Varex Imaging Corporation — Q3 FY2022 Form 10-Q
Reporting period: Third quarter ended July 1, 2022 (13 weeks); year-to-date covers the first nine months of fiscal 2022 (39 weeks). Comparisons are with the corresponding periods ended July 2, 2021. Varex designs, manufactures, sells and services X-ray imaging components and related software for medical and industrial markets.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Revenue | $214.5 million | $211.2 million | $628.0 million | $591.8 million |
| Gross profit / margin | $73.4 million / 34.2% | $74.1 million / 35.1% | $209.0 million / 33.3% | $195.9 million / 33.1% |
| Operating income | $23.0 million | $25.7 million | $63.6 million | $47.6 million |
| Net income attributable to Varex | $8.2 million | $12.0 million | $17.2 million | $8.7 million |
| Diluted EPS | $0.20 | $0.29 | $0.41 | $0.22 |
- Revenue mix: Q3 Medical revenue was $167.1 million, essentially flat year over year; Industrial revenue rose 8.0% to $47.4 million. For nine months, Medical revenue increased 6.5% to $493.2 million and Industrial increased 4.7% to $134.8 million.
- Profitability: Q3 gross margin fell 0.9 percentage points, principally reflecting higher freight and material costs and weaker Medical detector sales. Nine-month gross margin improved 0.2 percentage points; Industrial margin gains more than offset a modest Medical margin decline. Nine-month operating expenses declined 2.0% to $145.4 million, supporting higher operating income.
- Taxes and interest: Nine-month pretax income was $30.4 million versus $13.8 million; income tax expense rose to $12.8 million from $4.7 million. Management attributed tax expense to jurisdictional income, U.S. valuation allowances and foreign losses without recognized tax benefits. Nine-month interest and other expense, net was $33.2 million, slightly below the prior-year $33.8 million.
- Cash flow: Operating cash flow was negative $0.2 million for nine months, versus positive $42.0 million a year earlier, mainly due to an $81.1 million inventory cash use, partially offset by increased accounts payable. Investing cash outflow was $20.9 million and financing cash outflow was $24.0 million. Cash and restricted cash decreased $45.2 million to $100.9 million.
- Balance sheet and liquidity: Cash and cash equivalents were $99.6 million; marketable securities outside cash equivalents were $10.4 million. Inventory increased to $300.3 million from $224.8 million at fiscal year-end. Current assets were $593.4 million and current liabilities $172.3 million. Debt, net of discounts and issuance costs, was $412.6 million; principal debt was approximately $450.6 million. The $100 million ABL facility was undrawn, with $97 million available. Management said available cash, operating cash flow and ABL availability should meet anticipated needs for at least 12 months.
Material changes and notable items
- Nine-month revenue increased 6.1%; growth was led by Medical CT X-ray tubes and oncology demand, alongside Industrial X-ray tubes, detectors and nondestructive inspection products. Q3 growth was more muted, with Industrial growth offsetting flat Medical revenue.
- Supply constraints and costs weighed on Q3 Medical gross profit. The company reported more widespread raw-material shortages, particularly micro-controller chips and electronic components, and increased freight, labor and material costs.
- Varex redeemed $27 million principal of Senior Secured Notes in March 2022 for $28.7 million including premium and accrued interest, recording a $1.2 million loss. The filing’s MD&A also refers to a $30 million redemption in July 2022; that occurred after the July 1 quarter-end and is not reflected in the quarter-end debt balance.
- Year-to-date items included a $1.9 million loss on abandonment of the Santa Clara lease and $1.8 million of restructuring-related asset impairment charges. Inventory write-downs were $5.3 million, versus $3.5 million in the prior-year period.
- Backlog was approximately $456 million at July 1, 2022, but orders can be revised or canceled and conversion to revenue is exposed to supply-chain constraints. Canon Medical Systems represented 16.6% of Q3 revenue and 18.0% of nine-month revenue.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expected supply-chain challenges to affect delivery capability over the next several quarters and said sales-volume uncertainty could persist at least through the remainder of calendar 2022. Pricing increases were implemented on certain products, but rising costs could continue to pressure margins.
- Principal risks include component shortages and dependence on limited or sole-source suppliers, inflation and logistics costs, employee recruitment and retention, customer concentration, volatile demand, tariffs and geopolitical disruption, foreign exchange exposure, and significant debt and restrictive covenants.
- The company reported no material contingent liabilities at July 1, 2022 and was not aware of pending litigation expected to have a material adverse effect. It nevertheless faces ordinary-course legal, regulatory, product-liability and other contingency risks.
- Disclosure controls and procedures were assessed as effective as of July 1, 2022; no material change in internal control over financial reporting was reported during the quarter.
Investor verification points
- Track whether supply availability improves, particularly for micro-controller chips and other electronic components, and whether the elevated inventory converts into shipments and cash flow.
- Review subsequent-quarter gross margins, price realization, freight and material costs, and the balance between Medical and Industrial growth.
- Verify backlog quality and conversion, including cancellations, order timing and customer concentration.
- Monitor debt principal, scheduled maturities, note covenants, ABL availability and the effects of the July 2022 note redemption.
- Assess the sustainability of the effective tax burden and the causes of the sharp year-to-date operating cash-flow decline.