Varian Medical Systems Inc
Q1 2017 Earnings Call Transcript

Published: 26 Jan 2017

[Operator:]

Greetings, and welcome to the Varian Medical Systems, Inc First Quarter Fiscal Year 2017 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Spencer Sias, VP, Investor Relations. Thank you, please begin.

[Spencer R. Sias:]

Thank you. Good afternoon and welcome to Varian Medical Systems’ conference call for the first quarter of fiscal year 2017. With me are Dow Wilson, President and CEO; Elisha Finney, CFO; Varian Imaging Components President, Sunny Sanyal who will become CEO of Varex Imaging; Varian Controller, Clarence Verhoef, who will become CFO of Varex Imaging; and Magnus Momsen will replace Clarence as our new Corporate Controller and Senior Vice President of Finance. Dow and Elisha will summarize Varian results and Sunny will summarize Varian Imaging operations and we will take your questions following the presentation. To simplify our discussion, unless otherwise stated, all references to the quarter or year are fiscal quarters and fiscal years. Quarterly comparisons are for the first quarter of fiscal year 2017 versus the first quarter of fiscal 2016. References to financial results for orders are to gross orders, unless otherwise indicated. The company is reporting non-GAAP results in order to provide quarter-over-quarter comparisons of operational performance excluding unusual items. Unless otherwise stated all financial results are discussed on a non-GAAP basis. A reconciliation to the most comparable GAAP measure is included in our earnings release, which can be accessed on our website. Please be advised that this presentation and discussion contains forward-looking statements. Our use of words and phrases such as outlook, believe, expect, anticipate, could, should, will, promising and similar expressions are intended to identify those statements, which represents our current judgments on future performance or other future matters. While we believe them to be reasonable based on information currently available to us, these statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of the important risks relating to our business are described in our first quarter earnings release and in our filings with the SEC. We assume no obligation to update or revise the forward-looking statements in this presentation and discussion, because of new information, future events or otherwise. And now, here is Dow.

[Dow R. Wilson:]

Good afternoon everyone. Our company began 2017 with strong performance in oncology systems, continuing growth momentum in Imaging Components, and a $76 million GAAP charge related almost exclusively to the California Proton Treatment Center or CPTC in San Diego without which we would have handily beaten the high end of our earnings guidance range for the quarter. To summarize, our first quarter results we are reporting, strong oncology global order growth of 10% together with a four point improvement in its gross margin rate. Imaging Components gains in both orders and revenues, company-wide revenues of $763 million up 1% in both dollars and constant currency. GAAP net earnings of $0.22 per diluted share, after reporting $0.64 per diluted share in charges related almost exclusively to CPTC. Non-GAAP net earnings of $0.75 per diluted share, after recording $0.34 per diluted share in charges related almost exclusively to an accounts receivable reserve for CPTC and Board approval of the spinoff of Imaging Components into a new public company Varex Imaging in the next few days. Focusing first on Oncology Systems, orders totaled $586 million for the first quarter up 10% in both dollars and in constant currency. Broad-based demand for new equipment as well as software and services drove strong order growth across all geographies during the quarter. First quarter orders in the Americas grew by 5% in dollars and constant currency, orders in North America grew by 7% growth in both dollars and constant currency. The trailing 12 month order growth rate in North America is 6%. First quarter oncology orders in APAC rose by 29% in dollars and 24% in constant currency while EMEA grew orders by 8% in dollars and 10% in constant currency. In India we booked $18 million for a multi-linac project with a customer that will total $35 million over the next 10 years. This is our first combined hardware and software as a service deal in the region and it demonstrates our ability to meet the growing need from customers for a cloud hosted software solutions. Elsewhere in EMEA we continue to perform strongly in Poland. As you will recall we acquired our distributor there last year. During the quarter we won the majority of tenders and booked more than $20 million. The highlight in our APAC region was China, where we achieved 25% order growth during the quarter with sizable gains in both equipment and services. It appears that competitor protests to tender wins in this market are diminishing and are being resolved more rapidly. We grew orders in Japan where we're seeing positive signs of a market recovery. We supported an SBRT focused luncheon seminar at Jastrow [ph] the Japanese radiation oncology show, where TrueBeam and HyperArc created a real buzz. Several hundred people attended our sessions on SBRT and TrueBeam. Emerging markets in Asia were also active with good orders performance in South Korea, Indonesia, Vietnam and the Philippines. Turning to North America our order growth was driven mainly by healthy software and service gains as we expected potential changes to the Affordable Care Act did not appear to impact market performance in the quarter. Touching on our service business, global orders and revenues rose by about 7% in dollars in constant currency with gains in all territories. On the software side we saw growing interest in our newly introduced 360 oncology software platform particularly from customers in Western Europe. You may recall this offering which was introduced at the ESTRO show in October is a first of a kind software tool that enables clinicians on Tumor Boards to more effectively coordinate patient care among the numerous specialties involved in cancer treatment. We have also continued to have a very positive market response to our RapidPlan and InSightive Analytics software products that help improve the speed, quality, and cost efficiency of treatments. We have now taken more than 700 orders to RapidPlan since its launch and 380 systems are installed at customer sites around the world. Sales of our InSightive product are also ramping up nicely. During the quarter we received our 100th order for the VitalBeam treatment system. Half of these orders have come from customers in North America which demonstrates the appeal of this scalable solution even in developed markets. Comparing revenues on a trailing 12 month basis we believe we gained market share. Margins which Elisha will discuss in a few moments also benefited from ongoing efforts to reduce product cost. I will now turn to our particle therapy business which recorded first quarter revenues of $30 million. As I mentioned at the outset of the call, Varian took a $76 million GAAP charge in the first quarter in response to certain actions in January by CPTC and its loan agent or its capital markets to address liquidity issues caused by lower than expected patient volumes that are insufficient to support CPTC’s capital structure. This led us to reserve $38 million in accounts receivable and to impair $38 million of our $98 million loans to CPTC of which $29 million was accrued interest. These charges and the associated limited tax deductibility reduced our earnings in the first quarter by $0.64 per diluted share on a GAAP basis and by $0.34 per diluted share on a non-GAAP basis. We are reporting additional information on this matter today in the Form 8-K filing with the Securities and Exchange Commission. We believe this center can get on a more solid financial footing by serving a broader patient population with additional health care providers both locally and regionally. We remain confident and committed to supporting all of our customers and to building a profitable proton business based on leading technology that is treating many patients and performing at a high level. Of Varian's 15 proton projects we participated in the financing of only three. As of today our outstanding proton loan balance totals $131 million for CPTC and two other large regional centers in the U.S. Stepping back from the financing issues, we are generating revenues and are continuing to make good progress on 13 installations. Our sales funnel continues to look promising. Now I'll turn it over to Sunny for his discussion of the Imaging Components business.

[Sunny Sanyal:]

Thanks Dow and good afternoon. Imaging Components Business had a very busy quarter as we prepared for the spinoff of Varex Imaging and announced the planned acquisition of the medical imaging business of PerkinElmer. First quarter revenues for Imaging Components were 152 million up 7% from the year ago period. Orders for our business were 132 million up 4% from a year ago period. Going forward as a standalone company Varex will provide a different view than what you've seen in the past. Our public filings will provide a breakdown of revenues and gross margins by two segments, medical and industrial. Each of these segments will include X-ray sources, X-ray detectors, connect and control components, and software suited to their applications. Revenues for Imaging Components rose during the quarter with solid gains in both medical and industrial segments. Medical revenues increased by 8% with strong growth in CT tubes and dynamic detectors while industrial revenues grew by 6%. We're pleased to see good performance from global sales of dental detectors as well as sales growth for CT tubes in Asia. We continued to see price erosion in the lower priced radiographic portion of our detector business where we were able to maintain revenues with higher volumes. Connect and control revenues in both medical and industrial segments contributed good growth but our medical segment software product revenues were down for the quarter due to softness in veterinary imaging. At the end of November we participated in the RSNA Trade Show in Chicago, the largest event for radiology. This show is always a great opportunity to see new imaging equipment products powered by our components being introduced at the show by our medical OEM customers. At this show we also introduced several new products and we enjoyed great customer response to our expanded offerings of collimators and next generation low dose, low cost, flat panel detectors. In December we announced the signing of a purchase agreement to acquire the medical imaging business of PerkinElmer. We're very excited to add this highly complementary business to our detector portfolio. We're getting a great team that has built a strong brand and product offering in the industrial imaging market in addition to their portfolio of medical imaging products. They also bring us expertise in new detector technologies such as CMOS which will enable us to broaden our offerings with higher resolution solutions for certain applications. We expect to close this acquisition sometime in the summer after the regulatory approval process has been completed. The spinoff of Varex Imaging is expected to be completed in a couple of days. The when issued trading started on January 20th and the regular way trading is expected to start on January 30th. The past few months have been filled with many meetings and road trip presentations with the investor and analyst community. I invite you to go to our website vareximaging.com, see more about our company and products. It has been an exciting past year and as we prepare for the separation and I want to thank all the people at Varian and Varex who put in so much time and effort to make this a success. In particular thanks to Dow and Elisha for all their support through this process. Now I'll turn it over to Elisha.

[Elisha W. Finney:]

Thanks Sunny and hello everyone. We have already covered orders and operations so let me start with backlog. We ended the quarter at 3.4 billion up 2% from the year ago period including a 7% increase in the oncology backlog to 2.9 billion. Backlog adjustments during the quarter totaled 23 million bringing net orders for the company to 699 million. Now let me walk you through the P&L. First quarter revenues for the total company were 763 million, up 1% in dollars and in constant currency. Oncology revenues declined 1% in dollars and 2% in constant currency versus a strong year ago quarter. There was a geographic mix shift toward North American revenues which grew 7% in both dollars and constant currency to constitute 48% of oncology revenues in the quarter. Imaging Components posted a first quarter revenue increase of 7% with increases in both its medical and industrial segment. Our Particle Therapy business posted revenues of 30 million up 15% from the year ago quarter driven by progress on installation. The total company gross margin for the quarter was 44.1%, up three points due to strong performance in oncology. Oncology Systems gross margins increased by four points to 46.8% due to favorable product and geographic mix as well as product cost reductions. Imaging Components gross margin for the quarter fell by almost two points to 39.1% as a consequence of a product mix shift toward radiographic detectors as well as stepped up investments and increased production capacities to meet expected long-term demand. Including the Proton AR reserve first quarter SG&A expenses were 167 million up significantly in dollars and as a percentage of revenue from the year ago quarter. The accounts receivable reserve up 38 million is considered in the ordinary course of business for accounting purposes and therefore is not adjusted out of earnings as a non-GAAP number. Excluding the AR reserve SG&A would have been 129 million or 17% of revenue. First quarter R&D expenses were 63 million or 8% of revenues equal to the year ago quarter as a percentage of revenue. First quarter operating earnings totaled 106 million or 14% of revenue down significantly from the year ago period due to the Proton AR reserve. Excluding this 38 million reserve, the operating margin would have increased two points from the year ago quarter to 19% of revenue. Depreciation and amortization totaled 22 million for the quarter. The GAAP and non-GAAP effective tax rate was unusually high because of the proton impairment. The CPTC loan was made by our subsidiary in Switzerland where our tax rate is low so there was very little tax benefit from the loan impairment. Furthermore a large portion of the AR reserve was attributable to our subsidiary in Germany where our tax rate is effectively zero due to large tax loss carry forwards. Had it not been for the CPTC impairment our tax rate would have been about 27% for the quarter. For the balance of the year we believe Varian’s tax rate from continuing operations will be in the range of 25% to 26%. Fully diluted shares outstanding decreased 3.6 million from the year ago quarter to 94.2 million shares due to our ongoing share repurchase program. Diluted GAAP EPS was $0.22 for the quarter, non-GAAP EPS for the quarter was $0.75 including a $0.34 impact from the Proton AR reserve. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of 815 million, debt 607 million, and stockholders equity of 1.7 billion. DSO of 100 days was up one day from the year ago period. First quarter cash flow from operations rose by 6% from the year ago quarter to $82 million. Primary uses of cash were 17 million for CAPEX and 49 million for the repurchase of half a million shares of stock. As of today we have 8 million shares remaining under our existing repurchase authorization. Varian plans to repurchase 2 million shares in its second fiscal quarter of this year. And now let me turn it back over to Sunny and then Dow for the fiscal 2017 outlook for both Varex Imaging and Varian.

[Sunny Sanyal:]

Thanks Elisha for Varex Imaging we expect revenues for fiscal 2017 to grow by 3% to 4%. Over the 620 million total recorded for fiscal 2016 in our Form 10 filing with SEC. Assuming approximately 38 million shares outstanding and a 35% tax rate we anticipate that GAAP net earnings per diluted share for the second through fourth quarters of the fiscal 2017 will be in the range of $1.20 to $1.30. Going forward Varex Imaging will provide annual guidance. Now I’ll turn it over to Dow for the Varian outlook.

[Dow R. Wilson:]

Thank you. Beginning with our fiscal second quarter Imaging Components will be reflected as a discontinued operation for the first four months of fiscal year 2017. The company is guiding for continuing operations for the second through the fourth quarters of the fiscal year 2017. For the balance of the fiscal year we believe Varian revenues from continuing operations will grow in the range of 4% to 5% bringing revenue growth for the full year to 3% to 4%. Non-GAAP earnings per diluted share from continuing operations for the second through fourth quarters of the fiscal year will be in the range of $2.94 to $3.06. For the second quarter we believe Varian revenues from continuing operations will grow in the range of 4% to 5% and non-GAAP earnings per diluted share will be in the range of $0.84 to $0.90. To summarize the first quarter, we have demonstrated strength in our oncology business with strong orders that will support future revenue growth. We have successfully set up Imaging Components for continued expansion with an important acquisition in life as a new public company Varex Imaging. And while it was painful, our exposure to particle therapy financing has now been significantly reduced. We are continuing our drive for profitability with over a dozen projects and a healthy sales funnel. Varian is poised now to focus exclusively on providing the world with the technology it needs to beat cancer and our product pipeline has never looked better. We're very much looking forward to the rest of fiscal year 2017. We're now ready for your questions.

[Operator:]

Thank you. [Operator Instructions]. Our first question comes from the line of Anthony Petrone with Jeffries. Please proceed.

[Dow R. Wilson:]

Hi Anthony.

[Anthony Petrone:]

Hi Dow, how are you? Thanks and good afternoon everyone. Hi, Sunny, hi Elisha. Congratulations on approaching spin 2 to everyone. Good luck, separate companies going forward. I think, Dow I'm just getting some e-mails on sort of the implied full year guidance overall and maybe even more so the implied non-GAAP operating margin guidance for the remaining company. As I'm working it here I think if we give back the $0.34 take into considerations the $0.75 in the quarter and adjust for share count differences, I am coming up with about 450 to 470 in implied full company consolidated earnings. So A) just wanted to check if that math is correct and then B) what would be the implied non-GAAP operating margin outlook for Remain Co? And then a couple of follow ups for Sunny.

[Elisha W. Finney:]

Yeah, so Anthony let me let me take a stab at it and please bear with this guys as we as we said because of the spin it is just -- it's going to be a little messy and so we're going to try and clear this up to the best we can. In Q1 it really is apples and oranges because we've got both Varian and Varex. We've got some duplicate costs and then of course we've got the complicating factor with the AR reserve that we could not adjust out for non-GAAP purposes. So we decided let's each guide Q2 through Q4 as standalone companies as continuing operations. What I can say though Anthony and this is a very, very rough, back of the envelope rule of thumb, is when I have looked at what continuing operations is for fiscal year 2014, 2015, and 2016 and some of the quarters and these are unaudited so they have not been published anywhere yet, they will be. The continuing operations is anywhere from 75% to 80% of our reported numbers. So if you were to consider, I don't know which number you want to use but assuming you start with the $1.09 that excludes the AR you can take 78% of that, it gets you to $0.85 and you could then add that to Varian's guidance which at $3 on the midpoint would put you at 385 for the fiscal year. Was that as clear as mud.

[Anthony Petrone:]

That does help and I think we can run an implied operating margin guidance but I guess some confusion around that would be...

[Elisha W. Finney:]

Of course, sorry I forgot that part of your question. For these -- for Q2 through Q4 it should be in the range of 18% to 19% and then as I mentioned for Q1 without the AR reserve we would have been at 19% but of course that includes some Varex Imaging numbers in there.

[Anthony Petrone:]

Okay, and then the follow-up for Sunny would be the 7% growth number in the first quarter was ahead of what we were expecting and so I guess the question there is are there new contracts that were won in there or was there normalization of Toshiba? And then the follow up question would be on the Varex implied guidance. What does the operating margin profile look like through the remainder of the year? Thank you.

[Sunny Sanyal:]

Yeah Anthony, first of all we have had really good growth for the last three to four quarters and it's a very good sign and we have confidence in the recovery path that we're on. For this quarter we had some easy comps so the first half as you recall, our first half of 2016 was soft so for the second half we've got some tough comps and so the 3% to 4% is what we were anticipating for fiscal year 2017.

[Clarence Verhoef:]

You know second question on operating margins I'm sorry so I will take that. Anthony, this is Clarence. The operating margins for the balance of the year, the Q2 through Q4 will be in the range of 16% to 17%. There is a little bit of incremental SG&A cost associated with being a standalone company and then I guess as Elisha kind of alluded to there is just a ton of complication in trying to understand exactly what the Q1 number is. So therefore we're just really trying to give a cleaner answer is to just talk about the Q2s and Q4. Along those lines a little bit maybe one additional bit of information where you'll get more visibility to this as we will file a 10-Q for Q1 at the end of February and it's going to have a lot more breakdown of that and we'll be able to give you a little more color on the one time separation costs that are included in there.

[Anthony Petrone:]

Thanks. I’ll hop back in queue.

[Operator:]

Thank you. Our next question comes from the line of Brandon Henry with RBC Capital Markets. Please proceed.

[Brandon Henry:]

Yes, thanks for taking my question. The first on the Oncology Systems gross margin, looks like they continue to make good progress in the quarter. I think you mentioned last quarter that the gross margins for Oncology Systems would kind of be in the 44% to 45% range. I think you were above that range this quarter. So does that guidance now appear conservative and then maybe you can just talk about your expectations for gross margins for the remainder of the year for Oncology Systems?

[Dow R. Wilson:]

You know on the quarter we had good product mix, good geographic mix, and then something we've been talking about last four to five quarters, we've had very good cost performance and variable cost performance on the product cost and installation warranty. Elisha can walk us through some of the guidance impact but those are the big drivers on the quarter.

[Elisha W. Finney:]

Yeah, so at this point Brandon I am preferring to stick to the 44 to 45. I feel quite confident in those numbers given the performance that oncology has had the last several quarters. They really started to improve gross margin in the second half of last year so the comps get a little more difficult. But clearly I mean the business has done an outstanding job of maintaining stable pricing, product cost reduction, higher software, that would be the upside. If the stock were mixed we are to increase then clearly that could be some upward bias on the margin. But we're sticking to 44 to 45.

[Brandon Henry:]

Okay and then separately I think you mentioned that you were seeing some positive signs of a market recovery in Japan and I think that's kind of the first time I've heard that in a while. So can you give us some more details on that commentary and is the government again kind of picking up spending like what we saw in the past or is that something else?

[Dow R. Wilson:]

Well we unfortunately have not seen any new incremental government stimulus spending. That's what really drove this market three to four years ago. So, we haven't seen that but we have seen kind of a stabilization of the market with a little bit of growth. So, and that's two quarters in a row now. So we connected the dots. I mean I think it's still early but our funnel looks pretty good and that market has come down pretty substantially from where it was two to three years ago. But we're starting to see some turnaround. Our shares have been good there too.

[Brandon Henry:]

Okay and then just last question on China, I think you said there was 25% order growth in the quarter for China. How much of that was attributable to a resolution of the previous protests and then can you just talk about your expectations for China for the remainder of the year? Thanks.

[Dow R. Wilson:]

You know the protests piece was anniversary and so in fact what you're really looking at is growth. So we feel good about that. The market is strong and funnel remains good, the team is executing very well. I'd say that we continue to do very well especially at the high end of that market and get orders -- good orders there so, good execution in a good market.

[Brandon Henry:]

Okay, thank you.

[Operator:]

Thank you. Our next question comes from the line of Jeff Johnson with Robert W. Baird. Please proceed.

[Dow R. Wilson:]

Hi, Jeff.

[Jeff Johnson:]

Hi guys, how are you? Good, alright, so let me ask two hopefully quick questions and then I think I'm more confused after we went through the questions with Anthony but I want go through few numbers here if I could but first Dow just on the Proton business, you write down some of the scripts business, you gave a number that you still have $131 million exposure out there, what is the risk to that exposure number one? And number two, what your appetite may be for financing additional field down issue here?

[Dow R. Wilson:]

Great questions. So the total exposure as I said is $130 million. We've got $60 million remaining to CPTC in San Diego. We've got $50 million outstanding sub debt to Maryland and we've got $20 million of sub debt to New York. So those are the three that we have outstanding. I'd say feel very good about New York and Maryland and where they are. Large centers, Maryland is coming up to speed very, very quickly, fastest ramp. We believe in Proton Therapy, they're now doing 60 to 70 patients. They've got one more BeamLine coming on next month which should reduce the patient volume again a little bit more. In terms of appetite for more of these, these are all very large centers. I'd say that we don't have much appetite for large centers but we still look to use the balance sheet where there is a lower breakeven point, a smaller center, where we're a partner with reputable financing partners, where we're not the largest lender and where we're working with clinical partners who are leaders in their markets. So, for example in the case of both New York and Baltimore we are working with local leaders in their markets and that makes a big difference. And then of course we want I think the deal structure on this one was a little bit unique. We did it in 2011. So our first probing, show site, and in any case I think we want to make sure that we've got a local partner with some skin in the game. Elisha you have anything to add there.

[Elisha W. Finney:]

No, I would just say we are encouraged that big banks are continuing to finance Proton Centers. Varian has sold off as indicated a 120 million of loans that we had initially put on these centers. We sold off New York and a portion of San Diego. And the Muni [ph] financing program in Georgia from what we hear is continuing to proceed well. So I do think this is somewhat of a unique situation as Dow mentioned.

[Jeff Johnson:]

Okay, and then Elisha maybe not a technical accounting explanation because I really don't want to hear that but out of the $73 million write off you guys excluded $38 million. But there's another $38 million that we essentially have to take out of your SG&A and to non-GAAP earnings and things like that to get it apples-to-apples?

[Elisha W. Finney:]

That is correct Jeff and it's because and I won't give you any technical accounting but it's because from a SEC guidance standpoint accounts receivable is deemed in the ordinary course of business. It's not deemed unusual and something you can adjust into a non-GAAP number.

[Jeff Johnson:]

Okay and so the question where I want to step through a couple things is just if I look at your disclosures you get 70.3 million in non-GAAP net earnings. I need to add back about 35 million to that so your non-GAAP net earnings X all of the noise of the write off would have been closer to 102 million to 105 million or so, is that correct?

[Elisha W. Finney:]

I've got it on EPS Jeff because the tax rate change between the GAAP and the non-GAAP as well because again a lot of the AR was attributable to Germany at a 0% rate. The loan is at Swiss rate so the non-GAAP tax rate is 34.5 I think it was, where as GAAP is 48. Suffice it to say let me do it -- let me give it to you this way, let's just assume you start with$0.75 -- let's assume you start with $1.09. You add the two numbers together, $0.34 is the AR reserve $0.30 is the loan impairment, and then you've got $0.23 of other stuff like the spend and litigation and amortization of intangibles and those sorts of things and that's how you get to the $0.22 GAAP.

[Jeff Johnson:]

Alright that's fine. X all that noise and we could use your $1.09 number for the quarter that equates to a little over $100 million in net earnings X that. So if we start there is a base I don't want to dominate the time here but if we start there is a base. You're guiding over the next three quarters. I think between the two businesses, the net earnings and if we take the EPS out of it just because again the share count changes with Varex and that you're guiding to about 330 million in net earnings between the two companies, if I add that to the 105 million or so you're essentially guiding combined companies all noise out of it at somewhere around 435 million I think. Is that about reasonable because the street was at 442, I think you guys are guiding somewhere around 435 and there are some big numbers floating around here in emails and all that that you guys are cutting $0.20, $0.30, $0.40 out of what where Street has been thinking and I'm just not getting it that big?

[Elisha W. Finney:]

Well, let me take a stab at this. Jeff I will answer for Varian and I'll let Clarence answer for Varex. Q2 through Q4 when you run through our guidance you are going to see we are somewhere between call it 280 million and 290 million of net income for Varian. Then you need to take about 78% of Q1 net income assuming that’s what continuing operations will be for Varian and add it to that number and then on top of that you would need to add the Varex net income for Q2 through Q4.

[Clarence Verhoef:]

And that number just using the $1.20 to $1.30 range and I remember shares outstanding is somewhere in the range of 45 million to 50 million of net income after tax. One of the challenges there by the way also Jeff is that the Varex tax rate is significantly different than the Varian tax rate. Our tax rates in the range of 35%.

[Jeff Johnson:]

Yes, understood. And then just on top of that Clarence just add the 22% or whatever it would be from the Q1 105 million or so?

[Clarence Verhoef:]

That’s a fair approximation at this point in time from us. Let's call it a non-GAAP perspective because that would exclude pro forma and look back time separation costs and the like.

[Jeff Johnson:]

Alright, oh, I think my numbers are right but I'll follow up with you guys after offline just to make sure but I appreciate the time. Thanks guys.

[Dow R. Wilson:]

Sure.

[Operator:]

Thank you. Our next question comes from line of Tycho Peterson with JP Morgan. Please proceed.

[Tycho Peterson:]

Hey thanks, question on the viability of the particle therapy market. You know I know Jeff asked your earlier about your willingness to finance but Indiana did shut down, San Diego is having a liquidity issues, can you maybe just talk about you know the health of some of the other projects underway and why you think there's still a viable market here?

[Dow R. Wilson:]

Yeah, I mean I think when we look into the funnel we still have a good funnel. Indiana was a very specific case with some extremely old technology that's been a little blown out of proportion. But that center was 20 to 30 years installed and installed as frankly as kind of a research center with a little bit of clinical lad on. So I think its failure has been a little overstated in the marketplace. There were some procure issues in the market a couple years ago. Now San Diego I think the transition from these really, really large centers to small center, something we've been talking about on our call is very much going on in the marketplace. I mean this center would be very viable as a two or three room center financially and so it's got a tough capital structure. It maybe a little bit over built for the market in the market position. We do think that as it regionalizes and has opportunity to bring some more customers in especially in the San Diego area, that it can be viable. So I think there are some very specific things about San Diego that made it that way. We're still, of our 15 customers, 12 are cash paying. So we've got the three that I talked about and we feel very good about where two of those are. And clearly nobody is proud about this but we feel pretty good about where things are headed.

[Tycho Peterson:]

And then maybe can you just touch on what you're hearing from your customers in the U.S. on the CAPEX front. I mean your orders held up okay in North America and as you highlighted a lot of that was software and service but I'm just thinking about the remainder of the year did you see a freeze on CAPEX budgets?

[Dow R. Wilson:]

You know everybody is watching what happens in Washington but I'd say at this point in time we're not seeing a change in our funnel shape or size. And as I said in the call our -- in the script our rolling 12 month performance in North America is 6%. I would say that's pretty good for 12 months and from a funnel point of view we're not seeing that change. Clearly who knows what's going to happen in Washington and everybody is watching. But it's not changing behavior in the short-term.

[Tycho Peterson:]

Okay and then just two modeling ones. For dyssynergies can you tell us what the -- guidance, I know you talked about 20 million over two years, should we just assume 10 million this year?

[Elisha W. Finney:]

We will exit this year with 10 million of dyssynergies out. It has a roughly a 50 basis point impact on the EBIT margin this year that we also our tax rate is going to go down because as Clarence mentioned Varex is at a higher tax rate. So we are helped at the after tax line.

[Tycho Peterson:]

Okay and then for Sunny, the Varex guidance doesn't include anything for synergies right, assuming obviously that deal hasn’t closed yet?

[Sunny Sanyal:]

No, it is standalone Varex.

[Tycho Peterson:]

Okay, perfect. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Vijay Kamar with Evercore ISI. Please proceed.

[Vijay Kumar:]

Hey Dow, how is it going? Thanks for taking my question. I just maybe go back to the guidance question right. If you just go back simplistically maybe Elisha there's a question for you, on the last call so we thought that the combined rate was with the pre-oncology piece EPS would do high singles. So if we did $4.68 of EPS last year that implies somewhere around $5, call it 5 around that ballpark and I think the new guidance is $4.60 at the midpoint. I guess part of the delta, that $0.40 delta is the dyssynergies right which is maybe $0.20 but it still feels like there's a $0.20 delta between how we were thinking about numbers three months ago versus now, I just want to make sure was there anything else from an accounting perspective that I'm missing the way I'm thinking about numbers? Thank you.

[Elisha W. Finney:]

I'm not sure Vijay, let me let me walk through it one more time in terms of our if you take the midpoint of our Q2 through Q4 so let's call it $3 and then you add the 85% for Q1, now there's about four months there where we have some duplicate costs that we're absorbing. It is probably I don't know 4 pennies or so that we're absorbing while Varex has been out hiring duplicate positions. That would compare to the $4.68 from last year and don't hold me to this, it is unaudited but the continuing operations number for Varian is $3.68 and for Varex is about $1. So that -- call it $3.90 compares to the $3.68 if you just look at it that way.

[Vijay Kumar:]

I guess we will take this off line because I'm not sure, I get the math completely to be honest Elisha. I guess maybe one on -- in a doubt on the Proton business, a lot of questions here on -- for the other parts of the businesses right, other contracts you have you mentioned 15 projects right?

[Dow R. Wilson:]

Yes.

[Vijay Kumar:]

I guess the reason for the financing issue was volumes, can you just talk about why for the other projects volumes wouldn't be an issue, is this a reimbursement issue or I'm just trying to understand was this more regional issue for them in California?

[Dow R. Wilson:]

I'd say this is very much an issue in San Diego. So, first of all about 15 orders I have top -- count off top of my head but at least 10 of them are outside of the U.S. So there tends to be, it's not true in every case but it tends to be sovereign government purchases. So those are in pretty good shape. You know one or two of them are not, one or two of them are private but the vast majority of them are sovereign government purchases, backstop that way. So should be very good from a credit point of view. In the U.S., I mean New York the lead customer there is the top cancer center in New York City. They're already sending very significant numbers of patients to other centers. So as they build their own center they'll pull that volume back to this center. So we feel very good about the viability of New York. Baltimore is ramping very nicely. Little bit of a slow start but they've gotten to 60 to 70 patients and now they open in February last year. So just in a year they've ramped up very nicely. Good reimbursement environment there and I think this is really kind of about some of the very specific contractual things and market conditions that were in San Diego.

[Vijay Kumar:]

Got you, and maybe up one for Sunny, a lot of questions Sunny on the outlook for Varex. I guess maybe simplistically if I look back margins for your business was in the mid 20's. We're now looking at high teens. Is there, if I just had to look at it from a medium term perspective is there any reason why peak margin shouldn't go back up to 25% or are there any reasons why the new I guess normalized margins would be below sort of a historical peak?

[Sunny Sanyal:]

So we've communicated previously that we see as we have we expect margins to climb back up to 20% from where we are today in the 17%ish range and that's how far as we see at this point. We don't see a way to get back to the 25%ish range. Those were at a point in time when low end of the radiographic flat panels range, the pricing impact was less. But also overtime we've added more R&D and big R&D investment so with that as our base costs we see us getting to 20%ish.

[Vijay Kumar:]

And maybe just one last and I know I'm taking time here, on I guess if you look at the guidance for Varex and Q1 obviously is off to a strong start, any reason why you have had numbers improving over the last couple of quarters, why rest of the year should be 4% for the business?

[Sunny Sanyal:]

So as I said earlier, significant part of the reason is the comps. First half of 2016 versus first half of 2017. We had a tough first half in 2016 so came off a relatively easier comps. We had a very strong second half in 2016 so we got pretty strong comps going into the second half. So that's why we're expecting at this point to net out at 3% to 4% for fiscal year 2017.

[Vijay Kumar:]

Got you, that was helpful guys. Thank you.

[Elisha W. Finney:]

And Vijay just before you go I just want to remind you guys unfortunately this guidance is complicated because the continuing operations accounting is not yet done. When it is we will be posting this historical numbers on our website and will come out -- we're going to post FY -- the ANNUAL FY 2014, 2015, and 2016 next week or soon thereafter, and then we're going to give you quarterly continuing operations at the pretax level next week as well. So you'll have a lot more information on looking at Varian and Varex as independent companies.

[Vijay Kumar:]

That would be helpful Elisha because a lot of questions I'm getting as. Looks like -- the guidance was cut I'm not sure I'm sure you know there's a lot of accounting math here and we'll take it offline but those disclosure think would be helpful. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Amit Hazan with Citi. Please proceed. Q - Amit Hazan Hey Good afternoon guys. Let me surprise you and stick with the guidance topic maybe I’ll approach it in a little bit of a different way that I'm less interested in the mechanism around that than I am around how to model remaining Varian in a little bit longer term. So if you think about it kind of as fiscal year 2018 or down to 2017 maybe better fiscal 2018 give us a sense of what the operating margin aspiration is going to be for you but is it kind of 18% to 19% in fiscal 2017, what is it going to be in fiscal 2018, and maybe that'll help us to try to understand what kind of earnings growth the model off of what many of us I think are going to come off and I think many of us are going to be around $4.10 for fiscal 2017, so how do we grow above that?

[Elisha W. Finney:]

Yes, So I mean we did the long-term kind of expectations at the top line will be in the mid single digits. We're not coming off of that. So that remains to be true. From a pretax margin, it's a little harder post then to get to that 22. I'm going to make a lot of this up in the tax rate. So if we can go from 18 to 19 up to 21 in the next two to three years that is what we're going to be aiming for. So it's 18 to 19 as our expectation for this -- for the balance of this fiscal year and then I would hope to get at least 25 to 50 basis points as we go forward into the fiscal year 2018 as well. Q - Amit Hazan Okay, so let me turn to sales, I don't think this has been covered yet. On the sales volume, especially while you guys actually reiterated your 3% to 4% guidance net reported number despite the fact that currency has gone against you. So, the FX effect on guidance really is what the FX number that you are guiding to is actually you're putting forward a kind of an increase of your FX guidance essentially. So, I want to make sure that that's confirmed with you and then secondly, in the Proton piece and you talked about that being up in fiscal 2017, do you still feel comfortable that that's going to be up this year?

[Elisha W. Finney:]

So in terms of FX if I look at where both the Euro and the yen are today versus the year ago period it is roughly neutral. There's a little bit of a help with the yen and a little bit of hurt with the Euro and those tend to net out. So the FX impact on Q1 was very little. I'm expecting if rate stay stable where they are today and the balance of the year then FX was going to be pretty neutral to the balance of the year. Protons we are expecting growth. I am being very cautious just obviously in light of what the impairment that we've announced. We will be recording service revenue on the CPTC proton center on a cash basis because once I impair a receivable and a loan then it doesn't make any sense that I can then start to accrue revenue for that. So I'm a little less -- a little less optimistic on protons today just because of the situation we are in. But I would say that's offset by a little more optimism in our oncology business which is just doing very well. Q - Amit Hazan Let me just follow up on that just as the last question so, the currency has moved a lot since you gave guidance about three months ago. So the dollar is strengthened a lot against the Euro and against the yen and so maybe I don't if I understand why it would be the same now than it was three months ago for you. And given the proton piece if you're a little bit more cautious on that you're still kind of -- you still feel good though that we should be within that range of 3% to 4% that you gave three months ago?

[Dow R. Wilson:]

I mean, it is not even clear how we've built the guidance on the revenue side is when you look at our last two or three quarters in oncology they've all been very good. So we have certainly had the orders. I mean just in this quarter alone the oncology backlog was up 6% or 7%. So we've got a very good backlog there and the margin position in the backlog as we've talked about looks very good. Q - Amit Hazan But you know -- yeah, go ahead.

[Elisha W. Finney:]

Sorry, the Euro has barely moved from when we gave guidance last. I mean in Q1 our average rate was 108, as of today it is 107. I would -- that's is the level. A little bit of help on the yen, a little bit -- so but they tend to be roughly an offset. The impact was very small in Q1 and we expect that for the balance of the year. Q - Amit Hazan Okay, just one final clean up question on the share purchase, you said you would buy 2 million shares, is that incremental to what you usually buy or is that just -- you are just going to because that is pretty close to what you guys usually do in the quarter, how should we model that.

[Elisha W. Finney:]

Well now that's a little higher than what we have typically been doing when we were one Varian it was 1 million to 2 million shares per quarter typically. Obviously with Varian standalone there's going to be cash flow from operations will be lower by about 20%. We are just front loading so, we did 500,000 in Q1 and the plan is under 10b51 that we will do 2 million in Q2. Q - Amit Hazan Okay, thanks very much guys.

[Operator:]

Thank you. Our next question comes from the line of Anthony Petrone with Jefferies. Please proceed.

[Anthony Petrone:]

Great for fitting me into the follow-up, just a couple of follow-ups for Sunny and then maybe one for Elisha. I'm just trying to get to a full year earnings number and so we have 120 to 130 for the remaining four quarters and I know Clarence you mentioned you have to sort of tax it under a different tax scheme using 35%. So my implied range for Varex for the year is 166 to 186. I'm not sure if that makes sense, if I'm in the ballpark so any feedback there would be helpful and then just on the consolidated guidance I'm just wondering, what is in there for stock based compensation, I guess more so for Remain Co? Thanks again.

[Sunny Sanyal:]

Well let me let me start out by first of all saying that it’s for Q2 to Q4 it's 120 to 130. And I have because of the carve out costs or the spin off costs in Q1, it's going to be lower than the average of those three quarters, okay. So I would just say that Q1 is going to be at a lower rate. I'm not ready to talk through the specifics of it yet because we haven't finished determining what those are, that's part of this discontinued ops discussion that we also were talking about previously. So give us a little bit of patience here to get to that number and so I can't -- I probably can't give you exactly the answer you're looking for, for the full year.

[Anthony Petrone:]

That’s helpful.

[Sunny Sanyal:]

Then the question about the stock based comp I guess it's fundamentally at the same level of those as historical and so I guess the question is a little bit about are you asking what the mix is between Varex and Varian, is that the question.

[Anthony Petrone:]

Maybe just some more simply, what is the level of stock based compensation reflected in the guidance for both Remain Co and Varex?

[Elisha W. Finney:]

I don't want to get down to that level of detail. I would tell you in Q1 for total company it was 11 million was what was included. We’re just not going to post the guidance in that detail.

[Anthony Petrone:]

Thank you.

[Operator:]

Thank you. Our next question comes from line of [Indiscernible] with CRM. Please proceed.

[Unidentified Analyst:]

Hey guys, on the Varex side for some sort of housekeeping, can you give us a sense or an update of what cash or debt the balance sheet will look like at separation for Varex?

[Clarence Verhoef:]

Yeah, so a level of cash is going to be around $25 million to $30 million with a good portion of that being offshore and then the level of debt will be around 200, a little bit north of 200 million.

[Unidentified Analyst:]

Okay great, and then you gave us a slide deck for Varex when you were doing the road show that had 147 million of revenue in the first quarter of 2016. And so if you do the comparison year-over-year it's not 7% it's more like 3% or 4%, is there just some sort of difference there?

[Clarence Verhoef:]

Yeah, it's a little bit of an apples and oranges. That 147 includes the intercompany sales to oncology. So you would actually take the Varian Imaging Components number of 152 and add 5 million to it if you are going to look at Varex as a standalone entity, and then you're back to 7% again.

[Unidentified Analyst:]

I see and then just to clarify what you're saying Clarence about EPS, the GAAP guidance you're giving us includes stock comp and DNA so it is just a pure GAAP number?

[Clarence Verhoef:]

That's exactly right.

[Unidentified Analyst:]

Okay and then on the close of the PKI deal I seem to recall you guys originally saying sort of April, May, maybe now you're saying summer, has there been a change there?

[Clarence Verhoef:]

No, April is the earliest that it can be done. We've put built out into the actual purchase agreement that April is the earliest. But it's just that the assumption is that the Hart Scott Rodino review process could take longer if it goes through a second review cycle and the like. And so, it's totally a speculation at this point time. I, from a planning perspective we're planning it out as if it’s the first of April but the timing could be delayed just because of that process.

[Unidentified Analyst:]

Okay, and then in terms of orders at Varex, can you sort of talk about your largest customer order patterns there up year-over-year or they just sort of in line stable? And any comments on China versus Japan, I guess Sunny alluded to that in his comments?

[Sunny Sanyal:]

Yes, so I’ll take it as two separate questions. In general we see strength in our CT tubes business in China and that continues to be a good solid trend for us we've made a lot of investments in that area and it's a core part of our growth strategy. Orders performance has been consistent with how this business has performed so there's nothing unusual there. Their performance with our largest customer Toshiba continues to be -- it's come back towards normal and the relationship and everything we do with them is solid foundations are very strong there.

[Unidentified Analyst:]

As you alluded to Sunny a little bit of volumes versus price with the volumes being strong and price somewhat we see you still seeing the impact of the renegotiations due to FX in late 2015 maybe a little more color around some of the pricing?

[Sunny Sanyal:]

So, first of all the price pressures are predominantly in the low end of the detector space which is a radiographic detectors which is also our smaller part of our detectors business. In there the price -- those price adjustments that happen that were at one point triggered by the FX situation but in general pricing in that segment even after, it was a onetime correction but we saw a pretty significant prior significant price adjustment. But now the price erosion is down to what I would call as historical levels there in the mid single-digits range and that's what we saw in this quarter but we had good volume which offset that.

[Unidentified Analyst:]

Great, thanks for the color and good luck.

[Sunny Sanyal:]

Thank you.

[Operator:]

Thank you. We have no further questions in queue at this time I'd like to hand the floor back over to management for closing remarks.

[Dow R. Wilson:]

Thank you and thank you all for participating. A replay of this call can be heard on the Varian investor website at www.varian.com/investor where it will be archived for a year. To hear a telephone replay dial 1-877-660-6653 from inside the U.S. or 1-201-612-7415 from outside the U.S. and enter confirmation code number 1365-1576. The telephone replay will be available through 5PM this Friday January 27, 2017. Thank you.

[Operator:]

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.