Varex Imaging Corporation — Form 10-Q Summary
Business context and period. Covers the unaudited fiscal first quarter ended December 30, 2016, compared with the quarter ended January 1, 2016. Varex designs, manufactures, sells, and services X-ray imaging components and related products for medical, industrial, security, and inspection markets. The statements are combined carve-out financials derived from Varian’s records; they include allocated corporate costs and may not reflect Varex’s results as an independent company. Varian completed the distribution of Varex on January 28, 2017, after the reporting period.
Financial performance and liquidity
| Metric | Q1 2017 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $157.4 million | $146.8 million | Up 7.2% |
| Gross profit / margin | $58.8 million / 37.4% | $57.1 million / 38.9% | Profit up 3.0%; margin down 1.5 percentage points |
| Operating earnings / margin | $18.6 million / 11.8% | $22.6 million / 15.4% | Down 17.7% |
| Net earnings attributable to Varex | $11.1 million | $14.1 million | Down 21.3% |
| Operating cash flow | $19.2 million | $6.1 million | Up $13.1 million |
| Capital expenditures | $5.0 million | $10.5 million | Down $5.5 million |
- Revenue by segment: Medical $131.7 million, up 7.4%; Industrial $25.7 million, up 6.2%. Medical gross margin was 35.8%, down from 37.6%; Industrial gross margin was 45.5%, unchanged.
- Revenue by region: Americas $46.8 million, down 20.3%; EMEA $49.2 million, up 17.1%; APAC $61.4 million, up 33.2%.
- Cash and cash equivalents were $53.9 million at quarter-end, versus $36.5 million at September 30, 2016. Current assets were $375.6 million and current liabilities $76.1 million. No debt was recorded at December 30, 2016.
- After quarter-end, Varex borrowed $203 million under new credit facilities and transferred $200 million to Varian in connection with the separation. The facilities include a $200 million term loan and a revolving facility of up to $100 million, secured and subject to covenants.
- Backlog was $223.8 million at December 30, down 9.9% from September 30, mainly due to timing of annual customer orders. Backlog orders may be revised or canceled.
Material changes and management commentary
- Medical revenue growth reflected higher X-ray tube and flat-panel detector sales, including a stronger mix of higher-end products. This was partly offset by detector price erosion and a customer’s insourcing of one detector previously contract-manufactured by Varex.
- Industrial revenue growth was driven primarily by higher security-product service revenue. Management cited delayed security and inspection tenders, especially in oil-dependent economies and war zones, as a continuing demand constraint.
- Gross margin fell as Medical product mix shifted toward lower-margin products, lower-tier detector prices eroded, manufacturing-capacity investment increased, and quality costs rose. Management expects long-term gross margins of 38%–40% and considers R&D spending of approximately 8%–9% of revenue appropriate.
- Operating expenses rose 16.5%, led by higher SG&A, personnel, allocations, and separation-related third-party costs. The quarter included $3.3 million of direct separation costs within $11.9 million of Varian corporate-cost allocations to SG&A.
- The effective tax rate rose to 38.8% from 33.0%, primarily because of losses in foreign jurisdictions for which no tax benefit was recorded. Historical taxes were calculated on a separate-return basis and may differ from post-separation taxes.
- Varex agreed to acquire PerkinElmer’s medical imaging business for approximately $276 million, subject to working-capital adjustment and closing conditions. The filing expected completion after the second fiscal quarter of 2017. The obligation was not subject to a financing contingency; Varex planned to amend and increase its credit agreement to $600 million to support the acquisition.
Risks, contingencies, and unusual items
- Major risks include dependence on a limited number of OEM customers and suppliers, strong competition and pricing pressure, detector price erosion, currency strength, variable security-system orders, and manufacturing or supply disruptions. Toshiba Medical Systems represented 24.1% of quarterly sales and 13.9% of receivables at December 30.
- The transition from Varian may increase standalone operating costs and financing needs. Historical statements include Varian allocations, and Varex had relied on Varian for cash management and corporate services.
- The proposed PerkinElmer acquisition carries financing, regulatory, integration, employee-retention, and customer-retention risks. Failure to obtain financing would not release Varex from its obligation to close if other closing conditions were met.
- Varex disclosed standard product and director/officer indemnification arrangements, including certain arrangements with potentially uncapped exposure, but reported no material costs under product indemnifications. It reported no contingent liabilities at December 30 and no pending litigation believed likely to have a material adverse effect.
- Management stated that disclosure controls and procedures were effective as of quarter-end; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How standalone costs, cash needs, and margins compare with the historical carve-out figures after separation from Varian.
- Whether the PerkinElmer acquisition closed, its final purchase price and financing terms, and the resulting leverage and covenant headroom.
- Whether revenue and backlog trends persist, particularly in the Americas and security/inspection markets, and whether customer concentration changes.
- Whether Medical gross-margin pressures from product mix, pricing, capacity investment, and quality costs ease or continue.
- How the $203 million post-quarter borrowing and $200 million transfer affect ongoing liquidity, and whether the planned credit-facility expansion was completed.