Varex Imaging Corporation — FY2023 Form 10-K
Reporting period: Fiscal year ended September 29, 2023 (52 weeks); comparisons are with the fiscal year ended September 30, 2022. This is an annual report, not a standalone fourth-quarter filing.
Business context
Varex designs and manufactures X-ray imaging components and related software and systems for medical and industrial markets. Its products are sold primarily to OEMs. Medical generated 75.4% of FY2023 revenue and Industrial 24.6%. The five largest customers represented about 39% of revenue; Canon was the largest at 16.5%. Approximately 69% of revenue came from customers outside the United States.
Key financial metrics
| Metric | FY2023 | FY2022 |
|---|---|---|
| Revenue | $893.4 million | $859.4 million |
| Gross profit / gross margin | $290.3 million / 32.5% | $283.5 million / 33.0% |
| Operating income / operating margin | $77.1 million / 8.6% | $88.2 million / 10.3% |
| Net income attributable to Varex | $48.2 million | $30.3 million |
| Diluted EPS | $1.08 | $0.73 |
| Cash from operating activities | $108.4 million | $16.9 million |
| Cash and cash equivalents | $152.6 million | $89.4 million |
| Total debt, net of discounts and issuance costs | $442.6 million | $414.4 million |
At year-end, Varex also held $1.0 million of certificates of deposit and $41.3 million of marketable debt securities. The undrawn $100 million asset-based revolving facility had $88.7 million available. Current assets were $658.3 million and current liabilities $162.8 million. Principal debt outstanding was $448.0 million: $200 million of 4.00% convertible notes due 2025 and $243 million of 7.875% secured notes due 2027, plus other debt.
Changes versus FY2022
- Revenue increased 4.0%, driven by Industrial revenue growth of 19% to $220.1 million. Medical revenue was nearly flat at $673.3 million.
- Industrial gross profit rose to $84.8 million, while Medical gross profit declined to $205.5 million. Total gross margin decreased 0.5 percentage points, with higher digital-detector material costs cited for Medical.
- Operating expenses increased 9% to $213.2 million, including higher R&D spending and compensation costs. Operating income fell 13% to $77.1 million.
- Net income increased despite lower operating income, primarily reflecting a $17.4 million income tax benefit versus $13.7 million of tax expense in FY2022. The benefit largely reflected release of the U.S. valuation allowance.
- Other expense increased to $20.2 million, primarily due to a $16.4 million impairment of the dpiX Holding equity investment. Interest expense declined to $29.3 million, but was more than offset by higher other expense.
- Operating cash flow increased substantially, helped by lower inventory cash outflows and stronger receivable collections. Inventory fell to $277.5 million from $303.2 million; DSO improved to 65 days from 68.
Outlook, risks and unusual items
- No quantified FY2024 revenue or earnings guidance is provided. Management expected supply-chain challenges to have less impact in FY2024, but anticipated that China’s healthcare-industry anti-corruption measures would continue and could weigh on China medical sales.
- Management reported improved border-protection demand, increased FY2023 security-inspection sales, and additional tenders for FY2024. Backlog was approximately $335 million at year-end, but orders may be revised or canceled and conversion to revenue is uncertain.
- Key exposures include dependence on major OEM customers, competitive and pricing pressures, supply constraints and single-source components, raw-material inflation, foreign exchange, and geopolitical and tariff risks. U.S. tariff exclusions affecting specified goods were temporary and set to expire December 31, 2023 unless extended.
- A German joint-venture dispute involving VEC is in judicial proceedings; either party’s success could require it to buy the other’s interest at 75% of disputed fair market value. The filing also identifies product-liability litigation, while stating that it had no material contingent liabilities at year-end and that management did not believe current or pending litigation would materially adversely affect operations or financial position.
- The $16.4 million dpiX investment impairment followed lower projected glass purchases by Varex. The company also reported a $2.8 million environmental liability, net of expected insurance proceeds, related to historical sites.
- Adoption of a convertible-debt accounting standard changed the carrying value and diluted-EPS calculation. The filing says U.S. tax rules requiring capitalization of R&D expenditures are expected to increase taxable income and cash taxes over the next several years.
- Management stated operating cash flow, cash and available ABL borrowing capacity were sufficient for anticipated needs for at least the next 12 months. The ABL facility remains undrawn and Varex was compliant with its covenants at year-end.
Important facts for investors to verify
- Whether China’s anti-corruption measures, tariffs, and changing OEM demand materially affect FY2024 revenue and orders.
- Whether the $335 million backlog converts to sales on expected timing and margins, particularly in Industrial security and inspection.
- Progress in rebuilding Medical gross margin and containing operating expenses after the FY2023 margin decline.
- Cash generation, debt-service capacity, and refinancing or conversion outcomes for the $200 million convertible notes due 2025.
- Resolution and potential financial consequences of the VEC dispute, product-liability litigation, and environmental obligations.
- The sustainability of the FY2023 tax benefit and the effect of R&D tax capitalization on future cash taxes. Deloitte issued an unqualified opinion on the FY2023 financial statements and internal controls.