Varex Imaging Corporation — Form 10-Q summary
Reporting period: Fiscal second quarter and first six months of fiscal 2022, ended April 1, 2022. Comparable periods ended April 2, 2021. The quarter and six-month periods were 13 and 26 weeks, respectively. Varex designs and sells X-ray imaging components and related software and services through its Medical and Industrial segments.
Financial performance and position
| Metric | Three months ended April 1, 2022 | Year-over-year change | Six months ended April 1, 2022 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $214.7 million | Up 5.5% | $413.5 million | Up 8.6% |
| Gross profit / margin | $70.8 million / 33.0% | $64.6 million / 31.7% | $135.6 million / 32.8% | $121.8 million / 32.0% |
| Operating income | $26.6 million | Up from $15.8 million | $40.6 million | Up from $21.9 million |
| Net income (loss) attributable to Varex | $7.6 million; diluted EPS $0.18 | Up from $3.1 million; diluted EPS $0.08 | $9.0 million; diluted EPS $0.21 | Up from a $3.3 million loss; diluted EPS $(0.09) |
- Segment trends: Second-quarter Medical revenue rose 8.8% to $170.4 million, with gross margin increasing to 31.3% from 29.2%. Industrial revenue declined 5.5% to $44.3 million and gross margin declined to 39.3% from 40.3%. For the six months, Medical revenue rose 10.2% and Industrial revenue rose 3.1%.
- Expenses and taxes: Second-quarter operating expenses fell 9.4% to $44.2 million, principally reflecting lower compensation costs and higher revenue. Six-month income tax expense was $7.7 million on $16.9 million of pretax income; the filing cites jurisdictional earnings mix, U.S. deferred-tax valuation allowances, and foreign losses without recognized tax benefits.
- Cash flow: First-half operating cash flow was $2.5 million, versus $19.9 million a year earlier. Inventory use of cash was $46.5 million, partly offset by a $20.4 million increase in accounts payable. Capital expenditures were $7.5 million; operating cash flow less capital expenditures was negative $5.0 million. Financing activities used $25.4 million, mainly reflecting debt redemption.
- Liquidity and debt: Cash and equivalents were $115.1 million at April 1, down from $144.6 million at October 1, 2021. Net debt carrying value was $411.0 million, versus $434.5 million; the company also reported approximately $451.6 million of combined indebtedness before discounts and issuance costs. The $100 million ABL facility was undrawn, with $96 million available. Current liabilities were $167.1 million and current assets were $569.2 million. Management said cash, operating cash flow and ABL availability should cover anticipated operating needs for at least 12 months.
- Working capital: Inventories increased to $269.2 million from $224.8 million. Accounts receivable days sales outstanding rose to 65 days from 62 days.
Material changes and notable items
- Revenue growth was led by Medical products, including digital detectors for dynamic imaging and CT X-ray tubes. The company attributed first-half Industrial growth to digital detectors, security connectors and service revenue, although the second quarter weakened in X-ray tubes and nondestructive inspection.
- On March 18, 2022, Varex redeemed $27 million principal amount of Senior Secured Notes for $28.7 million, including premium and accrued interest, and recognized a $1.2 million loss. Remaining principal was $243 million. The ABL facility was amended to transition certain advances from LIBOR to SOFR and reduce specified margins and commitment fees.
- The company recorded a $1.9 million loss on abandonment of its former Santa Clara facility in the first quarter and $1.8 million of restructuring-related asset impairment during the six-month period.
- Canon Medical Systems represented 18.2% of second-quarter revenue and 18.7% of first-half revenue, highlighting customer concentration.
Outlook, risks and contingencies
- No specific numerical earnings or revenue guidance is provided. Management said supply-chain challenges are expected to affect product deliveries over the next several quarters and anticipated continued challenges through fiscal 2022. Backlog was approximately $411 million at April 1, but orders may be revised or canceled and conversion depends on supply availability.
- Management described demand as recovering and growing, supported by healthcare and diagnostic investment and deferred equipment purchases. It also noted that constrained supply prevents conversion of all demand into sales. Price increases have been implemented on certain products, with further adjustments expected during fiscal 2022; rising material, freight, transportation and labor costs could still pressure margins.
- Key risks include shortages of micro-controller chips and other components, reliance on limited or sole-source suppliers (including dpiX), inflation, employee availability, COVID-19 disruptions, Russia-Ukraine-related uncertainty, tariffs and foreign-exchange exposure, customer concentration, and variable industrial and government-project demand.
- Varex reported no material contingent liabilities at April 1, 2022 and said it was not aware of pending litigation expected to materially adversely affect operations or financial position. Disclosure controls were assessed as effective; no material internal-control changes were reported for the quarter.
Important facts for investors to verify
- Whether supply constraints ease enough to convert the $411 million backlog into shipments and revenue, and whether orders remain valid.
- Whether inventory growth and associated working-capital demands continue to suppress operating cash flow.
- Whether pricing actions offset inflation, freight and material costs without weakening demand or margins.
- Debt repayment capacity and the effect of fixed interest costs, the 2025 convertible notes, and the 2027 secured notes on liquidity.
- Ongoing exposure to Canon Medical Systems and to critical suppliers, especially dpiX, including the remaining $9.9 million 2022 dpiX fixed-cost commitment.
- The future effect of tax valuation allowances and the planned adoption of convertible-debt accounting guidance, which may affect interest expense and diluted EPS.