Varex Imaging Corporation — FY2021 Form 10-K Summary
Reporting period: Fiscal year ended October 1, 2021 (52 weeks), compared primarily with FY2020, which ended October 2, 2020 (53 weeks). The filing is an annual report, not a standalone fourth-quarter report. Amounts below are in U.S. dollars.
Business context
Varex designs, manufactures, sells and services X-ray tubes, digital detectors, linear accelerators and imaging software used in medical, security and industrial inspection systems. Its reportable segments are Medical and Industrial. Medical generated 79% of FY2021 revenue and Industrial 21%. The business relies heavily on OEM customers; Canon Medical Systems accounted for approximately 18% of revenue, and the top five customers together accounted for approximately 39%.
Financial and operating metrics
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $818.1 million | $738.3 million |
| Gross profit / gross margin | $271.5 million / 33% | $190.2 million / 26% |
| Operating income (loss) | $74.1 million | $(33.7) million |
| Net income (loss) attributable to Varex | $17.4 million | $(57.9) million |
| Diluted earnings (loss) per share | $0.43 | $(1.49) |
| Net cash provided by operating activities | $92.6 million | $13.2 million |
| Capital expenditures | $15.1 million | $23.5 million |
| Cash and cash equivalents at year-end | $144.6 million | $100.6 million |
Revenue rose 11% year over year. Medical revenue increased 10% to $643.8 million; Industrial revenue increased 13% to $174.3 million. Gross margin improved in both segments, reflecting higher volumes, favorable product mix and cost savings from prior-year cost reductions. FY2020 gross profit included $22.2 million of restructuring and product discontinuation charges and purchase accounting adjustments. Operating expenses fell 12% to $197.4 million, while interest and other expense increased to $45.5 million from $38.9 million, primarily due to the notes issued in 2020 and debt-related costs. The effective tax rate was 37.4%, versus 20.9% in FY2020.
Operating cash flow improved substantially, aided by net income and a $42.8 million decrease in inventory, partly offset by a $32.9 million increase in accounts receivable. Cash used in investing activities was $16.2 million; financing activities used $32.3 million, including debt repayment. Trade receivable days sales outstanding were 62 days, down from 66.
At October 1, 2021, total debt principal was $480.6 million; reported debt outstanding, net of discounts and issuance costs, was $434.5 million, including $2.8 million of current maturities. The balance sheet reports $431.7 million of long-term debt, net. Debt included $200 million of 4.00% convertible notes due 2025 and $270 million of 7.875% senior secured notes due 2027. Varex redeemed $30 million principal of the secured notes during FY2021 for $31.5 million, including premium and accrued interest, and recorded a $1.4 million loss. The $100 million asset-based revolver was undrawn; availability was $69.4 million at year-end, subject to borrowing-base limits. The company reported compliance with its ABL covenants.
Material changes versus FY2020
- Revenue and gross profit recovered from FY2020 declines; operating results returned to profitability.
- Operating cash flow increased to $92.6 million from $13.2 million. Cash increased by $44.0 million during the year.
- Debt principal declined by $31 million, mainly following the $30 million secured-note redemption. Interest expense nevertheless increased.
- Inventory fell to $224.8 million from $271.9 million. Inventory write-downs were $3.5 million, compared with $18.1 million in FY2020.
- Previously reported material weaknesses in internal control over financial reporting were reported as remediated. Management and the independent auditor concluded controls were effective as of year-end; the auditor also issued an unqualified opinion on the financial statements.
Outlook, risks and unusual items
Management described recovering demand, with many product categories returning to pre-pandemic levels, but did not provide quantified FY2022 revenue or earnings guidance in the supplied filing text. It expected supply-chain, logistics and manufacturing challenges to continue into FY2022 and to constrain deliveries over the next several quarters. Shortages of semiconductors and other components, higher freight and input costs, and employee recruitment and retention difficulties were identified as ongoing pressures. Varex had begun raising prices on certain products and anticipated further pricing adjustments during FY2022.
COVID-19-related disruption remains uncertain: deferred medical imaging purchases supported recovery, while further outbreaks could affect demand, operations or staffing. Other significant risks include customer concentration and potential OEM in-sourcing; dependence on limited or sole-source suppliers, including dpiX and a Varian-supplied linear-accelerator component; tariffs and trade restrictions; foreign-exchange and commodity-price exposure; regulatory and product-liability risks; and substantial debt, restrictive covenants and possible dilution or cash demands from convertible notes. Industrial security-system orders can be irregular and dependent on government budgets, tenders and installation schedules.
Varex reported no material contingent liabilities at year-end and did not believe any currently pending litigation would materially adversely affect operations or financial position. It disclosed an approximately $0.6 million environmental liability related to CERCLA sites; another commitment disclosure states an environmental liability of approximately $0.8 million, so the precise amount is not consistent in the supplied filing text. Other notable items include the FY2021 $3.5 million inventory write-down, the $1.4 million loss on note redemption, and the completion of remediation of prior internal-control weaknesses. The company paid no cash dividends and stated it had no current plan to do so.
Important facts for investors to verify
- Whether supply constraints, freight costs, labor availability and planned price increases affect FY2022 shipments, margins and backlog conversion; reported backlog was approximately $327 million and may be revised or canceled.
- Debt service and refinancing capacity, including the 2025 convertible-note maturity, 2027 secured notes, ABL borrowing-base availability and covenant headroom.
- Customer concentration and Canon’s purchasing levels, as well as the risk that OEM customers shift production in-house or reduce orders.
- Inventory quality and obsolescence assumptions, a critical audit matter; year-end inventory was $224.8 million and FY2021 discontinued-product write-downs were $3.5 million.
- Whether the remediated internal controls remain effective, and whether any subsequent filings report control deficiencies or restatements.
- The environmental-liability amount, which is stated differently in the supplied filing text, and any developments in product, regulatory, intellectual-property or indemnification matters.