basis, cash used in operating activities was $3.2 million as compared to $14.6 million in the first 9 months of fiscal 2016. We had capital expenditures of $0.8 million for the third quarter compared to $1.3 million in the third quarter of fiscal 2016. Approximately $0.3 million relates to our investments in our Healthcare growth strategy, approximately $0.2 million relates to our IT platform, and another $0.3 million for other projects. On a year-to-date basis, capital expenditures totaled $4.1 million as compared to $3.0 million in the first 9 months of fiscal 2016.

Lastly, during the third quarter, $0.8 million was paid out in dividends and $2.3 million was paid out in the first 9 months of the fiscal year.

A few final comments. Ed has asked me to lead key company initiatives focused on improving profitability, increasing our cash flow worldwide. Some of these key initiatives include: reducing travel and entertainment expenses, reducing facility-related expenses, reviewing our legal entity structure for profitability and potentially rationalizing unprofitable locations, and reducing inventory and accounts receivable balances. While we are not finished, results in these key initiatives to date have been very successful. For example, inventory is down to $42.9 million from $45.4 million at the beginning of the fiscal year.

Now I would like to turn the call over to Greg, who will discuss the results and plans for our Power & Microwave Technologies group. Greg?

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Gregory J. Peloquin, Richardson Electronics, Ltd. - EVP of Power & Microwave Technologies Group [4]

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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 FY '16. 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 product lines 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 tubes sold into the avionics and marine market as well as a decline in tubes 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 design the new 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 are addressing has never been higher. Several of these high-volume long-term requirements are for programs at key OEMs. My point here is we are developing a very strong design funnel to continue to improve our profitability with top line growth.

On a geographical basis, sales in both North America and Europe were stronger in the third quarter than prior year. Our Asian markets have been negatively impacted by delayed shipments from several large OEMs both for tubes and engineered solutions. We continue to adjust our product mix and cost model to take advantage of the opportunities while combating the headwinds.

We've also worked hard throughout the year to reduce our investment in inventory and maximize cash generated in the business. There is no question, we have an unparalleled capability and global go-to-market strategy that is unique to the RF and microwave management industry. We are the world leader in the manufacturing and distribution of electron devices, supporting legacy RF and microwave equipment, as well as new equipment where solid-state cannot replace tubes. We continue to offer suppliers and customers easy access to engineering support for all of our products on a global basis. We have design, engineering and manufacturing capabilities to support custom systems and subsystem requirements. With the new technology group, we have a fast-growing new technology partners to support customers' next-generation equipment in niche RF and power markets. The combination of these factors in place put us in excellent position to generate improved profitability with top line growth into the future.

And with that, I'll turn it over to Pat Fitzgerald in Richardson Healthcare.

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Patrick Fitzgerald, Richardson Electronics, Ltd. - EVP and General Manager of Healthcare [5]

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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 favored replacement parts sales, which generally carry higher margins.

Healthcare providers continue to face intense pressure to reduce costs. 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's 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 USD 7 billion and USD 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 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 IMES growth initiatives, including sales in Europe, were up for the quarter. European service providers are beginning to take on additional service contracts because of our ability to deliver parts quickly from Amsterdam. IMES product line expansions, including Siemens and Philips CT parts and key components for MRI systems continue to do well.

IMES equipment sales were also up in the third quarter compared to prior year. While margins on equipment are not as strong as the margins on replacement parts, we like this business because it seeds the market for the future. Customers who buy equipment from us today will come back to us for parts and tubes later on.

Sales of CT tubes were down in the third quarter, driven primarily by fewer preowned CT tubes being available to certify and sell compared to the prior year. We continue to make significant investments in our CT and X-ray tube development and manufacturing capabilities. The development of repair processes in parallel with new tube development, will be the key to creating a sustainable supply of CT tubes. To this end, we made progress in the quarter and our focus continues to be on rigorous life testing. We have one chance with our customers to get this right. Releasing repaired or new tubes to market before sufficient validation has been completed would have significant negative long-term consequences.

In the fourth quarter, we will launch several new products designed to leverage the pending release of refurbished CT tubes. These include master parts agreements and parts and glassware coverage contracts where we will provide replacement parts, and eventually, CT tubes, in exchange for a contract with a fixed monthly fee. Customers will be required to purchase coverage for all systems of a particular model in their installed base. This will create a recurring revenue source for our IMES parts business while allowing our customers to budget and have predictable replacement part and tube costs.

Sales of our image systems brand displays for Picture Archiving and Communication Systems, or PACS, and related accessories and equipment for operating rooms were down again compared to the same period last year. More hospitals are choosing to replace diagnostic displays on an as-needed basis versus a disciplined total refresh approach due to capital budget constraints. This leaves some hospitals exposed to compliance issues as diagnostic displays fall out of conformance.

We believe our QC/QA services and software to help customers monitor compliance put us in a good position to capitalize on future refresh projects when this market bounces back. With IMES parts, CT and X-ray tubes, PACS and operating room displays, wireless DR upgrade solutions as well as power grid tubes, coil repairs and cryogenic solutions for MRI systems, Richardson Healthcare has established excellent relationships with hospitals and independent service organizations on a global basis.

Over the past two years, we have significantly strengthened our value proposition for healthcare providers looking to lower their costs and increase efficiency. We continue to explore additional acquisitions in this market and are focused on companies with models that can be expanded internationally. We are also evaluating additional partnerships and organic investment in product line expansion in segments that we feel are underserved.

I'll now turn the call over to Jens Ruppert to discuss Canvys' third quarter results.

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Jens Ruppert, Richardson Electronics, Ltd. - EVP of Canvys and General Manager of Canvys [6]

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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 they continue to be challenged by customer consolidation and lower-than-anticipated demand in our Healthcare segment.

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 competitive 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 PC features 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 installation slots and includes a rear metal cooling plate allowing for more power efficiency. These solutions are ideal for customers for 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 for applications such as radiofrequency generators, laser eye surgery equipment and customized displays for dental treatment chairs. We are the one project in nonmedical areas for applications such as product dispensers and 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.

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Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO and President [7]

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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 glassware contract program is the best option for our customers to cap their replacement parts lift in cost and contribute to lower overall healthcare costs.

Jens continue 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 options for bringing international cash back to the U.S. How we bring the cash back will be determined primarily by the Trump administration's success in 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?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Mark.

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Mark Zinski, 21st Century Equity Research - MD [2]

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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.

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Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO and President [3]

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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 as you see the Healthcare business start 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 flip side of that is Greg's doing quite well with his PMT products with new vendors, and that's primarily semiconductor-based for OEMs, and that business tends to have a lower margin. So there's quite a mix there. I think you should see it stabilize somewhere in this area. We'd like to see 34%, 35%, but that's probably what you can expect for the max going forward.

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Mark Zinski, 21st Century Equity Research - MD [4]

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Okay, great. 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 these -- the recovery in the semiconductor wafer fabrication vertical?

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Gregory J. Peloquin, Richardson Electronics, Ltd. - EVP of Power & Microwave Technologies Group [5]

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Well, it's interesting because it's 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 our largest bookings that happened in the first and second quarter were actually new technologies going into 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 2 key markets and those are the 2 key product lines that generated the growth.

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Mark Zinski, 21st Century Equity Research - MD [6]

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Okay. And can you say that there's some kind of a secular recovery in this -- in that semi space? I mean, do you see some kind of bottoming out and upward recovery?

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Gregory J. Peloquin, Richardson Electronics, Ltd. - EVP of Power & Microwave Technologies Group [7]

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Well, the numbers we see from our key OEMs, they're up 30%, 40%, and they 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 roller coaster. 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 not at the bottom of it. We think we'll see double-digit growth in that until probably the end of the year.

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Mark Zinski, 21st Century Equity Research - MD [8]

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Okay, great. And then Bob, you had mentioned on the cost reduction methods you've been employing here, and 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 there?

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Robert J. Ben, Richardson Electronics, Ltd. - CFO, CAO, EVP and Corporate Secretary [9]

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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's 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.

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Mark Zinski, 21st Century Equity Research - MD [10]

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Okay. And then lastly, Ed, is there any way you can comment on 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 sort of counterpunch anything that happens there?

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Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO and President [11]

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Well, about 60% of our business is international. But we're a sole source on so much of the product, at least in the tube portion of the business, that 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 with what the administration is planning in that area.

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Operator [12]

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Your next question comes from the line of Eric Landry.

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Eric Landry, [13]

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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'd like your opinion on that, please.

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Gregory J. Peloquin, Richardson Electronics, Ltd. - EVP of Power & Microwave Technologies Group [14]

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Well, the bookings are driven very strongly by the new technology suppliers. Our backlog quarter-over-quarter is up 16%. So what makes up the strong bookings number is the new technologies group. And as I think I mentioned to you, Eric, in the past, we have a global design opportunity tracking system, and that tracks every design that we're working on. And these design cycles are long, some longer than others. But that funnel is growing, I'll have to say, beyond my expectations. It's growing 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 the tube business, but I don't see that slowing down here going into FY '18.

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Eric Landry, [15]

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Okay. So you mentioned that the semiconductor market was growing -- 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 December?

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Gregory J. Peloquin, Richardson Electronics, Ltd. - EVP of Power & Microwave Technologies Group [16]

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Yes, 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 until the end of the calendar year, Eric, calendar year. So until December, January.

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Eric Landry, [17]

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Okay, so that's well into year 2018?

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Gregory J. Peloquin, Richardson Electronics, Ltd. - EVP of Power & Microwave Technologies Group [18]

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Yes, halfway.

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Eric Landry, [19]

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Okay. Greg, of the -- I don't know, what is it, 1.5 dozen new deals that you've signed over the past 1.5, 2 years?

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Gregory J. Peloquin, Richardson Electronics, Ltd. - EVP of Power & Microwave Technologies Group [20]

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Yes. Yes, close to 20.

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Eric Landry, [21]

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

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Gregory J. Peloquin, Richardson Electronics, Ltd. - EVP of Power & Microwave Technologies Group [22]

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All of them. All of them are producing revenue. However, if you look at the RF and microwave part of that, 2 key suppliers, and these are the world leaders, they're both -- one's 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 2 are really the highest number of design wins, design opportunities and revenue. On the power semiconductor side, StarPower and a company called USCi, United Silicon Carbide, they're kind of leading from the power applications, power supplies and ultra capacitors, et cetera. So those 4 are really leading the revenue and the growth in terms of backlog.

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Eric Landry, [23]

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So...

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Gregory J. Peloquin, Richardson Electronics, Ltd. - EVP of Power & Microwave Technologies Group [24]

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(inaudible)

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Eric Landry, [25]

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No, go ahead.

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Gregory J. Peloquin, Richardson Electronics, Ltd. - EVP of Power & Microwave Technologies Group [26]

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Well, I was just going to say, the strategy is to sign technology leaders, and a lot of these are smaller startups 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 find these niche suppliers and these niche applications that are world-leading in terms of technology and we sign them to exclusive deals. It'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 9. So again, they're smaller but they're -- but it's high technology, high design end, a very technical sales strategy.

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Eric Landry, [27]

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

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Gregory J. Peloquin, Richardson Electronics, Ltd. - EVP of Power & Microwave Technologies Group [28]

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Yes. I mean, the whole deal is when you start one of these, the source of supply, you don't have the source of supply, you're shot. So the team's 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 a new supplier in probably, I don't think, this fiscal year. So we're set for a while.

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Eric Landry, [29]

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Okay, I got you. 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?

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Robert J. Ben, Richardson Electronics, Ltd. - CFO, CAO, EVP and Corporate Secretary [30]

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Well, I like to look out in the short term. Certainly, 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 typically close to what we showed in the third quarter.

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Eric Landry, [31]

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Got you. And the CapEx cycle as far as the tube business goes, are we -- is that -- are we about through that? Or is that still -- are we still looking at increased spending for that? I noticed that CapEx was down in the quarter from the prior quarter.

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Robert J. Ben, Richardson Electronics, Ltd. - CFO, CAO, EVP and Corporate Secretary [32]

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Yes, we -- I think we were at $4.1 million 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've been -- they're more focused on the repair tube than on the new tube at the moment. But they're linked together, so anyways.

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Eric Landry, [33]

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Okay. 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? Is -- how far along are you in that process?

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Patrick Fitzgerald, Richardson Electronics, Ltd. - EVP and General Manager of Healthcare [34]

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We continue to accumulate simulated clinical use in our in-house scanners. And we've had several tubes now go up to a year, which is when we pull them off. And 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.

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Eric Landry, [35]

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And have you been thrown any curveballs in the process that you weren't expecting?

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Patrick Fitzgerald, Richardson Electronics, Ltd. - EVP and General Manager of Healthcare [36]

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I think that 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.

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Eric Landry, [37]

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Okay, so it's going about as expected right now?

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Patrick Fitzgerald, Richardson Electronics, Ltd. - EVP and General Manager of Healthcare [38]

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I would say yes.

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Eric Landry, [39]

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

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Patrick Fitzgerald, Richardson Electronics, Ltd. - EVP and General Manager of Healthcare [40]

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Well, we actually have some experience from our past lifes 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 and 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. So 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 of how to price the tube portion of that as well.

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Eric Landry, [41]

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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?"

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Patrick Fitzgerald, Richardson Electronics, Ltd. - EVP and General Manager of Healthcare [42]

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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 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 from the OEM.

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Eric Landry, [43]

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Okay. Ed, last one. Was wondering if there's been any developers inquiring about your excess land there in LaFox?

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Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO and President [44]

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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 in the current land prices, you can hear them scream from here to Chicago. So we haven't gotten anybody to bite. Yes, they inquire, but we haven't -- we have nothing under contract, let's put it that way.

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Operator [45]

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The next question comes from the line of Bruce Bachmann.

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Unidentified Analyst, [46]

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

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Jens Ruppert, Richardson Electronics, Ltd. - EVP of Canvys and General Manager of Canvys [47]

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Yes. This is Jens. So I think the softness we could see in the third quarter at Canvys was mainly driven by a decreased [ immaximal ] customers in North America, mainly in the healthcare sector, as I mentioned this in my script. 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.

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Unidentified Analyst, [48]

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

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Jens Ruppert, Richardson Electronics, Ltd. - EVP of Canvys and General Manager of Canvys [49]

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It's up in both.

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Unidentified Analyst, [50]

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

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Robert J. Ben, Richardson Electronics, Ltd. - CFO, CAO, EVP and Corporate Secretary [51]

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Bruce, it's Bob Ben. We -- 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 would leave $45 million between Europe, Latin America and Asia, and the bulk of that's in Asia, Hong Kong and Korea, Japan. So that's -- we were working on some plans on that, as Ed 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.

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Unidentified Analyst, [52]

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

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Robert J. Ben, Richardson Electronics, Ltd. - CFO, CAO, EVP and Corporate Secretary [53]

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Yes, we are able to tap some of the foreign cash. For example, there's intercompany balances 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 it's $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 the 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's the decrease in inventory that I noted and other improvements in working capital.

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Unidentified Analyst, [54]

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

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Robert J. Ben, Richardson Electronics, Ltd. - CFO, CAO, EVP and Corporate Secretary [55]

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

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Unidentified Analyst, [56]

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Was that also true in the prior year?

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Robert J. Ben, Richardson Electronics, Ltd. - CFO, CAO, EVP and Corporate Secretary [57]

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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 we -- by the way, if I didn't mention it, I know I talked about 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.

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Operator [58]

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

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Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO and President [59]

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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.

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Operator [60]

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