Varex Imaging(US:VREX)2021-02-05 00:14Part I. Financial Information Unaudited Financial Statements The unaudited financial statements for Q1 2021 show a year-over-year revenue decline and increased net loss, with stable assets but decreased operating cash flow Condensed Consolidated Statements of Operations For Q1 2021, Varex reported decreased revenues and gross profit, with increased interest expense leading to a larger net loss Consolidated Statement of Operations Highlights (Unaudited) | (In millions, except per share data) | Three Months Ended Jan 1, 2021 | Three Months Ended Jan 3, 2020 | | :--- | :--- | :--- | | Revenues, net | $177.1 | $200.1 | | Gross profit | $57.2 | $61.1 | | Operating earnings | $6.1 | $4.6 | | Interest expense | $(10.3) | $(5.4) | | Loss before taxes | $(4.7) | $(1.2) | | Net loss attributable to Varex | $(6.4) | $(1.3) | | Diluted net loss per share | $(0.16) | $(0.03) | Condensed Consolidated Balance Sheets As of January 1, 2021, total assets were $1.137 billion, slightly down from fiscal 2020, with stable cash and significant long-term debt Condensed Consolidated Balance Sheet Highlights (Unaudited) | (In millions) | January 1, 2021 | October 2, 2020 | | :--- | :--- | :--- | | Current Assets | | | | Cash and cash equivalents | $105.5 | $100.6 | | Accounts receivable, net | $121.0 | $123.8 | | Inventories | $269.8 | $271.9 | | Total Assets | $1,137.1 | $1,139.5 | | Current Liabilities | $152.5 | $160.6 | | Long-term debt, net | $457.5 | $452.8 | | Total Liabilities | $672.7 | $673.7 | | Total Stockholders' Equity | $464.4 | $465.8 | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities significantly decreased to $7.1 million in Q1 2021, primarily due to working capital changes, resulting in a net cash increase of $4.9 million Consolidated Statement of Cash Flows Highlights (Unaudited) | (In millions) | Three Months Ended Jan 1, 2021 | Three Months Ended Jan 3, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $7.1 | $23.0 | | Net cash used in investing activities | $(4.4) | $(10.6) | | Net cash provided by (used in) financing activities | $2.2 | $(12.0) | | Net increase in cash and cash equivalents | $4.9 | $0.1 | Notes to the Condensed Consolidated Financial Statements The notes provide detailed information on accounting policies, revenue recognition, segment performance, and debt structure, including geographic and segment revenue breakdowns * The company operates in two reportable segments: Medical and Industrial, designing and manufacturing X-ray tubes, digital detectors, and components for medical imaging, security, inspection, and non-destructive testing applications222326 * Canon Medical Systems Corporation is a significant customer, accounting for 16.6% of revenues in Q1 2021 and 18.8% in Q1 202033 Revenue by Geographic Region (in millions) | Region | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Americas | $62.3 | $70.3 | | EMEA | $57.9 | $65.2 | | APAC | $56.9 | $64.6 | | Total | $177.1 | $200.1 | Segment Performance (in millions) | Segment | Q1 2021 Revenue | Q1 2020 Revenue | Q1 2021 Gross Profit | Q1 2020 Gross Profit | | :--- | :--- | :--- | :--- | :--- | | Medical | $139.2 | $155.6 | $44.1 | $43.8 | | Industrial | $37.9 | $44.5 | $13.1 | $17.3 | | Total | $177.1 | $200.1 | $57.2 | $61.1 | * Total debt outstanding, net of unamortized costs, was $460.1 million as of January 1, 2021, including $200.0 million of 4.0% Convertible Senior Unsecured Notes due 2025 and $300.0 million of 7.9% Senior Secured Notes due 2027878892 Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 11.5% revenue decline to the COVID-19 pandemic and an extra week in the prior year, while gross margin improved due to cost reductions despite increased interest expense * The COVID-19 pandemic has caused disruptions, including reduced customer demand, delays in equipment installations, and supply chain challenges, with uncertainty expected to continue into mid-calendar year 2021122124127 Revenues by Segment (in millions) | Segment | Q1 2021 | Q1 2020 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Medical | $139.2 | $155.6 | $(16.4) | (10.5)% | | Industrial | $37.9 | $44.5 | $(6.6) | (14.8)% | | Total | $177.1 | $200.1 | $(23.0) | (11.5)% | Gross Profit and Margin by Segment | Segment | Q1 2021 Gross Profit (M) | Q1 2020 Gross Profit (M) | Q1 2021 Gross Margin | Q1 2020 Gross Margin | | :--- | :--- | :--- | :--- | :--- | | Medical | $44.1 | $43.8 | 31.7% | 28.1% | | Industrial | $13.1 | $17.3 | 34.6% | 38.9% | | Total | $57.2 | $61.1 | 32.3% | 30.5% | * Research and development expenses decreased by 23.0% to $16.7 million, primarily due to cost actions and improved material cost management, while selling, general and administrative expenses remained relatively flat at $34.4 million145146147 * Interest expense nearly doubled to $10.3 million from $5.4 million in the prior year, mainly due to the issuance of Convertible Notes in June 2020 and Senior Secured Notes in September 2020148 * The company believes its operating cash flow, $105.5 million cash on hand, and availability under its $100.0 million ABL Facility are sufficient to meet operating needs for at least the next 12 months151152 Quantitative and Qualitative Disclosures About Market Risk The company faces foreign currency, credit, interest rate, and commodity price risks, managing currency exposure with hedging instruments and monitoring credit risk, with minimal current interest rate risk * The company faces foreign currency risk due to significant international sales, which can lead to pricing pressure from a strong U.S. Dollar, partially hedged using derivatives like cross-currency swaps168169 * Interest rate risk is related to the ABL Facility's floating rates, but there were no borrowings under this facility as of January 1, 2021172 * The company is exposed to commodity price risk from raw materials such as tungsten, lead, and copper, but did not utilize any commodity derivative instruments during the quarter to manage this exposure173 Controls and Procedures Management concluded that disclosure controls were ineffective as of January 1, 2021, due to ongoing material weaknesses in internal control over financial reporting, for which remediation efforts are underway * The CEO and CFO concluded that disclosure controls and procedures were not effective as of January 1, 2021, due to ongoing material weaknesses in internal control over financial reporting176 * Remediation efforts for previously identified material weaknesses are underway, including redesigning controls for inventory, enhancing controls over intercompany balances and journal entries, and developing a comprehensive internal finance training program177178 * The material weaknesses will not be considered fully remediated until the applicable controls operate effectively for a sufficient period and are validated through testing180 Part II. Other Information Legal Proceedings The company is involved in various legal actions in the normal course of business but does not anticipate any material adverse effects on its operations or financial position * Varex states that it does not have any pending litigation expected to have a material adverse effect on its operations or financial position182 Risk Factors The company faces significant risks including the ongoing impact of COVID-19, reliance on key customers and suppliers, intense competition, regulatory changes, and material weaknesses in internal controls * The COVID-19 pandemic has adversely impacted operations, cash flow, and product demand, and these effects could continue183186 * The company is heavily reliant on a limited number of OEM customers, with one customer accounting for 17% of revenue in the quarter and the top ten customers accounting for 51%189 * Changes in import/export regulations and tariffs, particularly between the U.S. and China, have negatively impacted the business by increasing costs and causing some customers to reduce purchases250251 * The company has identified material weaknesses in its internal control over financial reporting, which, if not remediated, could result in a loss of investor confidence292 * Varex has significant debt obligations of approximately $513.8 million that could adversely affect its business and flexibility, including Convertible Notes and Senior Secured Notes293 Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds reported during the period * The company reported no unregistered sales of equity securities or use of proceeds during the quarter329 Defaults Upon Senior Securities There were no defaults upon senior securities reported during the period * The company reported no defaults upon senior securities330 Mine Safety Disclosures This item is not applicable to the company's operations * Mine safety disclosures are not applicable to Varex331 Other Information No other information was reported for the period * The company reported no other information for the quarter332 Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files * The exhibits filed with the report include CEO and CFO certifications (Exhibits 31.1, 31.2, 32.1, 32.2) and interactive data files (XBRL)333