Varex Imaging Corporation — Q1 FY2020 Form 10-Q
Reporting period: Quarter ended January 3, 2020; unaudited. Varex designs and sells X-ray imaging components and related products for medical, industrial, security, and inspection markets. The current quarter was 14 weeks versus 13 weeks in the prior comparable quarter, which affects year-over-year comparisons.
Key financial results
| Metric | Q1 FY2020 | Prior comparable quarter |
|---|---|---|
| Revenue | $200.1 million | $185.7 million |
| Gross profit / margin | $61.1 million / 30.5% | $60.0 million / 32.3% |
| Operating expenses | $56.5 million | $49.6 million |
| Operating earnings | $4.6 million | $10.4 million |
| Net earnings (loss) attributable to Varex | $(1.3) million; $(0.03) per diluted share | $3.0 million; $0.08 per diluted share |
| Operating cash flow | $23.0 million | $20.0 million |
| Cash and cash equivalents | $30.0 million | $29.9 million at September 27, 2019 |
| Debt, net of issuance costs | $381.3 million | $395.1 million at September 27, 2019 |
Net cash used in investing activities was $10.6 million, including $8.1 million in capital expenditures; financing activities used $12.0 million, principally reflecting $17.8 million in debt repayments. Cash and restricted cash increased by $0.1 million to $31.4 million. The company reported $73.0 million available under its revolving credit facility and said it was compliant with its financial covenants. Current assets were $440.2 million and current liabilities $190.9 million.
Material changes and segment performance
- Revenue rose 7.8% year over year: Medical revenue increased 8.1% to $155.6 million, and Industrial revenue increased 6.5% to $44.5 million. The additional week in the current quarter should be considered in interpreting growth.
- Medical gross margin fell to 28.1% from 31.3%; the filing cites German customs-audit settlement reserves, higher warranty and slow-moving inventory reserves, and digital-detector price decreases. Industrial gross margin improved to 38.9% from 35.6%, mainly on favorable product mix.
- Total operating expenses increased 13.9%. R&D rose to $21.7 million and SG&A to $34.8 million; management cited the extra week, Direct Conversion, and higher audit and consulting fees among the drivers.
- DSO improved to 55 days from 63 days at fiscal year-end. Inventory increased to $269.1 million from $248.2 million.
Outlook, risks, contingencies, and unusual items
- No specific quarterly or annual revenue or earnings guidance is provided. Management stated that long-term R&D spending of approximately 8%–10% of annual revenue is an appropriate range; Q1 R&D was 10.8% of revenue.
- Remaining performance obligations were $268.3 million, expected to be recognized over the next 12 months.
- Varex expects another $7.3 million–$11.3 million of restructuring charges through December 2020, related mainly to closing its Santa Clara facility and relocating production. Operations there are expected to cease by September 2020.
- The company reported a $1.2 million net loss before tax and no income tax benefit, citing losses in jurisdictions with full valuation allowances. The effective tax rate was 0.9%.
- Key exposures include reliance on OEM customers (Canon Medical Systems accounted for 18.8% of quarterly revenue), price competition and detector price erosion, U.S.–China tariffs and trade tensions, foreign exchange, supplier concentration, and volatile industrial/security orders.
- Management said disclosure controls were not effective because of material weaknesses in internal control over financial reporting previously disclosed in the 2019 Form 10-K. Remediation was underway but not yet considered complete.
- Direct Conversion’s acquisition accounting remained preliminary. Varex also disclosed a $12.7 million dpiX fixed-cost commitment; the notes identify this as a 2020 commitment, while the MD&A states 2019, an apparent inconsistency to clarify.
Important facts for investors to verify
- How much of reported revenue growth reflects the extra fiscal week, and whether underlying demand and margins are improving.
- The final amount and timing of German customs-audit, warranty, inventory-reserve, and restructuring costs.
- Progress in remediating the disclosed material weaknesses and the implications of the prior delayed annual filing.
- Debt covenant headroom, floating-rate exposure, and liquidity needs alongside the $381.3 million net debt balance.
- The correct period for the $12.7 million dpiX commitment and the final purchase-price allocation for Direct Conversion.