Varex Imaging Corporation — FY2022 Form 10-K
Business context and reporting period. Varex designs and manufactures X-ray imaging components and related products for medical and industrial markets. This is the annual report for the 52 weeks ended September 30, 2022—not a standalone fourth-quarter report. Comparative period: FY2021, ended October 1, 2021. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $859.4 million | $818.1 million |
| Gross profit / gross margin | $283.5 million / 33.0% | $271.5 million / 33.2% |
| Operating income | $88.2 million | $74.1 million |
| Net income attributable to Varex | $30.3 million; diluted EPS $0.73 | $17.4 million; diluted EPS $0.43 |
| Cash from operating activities | $16.9 million | $92.6 million |
| Capital expenditures | $21.3 million | $15.1 million |
- Medical revenue was $674.7 million, up 5%; Industrial revenue was $184.7 million, up 6%. Medical represented 78.5% of revenue.
- Revenue by region: Americas $273.3 million (+2%), EMEA $280.8 million (+2%), and APAC $305.3 million (+12%). APAC growth was primarily driven by China.
- Operating expenses were $195.3 million, down 1%. Research and development was $77.0 million; selling, general and administrative expense was $118.3 million.
- Interest and other expense, net, was $43.7 million, versus $45.5 million. Income tax expense was $13.7 million; the effective tax rate was 30.8%, versus 37.4%.
- Cash and cash equivalents were $89.4 million at year-end, down from $144.6 million. The company also reported $94.5 million available under its undrawn ABL facility. Management said operating cash, balance-sheet cash and ABL availability were sufficient for anticipated needs for at least 12 months.
- Gross principal debt was $449.7 million; reported debt outstanding net of discounts and issuance costs was $414.4 million. Debt included $200 million of 4.00% convertible notes due 2025 and $243 million of 7.875% senior secured notes due 2027. The company redeemed $27 million principal of the secured notes during FY2022.
- Inventory increased to $303.2 million from $224.8 million, with raw materials and parts comprising $240.3 million. Inventory write-downs were $6.4 million.
- Estimated backlog was approximately $425 million; orders may be revised or canceled. No cash dividends were paid, and none were planned.
Material changes versus FY2021
- Revenue rose 5%, but gross margin edged down to 33.0% from 33.2%, with higher freight and material costs offsetting sales growth.
- Operating income increased to $88.2 million from $74.1 million, and net income attributable to Varex rose to $30.3 million from $17.4 million.
- Operating cash flow fell to $16.9 million from $92.6 million, primarily due to increased inventory purchases. Inventory rose $78.4 million year over year.
- Cash and cash equivalents declined by $55.2 million. The company also made debt repayments and purchased marketable securities and certificates of deposit.
- DSO increased to 68 days from 62 days. The largest customer, Canon, contributed 17.2% of FY2022 revenue, down from 17.9%.
Outlook, commentary, risks and unusual items
- Management reported demand recovery and growth, with demand for many products back to pre-pandemic levels. It did not provide numerical FY2023 revenue or earnings guidance in the supplied filing text.
- Management expected supply-chain and manufacturing challenges to continue into FY2023 and affect deliveries over the next several quarters. Micro-controller chips and other electronic components were particular constraints; inflation, freight, labor and materials increased costs. Varex raised prices on certain products in FY2022 and anticipated further price adjustments during FY2023.
- Key exposures include reliance on a limited number of OEM customers, sole- or limited-source suppliers, customer demand uncertainty, strong U.S. dollar, tariffs and trade tensions, China-related disruption, and geopolitical uncertainty including the Russia-Ukraine conflict. The top five customers accounted for approximately 40% of revenue; the ten largest accounted for approximately 52%.
- The ABL facility and debt indentures impose financial and operating restrictions. The ABL fixed-charge coverage covenant is tested when availability falls below specified thresholds; Varex reported compliance at year-end.
- The filing reported no material contingent liabilities at September 30, 2022 and no pending litigation believed likely to materially affect operations or financial position. Environmental liabilities were reported as approximately $1.6 million in the commitments note; elsewhere the filing describes approximately $1.1 million net of expected insurance proceeds for specified CERCLA sites.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Inventory valuation—especially estimates of excess and obsolete inventory—was identified as a critical audit matter.
- The company expects increased cash taxes in the early years of FY2023 and thereafter from the tax requirement to capitalize research and development expenditures. Adoption of the convertible-instrument accounting standard in FY2023 was also expected to change balance-sheet and interest-expense presentation and could affect diluted EPS.
Important facts for investors to verify
- Whether supply constraints ease, backlog converts to revenue, and inventory is used or written down without material margin or cash-flow deterioration.
- Whether price increases offset inflation, freight and labor costs, and whether gross margins recover.
- Cash generation, working-capital needs, debt maturities and refinancing capacity, including the 2025 convertible notes and 2027 secured notes.
- Customer concentration and purchasing trends, particularly Canon and China-related demand, tariffs and local sourcing requirements.
- The assumptions supporting inventory valuation and the company’s reported liquidity outlook; reconcile the filing’s environmental-liability figures when assessing exposure.