Q3 2022 Varex Imaging Corp Earnings Call
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Welcome to the Varics 3rd quarter 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, this conference is being recorded. I will now turn the conference over to your host, Chris Bell Fiore, you may begin.
Good afternoon and welcome to Verix Imaging's Corporation's Ernie's Conference Call for the 3rd quarter of fiscal year 2022.
With me today are Sunny Sanyal, our President and CEO , and Sam Mahashwari, our CFO .
Please note that the live webcast of this conference call includes a supplemental slide presentation that can be accessed at varicseswebsite at varicsimaging.com forward slash news. The live webcast of this conference call includes a supplemental slide presentation with a new video. The live webcast of this conference call includes a supplemental slide presentation
The webcast and supplements of slide presentation will be archived on Varic's website.
To simplify our discussion, unless otherwise stated, all references to the quarter are for the third quarter of fiscal year 2022.
In addition, unless otherwise stated, quarterly comparisons are made sequentially from the third quarter of fiscal year 2022 to the second quarter of fiscal year 2022 rather than the same quarter of the prior year.
Finally, all references 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.
RIS relating to our business are described in our quarterly earnings release and our filings with SEC.
Additional information concerning factors that could cause actual results to materially differ from those anticipated is contained in our SEC filings, including item 1A, risk factors of our quarterly reports on Form 10Q and our annual report on Form 10K. 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.
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 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 say.
Thank you, Chris, and good afternoon, everyone.
I am happy to report very good results in the third quarter of fiscal 2022. The sales remained very strong, reaching $214 million.
Our supply chain initiatives began to show results in an otherwise challenging environment and enabled us to realize sales at the high end of our guidance range.
We saw a robust demand for our products and continue to be excited about future growth.
Turning to our results, revenue in the third quarter was flat compared to the second quarter and up 2% year over year.
Revenue in medical declined 2% sequentially while industrial revenue increased 7%
Non-GAP gross margin in the quarter was 35%, which was above our expectations.
Price actions and productivity gains helped improve gross margins for their quarter.
Delta D-Bita was $36 million and non-GAAP EPS was $0.37.
Our cash position remained solid at $110 million at the end of the quarter.
Our balance was down $5 million sequentially, primarily due to continued investment in inventory to support growth in the current supply chain environment.
Let me give you some high-level insights into the current demand environment based on a qualitative assessment of our different modalities.
and applications during the quarter.
Medical segment revenues declined 2% sequentially and was flat year over year.
Global demand for CT tubes remains robust as OEMs continue to bring new CT models to market to support global demand, particularly in China.
Demand was also strong in our other medical modalities including fluoroscopy, oncology, radiography, dental and
We remain optimistic about future growth as we continue to work through our supply chain challenges so that we're able to maintain a consistent flow of material.
Revenues in our industrial segment increased 7% sequentially and increased 8% year-over-year.
Strong demand for our non-destructive inspection products continued in the quarter with strength across many different products in our portfolio.
We continue to see improvement in demand for high energy sources for security screening.
As we noted last quarter, an increase in tender activity earlier in the year signaled potential for future demand. For more information on COVID-19 vaccines, visit our website at www.covid19.gov
Some of this activity resulted in sales during the quarter.
We continue to see a healthy pipeline in security, especially in our cargo inspection business.
During our first quarter earnings call, we highlighted market growth opportunities in our medical segment.
Today I'd like to provide a perspective on our industrial segment and share with you how we see this market segment and our business evolving over time.
In fiscal 2021, our industrial segment revenues were $174 million or 20% of VARIC sales.
We estimate the current addressable market for our X-ray imaging components and the industrial segment to be about $1 billion, which we believe can grow at a 5-7% caguar over time.
While the industrial segment has returned to pre-pandemic levels, our revenue growth has been slower than expected due to a slower pace of recovery in the security segment.
Earlier in the year, when we had seen increased tender-related activity, we had anticipated that our orders would pick up later in the year.
As expected, orders for our linear accelerators which are used in cargo inspection increased in the third quarter.
We continue to see significant potential for our industrial non-destructive inspection portfolio products. We continue to see significant potential
and believe that this segment can grow at mid to high single digits over the next several years.
We expect five verticals within the industrial segment to be key to driving our future growth.
These particles are security, energy, food quality, electronics and consumer safety.
These are not new markets for VARICS, but our approach to them will be different.
Historically, our focus across all markets has been to sell X-ray components like tubes and detectors to our customers.
However, as we introduce new technologies like photon counting detectors, image acquisition, workflow software, and AI capabilities for automated detection.
We intend to provide more integrated system solutions for these industrial verticals.
This approach increases our total addressable market in the industrial segment by nearly $1 billion by fiscal 2027.
Let me share some examples.
In the energy vertical, specifically in the oil and gas sector, we are offering a full workflow solution for pipeline weld and corrosion inspection.
This solution incorporates our hardware components, image acquisition, workflow software, as well as automated detection of defects.
using AI and computer-aided detection.
Similarly on the consumer side, we see a growing use of X-ray and e-beam to inspect, sterilize or immediate consumer-facing products like medical supplies, packaged foods, grains, as well as fish, meat and plant products.
This is a growing market and our high-power x-ray sources and photon counting detectors can be used to inspect and irradiate food and other consumer-facing products.
We are in the early stages of development and introduction of these solutions to the market.
We will share more details as well as customer reactions and feedback When we begin to conduct prototype evaluations
In summary, in addition to our good results, I'm pleased to be able to say that our customers appreciate our efforts and remain confident in our ability to deliver on our backlog as they continue to place new orders.
This was particularly apparent in China where our ability to successfully run operations, despite the COVID lockdowns, earned us recognition from one of our top customers in China.
Further, in July , we attended European Congress of Radiology Tretro, referred to as ECR.
This is a large annual event that is attended by global manufacturers who market and sell imaging systems in European markets.
as well as radiologists and other imaging professionals from all over Europe .
The event was very well attended by manufacturers.
We were happy to see that our recently launched Dynamic Detective Product call is yours.
was prominently shown incorporated in a system by one of the leading manufacturers in Europe .
We were also happy to see some of our new Lumen family of radiographic detectors also presented by some manufacturers at this show.
To date, we have four OEM customers who are designing our Azure Dynamic Platform into their new systems.
and 10 others in active evaluation and planning mode.
In addition, more than 15 OEMs are either already buying our Lumen family of radiographic detectors from us or plan to do so in 2023.
Every customer that I met.
Thanked and appreciated the way our team has been working very closely with them and delivering our products to them despite all the material shortages.
With that, let me hand over the call to Sam.
Thanks, Sunny, and hello, everyone.
As a reminder, unless otherwise indicated, I will provide sequential comparison of our results for the third quarter of fiscal year 2022 with those of our second quarter of fiscal 2022. Thank you for your time today.
demand remained robust during the quarter and our supply chain initiative allowed us to ship more product compared to our expectations.
As a result, we posted sales of $214 million, about $10 million above our guidance midpoint.
Non-gab gross margin was strong at 35% and withstood the inflationary pressure of riding material cost.
and logistics supported by improved pricing and productivity benefits.
Non-GAPPPS was above the top of our guidance at 37 cents.
Third quarter revenues were flat compared to the second quarter.
Medical revenues were $167 million and industrial revenues were $47 million.
Equentially, medical sales decreased 2% and industrial sales increased 7%. Industrial revenues were 78% and industrial revenues were 22% of our total revenues for
Looking at the revenues by region, America's decreased 7% sequentially, while AMIA increased 1% and APEC increased 5%
Our local manufacturing and business development initiatives in China are performing well.
Our sales in China are comprised of product manufactured in China for China consumption as well as exports into China from our other subsidiaries.
China was 19% of overall revenue for the quarter and here to date it is 16%.
Currently, our sales in US dollars are roughly 75% of our overall sales.
About 15% are in Euros, 7% to 8% are in Chinese Yuan, and the remaining in various other currencies.
Let me now cover our results on a gap basis.
Third quarter gross margin was 34%, 100 basis points higher than the previous quarter. Operating expenses were $50 million, up $6 million, and operating income was $23 million, down $4 million.
Net earnings were $8 million and gap EPS was 20 cents based on fully diluted 41 million shares.
Moving on to non-gap results for the quarter. Pro-smartgen of 35% was 100 basis points higher than the previous quarter, driven by better materials related yields in our Salt Lake City factory.
Overall, we've been successful in mitigating inflation driven downward pressure to the gross margin of price improvements and sales volumes.
R&D spending in the third quarter was $20 million, up $1 million from the prior quarter.
It was 9% of revenues within our targeted 8-10% range.
As GNA was approximately $27 million, $5 million higher than the prior quarter, as a result as GNA was 13% of revenues.
Operating expenses are $47 million or 22% of total revenues.
up $6 million from the prior quarter. They increased in R&D and SGNA, and therefore our operating expenses was primarily driven by higher accruals for compensation expectations for the fiscal year associated with the increased insurance.
I want to remind you that in the previous quarter, we recorded a credit associated with our incentive plan.
Operating income was $28 million down 3 million sequentially due to the increase in operating expenses.
Operating margin was 13% of revenue compared to 15% in the previous quarter.
Tax expense in the third quarter was $6 million, or 29% of pre-tax income, compared to $7 million, or 31% in the previous quarter.
Net earnings were $15 million or 37 cents per diluted share, similar to our performance in the second quarter. Net earnings were $15 million or 37 cents per diluted share, similar to our performance
Average diluted shares for the quarter on a non-GAAP basis were 40 million.
Please note that ASU 2020-06 related to the accounting for convertible instruments will become effective for us from Q1 of auxilia-20-23 onwards.
Now turning to the balance sheet.
Accounts receivables increased by $3 million and DSO increased 2 days to 67 days in the quarter due to a higher proportion of product shipments late in the quarter.
Inventory increased $30 million as a result of supply chain related initiatives we highlighted on our last call.
We are stocking larger quantities of parts in inventory on and also having to pay higher prices for certain inventory items.
Compared to last fiscal year end, inventory is up roughly 33% of which 24% is due to quantity and 9% is due to cost increases.
As a result, days of inventory increased to 194 days.
Accounts payable increased by $4 million as we procured more inventory and days payable was 54 days.
Now moving to debt and cash flow information. Cash flow from operations was the use of $3 million in the third quarter and we ended the quarter with cash, cash equivalents, and marketable securities of $110 million on the balance sheet, a decrease of $5 million from the prior quarter.
The decrease in cash was primarily due to the growth in working capital.
Gross debt outstanding at the end of the quarter was $451 million and debt net of $110 million of cash and marketable securities was $341 million.
Adjusted EBITDA for the quarter was $36 million, and adjusted EBITDA margin was 17% of sales. Our net debt leverage ratio was 2.4 times at quarter end.
Now moving on to guidance for the fold quarter.
Demand remains strong and we expect our supply chain initiatives to support higher shipment levels.
The revenues are expected between $210 and $240 million, and non-GAF earnings for the
Our expectations are based on non-gap cross margin in a range of 33 to 34%. Non-gap operating expenses in a range of 45 to 46 million dollars.
tax rate of about 30% for Q4 and fiscal 2022.
non-GAAP denoted share count of about 41 million shares.
With that, we will now open the call for your questions.
Thank you Sam. Before we turn to Q&A, I just want to add a quick comment. I'd like to extend a warm welcome to Kathy Bardwell, who we announced today has joined our Board of Directors.
Kathy is the former Senior Vice President of Regulatory Affairs and Compliance for Starris Corporation, a leading provider of infection prevention, and other procedural products and services.
She brings 35 years of audit and accounting experience coupled with an extensive background in the field of quality and regulatory affairs and she will be a tremendous asset to our board.
We look forward to working with you Kathy. So with that operator, let's open it up for questions.
At this time we will be conducting a question and answer session. 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 2 if you'd like to remove your question from the queue. For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys. One moment please, Wally, pull for questions.
Our first question is from Larry Solo with SJS Securities. Please proceed with your question.
Great. Good afternoon to CJS. Thanks for taking the questions. Just like the first question on the supply chain initiatives. So I understand maybe are you guys
It sounds like you're certainly been constrained on the revenue side and it seems to be that improving significantly. Are there still, you know, where we stand today, are there still more levers for you guys to pull there? Or, you know, obviously you're acquiring a lot of inventory and that's...
and it seems to be that improving significantly. Are there still, you know, where we stand today? Are there still more levers for you guys to pull there? Or, you know, obviously you're acquiring a lot of inventory. And that's...
benefit of any of you a lot, but other other, I know you will call find more suppliers and even changing some of the cost, the actual material supplies. Are most of those in issues are they well on the way? They're almost done now. Can you kind of just give us an idea of, you know, how will we stand in that?
I know you were qualified more suppliers and even changing some of the cost, the actual material supplies. Most of those in issues are well along the way. They're almost done now. Can you give us an idea of where we stand?
Yeah, hey Larry, this is Sunny. So we began with several initiatives a while ago and there are a number of things. First of all, there are two categories. We've probably talked about situation with semiconductors and then the situation with electromchanical parts and components. So on the semiconductor side, we're making very good progress on both with dealing with...
obsolescence and moving our products across to other semiconductors, that's going along well. And we have, you know, we bought, purchased a lot of semiconductors as well to make sure that we have access to them. There, you know, where we had the hotspots, where there were critical issues, those have been somewhat mitigated. And the things that we know of, we have done a lot of work to mitigate them, and that's rolling forward. Thank you for tuning in.
There's still some unknowns there, but those are, I think we're, I wouldn't say we're out of the woods there, the semiconductor side is still tenuous, but we have at this point, you're seeing better flow of chips.
On the lecture on mechanical side, it continues to be...
You know, I call it the the newest in situation where you suppliers are You know, they're late. They're they're short shipping That's continuing and and working continuing with our diversification efforts there So in summary Larry. We're not out of the woods yet But you know, we've done a lot of work and we're seeing some of the results of that work
I appreciate that. In terms of price increases, I know you guys put price increases, started putting them in, I guess, beginning of the fiscal year or November . And we're sort of anniversary in that or coming close to that. And you mentioned, I know, inventory, which is just one component of what you're going to in the project, but that's up 9% like you said, at least. So are you getting, I want you to get in price increases quite, 5% increase.
Is there more to come? Are you still kind of chasing that? Is that still impacting overall performance?
Yeah, hi Larry, this is Sam. We are continuing to increase the prices and as you know in our business, we work with our customers, they are on annual contracts, many of them. And so as the contract is up for renewal, we are able to increase the prices and then based on the purchase order that have been placed in and after that when the new purchase orders are placed, they are getting placed at high prices.
So we are definitely making progress on improving the prices. I just want to remind you Larry that the cost of 9% is on the cost basis. And we had an…
And we had announced mid-single digit.
in that range type of price increases and our goal was to mitigate the mismargin impact from inflationary costs and so far we've been able to deliver that and it is our plan to keep on delivering on that. So price increases are definitely going through and there is more to go through and more to print on the P&L and a couple more quarters go by.
Okay, and you know, obviously, I don't know, you don't have to get your crystal ball out and, you know, but it does seem like as it goes the next year or your next fiscal year, likely, you know, I feel like you guys will continue to raise price if you have to, right? So to offset this.
sort of rising calls to good.
So we'll of course you know we'll evaluate the situation as we see how the overall market forces as well as you know the inflationary situation is developing so yes we will definitely be looking at it and assessing it on a dynamic basis yes.
Okay, and then just a last question on the, on the alley for Q4, maybe the range has been a narrow dislike, but it's still a pretty wide range. And I know, you know, a lot of uncertainty, nothing's changed in terms of the environment. Does seem like you guys have a little bit of a bad grip on the supply chain stuff, which I think also was a, was a big variable, you know, so, you know, it's sort of the difference between the low end and high. And is it more of a, you know, and is it more of a, you know,
I think a previous course was more of a supply issue. Is that still sort of the biggest variable or is there no?
service cards was more of a supply issue. Is that still sort of the biggest variable? Or is there, no, the demand have any, you know, he's still...
have a lot of ruin at the man's time.
Yeah, so as we look at the guidance for Q4, you know, Larry, like Sunny said in your first question, there is supply chain related uncertainty, there is still freight related delays. So, you know, we've made a lot of progress in supply chain and I would like to say that supply situation seems to be improving.
But I don't think we are at a point where we can say that it is bankable or it is. Yep.
40 to be baked into our Go Forward Guidance.
So as we look at the situation, we still guide with supply chain uncertainty baked into our guidance. And that's what is forming the guidance range at this point. And so to the extent, there are some hiccups in the receipt of raw material or delays in receiving of raw material. We might be on the lower side of the range. And if we get more material, then we......
probably would be towards the higher end of the range. That said, demand is quite strong of a backlog. That said, demand is quite strong of a backlog.
went up even further in this last quarter. So the demand is there, it's just we got to get it completed and ship it to the factory.
Got it. Thanks. I appreciate all that comment.
Thank you Larry.
Our next question is from Jim Sidoti with Sidoti & Company. Please proceed with your question.
Hi, good afternoon and thanks for taking the questions. So just to follow up on Larry's question on the price increases, is it fair to say that where you have implemented those increases, it's sticking.
Yes, so hi Jim, Sam here. Yes, they are sticking and we have been able to pass prices to our customers. And at this point, customers are also accepting the price increases. In the sense, everybody understands where the inflation is. And for long-term partnership, they understand. Those price increases are sticking.
And you mentioned that prospecting to the improvements of the industrial side, I think you called out cargo inspection or oil and gas pipelines and food inspection. And food inspection. And food inspection.
How do you respond to that? Are you increasing R&D for products related to those markets? Are you adding salespeople? So what do you do to capitalize on that potential?
Agenda to study. On, you know, industrial's broken out into many verticals. On the security side.
We are we saw tender activity earlier in the year and we're getting orders We know we we had anticipated that those would turn into some orders for us and we're starting to see those and that is where we see the pickup on the cargo inspection site there we have products that are already in place that are shipable so really nothing More to be done there other than you know ongoing R&D, but really the deal there is we we just need to ship against those and And we're doing that
In the other areas of the verticals, like we talked about food inspection, oil and gas, we have, let's take oil and gas as an example. In that segment, we have several products. In fact, what I talked about with getting closer to the customers with full workflow solutions, those are already...
Those have been rolled out to our customers or in that sales process of being embedded with our OEM customers. So that's in flight. And we expect that over the next several quarters, those will start to convert into some traction with these OEMs.
And then in other areas like food inspection and
irradiation. There we have R&D activity and investments that are in flight. And, you know, and we'll keep you posted on the progress in those areas, but we expect new products to be rolled out in those areas sometime early to the next year.
Okay, and the last one for me, I mean, is there any reason to...
They think that pre-cashable should start to improve over the next three or four quarters. Let's check ??
So, part chain issues start to subside. Is there anything that would prevent that from happening?
Hi, Jim Sam here. So in the last couple of quarters, as a specific decision, the drove increases in inventory in order to meet our customers demand. And inventory has gone up, and that is enabling us, or putting us in a better position, our situation, to complete the product and ship it. So as go forward, the rate of inventory increases, it's low down.
and so we should be able to generate free cash flow. At the same time, the priorities for our cash is working capital, capital expenditures for the business, followed by wherever we can we would like to pay down the debt. So those are the priorities. We have sufficient liquidity Jim. We are maintaining a $100 million plus cash.
which is what we have said that we want to keep for operating purposes.
and then we also have Linus.
credit, which is completely undrawn. So I'm quite excited about the growth of our ability to grow because we do have the inventory and as the supply chain situation, like you said, improves a little bit here further or it becomes more bankable or more certain than we should be able to deliver higher sales and generate more profits.
That's it for me. Thank you.
All right, that's it for me. Thank you. Thank you.
As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. If you'd like confirmation tone, we'll indicate your line is in the question queue.
Our next question is from Saraj Kalia with Oppenheimer & Co. Please proceed with your question.
Hi Sunny and Sam, this is Seamus on for Siraj.
Hey Shane.
Hey, so
Quick to start, status of the OEM partner validation for the carbon nanotubes?
And then I go pick the
Yeah, that's that's proceeding that's continuing on and
So we've got, um,
more OEMs engaged in those feasibility assessments, and then for the ones that we had, we've been shipping more tubes to them. So that work is progressing, and we're making steady progress.
You know, these types of novel platforms take longer in our development cycle. So this will continue this way. And then, you know, though we have them, take some time to formulate their designs and then they move forward with their projects. And then they move forward with their projects. And then they move forward with their projects.
Those are moving forward.
Got it. Thank you for that. And just another one. How are you guys seeing the replacement cycle for the tubes and detectors? Is it slowing given upstream component shortages or is it able to maintain steady?
You know, the replacement cycle is consistent, meaning tubes have a finite life. So once...
You know if I tube lasts a year They're going to be need they need to be replaced in the year for us a replacement Tube is no different from a new tube. So it's the same thing
So there is really no difference in our cell cycle or revenue cycle for replacement versus new tubes.
Okay, and just last one for me. How's your roadmap with forgetting back, getting to the 40% goes from our to work? Thank you for taking our questions.
Sure, thank you. So, you know, we've highlighted that our...
Gross margin for the current business portfolio is around mid 30s.
Methodes in the gross margin and right now due to inefficiencies, supply chain related issues, freight, etc. running high, a little bit.
lower than that in terms of our road map to get to higher 30s.
or closer to 40%, I think we would need a few new products to be released, which we've been working on, particularly cathode nanotubes, which you asked Shane, and then also photon counting related products. So with those products, and then of course also software, as those products get released and they get adopted, we should see improvement in our gross margin.
We have reached the end of the question and answer session and I will now turn the call over to Chris Belfi-Ree for closing remarks.
Thank you for your questions and participating in our earnings conference call for the third quarter of this year at 2022.
The webcast and supplemental slide presentation will be archived on BEREX's website. A replay of this quarterly conference call will be available through August 16th and can be accessed at the company's website or by calling 877-660-6853 from anywhere in the U.S. or 201-612-7415 from non-U.S. locations.
The replay conference call access code is 137-314-452. Thank you and goodbye.
This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.
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