Business context and reporting period
Varex Imaging Corporation designs, manufactures and services X-ray imaging components and related software for medical and industrial applications. This unaudited Form 10-Q covers the 13 weeks ended March 29, 2024 (fiscal Q2 2024) and the 26 weeks ended that date; comparisons are with the corresponding 2023 periods.
Key financial results
| Metric | Q2 2024 | Q2 2023 | Six months 2024 | Six months 2023 |
|---|---|---|---|---|
| Revenue | $206.2m | $228.2m | $396.2m | $433.8m |
| Gross profit / margin | $65.8m / 31.9% | $72.7m / 31.9% | $122.9m / 31.0% | $136.0m / 31.4% |
| Operating income | $7.7m | $15.6m | $11.9m | $28.6m |
| Net income attributable to Varex | $1.4m | $4.1m | $0.9m | $7.2m |
| Diluted EPS | $0.03 | $0.10 | $0.02 | $0.18 |
- Revenue declined 9.6% in Q2 and 8.7% for the six-month period. Medical revenue fell 14.5% in Q2 and 13.6% year to date; Industrial revenue rose 6.1% and 7.9%, respectively.
- Q2 Medical gross margin improved slightly to 30.0% from 29.7%, while Industrial margin declined to 36.8% from 38.8%. For six months, total gross margin eased to 31.0% from 31.4%.
- Q2 operating expenses rose 1.8% to $58.1m, including higher SG&A; expenses were 28.2% of revenue versus 25.0%. Six-month operating expenses increased 3.4% to $111.0m.
- Six-month operating cash flow was $13.4m, down from $23.6m. Investing cash use was $21.2m, including $16.2m of capital expenditures; financing cash use was $3.0m. Cash and restricted cash decreased $10.8m to $143.2m.
- At March 29, cash and cash equivalents were $141.8m and marketable securities $47.1m; together with $1.0m of certificates of deposit, reported liquid funds totaled $189.9m. Current assets were $651.9m and current liabilities $154.1m.
- Debt outstanding was $442.9m net of issuance costs; principal was approximately $447.3m. This includes $200m of 4.00% convertible notes due June 2025 and $243m of 7.875% senior secured notes due October 2027. The new $155m revolving facility was undrawn at quarter-end.
Material changes, outlook and risks
- Management attributed lower Medical sales principally to weaker radiographic and dental demand in Q2; CT partially offset the decline. Industrial growth was led by security inspection products. APAC revenue fell to $66.3m from $90.5m in Q2, while Americas and EMEA were broadly stable.
- Management said China’s healthcare anti-corruption campaign and more cautious customer purchasing have hurt Medical demand and are expected to continue through the remainder of fiscal 2024. Supply-chain and logistics challenges have eased from fiscal 2023 levels, but some supplier shortages and delays remain.
- No quantified full-year revenue or earnings guidance is provided in the supplied filing text. Management describes 8%–10% of annual revenue as its target range for long-term R&D investment; current R&D was 11.0% of Q2 revenue, primarily because sales were lower.
- Management believes cash, operating cash flow, revolver availability and market access are adequate for anticipated needs for at least 12 months. It anticipates refinancing the June 2025 convertible notes using some combination of revolver borrowings and cash.
- On March 26, 2024, Varex replaced its $100m asset-based revolver with a $155m secured revolving facility maturing September 2027. A separate secured equipment facility of up to $20m was signed April 26, after quarter-end; it was undrawn as of May 2, 2024.
- Unusual items: first-quarter MeVis Breastcare acquisition accounting generated a $0.9m remeasurement gain and a $1.2m bargain-purchase gain. Q2 interest expense included $0.6m of remaining ABL issuance costs written off on termination.
- Key exposures include customer concentration (Canon Medical represented 21.8% of Q2 revenue and 13.9% of receivables), reliance on limited or sole-source suppliers, trade and tariff uncertainty, foreign exchange and commodity-price exposure, and debt covenant/refinancing risk. U.S. tariff exclusions were stated to expire May 31, 2024 unless extended.
- The company disclosed a dispute between partners in its VEC joint venture, including litigation over shareholder resolutions and management; a successful party may be required to buy the other’s interest at a disputed valuation. Management reported no material contingent liabilities at quarter-end and did not believe current or pending litigation would materially harm operations or financial position, while separately disclosing product-liability litigation risk.
Important facts for investors to verify
- Whether Medical demand, particularly in China, stabilizes and whether the expected anti-corruption and cautious-purchasing effects persist through fiscal 2024.
- Backlog conversion: reported backlog was approximately $330m, but orders may be revised or canceled.
- Cash generation, inventory levels ($286.1m), and working-capital trends, including the decline in operating cash flow.
- Plans and available financing to address the $200m convertible notes maturing in June 2025, and compliance with revolving-facility leverage and fixed-charge covenants.
- Developments in the VEC litigation, product-liability matters, supplier commitments, and tariff exclusions.