Varex Imaging Corporation — Q3 FY2021 Form 10-Q
Reporting period: Quarter ended July 2, 2021 (13 weeks); year-to-date period was 39 weeks. The prior-year year-to-date comparison covered 40 weeks, so the nine-month comparison is not period-length matched. All amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and results
Varex designs, manufactures, sells and services X-ray imaging components and related software for medical, industrial, security and inspection applications. Its reportable segments are Medical and Industrial.
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $211.2 | $171.2 | $591.8 | $568.3 |
| Gross profit / margin | $74.1 / 35.1% | $26.3 / 15.4% | $195.9 / 33.1% | $145.0 / 25.5% |
| Operating income (loss) | $25.7 | $(26.8) | $47.6 | $(20.8) |
| Net income (loss) | $12.2 | $(28.2) | $9.1 | $(31.2) |
| Net income (loss) attributable to Varex | $12.0 | $(28.3) | $8.7 | $(31.5) |
| Diluted EPS attributable to Varex | $0.29 | $(0.73) | $0.22 | $(0.81) |
Q3 Medical revenue was $167.3 million, up 21.6%; Industrial revenue was $43.9 million, up 30.7%. For the nine months, Medical revenue rose 3.2% to $463.1 million and Industrial revenue rose 7.5% to $128.7 million. Q3 revenue growth reflected higher digital detector, CT tube and industrial product sales.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $42.0 million, versus $25.0 million a year earlier. Investing activities used $12.9 million and financing activities used $1.3 million. Cash and cash equivalents were $128.3 million at July 2, 2021; cash plus restricted cash at period-end was $129.8 million.
- At July 2, total debt outstanding, net of discounts and issuance costs, was $462.7 million, including $32.9 million of current maturities. Principal amounts included $200 million of 4.00% convertible notes due 2025 and $270 million of senior secured notes due 2027. The ABL facility was undrawn, with $70 million then available under its borrowing base.
- On July 15, after quarter-end, Varex redeemed $30 million principal amount of senior secured notes for $31.5 million, including premium and accrued interest, and recorded a $1.4 million loss. Management stated that operating cash flow, cash and ABL availability should cover anticipated needs for at least 12 months.
- Capital expenditures were $12.5 million for the nine months. Accounts receivable days sales outstanding were 64 days, compared with 66 days at October 2, 2020.
Material changes and management commentary
- Q3 gross margin improved to 35.1% from 15.4%; management cited higher sales, favorable product mix and prior cost-reduction measures. The prior-year quarter included about $16 million of inventory write-downs associated with discontinued products and restructuring.
- Nine-month operating expenses declined 10.6% to $148.3 million, including lower R&D and SG&A costs and no repeat of the prior-year intangible impairment charge. Interest expense rose to $31.3 million for the nine months, principally reflecting the convertible and senior secured notes issued in 2020.
- Estimated backlog was approximately $259 million, which the company expected to recognize as revenue over the next 12 months; orders may be revised or canceled. The filing gives no formal financial guidance.
- Management described recovering demand, including customer purchases deferred during the pandemic, but cautioned that recovery may not continue after backlog is fulfilled. Material shortages—particularly micro-controller chips and related electronic components—plus manufacturing, logistics and freight challenges were expected to affect deliveries over the next several quarters and continue into 2022.
Risks, contingencies and unusual items
- COVID-19 variants, uneven vaccination, customer demand uncertainty and supply-chain disruption could adversely affect sales, production, delivery timing and margins. Tariffs, foreign exchange, commodity costs, regulatory requirements and reliance on limited or sole-source suppliers are additional risks.
- Customer concentration is significant: Canon Medical Systems accounted for 17.1% of Q3 revenue and 17.2% of nine-month revenue. The ten largest customers represented approximately 52% and 51% of revenue for those periods, respectively.
- Disclosure controls and procedures were assessed as ineffective at July 2, 2021 because previously identified material weaknesses in internal control over financial reporting remained unremediated. Management was continuing remediation; effectiveness had not yet been established through a sufficient period of testing.
- The company reported no material contingent liabilities at July 2, 2021 and was not aware of pending litigation expected to materially adversely affect operations or financial position. It also disclosed standard indemnification obligations, including certain obligations without a stated maximum potential payment.
- Other items to monitor include the $3.5 million inventory write-down recorded in the first nine months of FY2021, $50.1 million of investments in privately held companies, and the $47.2 million carrying value of the dpiX investment. Varex has a 40% interest in dpiX, a key supplier, and committed to $5.8 million of dpiX fixed costs through the remainder of calendar 2021.
Important facts for investors to verify
- Whether supply constraints, freight costs and delivery delays persist or materially affect revenue conversion, margins and the $259 million backlog.
- Progress and independent testing of remediation for the material weaknesses in financial reporting controls.
- Cash generation, debt-service capacity and covenant headroom following the July 2021 note redemption; distinguish principal debt from the balance-sheet carrying amount.
- Developments in customer concentration, especially Canon Medical Systems, and the outlook for medical and industrial demand after deferred purchases and backlog conversion.
- Whether investment, supplier and inventory exposures—including dpiX commitments and the remaining inventory write-down risk—change materially.