Varex Imaging Corporation — Q2 FY2023 Form 10-Q
Reporting period: Fiscal quarter and six months ended March 31, 2023; comparative periods ended April 1, 2022. Figures are in millions of dollars unless noted. The company designs and sells medical and industrial X-ray imaging components, software, and related products and services.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Revenue | $228.2 | $214.7 | $433.8 | $413.5 |
| Gross profit | $72.7 | $70.8 | $136.0 | $135.6 |
| Gross margin | 31.9% | 33.0% | 31.4% | 32.8% |
| Operating income | $15.6 | $26.6 | $28.6 | $40.6 |
| Net income attributable to Varex | $4.1 | $7.6 | $7.2 | $9.0 |
| Diluted EPS | $0.10 | $0.18 | $0.18 | $0.21 |
- Q2 revenue rose 6.3% year over year. Medical revenue increased 2.2% to $174.1 million; Industrial increased 22.1% to $54.1 million.
- Q2 Industrial gross profit rose to $21.0 million from $17.4 million, while Medical gross profit declined to $51.7 million from $53.4 million. Total gross margin fell 1.1 percentage points.
- Operating expenses increased 29.2% to $57.1 million, including higher R&D and SG&A. Operating income fell 41.4%; Varex-attributable net income fell 46.1%.
- Interest and other expense, net improved to $7.8 million from $13.0 million in Q2. Lower interest expense reflected prior debt redemption and adoption of a convertible-debt accounting standard.
Cash, debt, and liquidity
- Cash and cash equivalents were $104.4 million at March 31, 2023, versus $89.4 million at September 30, 2022. Cash, certificates of deposit, and marketable securities totaled $122.1 million.
- For the six months, operating cash flow was $23.6 million, compared with $2.5 million a year earlier. Investing cash outflow was $7.5 million and financing cash outflow was $0.9 million; cash and restricted cash increased $15.2 million.
- Net debt carrying value was reported as $443.0 million, including $200 million of 4.00% convertible notes due 2025 and $243 million of 7.875% secured notes due 2027. The $100 million ABL facility was undrawn, with $89.8 million available.
- Current assets were $618.4 million and current liabilities $157.2 million. Inventory was $310.7 million, up from $303.2 million at fiscal year-end.
Material changes, outlook, and risks
- Management reported a more balanced operating environment and improved supply conditions during the quarter, but said some material shortages, manufacturing and logistics challenges were expected to continue through 2023. Inflation, labor and material costs, and product mix continued to pressure margins; the company had raised prices on certain products and anticipated further pricing adjustments in FY2023.
- Management said operating cash flow, cash on hand, and ABL availability were expected to cover anticipated operating needs for at least 12 months. No specific revenue or earnings guidance was provided. Estimated backlog was approximately $404 million; orders may be revised or canceled.
- Management attributed Medical margin pressure to higher material costs and an unfavorable product mix, including lower sales of some higher-margin products. Industrial growth was led by security inspection products and industrial X-ray tubes.
- Adoption of ASU 2020-06 increased the carrying value of convertible debt and reduced additional paid-in capital by $34.6 million, with a $6.5 million increase to retained earnings at adoption. This accounting change, rather than new borrowing, contributed to the increase in reported net debt carrying value since September 2022.
- Environmental remediation liability for legacy sites increased by approximately $2.9 million during Q2, to $4.0 million net of expected insurance proceeds. The filing said there were no material contingent liabilities at March 31, 2023 and no currently pending litigation expected to materially adversely affect operations or financial position.
- Key exposures include customer concentration (Canon Medical Systems represented 18.3% of Q2 revenue), reliance on limited or sole-source suppliers including dpiX, supply and raw-material costs, tariffs and U.S.–China tensions, foreign-exchange movements, and significant debt and covenant restrictions. Management stated disclosure controls were effective and there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether backlog converts to revenue as expected, given potential order changes and uneven delivery schedules.
- Whether Medical product mix, material costs, pricing actions, and supply conditions improve enough to stabilize gross margins.
- Cash-flow and inventory trends, and continued availability of the ABL borrowing base and covenant headroom.
- Debt repayment and potential dilution or cash requirements tied to the convertible notes and warrants.
- The final amount and timing of legacy environmental remediation costs, and the company’s exposure to supplier concentration and China-related trade risks.