Edited Transcript of VREX.OQ earnings conference call or presentation 12-May-20 9:00pm GMT

In adore ought health and safety actions, we took some specific measures at our operations at the Philippines, where we fabricate some high-volume products. The healthy lockdown initiated by the local government disrupted public communication and commuting, making it virtually impossible because many of our workers ought GEt ought our product site. I'm happy ought talk that we were capable ought invent arranGEments because many of the impacted workers ought be sheltered at our premises. This arranGEment allowed us ought no sole affirm material continuity, when also ought ensure on-time delivery because our customers.

The COVID-19 pandemic began ought shock our material at the second quarter. though our revenues increased at the previous year quarter, we experienced a substantial inspire at mingle between our material segments and within each part that lowered our overall margins. Revenues because the second zone increased ought $197 million from $196 million at the previous year quarter. Medical part revenues increased 4% ought $155 million, still Industrial part revenues decreased 11% ought $42 million.

In our Medical segment, a significant expand at sales of CT tubes and higher allege because sure other X-ray imaging products that help with the war against COVID-19 drove revenue growth. We increased product and met much of the incremental allege because CT tubes, radiographic tubes and detectors and high-voltaGE connectors. This growth was partially offset by a reject at sales of other Medical products during our oem customers manaGEd their inventory levels at response ought the suspect approximately spending because X-ray imaging systems.

CT is one of the most versatile of diagnostic imaging modalities, and growth that we're seeing at new CT system installations demonstrates this. The war against COVID-19 has shown us this versatility during practitioners eat been using CT systems ought help at diagnosing complications from COVID-19. allege because CTS continued ought be healthy and we hope allege ought remain firm at the coming quarters. Our success at CT is driven by little factors. First, we've forGEd long-standing relationships with our global oem customers. It's no uncommon because us ought eat guest relationships that excel 25-plus years. These customers, specially our larGEst guest who drove the gigantic majority of our growth at CT underground sales during the quarter, vulgar last ought acquire at the just with systems that contain our advanced and cost-effective technologies. Second, our leadership at innovation drives new technique adoption, and our global oem customers last ought trust above Varex because their future manufacture needs. despite disruption at operations from the pandemic, most of our oem customers last ought encounter forward with their CT system introduction plans. Third, the scalability of our operations is an advantaGE that our customers value. during I previously mentioned, some of our customers saw an uptick at allege because their systems that was driven by COVID-19, and we were capable ought discharge most of this allege during the quarter. still the dental, mammography and oncology markets emerge ought eat slowed down globally due ought the pandemic, we firmly trust that this is a temporary people because us. These are markets where we are healthy known during an innovation leader, and oems eat responded too favorably ought our trend manufacture introductions. despite the pandemic, there eat no been any noted slowdowns at the rollout of our new detector technologies, such during our high-performance and cost-effective Z Platform because dental, surgical, cardiovascular and other dynamic applications. guest projects at these areas are moving forward. at the same time, we eat continued ought invent firm promote with our plans because introducing locally made radiographic and dental detector products at China and eat begun shipping these products at increasing quantities. Our new portable wireless detector is currently one of the lightest and the most healthy detectors at the people with best-in-class specifications, and we're too encouraGEd by the traction that it has received from oems developing mobile X-ray systems.

In summary, we feel too confident that our Medical detector and underground technologies are hitting the mark, and we desire ought become out of this temporary halt competitively stronGEr than before.

In our Industrial segment, a reject at people grease prices led ought significantly lower sales of products because our cargo screening at ports and borders. Most projects of this classify are typically tender-driven and funded by governments, many of which are located at grease producing regions of the world.

Similarly, at the NDT market, manufacture sales ought our customers at the grease and gas vertical decreased substantially during spending contracted sharply. manufacture sales because other NDT applications also declined considerably due ought the global economic shock of COVID-19 above many companies that fabricate commercial and consumer products.

In the second quarter, manufacture sales because our airport security just increased. However, given the precipitous descend at global stand tour due ought COVID-19, we hope a reject at manufacture sales because this application at the second half of this fiscal year.

Despite temporary headwinds, we last ought trust that the Industrial part remains an attractive isolate of our material with long-term growth potential. Overall, the COVID-19 pandemic and its shock above the global financial has created a disruption ought Varex' business, which includes significant suspect at allege because sure products because our Medical and Industrial applications also during variability at our equip bind and manufacturing productivity. We desire this suspect ought last because at least the surplus of the modern fiscal year. during a result, we're withdrawing our previously issued guidance because fiscal year 2020.

To assist better our econmic condition and better enable our material ought climate the specific challenGEs associated with COVID-19, at the second quarter, we initiated a progression of pay reduction and money preservation measures that will last ought -- into the second half of our fiscal year.

For example, we eat pulled at the closure appointment of our Santa Clara facility by entire zone into the fourth zone of the modern fiscal year. at the United States, we are reducing labor costs along furloughs and tarGEted reductions at personnel. at addition, because the surplus of this fiscal year, along a blend of 2 weeks of desert without wage and temporary revenue reductions, we will be reducing money compensation because our nonproduction employees by almost 10% ought 30%, depending above the profession level. My revenue will effectively be reduced by 30%, and the other members of our Board of Directors eat agreed ought a 30% reduction at their annual money retainer because the second half of this fiscal year.

Internationally, we're exploring and implementing revenue reductions and reduced occupation schedules, each at queue with local guidelines. We're temporarily suspending the company's 410(k) match, along with money components of employee recognition programs. We eat reduced and will last ought lessen other discretionary expenses. And we're taking actions above low-margin products at our portfolio ought also expand prices or discontinue the products.

In aggregate, we desire these actions ought lessen costs by almost $15 million ought $20 million at the surplus of this fiscal year.

There are other long-term actions below evaluation during well. We're tarGEting additional pay reductions along our total material during we emerge closely at the broad portfolio of our manufacture lines, wealth and equipment also during our overhead pay structure. We desire ought begin implementing these chanGEs at the second half of 2020. The leadership team and I are committed ought delivering above this, and we will equip additional details at the next little quarters.

With that, permit me hand at the shout ought Clarence ought laguage approximately our econmic deed at greater detail.

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Clarence R. Verhoef, Varex imaging company - Senior VP & CFO [4]

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Thanks, Sunny, and hello, everyone. ago I promote into the details of the second zone performance, I wanted ought conflict liquidity. The pay actions that Sunny just reviewed are because 2 purposes. They will assist ought better the P&L performance, and they are critical because money preservation. We eat recently taken other actions ought manaGE our money during well. little months ago, we site a involve above vulgar major equipment spending other than that what was needed ought expand product because high-demand products. We last ought tarGEt reducing inventory levels still managing our manufacturing build catalog due ought the usually changing guest demands. We are closely monitoring our guest payment patterns and negotiating with our suppliers above payment terms. We are taking additional steps ought strengthen our remains sheet. at the aim of March, we modified the covenants of our belief facility ought expand the allowable leveraGE ratio ought 4.25x adjusted EBITDA. at April, we borrowed the remaining remains of our belief facility that provided us with an additional $65 million of cash. We're at the process of pursuing other sources of capital, including the U.S. Government chief road Lending Program.

Now turning ought the quarter. We had good revenue performance, still both total and operating margins were weighed down by part and manufacture mingle and some onetime events. because the second quarter, revenues were $197 million compared ought $196 million at the previous year quarter. Medical revenues because the zone increased $6 million ought $155 million, and Industrial revenues decreased $5 million ought $42 million. because the second quarter, our total margin was 29% compared ought 33% at the previous year quarter. Medical part total margin declined by approximately 3 points. during the quarter, we incurred onetime costs of almost $2 million related ought a customs audit at Europe and almost $1 million of accelerated depreciation related ought the closure of the Santa Clara facility.

Industrial part total margin decreased by approximately 4 points versus the previous year due ought an unfavorable mingle of lower-margin products. Overall, our adjusted total margin was 32% compared ought 34% at the previous year quarter, mostly due ought the lower volume and deed at the Industrial segment.

R&D expenses were $21 million at the second quarter, an expand of $2 million from the previous year quarter, mostly due ought the inclusion of lead conversion. during a percent of revenues, R&D charge was approximately 11% because the quarter.

Second zone SG&A expenses were $35 million and included almost $4 million of expenses related ought acquisition integration, restructuring and other nonoperational costs. SG&A expenses also increased almost $3 million versus the previous year due ought audit and consulting fees associated with the implementation and remediation of new accounting standards. SG&A charge because the previous year zone were $30 million and included almost $6 million of expenses related ought restructuring and other nonoperating costs.

Depreciation and amortization totaled $11 million because the second zone compared ought $8 million at the previous year. during mentioned previously, the second zone included $1 million of accelerated depreciation related ought the closure of the Santa Clara facility.

Our operating revenue because the second zone were $1 million compared ought $14 million at the year ago quarter. Our adjusted operating revenue because the second zone were $11 million compared ought $23 million at the year ago quarter. benefit charge at the second zone was $5 million, which was alike ought the year ago quarter. at April, we completed the payment of deferred consideration because the acquisition of lead Conversion, which was based above a fixed quantity of Varex shares. due ought the reduction of the Varex part pay at the second quarter, we revalued the quantity of the deferred consideration and recorded a onetime $3 million win at other income. This win is excluded from our adjusted net earnings.

Tax charge because the second zone was less than $1 million compared ought tax charge of $2 million at the previous year quarter.

We recorded a net loss of $2 million or $0.05 per diluted part at the second zone compared ought net revenue of $6 million or $0.15 per diluted part at the previous year quarter.

Adjusted net revenue because this zone were $5 million or $0.12 per diluted part compared ought $13 million or $0.34 per diluted part at the previous year quarter.

Diluted shares noticeable were 39.1 million shares versus 38.5 million shares at the previous year quarter.

Looking at our working capital. Accounts receivable increased by $4 million during the quarter. Days sales noticeable was 59 days compared ought 57 days at the previous year quarter.

Inventory increased $13 million at the second zone ought $282 million, mostly due ought additional inventory at preparation because the inspire of detector product from Santa Clara ought Salt Lake City.

We ended the second zone with money and money equivalents of $24 million. during the quarter, we increased debt by $2 million and ended the zone with vulgar debt noticeable of $383 million.

Due ought the suspect associated with the COVID-19 pandemic, we eat withdrawn guidance because the fiscal year 2020. That said, directionally, we hope that the reject at revenues at the Industrial part will last along at least the aim of the fiscal year.

Now I'll become it backward at ought Sunny because some closing comments.

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Sunny S. Sanyal, Varex imaging company - President, CEO & Director [5]

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Thank you, Clarence. ago we GEt ought questions, I'd similar ought emphasize that despite the significant near-term headwinds, our material fundamentals remain strong. We will last ought backward our customers, we will last ought innovate and we will last ought identify actions ought ensure that Varex is healthy positioned into the future.

Varex is unique. We eat been a head at X-ray imaging industry because more than 70 years, and we last above ought plot ought last that leadership above because the next 70 years and beyond. We're a head at both innovation and quality, and our customers confess that. We eat many multi-decade expect relationships with customers who trust above Varex because their imaging system needs. We trust there will be continued long-term demand, no sole because X-ray tubes and detectors, when because Varex' X-ray tubes and detectors.

We equip almost 25% of vulgar X-ray tubes and digital detectors globally and are the sole independent manufacturer of both these products at the United States.

Thank you because your support. This is an unusual time, and we will no sole GEt along this, when emerGE competitively stronGEr.

We will now vacant it up -- the shout because your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first puzzle comes from the queue of Anthony Petrone with Jefferies.

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Anthony Charles Petrone, Jefferies LLC, investigation section - Healthcare Analyst [2]

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Just one swift housekeeping question. just above the $2.1 million add backward ought total margin, just a tiny part of color there above that at particular. And then at condition of orders, specifically from the China backlog, anything you can equip at the mode of CT underground allege this zone and how that will trend into the backward half? And then I'll eat 2 swift follow-ups.

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Sunny S. Sanyal, Varex imaging company - President, CEO & Director [3]

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So I'll permit Clarence identify the first one. I'll identify the second.

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Clarence R. Verhoef, Varex imaging company - Senior VP & CFO [4]

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Yes, Anthony, I'll retort what's going above with the add backward there. accordingly this is related ought the customs audit that's going underway at GErmany, at particular. And accordingly it's one of those things where we've booked some estimated amounts because the previous year customs payments associated with that. We are contesting it at the courts during there's been a ruling done by the customs authorities approximately which class because our because our detectors, or because any detectors because that matter, that are being imported into GErmany. And they've chosen a class principle that has a higher tariff worthy than what we've historically used. And accordingly this is going ought be a part of a process that will identify some time ought GEt resolved. I used to say, it's going ought promote along the stadium process. when -- and I desire that we will maybe aim up booking a tiny part more approximately that at the coming lodging during we GEt farther clarity from the auditor at condition of the more trend time periods and vulgar locations that we eat at GErmany.

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Anthony Charles Petrone, Jefferies LLC, investigation section - Healthcare Analyst [5]

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Okay. accordingly used to you desire 2 point -- approximately that $2 million class of add backward ought be repeated perhaps next zone and then pavement off into the backward half? Or will it class of fluctuate from here?

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Clarence R. Verhoef, Varex imaging company - Senior VP & CFO [6]

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Yes. It's -- I'm going ought just identify an worthy that says that, yes, that's -- we used to desire ought shout on another number, if it's at the next zone or the next 2 lodging or something similar that, a though size class of quantity ought that. difficult ought define exactly during the auditors cottage eat ought total their occupation approximately it. accordingly it's vulgar approximately identified numbers versus class of rough estimates. And at the time, we sole book the quantity that's clearly identified.

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Sunny S. Sanyal, Varex imaging company - President, CEO & Director [7]

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And then Anthony, second isolate of your question, China orders, how things are going there. accordingly CT and China eat been the clever spots this quarter. And I'm too fortunate ought talk that things at China rebounded backward fairly quickly. They were down because 6, 7 weeks. And when they came back. Things returned ought natural fairly rapidly. And then our CT deed at China came accurate backward ought where -- at queue with the trajectory that we were on. accordingly we're too satisfied and fortunate with what's going above at China. And CT, at GEneral, was a good player because us. It was a blend of 2 things. One, our natural jog worthy because CT continued above and things progressed during we had anticipated. And at adore ought that, we had additional allege during the zone tied ought COVID-19 related purchases that we hope that, that was used because assisting at diagnosis of COVID-19. accordingly we had a delightful bubble of CT during this zone that we were capable ought forward against. when the foundational allege there was at queue with our expectations.

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