Varex Imaging Corporation — Q1 FY2024 Form 10-Q
Reporting period: 13 weeks ended December 29, 2023; comparative period ended December 30, 2022. Varex designs, manufactures, sells, and services X-ray imaging products for medical and industrial markets. Figures below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Revenue | $190.0 | $205.6 | Down $15.6 (7.6%) |
| Gross profit / margin | $57.1 / 30.1% | $63.3 / 30.8% | Profit down $6.2; margin down 0.7 percentage points |
| Operating income / margin | $4.2 / 2.2% | $13.0 / 6.3% | Income down $8.8 |
| Net income (loss) attributable to Varex | $(0.5); $(0.01) per diluted share | $3.1; $0.08 per diluted share | Shifted to loss |
| Operating cash flow | $10.3 | $(3.7) | Improved $14.0 |
| Capital expenditures | $10.4 | $5.5 | Increased $4.9 |
- Medical revenue fell 12.6% to $139.9, mainly on lower fluoroscopic, dental, and CT sales; mammography partly offset the declines. Medical gross margin was 27.8%, down from 28.9%.
- Industrial revenue rose 10.1% to $50.1, primarily from security inspection products. Industrial gross margin was 36.3%, down from 37.4%.
- Operating expenses increased 5.2% to $52.9, with SG&A up $2.1 and R&D up $0.5. R&D was 10.8% of revenue; management describes 8%–10% of annual revenue as its long-term target range.
- Cash and cash equivalents were $141.3 at quarter-end, versus $152.6 at fiscal year-end. Cash, certificates of deposit, and marketable securities totaled $194.5. Cash and cash equivalents plus restricted cash ended at $142.7.
- Total debt outstanding, net of $4.8 of issuance costs, was $443.0; principal debt was approximately $447.8. The $100.0 ABL facility was undrawn, with $71.9 available. The 4.0% convertible notes have $200.0 principal outstanding and mature in June 2025; $243.0 of senior secured notes mature in October 2027.
Material changes and notable items
- Revenue declined despite Industrial growth, as Medical sales weakness more than offset higher Industrial sales. Total gross margin compressed and operating income fell, while higher interest income and other income partly moderated the earnings decline.
- Operating cash flow improved from an outflow to an inflow, mainly due to stronger receivable collections and lower cash outflows for inventory and prepaid expenses. Investing outflow increased to $19.9, including $10.4 of capital expenditures and net purchases of marketable debt securities.
- Varex increased its ownership of MeVis Breastcare to 87.1%, gaining control. The acquisition generated a reported $0.9 remeasurement gain and $1.2 bargain-purchase gain.
- Accounts receivable declined to $139.6 from $163.6, while inventory rose to $289.7 from $277.5. Days sales outstanding increased to 67 days from 65.
Outlook, risks, and contingencies
- Management says cash, operating cash flow, ABL availability, and potential access to capital markets should be sufficient for anticipated needs over at least the next 12 months. It expects to refinance the June 2025 convertible notes using some combination of future borrowings and cash. No specific revenue or earnings guidance is provided in the filing text.
- Management expects supply-chain challenges to have less impact in FY2024, but says material shortages and delivery delays may persist. China healthcare-sector anti-corruption measures have slowed Medical sales there and are expected to continue affecting FY2024 revenue.
- U.S. tariff exclusions affecting certain China-related trade are temporary; the filing says exclusions were set to expire May 31, 2024 unless extended. Trade tensions, currency movements, inflation, customer demand, and reliance on limited or sole-source suppliers remain risks.
- Customer concentration is material: Canon Medical represented 14.7% of quarterly revenue, and the ten largest customers represented approximately 52%. The filing also describes one customer as accounting for 15% of revenue; investors may wish to reconcile this disclosure with the Canon concentration figure.
- The filing reports litigation between the partners of VEC in Germany over shareholder resolutions and control of the joint venture; the value of any buyout is disputed. It also identifies existing product-liability litigation, but states that no material contingent liabilities were recorded and management did not believe pending litigation would materially harm operations or financial position.
- Other commitments include $12.4 of 2024 fixed costs for dpiX, $8.2 of non-cancellable supplier purchase obligations, and up to $2.0 in two remaining milestone payments. The estimated environmental liability was $2.6.
Important facts for investors to verify
- Whether Medical demand, particularly in China and in CT, dental, and fluoroscopic products, recovers and whether Industrial growth continues.
- Progress on refinancing the $200.0 convertible notes before their June 2025 maturity, and the availability and cost of financing.
- Whether tariff exclusions are extended and how China policy, trade tensions, and supplier constraints affect costs, orders, and margins.
- Backlog was approximately $299 at quarter-end, but orders may be revised or canceled; monitor conversion into revenue.
- Developments in the VEC dispute and product-liability litigation, including any potential financial or operational effects.