Varex Imaging Corporation — Q1 FY2023 Form 10-Q
Reporting period: The 13-week quarter ended December 30, 2022; comparisons are with the 13 weeks ended December 31, 2021 unless otherwise noted. Varex designs and sells X-ray imaging components and related products and services through its Medical and Industrial segments.
Financial performance
| Metric | Q1 FY2023 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $205.6 million | $198.8 million | Up 3.4% |
| Gross profit / margin | $63.3 million / 30.8% | $64.8 million / 32.6% | Profit down $1.5 million; margin down 1.8 percentage points |
| Operating income | $13.0 million | $14.0 million | Down $1.0 million |
| Net income attributable to Varex | $3.1 million | $1.4 million | Up $1.7 million |
| Diluted EPS | $0.08 | $0.03 | Up $0.05 |
| Operating cash flow | $(3.7) million | $10.8 million | Down $14.5 million |
- Segment results: Medical revenue rose 2.8% to $160.1 million; gross profit was $46.3 million and gross margin was 28.9%, versus 29.5%. Industrial revenue rose 5.6% to $45.5 million, while gross profit fell 9.6% to $17.0 million and margin declined to 37.4% from 43.6%.
- Expenses and interest: R&D increased 13.0% to $20.0 million; SG&A declined 8.5% to $30.3 million. Net interest and other expense improved to $7.6 million from $10.7 million, primarily reflecting lower interest expense.
- Cash, liquidity and debt: Cash and cash equivalents were $81.5 million at quarter-end, down from $89.4 million at September 30, 2022. Cash, certificates of deposit and marketable securities totaled $107.7 million. Net debt was $442.9 million; the $100 million ABL facility was undrawn, with $92.0 million available. Current assets were $607.3 million and current liabilities $157.4 million.
- Working capital: Inventory increased to $320.3 million from $303.2 million. DSO was 70 days, compared with 68 at fiscal year-end.
Material changes and unusual items
- Revenue growth did not translate into higher gross profit: management cited a less favorable product mix, including fewer higher-margin CT tubes and certain medical detectors, lower Industrial service revenue, and higher material costs.
- Operating cash flow turned negative, with cash use from inventory and accrued liabilities partly offset by collections on accounts receivable. Investing activity included purchases of marketable securities and settlement proceeds from net investment hedges.
- Adoption of ASU 2020-06 increased reported net debt by $28.5 million, primarily because the unamortized convertible-note discount was removed. The adoption also reduced additional paid-in capital by $34.6 million and increased retained earnings by $6.5 million. This was an accounting change, not a new borrowing. Diluted EPS may be affected by the required if-converted method; convertible-note shares were anti-dilutive in this quarter.
Outlook, commentary and risks
- Management provided no specific revenue or earnings guidance in the supplied filing text. It expects supply-chain, manufacturing and logistics challenges to continue through several quarters, and describes uncertainty in sales volume through at least FY2023. It also anticipated further product pricing adjustments during FY2023 to address rising costs.
- Management said demand for certain products was good and supply conditions had improved, but shortages—particularly micro-controller chips and other electronic components—continued to impede production and fulfillment. Inflation, freight and labor costs, customer caution, and product mix remain pressures on margins.
- Backlog was approximately $405 million at December 30, 2022; orders can be revised or canceled, so backlog is not assured revenue.
- Customer concentration is material: Canon Medical Systems accounted for 20.1% of quarterly revenue. The ten largest customers represented approximately 55% of revenue.
- Other disclosed risks include dependence on limited- or sole-source suppliers (including dpiX), international and currency exposure, tariffs and geopolitical tensions, regulatory and product-liability risks, and significant debt and covenant restrictions. Varex’s 2023 fixed-cost commitment to dpiX was $13.1 million. The company reported no material contingent liabilities and no currently pending litigation expected to materially adversely affect its operations or financial position.
- Management stated that cash, operating cash flow and ABL availability should cover anticipated operating needs for at least 12 months. Disclosure controls were assessed as effective at quarter-end.
Important facts for investors to verify
- Whether reported backlog converts to shipments and revenue, given continuing component shortages and customers’ fulfillment constraints.
- Whether gross margins recover as product mix, material costs and Industrial service revenue change.
- Why operating cash flow was negative, and whether inventory and accrued-liability movements reverse in subsequent quarters.
- Debt maturity, cash-interest and covenant capacity, including the convertible notes due 2025 and secured notes due 2027; assess potential conversion-related dilution and cash needs.
- Exposure to Canon and other large OEM customers, and to dpiX as a supplier and related-party investment.
- Whether management’s 12-month liquidity assessment remains supported by cash generation and available ABL borrowing capacity.