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Edited Transcript of RELL.OQ earnings conference call or presentation 8-Oct-20 2:00pm GMT

·33 min read

Q1 2021 Richardson Electronics Ltd Earnings Call LA FOX Nov 25, 2020 (Thomson StreetEvents) -- Edited Transcript of Richardson Electronics Ltd earnings conference call or presentation Thursday, October 8, 2020 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Edward J. Richardson Richardson Electronics, Ltd. - Chairman, CEO & President * Gregory J. Peloquin Richardson Electronics, Ltd. - EVP of Power & Microwave Technologies Group * Jens Ruppert Richardson Electronics, Ltd. - Executive VP & GM of Canvys * Robert J. Ben Richardson Electronics, Ltd. - Executive VP, CFO, CAO & Corporate Secretary * Wendy S. Diddell Richardson Electronics, Ltd. - COO & Executive VP of Corporate Development ================================================================================ Conference Call Participants ================================================================================ * Anthony Chiarenza Key Equity Investors, Inc. - President and CEO * Charles W. Neuhauser Mainwall Investment Management, LLC - Chief Compliance Officer * Gary Gambino * Harry Sauers ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by and welcome to the Richardson Electronics Earnings call for the First Quarter of Fiscal Year 2021. (Operator Instructions) I would now like to introduce your host for today's conference, Mr. Edward Richardson, CEO. You may begin, sir. -------------------------------------------------------------------------------- Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [2] -------------------------------------------------------------------------------- Good morning, and welcome to Richardson Electronics Conference call for the first quarter of fiscal year 2021. Joining me today are Robert Ben, Chief Financial Officer; Wendy Diddell, Chief Operating Officer and General Manager for Richardson Healthcare; Greg Peloquin, General Manager of our Power & Microwave Technologies Group; and Jens Ruppert, General Manager of Canvys. We're all calling in from remote locations. As a reminder, this call is being recorded and will be available for audio playback. I'd also like to remind you that we'll be making forward-looking statements, and they're based on current expectations and involve risks and uncertainties, more so today than ever. Therefore, our actual results could be materially different. Please refer to our press release and SEC filings for an explanation of our risk factors. I'd like to begin the call by again thanking our employees and our suppliers for their focus and commitment to our business throughout the pandemic. With their efforts, we've been able to serve our diverse customer base without interruption. We're pleased with our results for the first quarter of fiscal year 2021 despite the disruptions placed on the companies throughout the world. Our sales were less than 5% below the prior year for the first quarter. The semiconductor wafer fabrication market continues to be strong, and we had good growth in the power and microwave group with the rollout of 5G. Within the Healthcare segment, patient volumes and elective surgeries are on the rise. As a result, CT tubes and parts sales improved over our most recent quarter. The operating loss in the quarter occurred as a result of lower sales in the first 2 months of our fiscal year. Gross margins strengthened in the final month of the quarter. We're seeing steady signs of improvement as people adjust to life with masks and social distancing, and businesses slowly return to pre-COVID levels. I'll now turn the call over to Bob Ben, who will provide a detailed recap of our first quarter. Then Greg, Wendy and Jens will discuss individual business unit performance, our successes and our opportunities for future growth. -------------------------------------------------------------------------------- Robert J. Ben, Richardson Electronics, Ltd. - Executive VP, CFO, CAO & Corporate Secretary [3] -------------------------------------------------------------------------------- Thank you, Ed, and good morning. I will review our financial results for our first quarter of fiscal year 2021, followed by a review of our cash position. Net sales for the first quarter of fiscal 2021 decreased to $38.8 million or less than 5% compared to net sales of $40.7 million in the prior year's first quarter, despite the impact on demand from COVID-19. Sales of semiconductor wafer fab equipment specialty products as well as power conversion and RF and microwave components increased from last year's first quarter. Overall, PMT sales decreased $0.3 million or 1%. Power grid tube sales were negatively impacted by the pandemic and economic softness. Canvys sales decreased by $0.6 million or 7.8% due to COVID-related pushouts from its European medical OEMs, partially offset by higher North American sales. Richardson Healthcare sales decreased $1 million or 34.2% due to the continued hospital closures to noncritical personnel and service providers, and an overall decline in CT use throughout the pandemic. Lower sales of refurbished CT systems in Latin America also contributed to the revenue decline. Healthcare sales increased 27.7% versus the fourth quarter of fiscal 2020. Gross margin for the quarter was 31.8% of net sales compared to 31.9% of net sales in last year's first quarter. PMT margin increased to 33.0% from 31.7% due to a favorable product mix and improved manufacturing efficiencies. Canvys margin as a percent of net sales also increased 34.0% from 31.9% as a result of its improved product mix. Healthcare margin as a percent of net sales was 5.6% in the first quarter of fiscal 2021, down significantly from last year, but an improvement over Q4. The low-margin was due to manufacturing under absorption and inventory reserve costs related to tube development and production improvements on significantly lower net sales. Operating expenses were $13.0 million for the first quarter of fiscal 2021 compared to $12.8 million in the first quarter of fiscal 2020. The increase in operating expenses resulted from a $0.4 million increase in legal expenses and from our normal employee compensation expenses, including annual merit increases. These increases were partially offset by lower travel expenses. Throughout the pandemic, the company decided to support its employees through regular merit increases and incentive plans and by avoiding layoffs or furloughs. As a result, the company reported an operating loss of $0.6 million for the first quarter of fiscal 2021 as compared to an operating income of $0.1 million in the first quarter of last year. Other expense for the first quarter of fiscal 2021, including interest income and foreign exchange, was $0.4 million compared to other income of $0.2 million in the first quarter of fiscal 2020. The income tax provision of $0.1 million for the quarter reflected a provision for foreign income taxes, which was lower than in the prior year's first quarter, and no U.S. tax benefit due to the valuation allowance recorded against the net operating loss. Although there is no tax benefit shown on our financial statements from U.S. net operating losses, we can use our net operating losses to offset any cash tax liability reported in our U.S. federal income tax return. The amount of federal NOLs is $17.6 million. Overall, we had a net loss of $1.1 million for the first quarter of fiscal 2021 as compared to a net income of $0.2 million in the first quarter of fiscal 2020. We continue to closely manage our cash position. Cash and investments at the end of the first quarter of fiscal 2021 were $42.5 million compared to $46.5 million at both the end of fiscal 2020 and the end of first quarter of fiscal 2020. Capital expenditures were $0.7 million in the first quarter of fiscal 2021 compared to $0.3 million in the first quarter of fiscal year 2020, approximately $0.5 million related to our Healthcare business and $0.2 million was for our IT system in the first quarter of fiscal 2021. We paid $0.8 million in dividends in the first quarter of fiscal 2021. In addition, based on our current financial position, our Board of Directors declared a quarterly dividend of $0.06 per common share, which will be paid in the second quarter of fiscal 2021. Now I will turn the call over to Greg, who will discuss the results for our Power & Microwave Technologies Group. -------------------------------------------------------------------------------- Gregory J. Peloquin, Richardson Electronics, Ltd. - EVP of Power & Microwave Technologies Group [4] -------------------------------------------------------------------------------- Thank you, Bob, and good morning, everyone. PMT sales in the first quarter of fiscal year 2021 were $30.3 million versus $30.6 million in Q1 of FY '20. Our gross margin increased in the quarter to 33% versus 31.7% in the prior year. Gross margin improved in both business units through demand creation and engineered solutions. In terms of revenue, issues related to COVID-19 hurt our MRO business. However, this was offset by strong growth in our power and microwave business unit and our new technology suppliers, and increased business in our global semiconductor wafer fab customers. Overall, we saw a positive booking trend for both Electron Device Group, EDG and the Power Microwave Group, PMG. The increase in EDG was in support of our semiconductor wafer fab customers. The increase in PMG booking dollars over prior year is a combination of new technology partners' products, our demand creation model, new design wins and high-growth markets. COVID-19 did have a slowdown effect on our business in Q1. Again, I use the word slowdown because we have proven in Q1, the demand for our products and services did not go away. In fact, we are very excited about our booking trends in the quarter. In response to COVID-19, we have looked extensively at how to do things different to achieve success. We developed several unique strategies to support our customers on a global basis through designs and products, while working with the restrictions on travel and face-to-face meetings. These strategies include adding new technology partners, such as AC Propulsion, General Atomics, Amogreentech and DAPU 5G Telecom. In addition to our own internal designs like the ULTRA3000 for wind turbines. We increased communication through customer and supplier focused webinars and major web upgrades. Richardson go-to-market strategy has allowed us to grow multiple business opportunities during the pandemic through creative approaches and communication procedures. We are committed not only to the bounce back, but to bounce forward coming out of this pandemic. This quarter, we continue to seek support from our key partners such as Qorvo, MACOM, Nokia wave, United Silicon, LS Mtron and Fuji Semiconductor. Key tube manufacturers in the industry, such as CPI, Thales, NJRC and Photonis worked with us to manage our customers' requirements. In addition, our in-house engineering and manufacturing teams did a fantastic job supporting our increased demand from our global semiconductor wafer fab customers. And looking specifically at 5G and wireless sales, revenues increased double digits in the quarter. As the need continues to grow for people to work from home, the city, the country, their cab and even their car as they must be able to receive large amounts of data from any of those locations quickly. The consensus in the market is that COVID-19 will still affect the 2020 forecast for 5G due to supply chain issues, manufacturing and design delays resulting from the pandemic has pushed some of the rollouts out. However, the infrastructure side where we play will show strong growth in 2020 and into 2021. Especially during this and coming out of this pandemic, I cannot stress enough the value of Richardson Electronics model to our customers and suppliers. Our unparalleled capability and global go-to-market strategy are unique to the power and RF microwave industries. Through our steadfast and new creative focus on customers, we will survive this pandemic by taking advantage of opportunities when they arise. The demand for our products have not gone away. Our customers and technology partners need Richardson products and support more than ever. And with that, I'll turn it over to Wendy Diddell in Richardson Healthcare. -------------------------------------------------------------------------------- Wendy S. Diddell, Richardson Electronics, Ltd. - COO & Executive VP of Corporate Development [5] -------------------------------------------------------------------------------- Thanks, Greg, and good morning, everyone. In the first quarter of our fiscal year, hospitals began to slowly reopen for elective procedures and equipment maintenance. Our call activity picked up throughout the summer in line with this. However, the pandemic still has a stronghold on the health care business and the threat of increasing COVID cases is tempering optimism. We did not go back into production in the quarter due to component delays as well as our plan to focus on development and improvements. At no time were we at risk of running out of CT tube inventory. In fact, we sold more ALTA750D tubes during the quarter than any prior quarter other than Q3 of last year. A high percentage of our tubes were sold in cost-conscious countries. Given the financial condition of the health care industry globally, we anticipate this trend will continue. Health care revenue and margin in Q1 were better than our most recent fourth quarter, but below Q1 of FY '20. Sales were $1.8 million versus $1.4 million in our fourth quarter and $2.8 million in Q1 of last year. Revenues from tubes, parts and P3 contracts were up over Q4, although down when compared to Q1 last year. Our part sales were positively impacted by higher service demand for newer CT scanner models. Parts for these systems typically have a higher price point and better margin. And while we had a good quarter for ALTA750D, this came partially at the expense of harvested CT tubes. We continue to have interest in our P3 programs, although hospitals have not prioritized these discussions during COVID-19. System sales were flat to Q4 FY '20 and down compared to Q1 of last year. This is due to challenging economic conditions in Latin America as well as the pandemic. More recently, we're also facing a lack of system availability. Our system sales depend on hospitals changing out systems. This is not happening as frequently during the pandemic. We anticipate better availability as hospital financial performance improve. Gross margin was 5.6% in the quarter, reflecting the redirection of resources to R&D and costs associated with new tube development. We are looking forward to launching our second tube the ALTA750G. If everything goes well through beta testing, we anticipate launch during the first half of calendar year 2021. We're also making good progress on our next 2 tubes. We plan to launch those solutions later next year. Our efforts to secure registrations for additional countries continue. At this point, I will turn the call over to Jens Ruppert to discuss first quarter results for Canvys. -------------------------------------------------------------------------------- Jens Ruppert, Richardson Electronics, Ltd. - Executive VP & GM of Canvys [6] -------------------------------------------------------------------------------- Thanks, Wendy, and good morning, everyone. Canvys, which includes the engineering, manufacturing and sales of custom displays to original equipment manufacturers in the industrial and medical markets delivered a good performance with sales of $6.7 million during the first quarter of fiscal 2021, a decrease of 7.8% over the same period last year. The revenue decrease for the quarter was related to decreased customer demand in Europe due to the outbreak of the coronavirus and the resulting impact on the OEM. Sales in North America were stronger than prior year's first quarter. Thanks in part to continued high demand for monitors used for patient monitoring and mobile x-ray machines. Revenue increased from 2 new programs that we didn't have one year ago as well. Both new programs are for highly customized, human machine interfaces, HMI, used for robotic-assisted surgery and cryolipolysis machines. Gross margin as a percentage of sales was 34.0% during the first quarter of fiscal 2021, up from 31.9% during the first quarter of fiscal 2020. The increased gross margin was related to a more favorable product mix. Our healthy backlog, along with a number of projects that are currently in the engineering stage, position us well for continued growth before considering any long-term impact from COVID-19. COVID-19 hit our business in Europe hard in Q1 FY '21. It is nearly impossible to predict when our business will return to normal. But we are optimistic that our business in Europe will bounce back towards the end of the fiscal year 2021. We continue seeing pushouts from North American customers as well. However, new projects that we added recently helped offset these delays. We are compensating for the lack of face-to-face customer visits and trade shows during the pandemic, by focusing on web marketing and sales efforts. Our new website will be online very soon. The new responsive website has a much wider reach, addressing the large number of mobile device users that we couldn't address with our current site. The website will be more modern and offers intuitive navigation. We're confident that our online strategy will result in new leads and business growth. During the quarter, we received several new orders from both existing and first-time medical OEM customers. Some of these include: real-time cell analyzers to determine the metabolic phenotype; patient monitoring, where our monitors are installed at the patient's beds; surgical navigation assistance that enables surgeons to precisely track the location of surgical instruments throughout a procedure; robotic-assisted surgical platform to improve precision and accuracy in spine surgery; examination and treatment shares used in gynecology and urology. In the nonmedical space, we received orders for various display products. Applications include displays used for food processing and packaging machines, where they have to resist high-pressure and high-temperature water jets, teleprompter displays for well-known news stations and various displays for the transportation market. In the transportation market, our displays are installed in subways or used for railway applications and require very specific certifications. The ability to meet the strict requirements is another advantage Canvys provides. Our new website will prominently feature short case studies to many different challenges and the displays we develop to meet these requirements. From the variety of customers 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, I will continue to review and adjust our business strategy to improve 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 demands of our customers, particularly during this pandemic. I will now turn the call back over to Ed. -------------------------------------------------------------------------------- Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [7] -------------------------------------------------------------------------------- Thanks, Jens, for another good quarter. The new customers, Canvys generated over the past several years helped offset delays from our customers pushing out deliveries. I know it can be frustrating at times, but you and the other business unit managers have done an excellent job keeping in close contact with our customers and working through challenges brought on by the pandemic. For the past 6 months, we had a number of successes resulting from our growth initiatives, including Healthcare, Power & Microwave Technologies and displays. We spent time improving our technology and processes, strengthening our list of suppliers and looking for unique ways to better serve our customers. We also continue to carefully manage expenses and maximize cash flow. And one of our engineers recently noted, we're focusing on the new-better, not just the new-normal. During these times, customers are looking for partners with sufficient financial resources and scale. I'm confident that Richardson Electronics, including our employees, suppliers and customers will help drive improvements in health care and infrastructure. Through our growth initiatives and partnerships we'll provide a path beyond the COVID-19 pandemic and our other challenges that may threaten us in the future. At this point, we'll be happy to answer a few questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) The first question comes from Tony Chiarenza with Key Equity Investors. -------------------------------------------------------------------------------- Anthony Chiarenza, Key Equity Investors, Inc. - President and CEO [2] -------------------------------------------------------------------------------- My question is in the use of cash and thinking about the dividend and the possible buyback. I mean, what are your thoughts about your cash usage as you go on through over the next 6, 9 months? Hopefully, we get a recovery and you can get back positive cash flow. But obviously, the stock price is very low, below liquidation value, so it might be advantageous to buyback some shares at this time. I mean, I'm just thinking about what the thoughts are of the Board at this point. -------------------------------------------------------------------------------- Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [3] -------------------------------------------------------------------------------- Well, that's a discussion that we have in every board meeting and that occurred again this week. We're quite concerned about having enough cash to continue to fund our strategy, particularly in Healthcare. As you can see, we still have a substantial amount of cash, but quite a bit of that is outside of the United States. It takes us about $10 million in cash to run our foreign subsidiaries. And there's a certain amount of cash that's trapped outside of the United States, it's difficult to bring back. So we have approximately somewhere under $25 million in the U.S. that we can use to fund the company. But we watch that carefully. So I don't see us buying stock back in the near future. I understand the stock is at a very low margin, but we did buy something like $65 million of the stock back a few years ago, and our intent now is to keep our powder dry, if you will, and have cash available to fund the company's strategy. -------------------------------------------------------------------------------- Anthony Chiarenza, Key Equity Investors, Inc. - President and CEO [4] -------------------------------------------------------------------------------- And how about the dividend? Is your intention is to continue that at the current levels? -------------------------------------------------------------------------------- Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [5] -------------------------------------------------------------------------------- Yes. Yes. For the time being, it will be continued the way it is. -------------------------------------------------------------------------------- Anthony Chiarenza, Key Equity Investors, Inc. - President and CEO [6] -------------------------------------------------------------------------------- Okay. Now can you give us an idea, obviously, we're halfway through the next quarter, how things are looking at the various area that you continue to see recovery? And do you continue to see a path to positive cash flow and positive earnings? -------------------------------------------------------------------------------- Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [7] -------------------------------------------------------------------------------- Yes, ultimately. The one thing that is really encouraging, and it's up and down like a roller coaster, but the semiconductor wafer fabrication business is the largest portion of our business. And it was up substantially in the first quarter, and we're being told that next year the semiconductor wafer fab business will be the highest in history. And if that's true that will have a major impact on our total sales. To give you some idea in the past when the semiconductor wafer fab business was up, we were doing about $20 million a year in that business. And so if that happens again, that will -- unfortunately, it's a business that goes up and down a lot, but it's a very profitable business as well. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Our next question comes from Harry Sauers, who is a private investor. -------------------------------------------------------------------------------- Harry Sauers, [9] -------------------------------------------------------------------------------- I have a few questions for you all today. Obviously, I want to echo that sentiment regarding the buyback. The stock is cheap. I mean, from my point of view, it doesn't make a whole lot of sense to continue the dividend, but not buyback stock. But I figure that's beating a dead horse at this point. I'm looking at the canvys.com website now. Have you made any material changes to it lately? -------------------------------------------------------------------------------- Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [10] -------------------------------------------------------------------------------- Jens, do you want to talk to that? -------------------------------------------------------------------------------- Jens Ruppert, Richardson Electronics, Ltd. - Executive VP & GM of Canvys [11] -------------------------------------------------------------------------------- Sure, sure. So we have not updated the website yet, but I can rest you assured that we are working on this as we speak, and we are coming up with a website within the next 6 weeks, a new website, which is much more responsible and addresses all the tablet users and stuff like that. We have nice marketing videos and stuff. So there will be a big improvement to the website over the next 6 weeks. -------------------------------------------------------------------------------- Harry Sauers, [12] -------------------------------------------------------------------------------- The next 6 weeks. Okay. That's great to hear because I first raised this a couple of quarters ago. -------------------------------------------------------------------------------- Jens Ruppert, Richardson Electronics, Ltd. - Executive VP & GM of Canvys [13] -------------------------------------------------------------------------------- Yes. And we -- we did what you asked for. -------------------------------------------------------------------------------- Harry Sauers, [14] -------------------------------------------------------------------------------- All right. Well, glad to hear that. Moving forward, we're looking at what steps are you going to take to reduce our operating cash flow burn? -------------------------------------------------------------------------------- Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [15] -------------------------------------------------------------------------------- Well, the major issue, of course, is to get Healthcare to be profitable. The rest of the company is doing quite well, but we feel the major portion of our future is in health care and once we can produce enough tubes and related parts equipment for CT applications and start to make a profit in Healthcare, it has an amazing impact on the company. And unfortunately, it's still several years out, but we're making progress there all the time. -------------------------------------------------------------------------------- Harry Sauers, [16] -------------------------------------------------------------------------------- So several years out, would you be able to give me a ballpark range on that? Are we talking 3 years? Or are we talking 10? -------------------------------------------------------------------------------- Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [17] -------------------------------------------------------------------------------- No. We just went through that analysis for the Board. They wanted to see where we are to be breakeven in Healthcare. And right now, we're looking at about 3 years. It all has to do with how many tubes we sell and at the same time, related equipment into the CT applications. The other thing that happens is that our cost in the manufacture of the CT tubes comes down dramatically as we increase the quantity. So that will help as well. -------------------------------------------------------------------------------- Harry Sauers, [18] -------------------------------------------------------------------------------- So really, really, the profitability issue for Healthcare is a problem of scale, not a problem of product viability or high cost of goods or anything like that. If you scale up, it will be profitable? -------------------------------------------------------------------------------- Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [19] -------------------------------------------------------------------------------- Yes, correct. Right. We have the capability. We probably have the most modern CT manufacturing facility that exists in the world today. That's all new equipment, and we've invested $25 million, $30 million in that space. Have a capacity to build about 1,000 tubes a year if we ran in 3 shifts. And I can tell you that we're building far less than that right now. So we have a lot of capacity. And as we start to build the numbers, the unit cost comes down, the margin goes up substantially. -------------------------------------------------------------------------------- Harry Sauers, [20] -------------------------------------------------------------------------------- Yes. Would you break down the unit economics on that for me? -------------------------------------------------------------------------------- Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [21] -------------------------------------------------------------------------------- We really don't do that. We don't go public. I could probably give you a percentage. The cost of the product will probably, if we got to capacity, would probably be reduced about 20% from where it is today. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- Our next question comes from Charles Neuhauser with Mainwall. -------------------------------------------------------------------------------- Charles W. Neuhauser, Mainwall Investment Management, LLC - Chief Compliance Officer [23] -------------------------------------------------------------------------------- Earlier in the discussion about the cash balance, you had said something about meeting or wanting to retain enough cash to support the continued development of the Health business. You just said you've invested $25 million to $30 million into that business already. And so when you say you need or want to maintain a cash balance to support the continued development of that business, how much more money are we talking about? -------------------------------------------------------------------------------- Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [24] -------------------------------------------------------------------------------- Well, of course, it depends on volume. And again, as I mentioned, we have current capability to build about 1,000 tubes a year if we go into 3 shifts, which would be a nice problem to have. And 1 tube or 2 tubes doesn't make a business. And so we're busy developing additional tubes to be a viable supplier of CT tubes to the industry. And there is additional capital expenditures if you develop new types. But for the most part, they're all built on the same equipment. So it takes time doing the fixtures that are peculiar to the new types that we're adding. And the CapEx in that business, Wendy help me, $0.5 million a year or something like that? Maybe a little more, $700,000 a year in the Healthcare business unless we do something extraordinary. -------------------------------------------------------------------------------- Charles W. Neuhauser, Mainwall Investment Management, LLC - Chief Compliance Officer [25] -------------------------------------------------------------------------------- So it's not a question of additional capital investment. It's a question of funding the operating losses until, as you had already mentioned, you get to the point of breakeven in a few years. Is that the best way to look at that? -------------------------------------------------------------------------------- Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [26] -------------------------------------------------------------------------------- Yes, that's correct. -------------------------------------------------------------------------------- Charles W. Neuhauser, Mainwall Investment Management, LLC - Chief Compliance Officer [27] -------------------------------------------------------------------------------- And presumably, the order of magnitude of the operating losses can be determined by just looking at your financial statements, as far as the segment reporting goes, is that a reasonable statement also? -------------------------------------------------------------------------------- Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [28] -------------------------------------------------------------------------------- Well, we don't report down to that level of detail, but it's $4 million or $5 million a year. -------------------------------------------------------------------------------- Charles W. Neuhauser, Mainwall Investment Management, LLC - Chief Compliance Officer [29] -------------------------------------------------------------------------------- Yes. I mean, to get back to just a simplistic way of looking at things. The revenue base of the other businesses should justify -- it should be able to produce operating income to justify a higher stock price than we're looking at today. So the crux of the matter, like you just said, I guess, is to get that health business to stop losing that kind of money. (inaudible) -------------------------------------------------------------------------------- Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [30] -------------------------------------------------------------------------------- Right. The issue is the tremendous opportunity. We guesstimate that the total market for replacement parts and service in the CT space is something like $9 billion and unfortunately, the tube business is a wonderful business that we do about $100 million and then very profitable, and we own a large share of that market, which I've gotten asked before in the past. But -- so to grow in the 2 business, that's why we went into CT, and it really gives us an opportunity for the future, but it takes a substantial investment to get there, and that's what we're talking about. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- (Operator Instructions) Our next question is a follow-up question from Harry Sauers who is a private investor. -------------------------------------------------------------------------------- Harry Sauers, [32] -------------------------------------------------------------------------------- Another set of questions. So I'm really curious, I've seen a lot of public companies willingly take any kind of salary reductions, especially as we go through a very challenging period. Is that something that you, Ed or any of the fellow executives here have considered? -------------------------------------------------------------------------------- Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [33] -------------------------------------------------------------------------------- Well, we've already done it, although it's not visible. The -- to give you some idea, our incentives on the business range anywhere from 25% to 70%, depending upon the individual. And those incentives have been cut in half at the current levels and won't go back up to a normal level until the company is profitable. -------------------------------------------------------------------------------- Harry Sauers, [34] -------------------------------------------------------------------------------- Well, I'm sure as far as incentives go, but I mean, as a shareholder, I would rather see you compensated 75%, 100% in incentives and see the salary [flash]. Because the salary is a cash outlay from day one, but the incentive only gets paid if you do well. -------------------------------------------------------------------------------- Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [35] -------------------------------------------------------------------------------- Right. Well, you only -- the only salary increases we're issuing at the moment and have for the past few years are just cost of living increases. So right now, they're 3% and a fraction. -------------------------------------------------------------------------------- Harry Sauers, [36] -------------------------------------------------------------------------------- Sure. So the answer then would be no, you have not looked at any kind of temporary salary reductions for executives here? -------------------------------------------------------------------------------- Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [37] -------------------------------------------------------------------------------- No. We haven't done that, and we also took a position in the pandemic to keep our total workforce in place. We have thank goodness, we have engineers and administrative people that have worked here 50 years, and we think it's our obligation to continue to employ them. Some of our competitors have laid off substantial numbers of people, but we chose not to do that. So unfortunately, that hasn't helped the income side either, but we think it is something we need to do long-term to have good people to support the business. -------------------------------------------------------------------------------- Harry Sauers, [38] -------------------------------------------------------------------------------- Certainly. I agree with you there. And again, regarding incentive compensation, what does that look for me, is there anything tied to the stock returns beyond the option is exercisable? -------------------------------------------------------------------------------- Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [39] -------------------------------------------------------------------------------- I'm sorry, I didn't quite understand you. -------------------------------------------------------------------------------- Harry Sauers, [40] -------------------------------------------------------------------------------- Yes. What incentive plans do we have that are tied to stock returns besides just the options are? -------------------------------------------------------------------------------- Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [41] -------------------------------------------------------------------------------- Well, we have both stock options and stock grants. And unfortunately, they're all under water at the moment, but there's substantial amount issued. Bob, what's the total number of options and grants that are out there, [8.5] million something like that? -------------------------------------------------------------------------------- Robert J. Ben, Richardson Electronics, Ltd. - Executive VP, CFO, CAO & Corporate Secretary [42] -------------------------------------------------------------------------------- That's about right. Yes. We -- the last couple of years, we've done about 350,000 shares in both stock option grants and restricted stock. So there's... -------------------------------------------------------------------------------- Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [43] -------------------------------------------------------------------------------- Unfortunately, they're all under water at the moment. So I hate to say it, but the employees say, well, give us a break, give us more options. They haven't made money on them yet. They did back in 2011, somewhere in that area, but it's been a long time. -------------------------------------------------------------------------------- Harry Sauers, [44] -------------------------------------------------------------------------------- Well, that's practically not done very far since then. I do have one last question. Where exactly is the cash you discussed in overseas? And what about it makes it hard to repatriate beyond just the $10 million or so required to run the businesses? -------------------------------------------------------------------------------- Robert J. Ben, Richardson Electronics, Ltd. - Executive VP, CFO, CAO & Corporate Secretary [45] -------------------------------------------------------------------------------- Harry, this is Bob Ben. I can help answer that. First of all, I don't know how long you've been following us, but for the last 3 years, we've repatriated probably over $30 million in cash from our foreign locations. So now we're down to some of the more difficult locations. So right now, as Ed stated, we have about $28 million of cash in the U.S. at the end of the quarter, and our total cash at the end of the quarter was $42.5 million, so that leaves $14.5 million overseas. And I think I heard Ed also say that we need about $10 million to operate those foreign subsidiaries. So that leaves about another $4.5 million or so doing the math that we can repatriate from locations overseas. And those locations are primarily China, the U.K., Italy and also France is another -- and Germany are the main locations. And we're looking at our activities in that area as we speak. And in fact, we have plans to repatriate a sizable amount of that $4.5 million remaining in -- hopefully, in the second quarter, if not by the end of the second quarter, certainly by early third quarter. So -- but the difficult places, to answer your question more directly is China. It's very difficult to get money out of China. If you follow this before we -- a few years ago, we were successful in getting $11.5 million out of China, but it takes a while, and it has to be the right timing for the Chinese government to allow funds out of the country. So we'll be looking at that, but that's our most difficult one. Other places, it can be difficult parts of Europe, just because our cash is trapped due to the sale of our PD division from many years ago, and so it's not money that can typically be brought back through dividends, which is a fairly simple way to do it. We have to do with what's called a return of capital, and that's in some countries, such as China and Italy is very involved and difficult to do. So rest assured, we're working on getting as much cash as we can, and we'll have some news to report in the second quarter, hopefully. -------------------------------------------------------------------------------- Harry Sauers, [46] -------------------------------------------------------------------------------- And I imagine that will be used to shore up our cash on hand. It's not going to be paid out through a special dividend or buyback or anything? -------------------------------------------------------------------------------- Robert J. Ben, Richardson Electronics, Ltd. - Executive VP, CFO, CAO & Corporate Secretary [47] -------------------------------------------------------------------------------- That's correct. Yes. Our -- as Ed stated, we don't have any plans at this point for a buyback. But once again, a few years ago, I've been with the company now 5 years. When I first joined, we had paid out just in terms of buybacks, over $65 million over a period of years before I joined. And so we've been doing the dividend consistently and certainly, we watch our financial position each quarter to be able to make that decision. Our Board does, but it's anticipated that, that will continue as long as our performance continues. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- Our next question comes from Gary Gambino, who is also a private investor. -------------------------------------------------------------------------------- Gary Gambino, [49] -------------------------------------------------------------------------------- I just wanted to ask about inventory. So we had another big build this quarter up to $60 million. And it looks like it's been on a big build for the last 3 or so years, definitely a lot faster than sales. So could you just explain what the strategy is behind that? And if you can expect the build to maybe flatten out or come down a bit? -------------------------------------------------------------------------------- Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [50] -------------------------------------------------------------------------------- Sure. Well, some of the build has to do with being prepared for the increased business with the semiconductor wafer fab business. A lot of it has to do with PMG, which Greg runs. As you may know, when we sold RFPD to Arrow, that business was $370 million in sales, and Greg ran it and went to Arrow for 3 years. And has come back to help us build the business again. He is doing quite well in increasing the business 15%, 20% a year. And it takes additional inventory to do that, particularly products like for 5G, a lot of them are on allocation, and then we try to buy in well in advance so that we have inventory to service that business. So some of the inventory is there. And some of it has to do with the increased semiconductor wafer fab business. -------------------------------------------------------------------------------- Operator [51] -------------------------------------------------------------------------------- I'm not showing any further questions at this time. I'd like to turn the call back over to Ed for any closing comments. -------------------------------------------------------------------------------- Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [52] -------------------------------------------------------------------------------- Okay. Well, thank you for joining us and for your ongoing interest in Richardson Electronics. We look forward to discussing our second quarter with you in January 2021. In the interim, we wish you good health and success. Thank you very much. -------------------------------------------------------------------------------- Operator [53] -------------------------------------------------------------------------------- Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.