Varex Imaging(VREX) - 2022 Q2 - Quarterly Report

Part I. Financial Information This section presents the company's financial statements, management's analysis, market risk disclosures, and internal controls Financial Statements The unaudited condensed consolidated financial statements for the period ended April 1, 2022, reflect year-over-year growth in revenues and net income, alongside changes in cash, inventory, and debt Condensed Consolidated Statements of Operations Revenues and net income attributable to Varex significantly increased for both the three and six-month periods ended April 1, 2022 | Financial Metric | Three Months Ended April 1, 2022 | Three Months Ended April 2, 2021 | Six Months Ended April 1, 2022 | Six Months Ended April 2, 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenues, net | $214.7M | $203.5M | $413.5M | $380.6M | | Gross Profit | $70.8M | $64.6M | $135.6M | $121.8M | | Operating Income | $26.6M | $15.8M | $40.6M | $21.9M | | Net Income (Loss) attributable to Varex | $7.6M | $3.1M | $9.0M | ($3.3M) | | Diluted EPS attributable to Varex | $0.18 | $0.08 | $0.21 | ($0.09) | Condensed Consolidated Balance Sheets As of April 1, 2022, the balance sheet reflects a slight decrease in total assets, a reduction in cash, an increase in inventory, and a decrease in total liabilities | Balance Sheet Item | April 1, 2022 | October 1, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $115.1M | $144.6M | | Inventories | $269.2M | $224.8M | | Total current assets | $569.2M | $554.2M | | Total assets | $1,142.6M | $1,147.5M | | Long-term debt, net | $408.4M | $431.7M | | Total liabilities | $628.2M | $651.0M | | Total stockholders' equity | $514.4M | $496.5M | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities significantly declined for the six months ended April 1, 2022, primarily due to increased inventory investments and debt repayments | Cash Flow Activity (Six Months Ended) | April 1, 2022 | April 2, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $2.5M | $19.9M | | Net cash used in investing activities | ($6.6M) | ($8.4M) | | Net cash used in financing activities | ($25.4M) | ($1.0M) | | Net (decrease) increase in cash | ($29.6M) | $10.5M | Notes to the Condensed Consolidated Financial Statements These notes detail the company's business segments, revenue disaggregation by region, segment performance, and debt structure - The company operates through two reportable segments: Medical (X-ray tubes, digital detectors, software for medical applications) and Industrial (components for security, inspection, and non-destructive testing)[26][115][116] Revenue by Region (Six Months Ended) | Revenue by Region (Six Months Ended) | April 1, 2022 | April 2, 2021 | | :--- | :--- | :--- | | Americas | $128.9M | $132.8M | | EMEA | $137.0M | $125.6M | | APAC | $147.6M | $122.2M | | Total | $413.5M | $380.6M | Segment Performance (Six Months Ended) | Segment Performance (Six Months Ended) | April 1, 2022 | April 2, 2021 | | :--- | :--- | :--- | | Revenues | | | | Medical | $326.1M | $295.8M | | Industrial | $87.4M | $84.8M | | Gross Profit | | | | Medical | $99.4M | $89.8M | | Industrial | $36.2M | $32.0M | - As of April 1, 2022, total debt outstanding, net of unamortized costs, was $411.0 million, comprised mainly of $200.0 million in Convertible Senior Unsecured Notes and $243.0 million in Senior Secured Notes[89] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the impact of ongoing supply chain disruptions and inflation on operations, alongside revenue growth, debt reduction, and liquidity management Impact of COVID-19 and Economic Environment The company faces persistent supply chain disruptions, including material shortages and inflationary pressures, despite recovering product demand - The company continues to experience logistics, supply chain, and manufacturing challenges that are expected to persist throughout 2022[128] - Shortages of materials, particularly micro-controller chips and associated electronic components, have caused and may continue to cause delays in manufacturing products for customers[128] - The company has experienced inflationary increases in raw materials, logistics, transportation, and labor costs, and has raised prices on certain products in response[129] Results of Operations Revenues increased for both the quarter and six-month period, driven by the Medical segment, with improved gross margins and reduced SG&A expenses boosting operating income Revenue Change (Q2'22 vs Q2'21) | Revenue Change (Q2'22 vs Q2'21) | Amount | % Change | | :--- | :--- | :--- | | Medical | +$13.8M | +8.8% | | Industrial | -$2.6M | -5.5% | | Total | +$11.2M | +5.5% | Revenue Change (H1'22 vs H1'21) | Revenue Change (H1'22 vs H1'21) | Amount | % Change | | :--- | :--- | :--- | | Medical | +$30.3M | +10.2% | | Industrial | +$2.6M | +3.1% | | Total | +$32.9M | +8.6% | - Selling, general and administrative (SG&A) expenses decreased by $5.3 million (17.3%) in Q2 and $6.6 million (10.2%) in H1, primarily due to lower compensation costs[151][159] Liquidity and Capital Resources Cash decreased due to inventory investments and debt repayment, while the company maintains liquidity through its undrawn ABL facility - Net cash from operating activities decreased to $2.5 million from $19.9 million year-over-year, primarily due to increased purchases of inventory[165] - Net cash used in financing activities increased to $25.4 million from $1.0 million, mainly due to the redemption of $27 million of Senior Secured Notes in March 2022[167][95] - As of April 1, 2022, the company had $96 million available under its ABL Facility, which remained undrawn[162] Quantitative and Qualitative Disclosures About Market Risk The company identifies market risks including foreign currency fluctuations, interest rate volatility on debt, and commodity price changes for raw materials - The company is exposed to foreign currency exchange rate risk as a significant portion of customers are outside the U.S., and a strong U.S. Dollar may result in pricing pressure[178] - Interest rate risk is present as borrowings under the ABL Facility bear floating interest rates, although there were no such borrowings as of April 1, 2022[182] - The company faces commodity price risk related to raw materials such as tungsten, lead, and copper, with price volatility impacting product margins[183] Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of April 1, 2022[186] - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls[187] Part II. Other Information This section covers legal proceedings, risk factors, equity sales, and exhibits Legal Proceedings The company is not aware of any pending litigation expected to have a material adverse effect on its operations or financial position - The company is subject to various claims and legal actions in the normal course of business but is not aware of any pending litigation that could have a material adverse effect[189] Risk Factors Significant risks include ongoing supply chain disruptions, customer concentration, trade tariffs, and substantial debt obligations - Supply chain disruptions, including shortages of important components like micro-controller chips, have increased costs, impacted manufacturing, and caused product delivery delays, with these challenges expected to continue[190][192] - The company has a high concentration of OEM customers, with one customer accounting for 18% of revenue in the quarter. The loss of a major customer could materially reduce sales[198] - Changes in import/export regulations and tariffs, particularly between the U.S. and China, have increased costs, forced price concessions, and could limit market share growth in China[255][256] - The company has significant debt obligations (approximately $451.6 million as of April 1, 2022) that could limit operational flexibility and affect its ability to meet obligations[291] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported for the period - None reported[313] Exhibits This section lists the exhibits filed with the Form 10-Q, including credit agreement amendments and certifications - Exhibits filed include a LIBOR Transition Amendment to the credit facility, CEO/CFO certifications (Rule 13a-14(a) and Section 906), and Inline XBRL documents[318]