Q2 2022 Varex Imaging Corp Earnings Call
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Greetings and welcome to the Barrick second quarter of fiscal year 2022 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note that this conference is being recorded.
I will now turn the conference over to your host Chris Belfiore Director of Investor Relations you may begin.
Good afternoon, and welcome to Barrick's Imaging Corporation's earnings conference call for the second quarter of fiscal year 2022.
With me today are sunny Sanyal, our president and CEO and Sam Maheshwari our CFO .
Please know that the live webcast of this conference call included a supplemental slide presentation that can be accessed at variances website at barracks imaging dotcom forward Slash news.
The webcast and supplemental slide presentation will be archived on <unk> website.
She simplify our discussion unless otherwise stated all references to the quarter or for the second quarter of fiscal year 2022.
In addition, unless otherwise stated quarterly comparisons are made sequentially from the second quarter of fiscal year 2022 to the first quarter of fiscal year 2022.
Rather than to the same quarter of the prior year.
Finally, all references to the year or to the fiscal year and not calendar year, unless otherwise stated.
Please be advised that during this call we will be making forward looking statements, which are 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 SEC.
Additional information concerning factors that could cause actual results to materially differ from those anticipated is contained in our SEC filings, including item one a 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 todays date and we assume.
No obligation to update or revise the forward looking statements in this discussion.
On today's call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not presented in accordance with nor are they a substitute for GAAP financial measures. We've 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.
I will now turn the call over to Sunny.
Thank you Chris.
And good afternoon, everyone.
We continued to see robust demand for our products in the second quarter of fiscal 2022 and achieved sales of $215 million despite ongoing supply chain constraints.
The current operating environment remains challenging with persistent supply constraints inflationary cost pressure and continued COVID-19 related shutdowns outside the U S.
While we continue to work to mitigate these headwinds they impacted our performance in the second quarter and we expect this to continue in the third quarter.
Despite these headwinds we remain focused on delivering on our backlog, while investing in innovation and being the partner of choice for our customers.
Turning to the results revenue in the second quarter increased 8% sequentially and 6% year over year revenue in both medical and industrial segment increased sequentially.
non-GAAP gross margin in the quarter was 34% in line with our expectations as price actions helped offset some of the cost increases.
Adjusted EBITDA was 38 million and non-GAAP EPS was 37 cents.
Our cash position remained strong at $115 million at the end of the quarter.
Balance was down $43 million sequentially.
Driven by redemption of $27 million of our senior secured notes as well as working capital investments.
Now based on our qualitative assessment, let me provide some high level insights into the demand environment for our different modalities and applications during the quarter.
Medical segment revenues increased 10% sequentially and 9% year over year.
We continue to see robust demand globally for C T tubes.
Amanda was also strong in our other medical modalities, including fluoroscopy oncology radiography dental and mammography.
In addition, all modalities posted improved revenues compared to the prior quarter and a year ago.
Revenues in our industrial segment increased 3% sequentially and decreased 6% year over year compared to a very strong quarter in industrial last year.
We continue to see strong demand for our products for non destructive inspection across several of our industrial verticals, including electronics inspection and aerospace applications.
Similar to last quarter, we are experiencing improved demand for our high energy sources and tubes for security screening.
In previous quarters, we had mentioned that we had expected to see future demand as tender activity picked up.
In the second quarter, we were pleased to see some of this activity translate into orders for us.
In addition, we believe strong backlog at our customers bodes well for future growth in the security business.
Last quarter, we provided details on some of our new products in the medical segment, we continue to see good traction with our customers and their response to our new products.
And our tubes business, our high performance X Ray tubes for cardiovascular applications continue to see good initial customer interest.
One customer is getting close to a system launch several others are evaluating integration and design options and we continue to get positive reactions from additional Oems.
Our joint venture in Germany continues to make steady progress with nano tube technologies.
As we noted in the first quarter, we signed a prototype development agreement with the medical customer and we shipped the first multimedia a prototype to an industrial customer.
We continue to work closely with this industrial customer as they work on integrating the prototype into their system and also shipped additional prototypes the customer during the quarter.
And detectors photon counting technology continues to make progress and is currently being utilized or evaluated in a number of medical modalities, including dental radiography and mammography.
Due to its high frame rate imaging ability, we continue to see photon counting adoption and inline industrial inspection systems with automated detection.
We are seeing increased orders from customers in Japan, Europe , and the U S for food inspection systems focused on foreign particle detection as well as analysis of food content.
Towards the end of this year, we expect to see additional customers launch new systems, utilizing our photon counting detectors and food inspection and in battery inspection.
We have had multiple design wins with our Z platform dynamic detectors now called Azure.
In mobile C arm and dental applications, we expect production of these systems and our product shipments to start ramping up in the second half of 2022.
In addition, more customers are evaluating our prototypes with positive feedback.
Separately, we're seeing good progress with the launch of our alumina series Rad detectors. We are excited to see that the lumen series is performing well and that several of our existing customers are migrating to this product.
We expect to see more competitive wins with the lumen series.
As we have talked about for several quarters, we continue to see robust demand across the business.
Strong order momentum continues adding to an already already solid backlog.
Our customers' confidence in our ability to work through the current backlog through their issuance of new orders supports our expectations for a continued strong demand environment.
Despite current COVID-19 related shutdowns in China demand in China remains strong, especially for our Cte tubes.
Our investment in manufacturing capacity in Wuxi has enabled us to meet our Chinese Oems needs for local service and supply, which gives them a competitive advantage.
We recently attended a medical imaging exhibition that as part of Japan Radiology Congress.
We were happy to see that the conference was well attended by medical imaging Oems and we were able to connect live with many of our customers.
Japan is the hub for many global medical and industrial imaging Oems and our discussion with them confirmed our perspective on the continued strength in C T and imaging systems for surgery.
We also saw signs of demand recovery and the high end cardiovascular systems, which had slowed down during the past two years due to COVID-19.
There was also a growing interest and acknowledgment of the potential for photon counting technologies in medical imaging confirming that our investments in technology are on the right path.
As you're all aware supply chain challenges continue to be a pressure point for <unk> and many other companies globally.
We continue to operate in a hand to mouth environment for certain components like semiconductors and related electronics.
This situation is further exacerbated by erratic vendor performance across the supply chain, which we expect will continue into the near future.
Let me outline the measures that we're taking to respond to these challenges.
First we have increased inventory levels of key parts and materials.
Second.
We are redirecting, our R&D efforts to redesign certain products and qualifying new suppliers.
Third we are sourcing semiconductors from the spot market by paying high prices.
Fourth.
We're prepaying certain vendors to improve the likelihood that we receive the material when we need it.
Lastly, we moved shipments from ocean to air freight and are using expedited shipping.
These measures helped mitigate some of the supply chain constraints in the second quarter, but at the expense of profitability.
In summary, as we look forward towards the second half of the fiscal year.
We expect supply chain volatility to continue.
We're pleased to see robust demand for our products.
Pending successful completion of supply chain diversification efforts, which are already underway, we expect fiscal 2022 to be another growth year for barracks.
With that let me hand over the call to Sam.
Thanks, Sunny and Hello, everyone. As a reminder, unless otherwise indicated provide sequential comparison to off our results for the second quarter of fiscal 2022 with those of our first quarter of fiscal 2022.
Demand remained robust during the quarter and we were able to mitigate some of the supply chain constraints in the last few weeks of the second quarter.
This allowed us to post revenues of $215 million, which was $10 million above the midpoint of our expectations.
That said rising cost of raw material and logistics pressured gross margin offset by volumes being higher than expectations and of our pricing initiatives.
non-GAAP EPS was near the top of our guidance at 37 cents, which benefited from a credit to SG&A expense.
Second quarter revenues increased 8% from the first quarter helped by improved production towards the end of the quarter medical revenues were $170 million and industrial revenues were $44 million sequentially medical sales increased 10% and industrial sales increased 3%.
<unk> revenues were 17, 9% and industrial revenues were 21% of the overall revenues for the quarter.
Looking at revenue by region Americas increased 13% sequentially, EMEA increased 3% and APAC increased 8% overall.
Overall, China was 15% of the revenue in the quarter.
Okay.
Let me now cover our results on a GAAP basis first quarter gross margin was 33% in line with the previous quarter operating expenses were $44 million down $7 million and operating income was $27 million up $13 million sequentially. This resulted in net earnings of $8 million.
And GAAP EPS of <unk> 18 cents on fully diluted 42 million shares.
Moving on to non-GAAP results for the quarter gross margin was 34% in line with our expectations and similar to last quarter.
Nice improvement offset by higher costs helped us to maintain our gross margin sequentially.
Freight expenses impacted gross margin by about 30 basis points compared to the first quarter and by 100 basis points compared to the year ago quarter.
Compared to pre Covid levels spread expenses are impacting gross margin by roughly 150 basis points as of now.
Like previous quarters, we continue to qualify with alternate suppliers and as a result, R&D resources were devoted towards mitigating supply chain issues.
These activities impacted gross margin for the quarter by about 30 basis points.
As Ive stated previously in late October 2021, the communicated broad based price increases are mid single digit percentage or higher.
Since many customers are on an annual contract, we expect to realize price increases gradually throughout fiscal 2022.
At this stage, we are seeing traction with this initiative and we continue to work with the remaining customers as their contracts come up for renewal.
I want to reiterate that price improvement initiatives were launched to offset cost inflation and not an initiative to improve profitability.
R&D spending in the second quarter was $19 million up $1 million from the prior quarter. It was 9% of revenues within our 8% to 10% target range.
SG&A was approximately $22 million $4 million lower than the prior quarter.
The decrease was related to a credit associated with our incentive plans.
The result is G&A was 10% of revenues demonstrating the operating leverage in the P&L.
Operating expenses were $41 million or 19% of revenue down $3 million from the prior quarter, driven mainly by lower SG&A.
Operating earnings were $32 million up $4 million sequentially operating margin was 15% of revenue in the quarter compared to 11% in the first quarter.
Tax expense in the second quarter was $7 million or 31% of pre tax income. Please note that we continue to target about 25% tax rate for the full year.
Net earnings were $15 million or 27 cents per diluted share compared to $10 million or 25 cents per diluted share in the fourth quarter.
Average diluted shares in the quarter were 41 million on a non-GAAP basis.
We have provided a reconciliation between GAAP and non-GAAP shares at the end of our earnings press release, the appendix to our slides provides a table showing the effect of a bond hedge on the diluted share count for GAAP and non-GAAP purposes at differentiate prices.
Separately, ASU 2000, Twenty's zero, six which is related to the accounting for convertible instruments will become effective for us from Q1 of fiscal year 'twenty 'twenty three onwards.
Now turning to the balance sheet.
Accounts receivable increased by $27 million due to higher sales late in the quarter.
Hence DSO increased to 65 days.
Inventory also increased $22 million as a result of our actions to stock larger quantities of parts and materials.
This also included having to pay higher prices for semiconductors, and prepaying certain vendors to improve the likelihood of receiving the material timely as it result days of inventory increased to 170 days.
Accounts payable increased by $7 million and days payable was 50 days.
Now moving to debt and cash flow information.
Cash flow from operations was the reduction of $8 million in the second quarter and we ended the quarter with cash of $115 million on the balance sheet, a decrease of $43 million from the prior quarter.
The decrease in cash was the result of the redemption of $27 million and principal amount of our senior secured notes as well as an increase in inventory and accounts receivable.
Gross debt outstanding at the end of the quarter was $452 million and debt net of cash was $337 million and adjusted EBITDA was $38 million and adjusted EBITDA margin was 18% of sales.
Combination of profitability and our solid cash cash position helped keep our net debt leverage ratio to two three times at quarter end.
Yeah.
Before providing guidance I wanted to take a step back and discuss broader revenue dynamics in connection with Tony's comments earlier.
Our Q2 revenue came in above the midpoint of our expectations. This was mainly due to receiving certain raw materials to complete product assembly towards the end of the quarter.
This dynamic was the exact opposite of what we experienced in Q1, but somewhat similar to what we experienced in the fourth quarter of fiscal 2021.
It illustrates the significant volatility in the current supply chain environment.
And in the face of strong demand.
We'll continue to influence our sales performance in the near future.
However, we expect our supply chain diversification initiatives to progress further and reduce this volatility as we move past the third quarter.
With that as a backdrop here is our guidance for Q3 revenues are expected between 190 and $220 million and non-GAAP earnings per diluted share unexpected between Tencent and <unk>.
Our expectations are based on non-GAAP gross margin in a range of 32% to 34% non-GAAP operating expenses in a range of $45 million to $46 million.
Tax rate of about 25% for Q3 and fiscal 2022.
non-GAAP diluted share count of about 41 million shares.
With that we will now open the call for your questions.
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One moment, please while we poll for questions.
Our first question is from Larry Solow with S. J S. Securities. Please proceed with your question.
Great. Thanks C. J just on the good afternoon, guys on the on the realization of price increases I'm Sami you mentioned sort of those those price increases were put in are obviously more on defense.
Of course, the offensive just to sort of cover your cost, but just a couple of questions. There. So you mentioned most of your you know these are annualized contract. So I assume where they're kind of calendar 'twenty. Two so we're not even halfway through the year, yet or lessen that obviously so perhaps.
Perhaps you and some of them, but hopefully you still have some at least some wind at your back in terms of more price increase or benefit rolling through but perhaps costs are even higher than you.
When you first started putting these into it so could you come back to the drawing board or maybe put more in or how do you look at that and my sort of my assumption that you still have a good amount to go is that a fair statement.
Thanks, Larry So yeah sure how we communicate.
We communicated to our customers in October and then we started working with them on price increases so that activity like you rightly pointed out began to kick in effectively from the January of this year.
And it is going on now rolling basis. So we still have more activity ahead of us and as the contracts come up for renewal, we are able to get those increases so in a way. It is as we mentioned that generally we have these on an annual basis. So for the next round or phase two.
Two of the earliest it would be as October 2022.
If we decided to send out the letter then monitor the cost at that time.
So we will evaluate the situation at that time, but right now we are very much into our call. It phase one and we hope to inflation.
Sites, but we don't really have a very good perspective right now we will just monitor the situation and then act accordingly, but we are very much into the initial phase right now.
Right, Okay, and just in terms of impact.
Impact our supply chain just in terms of impact on revenue not so much on the cost side is.
There is the medical segment, obviously, it's a bigger piece of your business, but.
It looks like you know that segment is actually experience better growth relative to sort of rebounded.
Rebounding from Covid.
Versus industrial or is that more just because their demand is better or worse.
As the industrial piece of also maybe having you here.
Disproportionate.
The issues with supply.
I would characterize it theyre, both both medical and industrial are kind of experiencing the.
Hello type of issues. If you would notice you know industrial for US is the 20% revenue type a segment that has been that way for many many quarters if not years and that has continued on here and there Larry for a given quarter you might see a spot effect here or there but other.
And that from a static perspective, it's still 80 20 or 70 921 in terms of revenue split and that's continuing you might see plus minus a percent here or there in terms of proportional revenue for the overall company so they're both getting impacted.
Similarly of course in the industrial business. We also have systems business, particularly on the security side.
That business Theres been a lot of tender activity in that business recently, and when I say recently I would say in the last six months and Sunny.
I mentioned that in his prepared remarks.
That we are seeing activity. There. So we are excited about that piece of the business.
Finally, beginning to come back from the Covid. So so on that business. There's been there's been a there's been a bit of a delay from.
Covid two resurgence from Covid, whereas the other business has kind of picked up right. After COVID-19.
Okay, Great and then just last question you know sort of gave us a little Oh I appreciate the update on the on the R&D side. Good traction it sounds like a bunch of new products and it does sound like maybe not an inflection point, yet, but you know a lot of these larger programs. It seems like you've at least you know, reaching the prototype stage and there's probably still some.
Time to go before you have mass commercialization, but it does sound like were you know getting.
Getting at least closer on many of these programs is that.
It's fair to say.
I mean, the program started moving forward so our our R&D programs moving forward there continue to be funded and what's encouraging for us is that on the customer side. You know, there's also engagement and continued activity.
A couple of years ago, some of that had slowed down, but we've seen while customers be engaged in earnest.
Okay, Great I appreciate that thank you guys.
Thanks, Larry.
Our next question is from Suraj Kalia with Oppenheimer. Please proceed with your question.
Good afternoon, Sunny Sun can you hear me all right.
This week.
Perfect gentleman, congrats on the quarter, Hey, Sunny many many many calls going on at the same time. So please forgive me if you've already mentioned this.
So can you walk us through your regulatory approach.
Specific OEM feedback that could cause that you'll have received.
You know that might require some tweaking.
Yes.
So suraj.
We provide the components to our Oems, who then incorporate these.
Technologies into their systems. So we don't we.
We don't file a 500 10-K's or seek regulatory regulatory approval per se, our OEM customers do and they have established processes and in.
Sometimes its predicate devices the values. So the status is not something that we actively pursue them or not a real consideration.
In terms of how we launched this technology.
In terms of feedback you know the Oems are going through very similar.
Process like they do with our other tubes and other.
Other tubes, which is what.
But do you have a novel technology. They they go back and forth between what the technology can do and what they what they need and so they go back and forth on that so the feedback that we get are getting from the Oems have more to do with application specific needs. So the basic technology is working very well.
Team at her tubes are working well they might say well, we need X number of amateurs instead of.
This is that's an ongoing process so its very dynamic as our customers.
Go through the design phase of their system. So we're in that mode and so with the with what we've done in medical and industrial where we're doing a combination of two things, helping our customers with with supporting them with their specific design needs and secondly, continuing to market. This to other Oems. So you know with the eye on seeking out.
Applications that we think this technology is capable of serving.
Right. So sunny forgive me I should've been more specific about your end user.
Tori approach, but yeah.
Would it be an array of devices in terms of different can fix on the number of emitters K V piece, so on and so forth for you across.
Across the board and any update on the on the cycle testing.
Or are we pretty much done for the most part and its commercial launch, let's see experian down the line.
So look we did a lot of the performance characterization early on and then you talked to you guys about that in the last few quarters. What we're past that point, we are satisfied with with the basic performance the capabilities and we've got a handle on the the brackets.
Performance brackets on what these tubes are capable capable up from a dose energy etcetera. So that there's really no more new news to add there. What we are doing right now is purely focused on on getting application application mindshare in adoption. When you have a novel technology like this it.
It takes quite a bit of work to together with their customers to get adoption. That's the phase we're in and you know once we get a few of these examples under our belt, we will be in a better place to them.
Along with the with the demand generation side, but because we can give concrete examples.
Fair enough and one question I'll throw it to go away and hop back in queue. I know you were you briefly made some remarks about the lack of visibility in the current environment I appreciate it.
Your commentary summit.
Would you care to.
Give us a perspective when you do win.
Inventory management, especially but you know been LIFO comes into play and that's the way it because gross margins are a key component of your story.
Or are you managing that so that really doesn't.
Just given everything going around it.
Cost inflation I'd love to get your perspective in terms of.
Has there been any shift in your inventory management plans any additional color would be great gentlemen, Thank you for taking my questions and congrats.
Thank you Suraj. So yeah in terms of inventory management practices, you know say six quarters or eight quarters ago, we were making our production and manufacturing processes more effective and we were able to bring inventory down and that was during the COVID-19 phase and since Covid demand is.
Significantly.
<unk> taken a turn on the positive side.
And followed by supply chain issues. So at this time.
We are looking at stocking more raw material and parts. So so from that perspective on an average we are talking more and more inventory has gone up and it may go up a little bit more yet again so.
So that's one thing that we're trying to do.
Sunday outlined a number of initiatives in terms of making sure we have the raw materials.
To be able to meet the customer demand. So we are taking all of those actions as sun. He said and I would simply add on top of that that we are buying more we're giving long lead purchase orders to our suppliers. So say if you were buying.
Giving a P O four three to four months in advance to a supplier now we are doing that doubled now we're doing double that so in that way, we are providing a lot more visibility to our suppliers. So that we are assured of getting the material and that's those are some of the changes we have made.
The factory as of now is running I would say.
I would say inefficiently in defense and we've talked about it in the prior quarters with all of you are driven by supply chain.
Start in soft nature.
Trying to scramble for material and all of those things. So factories are in efficient we're trying over best to manage through this situation.
And we're also leveraging of our balance sheet too to ensure that we can meet the customer demands.
So Raj the does that answer your question.
Yes. Thank you.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue.
Our next question is from Jim Sidoti with Sidoti <unk> Company. Please proceed with your question.
Good afternoon, thanks for taking the questions. The first one is can you talk about shipments on them you know for the three months of the quarter, where they really hate it.
Excuse me, a very heavily weighted towards the third quarter because of the supply chain issues.
Towards the third month of the quarter Didnt require solutions.
Hi, Jim This is Tom yes.
The shipments for the quarter, but not linear and they were tilted towards the third month of the quarter and as a result.
It caused a ought to be high on the balance sheet and yeah. So so last two three weeks of the quarter.
We were able to we were able to get the material to initiate up finish the product and we're able to ship it to our customers yes.
And I assume.
There was a lot of overtime during that period, so that impacted the gross margin as well.
Yes.
And I was just answering suraj, yes, we do have over time, we do have over time under time all of that goes on we need too many times bimbo and complete the product so all of those.
All of those aspects that covered when I say, but main factories are running inefficiently. So yes, mhm, Okay and then the credit for SG&A can you just give us a little color on what that was about.
Yeah, so that credit was related to our incentive plans and in this quarter. We looked at you know where the demand is versus where we are able to ship. There is a gap and we we we looked at that.
And we looked at the performance of last year. This year and we went ahead and.
Adjusted for that and re estimated it and that's what caused the credit on the on the P&L.
Okay. So we shouldn't expect that to continue in the next.
Second half of the year.
That is correct, Jim it would be only for Q2.
Outside of that credit to the operating expenses were in line with what we had guided you and also in line with what Q1 actual spur and also pretty much in line with what we are guiding towards Q3. So the base outside of the credit operating expenses are running around 45 million.
$45 million to $46 million range.
Okay, and then you said you made a comment at the beginning though that despite the supply constraints.
So said you expected growth for the year is that top line growth bottom line growth or both.
Jimmy I think a we hope a you know as of now we're only guiding for Q3, but we are hopeful of a full year topline growth in full year bottom line growth.
Alright, alright, thank you.
Thanks, Jim.
We have reached the end of the question and answer session and I will now turn the call over to Chris Belfiore for closing remarks.
Thank you for your questions and participating in our earnings conference call for the second quarter of fiscal year 'twenty two.
The webcast and supplemental slide presentation will be archived on <unk> website, a replay of this quarterly conference call will be available through may 17th.
Can be accessed at the company's website or by calling 870 76606853 from anywhere in the U S or 200 161 to 7415 from non U S locations.
The replay conference call access code is 137 to 8899.
Thank you and goodbye.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Okay.
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