Q3 2020 Varex Imaging Corp Earnings Call
Greetings and welcome to the three Q as White <unk> earnings conference call at this time.
Are they listen only mode, a question and answer session will follow the formal presentation.
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My here. This conference is being recorded I'd now like to turn the conference over to your host Mr., How would Goldman director of Investor Relations. Thank you you may begin.
Good afternoon, and welcome to VERYX imaging corporations earnings conference call for the third quarter fiscal year 2020.
With me today or somebody saying, you all our president and CEO.
Sam Maheshwari, our new CFO and Claire, they're all are retiring Seattle.
The simplify our discussion unless otherwise stated all references to the quarter or for the third quarter fiscal year 2020.
Unless otherwise stated comparisons or to the same quarter of the prior year.
On today's call will discuss certain non-GAAP financial measures.
Non-GAAP measures are not presented in accordance with nor are they a substitute for GAAP financial measures.
We provided a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure in our earnings press release, which is posted on our website.
Please be advised the during this call we will be making forward looking statements, which our predictions or projections about future events.
These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated.
Risks relating to our business are described in our quarterly earnings release, and our filings with the L.C.C.
Additional information concerning factors that could cause actual results to materially differ from those anticipated is contained in our FCC filings, including item one eight.
Risk factors of our quarterly reports on form 10-Q, and our annual report on form 10-K.
The information in this discussion speaks as of today's date, and we assume no obligation to update or revise the forward looking statements in this discussion.
And now I'll turn the call over just sunny.
Thank you Howard good afternoon, everyone and welcome.
Before we begin its my pleasure to introduce you to our new CFO semi choueiri.
Sam brings to us more than 20 years of experience in finance with private and public high Tech companies and this experience will be instrumental in leading barrick's into our next stage of growth.
So I'm a lot of some remarks today before we get into the queue anyway.
Also here with us as Clarence Vera Who's been our CFO up to this point on behalf of everyone. At Barrick sorry, you want to thank him for his service during the past 15 years and particularly for his leadership during the spin off a marriage and then getting US established as an independent public company, we wish clients all the best in his retirement.
The cold with 19 pandemic began to impact our business in the second quarter of this year and and it began as a shift in mix largely between our medical and industrial segments.
Along with a bubble up demand in certain areas of medical such as see tubes and detectors for mobile X Ray.
As a pandemic progressed in the third quarter, we experienced a further slowdown in sales in our industrial segment, particularly in cargo and airport security.
At the same time, we continue to see an increase in sales that see tea and radiographic products. These gains were offset by significant decline in sales.
Our products used in elective medical procedures, such as cardiology oncology dental and mammography.
The net impact in the third quarter was the revenue declined 13% from a year ago 271 billion.
On a segment basis medical revenues decreased 9% and industrial decreased 25% from the prior year quarter.
During the third quarter, we continued to see strengthen C.T. and our volume of C.T. tubes screw, particularly in sales for new systems, each of which represents a potential for recurring revenues in the future.
This growth in Cps game, both from our global OEM customers as well as from demand in China.
Despite the turbulence in our medical and industrial markets. We have continued to win new business driven by our ongoing innovation the strength of our decades long customer relationships and our efficient globally local manufacturing operations.
Our customers are continued to win in the markets that they serve and rely on our innovative technologies to provide mission critical components for their systems.
In fact, one of our veterinary customers recently celebrated the sale of their 4000 system using our detectors.
Our customers in China, we've been making steady progress with the sales RPT systems are now experiencing market share gains in their local market and we look forward to supplying them with a variety of components as their businesses grow.
In response to the Cobiz related decline in revenues and gross margins.
We examined our product portfolio very closely and we decided to discontinue a number of low margin products in the quarter.
The combination of inventory charges well the discontinued products.
Unfavorable product mix and additional onetime adjustments led to an unusually low gross margin rate for the quarter.
Over the past five months, we've also been taking actions to reduce expenses. The results of those actions are reflected in our operating expenses for the third quarter, which declined by more than 10% sequentially from the second quarter fiscal year 2020, and also from the prior year quarter.
Some of these cost actions such as furloughs pay reductions and suspension of four one k. were temporary in nature and largely aimed at managing our cash flow.
In addition to these temporary measures. We also took some head count reduction actions, which when combined with other actions will result in an overall workforce reduction of about 10% this calendar year.
The combined impact of these actions is expected to result in cost savings of more than $25 million in fiscal year 21.
So these actions have been completed why the others will be carried out between now and early part of fiscal year 2021.
These cost actions rationalization of our product portfolio and productivity gains from closing the Santa Clara facility will better position barrick's for when the extra emerging markets recover from the downturn caused by covered my team.
I want to recognize their contributions of employees that are impacted by our workforce reduction these were valued employees and we wish them. All the best we have carefully assess reprioritized and redistributed their work. So that we can continue to execute our plans and meet our customer obligations.
On that note, let me handover the call deployments to talk about our financial performance in Q, the third quarter in greater detail.
Thanks, Anthony and Hello, everyone.
Third quarter saw increased effect of the economic downturn due to covert 19 on ARPU.
From a financial perspective, it has changed our business in three key areas.
First of all our revenues and gross margin profile change significantly.
Second it increased pressure on liquidity, so we modified our capital structure to ensure that we have the liquidity needed to weather the downturn for an extended amount of time.
Third the changing business forecasts project, an examination of our assets to ensure they were properly valued.
For the third quarter revenues were $171 million compared to $197 million in the prior year quarter medical revenues for the quarter decreased $14 million $238 million and industrial revenues decreased $12 million to $34 million.
For the third quarter, our gross margin was 15% compared to 31% in the prior year quarter.
During the third quarter, we incurred one time costs of $16 million for the write off of inventory associated with discontinued products and $1 billion of restructuring charges.
Excluding these unusual items and other non-GAAP adjustments, our adjusted or non-GAAP gross margin was 26% compared to 34% in the prior year quarter.
Still included in the non-GAAP gross margin were somewhat unusual expenses that are not treated as non-GAAP adjustments, namely about $6 million or four points of margin from additional inventory reserves higher freight and tariff costs and property revaluation.
The remaining margin decline from the prior year quarter was primarily due to unfavorable product mix and lower overhead absorption with the reduced shipments.
We did see reductions in operating expenses in the third quarter due to actions taken over the past several months R&D expenses were $19 million in the third quarter, a decrease of $2 million from the prior year quarter R&D expense remained at about 11% of revenues for the quarter due to the lower revenue base.
Third quarter SGN, a expenses were 31 million dollar same as the prior year quarter. Both periods included approximately $2 million of expenses related to acquisition integration restructuring and other non operational costs.
During the quarter, we also recorded a $3 million charge for the impairment of some intangibles associated with the acquisition of direct conversion.
Depreciation and amortization totaled $10 million for the third quarter compared to $9 million in the prior year.
The third quarter included $1 million, an accelerated depreciation related to the closure of the Santa Clara facility.
We had an operating loss for the third quarter of $27 million compared to operating income of $5 million in the year ago quarter.
Our non-GAAP operating loss for the third quarter was $1 million compared to operating income of $19 million in the year ago quarter.
Interest expense in the third quarter was $7 million, including $1 million, a noncash interest charges associated with the convertible debt issuance compared to $5 million of interest expense in the year ago quarter.
Other expenses were $6 million for the third quarter and included $3 million for the impairment of an investment in a startup detector technology as well as $1 billion of expense associated with the valuation of deferred consideration for the acquisition of direct conversion.
The remaining amount of other expense was due to losses from foreign exchange and unconsolidated joint ventures.
We recorded a tax benefit for the third quarter of $12 million compared to tax expense of $1 million in the prior year quarter.
We had a net loss of $28 million or 73 cents per diluted share in the third quarter compared to a net loss of $1 billion or four cents per diluted share in the prior year quarter.
The non-GAAP net loss for the quarter was $8 million or 20 cents per diluted share compared to non-GAAP net earnings of $9 million or 24 cents per diluted share in the prior year quarter.
Diluted shares outstanding were 39 million shares compared to 38.3 million shares in the prior year or.
Turning to the balance sheet accounts receivable decreased by $17 million during the quarter collections remain stable with day sales outstanding at 58 days same as in the prior year quarter inventory remained flat in the third quarter at $283 million.
Cash flow from operations was $1 million for the third quarter and is $25 million for the fiscal year to date compared to $49 million for the prior year to date.
We ended the third quarter with cash and cash equivalent to $87 million, which has an increase of $63 million in the quarter.
Correspondingly total gross debt outstanding increased by $86 million during the quarter to $469 million. The profile of our debt has changed we now have total bank debt of $269 million almost entirely on a term loan plus an undrawn revolving credit facility with $100 million available.
In addition in the third quarter, we issued $200 million of convertible notes that are due in five years. The net proceeds were used to reduce the bank debt and increase our cash balance the notes have a 4% interest rate those paid by annually and are callable. After three years. The conversion feature was set at a 25% premium that we purchased a call spread to effect.
Really raised that to 50%.
We have strengthened our liquidity position with the higher cash balance and availability under the revolver and we'll continue to drive programs to improve our cash flow such as cost reduction plans lower working capital and reduced capital equipment purchases.
As I had into retirement I want to say thanks for all the support I have gotten from everyone on the VERYX team over the past 15 years I've been very lucky to build bars with so many wonderful people in this company I really appreciate their friendship as well as our commitment to the VERYX vision.
Let me focus on a couple first of all I have had an incredible finance team that has worked tirelessly to close each quarter and help me dive into the details of the numbers.
Second thanks us on in senior leadership for being Great partners for the past four years.
And then last but certainly not least special thanks to the legal team and Howard for everything that they have down for me and forbearance.
I'm excited about the prospects for barracks, and I have a lot of confidence in science and ability to lead the company through its next phase of growth.
With that let me turn the discussion over to sound for some comments on the outlook.
Thanks, Clarence I'm excited to join directs to help lead the company through its next phase of growth and profitability.
The first on the job I'll be working on improving the capital structure as well as the operating and cost structure on the company.
In the near term as Clarence noted liquidity has become a key focus area for us.
Based on our current forecast, we may not be able to meet some of the financial covenants under our existing credit agreement over the next 12 month.
Hence we are actively working on replacing the current credit facility with new sources of debt financing.
More information on this will be included in our notice of late filing of third quarter 10-Q.
On the operating side, we continue to take steps to lower cost.
First the transfer of detector production from the Santa Clara facility to Salt Lake City and other sites are going to be completed by the end of this fiscal year.
The net annual benefit from this consolidation is projected to be approximately $15 million.
We expect this benefit to start showing on the piano starting in fiscal Twentytwenty, one and be fully reflected in the second quarter fiscal Twentytwenty one.
Secondly, a few weeks ago, we announced a reduction forced off 94 people. This reduction is expected to result in annual savings of approximately $13 million and will be fully reflected on the piano from the first quarter fiscal 2021.
And we continue to partner with our suppliers on crop cost reduction opportunities.
All these actions lead to a lower cost structure that will position directs to have better profitability and the economy recovers from coal would 19.
Due to the uncertainty associated with the coal would 19 pandemic last quarter, we withdrew guidance of revenue and EPS for the full fiscal year Twentytwenty.
While we reevaluated guidance that can be provided on an ongoing basis for Q4 fiscal twentytwenty, we expect revenues to be in the range of hundred $55 million $270 million.
With that I would like to hand, the call back to Sunny for some closing remarks.
Thank you Sam.
Well there are number of uncertainties facing us I am confident that once the effect of cobot 19 pandemic passes the markets that we serve and the demands for our products will bounce back.
We're in innovation leader with market, leading products, an exceptional relationships with our customers. Our end markets are resilient and theres, a lifelong doing a need for health care and security products.
During this economic downturn, we remain focused on our long term strategy and stayed on track with our new product introduction programs.
In addition, our facilities are operationally prepared to meet the demands that we expect to see when elective procedure volumes that healthcare facilities around the world and.
Corresponding sales of imaging capital equipment returned to normal.
Despite the headwinds due to cope with 19, we are confident that not only the fundamentals of our business remains strong but that our strategies for growth end market leadership are still spot on.
As we have discussed previously the three pillars of our long term growth strategy, our first to drive growth in market expansion via new product introductions and technology innovation to enable new applications.
And to drive growth in emerging markets by implementing a local for local strategy and third to drive growth expansion into new and Greenfield verticals of industrial imaging.
Hi, good very good progress on all three fronts. This year and the momentum continued in the third quarter. Let me tell you a little bit more about progress made each of these areas.
Our customer end markets successes in a is enabled by innovation. It is what we are known for and the number one reason why our customers seek us out.
Last fiscal year, we launched nearly four dozen new or updated extremity products across our solution lights.
Continuing with that momentum this year, we've begun shipping early versions of our Z platform detectors to our medical and dental customers. This platform approach at Cmos like performance cost effectively overtime, we expect our Z platform to be a disruptive technology, which can potentially displace amorphous silicon as a platform and dynamic detectors.
We're very happy with enthusiastic early response by Oems in surgery, cardiovascular and dental markets.
Along with the V. platform is an array of our next generation lightweight robust radiographic detectors with market, leading wireless performance that are ideal for both fixed and mobile applications.
We are shipping these detectors and volume now and in the food future. We intend to make these detectors available on rugged non glass substrate.
Our innovation and see technology has continued in both the high end segments of BT as well as in the high volume 16, 32, and 64 slight segments intended for emerging markets and value segments of mature markets.
Since our recent launch a full array of Collimators far radiographic I'm sure Scopic applications, we have shipped over 5000 units and are beginning to expand our customer base.
We've also continued to make progress with some anchor customers on incorporating our.
Why don't you multimeter sources, and photon counting detectors into potential new applications for the future.
The second leg of our strategy is to establish ourselves as a globally local company with our local for local approach to operations and customer relationships.
We are now actively shipping detectors made in machine and we have been shipping tubes assembled in Wishy for awhile now.
As I mentioned before our local for local strategy is targeting both.
Growing relationships with our local Oems like we have in China, as well as with our global OEM customers, who want local content local commercial and operational support from a partner like us.
As you may be aware, we've also implemented our local for local programming the U.S. and Europe to serve our global OEM customers that have manufacturing facilities. In these regions. We are unique in this capability I mean, it is a significant differentiator.
Third pillar of our strategy is to drive growth into industrial verticals. In Q3, we saw a slowdown in sales for airport and cargo security and in oil and gas, but our market developing and product development efforts and these verticals continued to move forward.
The value proposition for imaging applications is very strong in many industrial verticals and our perspective on the segment as a long term growth opportunity for us has not changed.
We are done important juncture in our evolution as we transition from Barrick's 1.0 to Barrick's 2.0. The first version is where among other things we stood up a new public company. Following following our spin off.
Peter the integration and consolidation of a major acquisition expanded our global footprint.
Marriage, 2.0 will be about driving growth and improving our financial performance and capital structure.
Over the coming quarters, we will provide more information on our vision for VERYX 2.0.
With that we will now open up the call for your questions.
At this time the conducting a question and answer session if you'd like to ask your question. Please press star one on your telephone keypad.
Formation somewhat indicate your line is in the question Q.
My first starts to if you would like to some of your question from the Q4 participants using speaker equipment it might be necessary to pick up your handset before passing the sir.
One moment when we pull for questions.
Our first question comes from the line of Larry Solow CJS Securities. You May proceed with your question.
Great. Thank you very much and just first of all just Clarence best of luck to and Uh Huh.
Sam breadth, Sam a welcome meal.
Thanks, Terry. Thank you so yes for my pleasure I'm, just a couple <unk> on the on the revenue trends and I realize you guys are a little bit longer cycle, but it does seem like Oems Elisa spending some money in some cases, so I'm just trying to decide for some of the the.
The mix drop obviously in some of your higher margin markets are more related to elective surgeries and and those things do seem to be coming back somewhat and again I realize you guys or not.
[noise] directly correlate with day to day activity, but I'm just trying to figure you don't get any color on or OEM starting to spend more now.
You mentioned, there's not much visibility and you sort of give some revenue guidance to that so I'm just trying to get a little more color on that if you can.
Yes, so sorry, the funny, let me give their color on a.
Modality front end by geography first of all just as a reminder, we provide components that go into these imaging equipment up the Oems make and these are a capital equipment. So.
Well, what what triggers purchase of capital equipment is the availability of capital budget that didn't buy the healthcare organizations. So in terms of modalities first of all of you said C.T. has continued to stay active and strong through the whole process. We've seen this now throughout the year in fact during.
During the height of the pandemic up in the in the third quarter in the second quarter. We saw a bubble demanded CTC and then Cts still continued on so that's up that was our projections you recall that PT personal modality and that there's a significant demand for CTG globally and in the emerging including the emerging markets, So thats going to.
Third on radiographic saw a bubble in demand. It's a you know it it'll settle down to some normal levels, but that was a bubble.
What were the.
Significant drop off for US has been has been in oncology cardiology dental. These these are we had mammography. These are what we've been calling as elective procedure modalities. There right. It's encouraging it's encouraging to see that the volumes or does the procedure volumes are slowly picking up in hospitals.
Great and our customers are also making those comment that they're starting see surgery volumes and a you know cap volumes and dental and they are they're seeing that up.
Uptake. The question is set for them is when does capital equipment purchasing return to what used to be let's say in 2019 type of a normal.
There are the story is by is by geography, what we're hearing from our customers and it's probably consistent with what hopefully it's consistent with you're hearing as well is certain markets like China.
Came back a fairly rapidly and China's.
And it back towards some sums flavor of normalcy.
The rest of Asia is it a little behind that Europe is starting on its uptake and people are confident that the markets in Europe are now, they're starting to see tender activity quote activity, but there hasn't still yet been major buying activity and the U.S. is the far this actually U.S. is behind that followed by Latin America, which is the farthest behind.
For us for our customers most of our customers. The U.S. represents this.
The largest market for high end products and the rest of the rest of the country's emerging markets, while they're coming back there is for us. It's still some amount of a value segment products. So a lot depends on the recovery the speed of recovery is the part that's on known.
Right I hope I give you enough color so for us.
Right.
Well proceed by geography and by modality.
And any visibility you mentioned sort of you know obviously.
The knock on effect Oems won't spend if the hospitals have demand.
Even with hopefully see continued improvement in.
Procedures, obviously hospitals will probably remain under pressure until covert yeah.
Not really an issue anymore would show unlikely we will happen. The next six to 12 months. So.
Is there a possibility where you know hospitals are financially under a lot of pressured so budgets from mean.
Oh, well below normal for an extended period of time, even in a post cold would world.
Larry that's possible, we don't have a I mean, unfortunately, our crystal ball on that is marquee however, given that our customers.
Conduct business globally, we think glut that won't be.
That won't be a global story I think global there'll be a lot of variability in how that plays out.
Globally.
So the budgets are also not entirely hospital based budgets right. So mammography, there's a lot of outpatient a budget and physician offices dental up most of my definitely and goes into physician offices. So.
If we will see a ratcheting up of modality based capital equipment purchasing burchett versus a light switch being thrown on.
So where.
We're seeing very very close to this and as you know where.
I had on the value chain, although on the supply chain front. So I'm I'm optimistic that we will see some of these trends.
Perhaps a little bit earlier than you make a bend than actual shipments of equipment.
HM Okay. Okay fair enough just a quick question just on more on the gross margin current you mentioned that you know the two drivers of the drop obviously mix and then unabsorbed overhead.
The the detriment the decremental margin I think sequentially it was like 70% or something so even higher than I thought it would be because I know Q2 was already somewhat impacted by mix. It sounds like this quarter was probably worse just trying to if you had the bucket. Those two categories was more of the mix that that led to that 70% a contraction.
Sure.
We're on sort of you know all around or both close to even.
Yeah, Larry if you don't mind, maybe maybe I'll just go through a little bit of a walk from.
Last year's gross margin of 34% to the 26% non-GAAP gross margin yeah, that's gone.
Okay. So.
No there was even though we did.
Significant adjustments that were treated as non-GAAP. There was also some items that were adjustments of one a onetime in nature, but they did not get treated as non-GAAP and that would have been some additional inventory reserves.
Based on changing volume profile.
Some revaluation of some assets ends up being an expense on the on the PNM all that is not treated as a non-GAAP.
And then we also had an increase in freight and tariff costs.
Somewhat a you know I mean, mostly I'd say the freight is a lot of.
Intercompany movement of freight.
Because it and inbound freight to those costs have gone up.
Recently, the combination of those are those onetime kinds of event is roughly three point the gross margin.
The lower productivity.
Just a and less overhead absorption and I would put Santa Clara little bit in the mix of that as well.
Complicating it is probably about two points.
And then the remaining balance of the eight point.
Swing is three point change due to mix that's going to be the the last part of it so.
So I guess, it's more important does that three points is tied to mix, but the other five points is let's call. It some.
Fairly unusual things either tied to volume or tied to a onetime events.
Okay. No. That's the that's that's useful color I'm just last question on some of the products you guys are getting markets, you're exiting or products are exiting is this more on the detector side and where things don't seems like that can I get somewhat lower and stuff was.
The impact on your gross margin of the last few years and.
For these products actually losing money.
Yes. So these hey, Larry these are mostly detector products. These as you know do the electronics products with more frequent upgrades in models and ER and faster Npis cycle. So we looked at our older products that have replacement products for them and we took this opportunity to go back to the customers.
And work with them to get them too.
In a variety of different actions, which led to us deciding to shut them down and that'll help us.
Help us with our productivity and cost structures in the future. So it's more rationally over your skis rationing of your skews as opposed to actually exiting the whole product launch just spread narrowing it down.
That's exactly right. So fundamentally just because of that as we looked at the outlook.
Based on the lower demand associated with Covance actually made is look at these products and say is there enough volume there to be worthwhile and then made the determination they're not I would say generally speaking day, we're not losing money products, but they were very low margin products I think that's the other kind of key point is that it should have.
That's a little bit on the margin profile going forward I'm not sure. It's a huge impact, but I think it does help a little bit from that perspective.
Okay, great. Thank thanks again.
Okay.
Our next question comes from the line of Anthony Petrone. The Jeffrey you May proceed with your question.
Oh, Thanks, again, and now I'll second.
The a friendly departure to Clarence sounds great working with you and and welcome to home to the two to the group here.
Maybe to pick off on the last one questioning would be is there a revenue run rate on on the discontinued products.
A few if you mentioned that the actual revenue run rate and how much of that is reflected in the 155 to 170 guidance for the fourth quarter and a lot of a couple of follow ups.
I don't have an exact answer for you on that on the number of the revenue associated with those products, but its low.
It's a yeah that was part of the reason there discontinued is because they are low volume low margin kind of products and so it's a I'd just say that it's in the you know I'm going to speculate a little bit that it's Alan the $5 million a quarter or less than that kind of a kind of a number. So I mean, it's a it's a pretty small impact on that.
So I don't think that was.
A major factor in anything in terms of the outlook for the for Q4.
Anthony in a lot of these cases, because there are some subsequent.
Models of the products in a way you know it.
Evens out are you.
With a with the lowering of volumes through the due to kobin.
We can we give the extra time to work with these customers to get them.
Execute our sunset end up like strategies here, so there wouldn't be a customer loss theres. Another revenue stream loss. These are typically products that go back into the installed base of our customers for low volume service and support and.
You know opportunity is to work with our customers you have them take on the newer models.
No. It's helpful and then if we.
That's helpful background, there, but if we adjust even four or 5 million.
Number four Q, you have a $10 million range.
In the guidance next quarter and I'm. Just wondering you know when you think of the low end to the high end what.
What are the drivers in spread of that range, what gets you toward the high end.
As opposed to the low end.
And then maybe just broadly is and I know, we pressed on an a bit here just the sort of the tone.
From Oems as you discuss with them, where you know capital budgets it.
For hospitals in the various geographies in which you're exposed to.
And then we'll have one capital question.
Oh, the follow up with.
Okay. So let me take the second question around the tone for the over from the Oems and I'll ask Sam to comment on.
The 155 170 and his thoughts on what makes the 150 and what makes the 170.
You know the tone from the Oems is optimistic but there there's still.
Some level of uncertainty in there. So you know the cliche I'm cautiously optimistic the reason for that is that they are seeing in for certain modalities increase in tender activity for them that the early the harbinger of the market activities returning.
Some part of that is due to investments by governments in different countries all of the world. Some part of it is just general returned to normal in some of these outpatient type of environments, particularly dental dental a activity has started.
The market activity tender activity. So the Oems are a while they're not saying that they have bottomed out they have to Ulta don't think that the bottom is very far away. So we're we're in sort of an at some asymptotic motive getting towards the bottom from where they believe this will pick back up and that said that timeframe when does it get back.
Do a 2019 type of from all that is the part is not clear with us, but as we look forward. Anthony is from Q2 into Q3 as we looked at Q3 you'd have just felt it felt that it was pretty clear there was a downward trend now as we look forward. We see you know at at worst.
Flat ish, but it's not quite there yet.
But the momentum certainly feel to the market that it is on the positive trend as I said that varies by geography, most of our Oems are concerned about the U.S. market and so if you listen to the you know the Oems that are in the mammography oncology dental space at all but they all count on the U.S. market for the high end products.
So.
Yes, sure Anthony and I'll try to address your question on the lower end versus the higher end of the revenue as the project for Q3.
As always a portion of a business in the quarter Richard book and ship for the same quarter. So that's really depends upon the level of activity in the third month, particularly towards the last two or three weeks. We are definitely seeing pockets of activity here in there, which is strong but at the same time, some geographies and modalities are somewhat soft.
So in order to come up with the guidance number for you we kinda looked at it and kinda bookended both the both the numbers that.
Then on the industrial side as you know some also a products out higher if the high end machines and one of the machine is dependent you know it depends upon factory acceptance and that type of activity before to chips and it is kind of looking at.
Shipment towards the end of the quarter, so whether it falls in this side of the fans of the quarter or the next quarter. So that also tended to numbers a little bit I think I would say overall, that's where we are in terms of providing the revenue guidance to you.
And I don't have any doctor.
Sure Let me back to your question on revenue and also just to add to Larry's earlier question.
We shouldn't forget that we we also have a strong plane industrial on the industrial slide the dynamics are slightly different they're not they're not dependent in the hospital capital budgets and that's what we like the industrial market. So they are the recovery is expected to be.
More rapid because it's up distributed across a very large number of.
Of the organizations the difference in industrial is that it varies by vertical quite a bit. So while we may also I mean, the Arab everyone would say that the airports airport security will take longer to recover airport and cargo security, but on the Andy T. side, we expect faster recovery than them then the car.
Then the security side.
And then just to round out there on destructive testing you expect the more rapid recovery, but airport security call go will take longer as it will take those are tender driven yes in airports are as you know airports artists.
You'll be while before business travel volumes pick up and so while the value proposition there has not gone the activity there's still by the way there's still replacement activity that will come back sooner, but the new projects and the new tenders for employee installing new Cts scanners and airports will depend on people's ability to do that.
Project. The number one thing we hear from Oems is projects on hold because theres no one to do do the work either on the customer side or on the vendor site.
So would you give the fate that'd be hasn't gone away. It's just that people are waiting for the opportunity to be able to do these projects.
Understood in the last one from me I'll get back in as as you mentioned.
Sam on the debt covenants being potentially tripped here and we'll see more information on the upcoming filing I know they need convert part of the proceeds were used to service the existing debt.
Can you give a little bit more color on on which facilities. We're talking about here. There was some consolidation what was outstanding.
It was the revolver and now we have the converts just where the.
Trip up comes from them when we think of.
Sort of a potential.
Violation of a covenant.
We have additional debt coming on but also the trailing 12 month EBITDA is stretched here. So you know how much is actually driven by the additional debt versus the drop in EBITDA.
Sure Yes. Thank you. Thank you Anthony Yes. So you know we have dead and you rightly or correctly pointed out the debt that we are talking about here is related to term loan and over the wall were both of them out actually following the same covenants.
And these covenant on not related to the convertible debt that be issued in June so what you're talking about here is again, the combination of debt and reward would the revolver remains undrawn, but nonetheless, the same set of covenants apply.
So as we look at that debt and.
The EBITDA over the trailing 12 months.
We met all the covenants at the end of Q3.
Fiscal Q3 quarter here, but as we forecast our numbers.
We are looking at the situation that we may not be able to meet those covenants. So what happens in this type of situation is that accounting standards required to disclose this.
The business as a going concern irrespective of our ability to refinance or modify those covenants, but our plan is to go ahead and replace these lines of debt with a new sources of debt essentially the please these that with new sources of debt.
That's helpful. Thank you.
Our next question comes from the line of Suraj Kalia with Northland Securities. You May proceed with your question.
Good afternoon, everyone. So Clarence it was a pleasure working with you and wish you other relaxed and healthy retirement.
Sam already relax.
[laughter] I'm sure you are and Sam welcome to the club look forward to working think looking with you.
So.
<unk>.
So let me start start out with view and then I'll hop over to Clarence and Sam.
You know as co bid might have accelerated some changes that you're thinking about Santa Clara so on and so forth, but let me ask of higher level question, what part of these changes implemented in the short term.
Q2, right now do you envision becoming more permanent in nature and why.
So.
May I just want to make sure I followed your question appropriately we took certain actions.
Earlier on that were temporary the furloughs pay reductions those were temporary actions for immediate relief from up from akin to improve our cash flows. But then the rest of actions that we took where were intended for permanent effect so that and.
So those are so for example, the head count reduction actions that we took we you know we took a sharp look at all of our I mean, we've been looking at our cost structure and our intention was to these these were actions that we would have continued on.
We would call. We there were some certain things that came on earlier like for example, the product rationalization will give us we had an opportunity due to Kobe due to slow down in certain volumes to go back and work through those product rationalizations, but this isn't a series of actions that we will continue the product lifecycle actions will continue on.
The cost reduction actions on where on you know where Ah.
Were permanent we will see the effect of some effect of that in Q4, it'll ratchet up and then going going into Q1 that'll continue to increase the overall run rate impact of all these actions is about $25 million it'll ramp up.
And we'll see the full value of that I believe some in Q2 in Q2.
So did I did I get your question right, Yeah, maybe maybe I should something maybe I should have phrase the differently I guess, what I was trying to understand is the one is a cost impact right cost savings changes the write down but what isn't just wanted to make sure that the net effect to follow this on the revenue it's not like you're looking.
To reduce some people to hence topline is also going up going to get affected that's really what I was trying to understand that vitter. It's the structure it's been optimized.
That's correct stress, we we we.
Our goal is to run the company for the long term. So the product we looked at we looked at what's going on as it did this fundamentally change our strategy has is ARX does our entire strategy needs to be revisited. There. That's there's no so the R&D programs or.
Sales and marketing related work, that's going on the local for local strategy and the investments that we're making in China and data set up there those things have we've made sure that those are not our ability to continue on with those programs and actions are not impaired so the revenue.
By the way our customer relationships are absolutely still a stellar an exceptional that product launches are still going on and part of our customers are also working even though there. They are hurting biopharm cope with their new product introduction actions are still continuing so those things have stayed on track and now it's purely a matter of the market driven.
Buying activity, which will drive both the topline growth and the return of the mix back towards normal and so as we look at that spreads were hard pressed to see how dental won't come back people need dental services, the dental equipment, that's driving some of the fundamentals.
Of the clinical side of this there those are those are all still intact. Similarly.
The the procedures for us where though we're the higher value procedures around oncology cardiology those are bound to come back. So we don't see the revenue being impacted we're not commercially we're not going to be impacted by their actions. We've taken now it's all market driven activity.
Sewage I can add a little bit with my one or two weeks here is that the actions that we are taking do not impact the long term growth or our ability to recover from the low levels that we currently are so these headcount reductions, notably jeopardize our compromise our growth potential in revenues.
So I don't know if that's what you would actually no fair enough okay.
It's something you mentioned about you what's good about buying customer buying I guess it have inventory ordering patterns changed into last few months.
Our customers asking for more lenient credit terms just on trying to understand how the demand chain is is.
Shaping up.
Specifically on the on the inventory side and on the credit side, whether you guys are seeing any difference right now.
So as far as there has been though.
No real it's not been perceptible at all no changes in the customers asking for terms are kept for.
Whether it's for their cash preservation or other needs in fact, our Dsos remained strong at 58, it hasn't changed and our collections have remained strong so no impact there at all what we've seen though is in some pockets where customers. This customers do this throughout the year when they perceive a slowing down of demand.
No they they try to deplete their own ER.
Inventory and buffers and the when it worked that down and that's what that's you know that proceeds are.
Softness in our demand so customers are doing that they're being more judicious with their inventory, mostly as a being.
Being conservative, but no changes in anything else.
And we've not had to go back and negotiated pricing on those kinds of activities have not been happening.
Right.
And I guess.
The last two for getting any one of few one is you know sunny salmon Clarence.
Most of the companies on the earning call have come out and said look we're expecting a normalcy by calendar Q4 calendar Q1 next year odd, but you know, but there will be shape or a U shape I'm not maybe I missed your commentary in terms of.
How you guys are expecting.
The recovery part so that's one part and the second thing is I knew the Q4 guidance people have tried to parse it different ways, maybe I can come at it from a different angle Clarence and Sam should I am I fair and assuming that medical is gonna be down double digits, probably 15% and industrial.
It's going to be down another 25, 30% is that the right way to think I guess, just trying to understand on your low in new high and what the different components of the business. So any color Dave would be great gentlemen, Thank you for taking my questions.
Sure.
Sure I'll go here and then probably 70, you can fill in some of that.
Okay for white some other color. So you know we are quite sure business levels would recover and what we're doing in the meantime is to take cost actions. So that's been the business doesn't go where we are we.
We are able to generate more profitability.
It seems to us and in our discussions here is that.
Business has gone down, but it is not going down much more anymore in the sense. It has stabilized at a lower level.
But it has stabilized we don't really know exactly when it would recover so it's very hard for us to pinpoint a quarter.
But we're not seeing a whole lot of degradation anymore, that's where this range of 155 to 170 that we are providing so at the midpoint. It say 160 to 165, that's the type of number and we just did 170, so the business, it's somewhat stabilized at the lower level, but.
Really hard.
For us to pinpoint and kind of guide you to a quarter, where we would be able to see a C. C. A sharp recovery here.
So that's the color I can for why do you maybe something you want to know and I'll just add one more thing so.
So as we have we serve global Oems and local Oems and the global Oems benefit from the trends in all the different geographies.
So the question of when they expect recovery to start varies by who you speak with so for example, our Chinese Oems will say their recoveries of big on and that's reflected in our business in China and I'm happy to say by the way, our China business is going well and I'm glad to see that our strategy that panned out.
There then as you look at other Oems, though there will be mixed they'll tell you that certain markets are a recovering faster. So there their view of where the bottom is might be earlier than let's say their view of where you S and Latin America is adding Latin America seems to be on everyone's pessimistic list versus the US is on next.
In line after the Europe. So I think this is very there's a great nations here and since we have whereas the market one of the market leading companies here, serving most Oems I think we will end up my sense is we will end up being more R.R.
Our performance will be indexed to the overall market. So to say I'm just I'm more optimistic that we will see a more I in certain industrial verticals I'm, hoping to see faster recovery, particularly MDT, but in medical it'll be really by geography.
Hey, So Raj one other comment it because you were talking about comparisons probably versus Q4, a year ago, I think thats, probably not the right comparison, you probably need to be more thinking about how things lift versus the Q3 that we just finished because the comp is is that Q.
More of a year ago, we are $202 million revenue 50 million or that was in industrial.
So it's it's it's a little bit of apples and oranges and I think it's more important to think of it as Q4 being more similar profile. The Q3 in terms of the mix between medical and industrial.
Yes.
Great Britain.
Our next question comes from the line of Jim Sidoti with Sidoti and company. You May proceed with your question.
Well Jim Good afternoon can you hear me.
Yeah, We got you.
Great Great. So Oh declared.
Sounds like you did all the work now you're leaving the aluminum Sam with me.
That's right I said everything out for him [laughter] its Santa Clara or is that is that officially closed at this point.
No no we won't completely be close till the ended the quarter in terms of production there's still some.
And finishing up a few products, where we had some inventory carried over inventory that we want to finish those products up and theirs. So.
So it won't fundamentally complete until the end of September.
Bicycle 2021, though you should have no cost saving.
For the prior year or.
Okay.
And then second we can work in.
Two months.
This is a little bit about the accounting around it so once the production stops.
Dennis no longer and operating facility in any Cana final cleanup costs and.
You know those kinds of things that have to be done will be treated as a non-GAAP expense is part of the restructuring charge that we've already set aside for.
Okay and similar with the the the workforce reduction I mean, you.
You'll really see the benefit of that in fiscal 2021.
Yes, I mean, you get a little bit is a benefit already but it's a happen latter part of July so the only got a couple of months in a in the fourth quarter, but in reality, where you get that benefit is in.
Q1 of that why 21.
Okay now.
Hi, I'm.
I agree with Sony you know procedures that you know in the names I covered procedures started recovering.
We're up actually for most of the names in July so like I think that the timing for the medical business.
So I'm confident the medical business.
Coming back over the next couple of quarters, but.
With the industrial business.
Ill.
Notch not as company on the timing of that you just indicated that was the $50 million business a year ago.
And then the T. will probably come back willing to boot quickly, but how much of that business was the airport security and the oil pipeline inspection how long do you think before those people start to come back.
So in relative terms.
Going of actual numbers themselves oil and gas is fairly small for us at this point you remember, it's a new vertical for us. So we decided to break into with a after the acquisition of the small company Gobi am I. So when we learned that sort of entering early growth phase in there.
Bulk of our business comes from Andy Tea and in many verticals. So for example, as you think about recovery you think about foot inspection electronics inspection aerospace automotive. So there are a number of verticals, where the recovery will happen at a different pace from air.
Pork and oil and gas. So that's why we we have a.
We are anticipating that parts of industrial will recover sooner and some parts that will might take longer to recover.
We know in upcoming quarters will get better visibility to how that is progressing.
But do you think over the next 12 months. So I mean, any reason why that business wouldn't get back to 2019 level in 12.
Two months.
Boy, that's hard to say, but we will I would hope so because think about this I mean the concern.
A lot of the consumer facing.
Areas of industrial.
Those we'll just have a little blip and come back. So food inspection you know we have a people that process fish that process food grains, you know that used to X rays for inspection.
They just took a blip based enough for during the acute phase of cobot and there.
That's needed.
So you don't frankly, the the one vertical that is the slowest is the two verticals airport security and oil and gas those the too that I. If at all that there will be trailing those two and a when we start seeing activity there that's a.
TBD.
Okay. Alright, then last for me it sounds like you issue with the Covenant is that you'll have to do some kind of refinancing maybe slightly higher interest rate, but it doesn't sound like you're worried about having any liquidity issues over the next 12 months is that right.
That's correct. We are working on refinancing of course, I would like to see that refinancing complete but we've been working on it with our partners and advisors. So yeah until it's done I'm or there's some what little bit worried but that's not a big way.
Okay, all right. So like I said at the beginning I I think Clarence left in pretty good shape, Sam So of course.
Good working with you.
Thank you good luck with your liquid venture. Thank you.
Thank you.
Our next question comes on line of Mark Strouse of JP Morgan You May proceed with your question.
Yeah, Thanks, very much for taking my questions and all Oh I'd like to Echo My best wishes to you Clarence and Sam welcome to the free.
Just one point of clarification from me I'm, sorry, if I Miss this the greater than 25 million cost reductions you're talking about now.
Is that building off of the a the comments from last quarter. I think you were talking about 15 to 20 million then or is this entirely incremental.
Yes, it is including benefits from the Santa Clara facility. So you know I talked about 15 million dollar in on that set of actions and then we also reduced the number of people. So that's $28 million and few other things that we have into hopper here.
So we're thinking you know.
We may be able to do a total of cost reductions upwards of $30 million and all of them are in place not completed but definitely begun we feel good about those plans I did rough math on that.
And about three quarters of that flows through the cost of say line and a quarter of that 25% of that would flow through opex.
So I think it might be prudent here to kinda give you an idea where we are kind of targeting the opex to land out. So by the time. All these things are done I'm thinking say 44 million 45 million dollar that acorda type of non-GAAP Opex run rate, we would be able to achieve.
And I think we wouldn't be able to get there by Q2 of Twentytwenty. One so the actions in Q4, Q1 et cetera that will reduce costs, a little bit but the full effect will begin to print from Q2 of 2021, So thats, where we are trying to land. This in six months' timeframe on the Opex site.
And then of course on the gross margin side. These cost reductions should should give US you know roughly about three percentage points, we're going to start getting some of these benefits a little by little but in the upcoming quarters, but by Q2, they should begin to print in the gross margin.
Okay, then <unk>. Thank you Sam it with the changes in management always like to here.
Why people decided to join so I know, we're button up against time here, Sam but can you just get kind of your your quick elevator pitch on why you decided to join barracks.
Yes, I think the biggest draw for me was the industry in the generics is you know, particularly healthcare long term sunshine industry. So to say growing everybody would need health care providers et cetera, and then the leadership position and I looked at the X Ray capabilities in my mind extra would always be needed and there's so many other applications for.
Xraying just medical and also.
Industrial and then the last thing I did see during my discussion a you know that has the potential here to kind of improve profitability and do some good work here. So those were some of the draws that brought me in here.
Great. Okay. That's it for us thank you very much.
Thank you Mark.
Our next question comes from the line of Joseph Colleen will show you May proceed with your question.
So operator with the top of the hour or past our time so.
I think the somebody's every time to end the call.
I would like what tentative how're you.
Remarks.
Thank you for your questions Dan participating in our earnings conference call for the third quarter fiscal 2020.
A replay of this quarterly conference call will be available through August 26, and.
And can be accessed the company's website or by calling 87766 06853 from anywhere in the U.S.
For 201.
Six one to seven for one five from non U.S. location.
The replay conference call access code is 137.
Zero 7029.
Goodbye.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation have a great day.
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