Varex Imaging Corporation — Q1 FY2021 Form 10-Q
Reporting period: 13 weeks ended January 1, 2021; comparable quarter ended January 3, 2020 covered 14 weeks. Varex designs, manufactures, sells and services X-ray imaging components and related software for medical, industrial, security and inspection uses.
Financial performance
| Metric | Q1 FY2021 | Prior-year quarter |
|---|---|---|
| Revenue | $177.1 million | $200.1 million |
| Gross profit / margin | $57.2 million / 32.3% | $61.1 million / 30.5% |
| Operating earnings | $6.1 million | $4.6 million |
| Interest expense | $10.3 million | $5.4 million |
| Net loss attributable to Varex | $6.4 million; $0.16 per share | $1.3 million; $0.03 per share |
| Cash from operations | $7.1 million | $23.0 million |
| Capital expenditures | $4.4 million | $8.1 million |
Medical revenue was $139.2 million, down 10.5%; Industrial revenue was $37.9 million, down 14.8%. Medical gross margin improved to 31.7% from 28.1%, while Industrial gross margin fell to 34.6% from 38.9%. Management attributed the revenue declines partly to reduced demand and partly to the prior period’s extra week.
At January 1, 2021, cash and cash equivalents were $105.5 million; total current assets were $522.6 million and current liabilities $152.5 million. Debt was approximately $513.8 million before unamortized discounts and issuance costs; reported net debt carrying value was $460.1 million. The $100 million asset-based revolving facility had no borrowings, with availability subject to the borrowing base. Management said cash, operating cash flow and facility availability should cover anticipated needs for at least 12 months.
Changes, outlook and risks
- Revenue declined 11.5% year over year, while gross margin improved 1.8 percentage points. Operating expenses fell 9.6%, including lower R&D spending; higher interest expense and a $1.6 million tax expense contributed to the larger net loss.
- COVID-19 continued to reduce demand for Industrial products and certain higher-end medical products, delay equipment installations and disrupt supply chains and manufacturing. Management expected pandemic-related uncertainty to continue into mid-calendar 2021; it gave no specific financial guidance.
- Backlog was $260.1 million, which the company expected to recognize over the next 12 months, but orders may be revised or canceled.
- Disclosure controls and internal control over financial reporting were not effective because previously identified material weaknesses remained. Remediation work continued; management said further operating history and testing were needed before concluding the weaknesses were resolved.
- Major risks include customer concentration (Canon represented 16.6% of quarterly revenue), significant debt and restrictive covenants, reliance on key suppliers including dpiX, foreign-exchange and tariff exposure, and COVID-related demand and operating disruption. No material contingent liabilities were reported; routine legal matters were described as not expected to have a material adverse effect.
Investor verification priorities
- Track whether revenue and Industrial demand recover, and whether backlog converts to revenue or is canceled.
- Review progress and testing of internal-control remediation, including inventory, cost of revenue and financial reporting controls.
- Verify debt-service capacity, ABL borrowing-base availability and covenant compliance as operating results and cash flows change.
- Assess concentration and supply-chain exposure, including Canon revenue and accounts receivable exposure, dpiX dependence, and the $11.6 million 2021 dpiX fixed-cost commitment.
- Reconcile the reported debt carrying value with principal obligations, interest expense and potential convertible-note dilution.