Varex Imaging Corporation — Q1 FY2022 Form 10-Q
Business context and period. Varex designs and sells X-ray imaging components, software and related products for medical, security and industrial markets. This unaudited quarter ended December 31, 2021 (13 weeks); the comparable quarter ended January 1, 2021. Fiscal 2022 ends September 30, 2022.
Financial performance
| Metric | Q1 FY2022 | Comparable quarter |
|---|---|---|
| Revenue | $198.8 million | $177.1 million |
| Gross profit / gross margin | $64.8 million / 32.6% | $57.2 million / 32.3% |
| Operating income | $14.0 million | $6.1 million |
| Net income (loss) attributable to Varex | $1.4 million; diluted EPS $0.03 | $(6.4) million; diluted EPS $(0.16) |
| Operating cash flow | $10.8 million | $7.1 million |
- Revenue increased 12.3%. Medical revenue grew 11.9% to $155.7 million; Industrial grew 13.7% to $43.1 million.
- Medical gross margin declined to 29.5% from 31.7%, with higher freight and material costs partly offsetting higher CT tube sales. Industrial gross margin increased to 43.6% from 34.6%, supported by detector, tube and service sales.
- R&D expense was $17.7 million; SG&A was $33.1 million. SG&A included a $1.9 million loss for abandonment of the Santa Clara lease. The quarter also included $1.8 million of restructuring-related asset impairment charges.
- Cash and cash equivalents were $157.8 million at quarter-end, versus $144.6 million at October 1, 2021. Operating cash flow benefited from improved performance and collections, partly offset by inventory purchases and lower accrued liabilities. Capital expenditures were $4.1 million.
- Debt was reported at $436.5 million net of discounts and issuance costs, plus $2.8 million of current maturities. The filing gives approximately $480.1 million of total combined indebtedness on a principal basis. The $100 million ABL facility was undrawn, with $67 million available at quarter-end.
- Inventories rose to $247.6 million from $224.8 million. Backlog was approximately $289 million; orders may be changed or canceled.
Changes, outlook and risks
- Varex returned to quarterly profitability from a year-earlier loss, with higher revenue and operating income. Revenue growth was broad across both segments, while Medical margin pressure contrasted with substantial Industrial margin improvement.
- Management said demand had recovered and continued to grow, but supply-chain, logistics and manufacturing challenges were worsening and expected to affect product delivery over the next several quarters and through FY2022. Shortages, particularly of micro-controller chips and other electronic components, and higher freight and input costs may constrain sales and margins.
- The company raised prices on certain products and expected further pricing adjustments during FY2022. Management described long-term R&D spending of approximately 8%–10% of annual revenue as an appropriate range; this is not a revenue or earnings forecast.
- Management said operating cash flow, cash on hand and ABL availability should cover anticipated operating needs for at least 12 months. No specific quarterly or annual revenue or earnings guidance is provided in the filing.
- Material risks include supplier concentration and shortages, employee absences and hiring challenges, customer concentration, unpredictable demand, tariffs and foreign exchange, regulatory requirements, and significant debt and restrictive covenants. Canon Medical Systems represented 19.2% of quarterly revenue and 13.9% of quarter-end receivables. The ten largest customers together represented about 50% of revenue.
- The company reported no material contingent liabilities and no pending litigation known to it that could materially adversely affect operations or financial position. Management concluded disclosure controls were effective as of December 31, 2021.
Important facts for investors to verify
- Whether supply constraints, rising costs and pricing actions affect shipments, backlog conversion and segment margins in subsequent quarters.
- Whether inventory growth is a deliberate buffer against shortages or creates risk of excess, obsolescence or weaker cash conversion.
- The distinction between reported net debt carrying value and approximately $480.1 million of principal indebtedness, and the timing and terms of the 2025 convertible notes and 2027 secured notes.
- Customer and supplier concentration, including Canon Medical exposure and Varex’s dependence on dpiX for detector components.
- The continuation of demand recovery in Medical and Industrial markets, and the variability of security and inspection orders and backlog conversion.