10-K: Varex Imaging Corporation Reports Fiscal Year 2024 Results Amidst Economic and Geopolitical Headwinds

Varex Imaging Corporation's fiscal year 2024 results reflect a decrease in revenue and profit, impacted by global economic instability, supply chain challenges, and geopolitical tensions, particularly in China.

Summary

• Varex Imaging Corporation's fiscal year 2024 saw a 9% decrease in total revenue, reaching $811 million, compared to $893.4 million in fiscal year 2023.
• Medical segment revenue declined by 14%, while Industrial segment revenue increased by 4%.
• The company experienced a decrease in gross profit by 12%, totaling $256.9 million.
• Operating expenses increased by 5% to $224.8 million.
• The company reported a net loss of $47.7 million, a significant downturn from the $48.2 million net income in the previous year.
• The effective tax rate was 1,044.0% due to unfavorable impacts of U.S. deferred tax attributes and losses in certain foreign jurisdictions.
• The company's total debt was approximately $446.6 million of principal, including $200 million of convertible notes due in 2025.
• The company anticipates refinancing the convertible notes using a combination of borrowings under its Revolving Credit Facility and cash.
• The company's estimated total backlog at September 27, 2024, was approximately $299 million.

Sentiment

Score: 3

Explanation: The document presents a negative outlook due to decreased revenue, a net loss, and various economic and geopolitical risks. While there are some positive aspects, the overall tone is cautious and concerning from an investment perspective.

Positives

• The Industrial segment saw a 4% increase in revenue, driven by security inspection products and industrial tubes.
• The company experienced fewer supply chain, manufacturing, and logistics challenges in fiscal year 2024 than in fiscal year 2023.
• The company continues to invest in research and development to support long-term growth objectives.
• The company has implemented local sourcing strategies to offer local content, which has been well received by both local customers and global OEMs.

Negatives

• Medical segment revenue declined by 14% due to lower sales in China and decreased sales of fluoroscopy, oncology, and dental applications.
• The company reported a net loss of $47.7 million, a significant downturn from the $48.2 million net income in the previous year.
• The effective tax rate was 1,044.0% due to unfavorable impacts of U.S. deferred tax attributes and losses in certain foreign jurisdictions.
• The company's business in China has been impacted by trade wars between the United States and China.
• The company has experienced cautious purchasing behaviors by customers, which are expected to subside by calendar year-end 2024.

Risks

• The company is subject to global, regional, and country-specific economic instability, shifting political environments, and changing tax treatments.
• Supply chain disruptions and reliance on a limited number of suppliers for certain key components could lead to delayed product delivery and increased costs.
• The company faces intense competition and pricing pressures, which could result in margin erosion and loss of customers.
• The company's business in China has been, is currently being, and may in the future be, impacted by trade wars between the United States and China.
• The company may be unable to complete future acquisitions or joint ventures or realize expected benefits from acquisitions of or investments in new businesses and joint ventures, products, or technologies.
• The company is subject to legal proceedings that may materially and adversely affect its business, results of operations, or cash flows.
• Product defects or misuse may result in material product or other liability or professional errors and omissions claims, litigation, investigation by regulatory authorities, or product recalls.
• The company's operations are vulnerable to interruption or loss due to natural or other disasters, the effects of climate change, power loss, strikes, and other events beyond its control.
• The company's competitive position would be harmed if it is not able to maintain or defend its intellectual property rights.
• Disruption of critical information systems or material breaches in the security of the company's systems may materially and adversely affect its business and customer relations.
• Changes in import/export regulatory regimes, tariffs, and national policies have in the past and could continue to negatively impact the company's business.
• Compliance with foreign laws and regulations applicable to the marketing, manufacturing, and distribution of the company's products may be costly, and failure to comply may result in unfavorable legal proceedings, in significant penalties and other harm to the company's business.
• Existing and future healthcare reforms and changes to reimbursement rates, may indirectly have a material adverse effect on the company's business and results of operations.
• The company is subject to federal, state, and foreign laws governing its business practices which, if violated, could result in substantial penalties.
• The Revolving Credit Facility, Equipment Credit Facility, and the indenture governing the company's Senior Secured Notes impose significant operating and financial restrictions that may limit the company's current and future operating flexibility.
• Because the company's Convertible Notes mature in June 2025, failure to maintain sufficient liquidity and/or to refinance the Convertible Notes could result in a material adverse effect on the company's results of operations and financial position.

Future Outlook

The company anticipates some contraction in demand for Linatron X-ray accelerators for border protection applications in fiscal year 2025, but expects demand to remain solid. The company also expects cautious purchasing behaviors by customers to subside by calendar year-end 2024. The company anticipates the Chinese government's anti-corruption campaign to continue at some level through fiscal year 2025, which could continue to adversely impact revenues in the China business. The company anticipates refinancing the convertible notes using a combination of future borrowings under its Revolving Credit Facility and cash.

Management Comments

• The company remains cautious about the general economic environment as many factors remain dynamic and unpredictable.
• The company experienced fewer supply chain, manufacturing, and logistics challenges in fiscal year 2024 than in fiscal year 2023.
• The company continues to monitor developments in the area of potential changes to tariffs as a result of the outcome of the recent United States presidential and congressional elections.

Industry Context

The report highlights the challenges faced by the medical device industry, including economic instability, supply chain disruptions, and geopolitical tensions. The company's performance is also affected by specific industry trends, such as the Chinese government's anti-corruption campaign in the healthcare sector and the ongoing trade war between the United States and China.

Comparison to Industry Standards

• The company competes with major diagnostic imaging systems companies, some of which manufacture their own X-ray imaging components, such as Canon, Philips Healthcare, and Siemens Healthineers.
• The company also competes with other independent X-ray tube manufacturers and digital detector manufacturers, including Trixell S.A.S., Vieworks Co., Ltd., Hamamatsu Corporation, iRay Technology (Shanghai) Limited, and Jiangsu CareRay Medical Systems Co., Ltd.
• In the industrial sector, the company competes with OEM suppliers such as iRay, Teledyne, and Comet AG in the low-energy sector, and Nuctech Company Limited, Siemens AG, ETM Electromatic Inc., and PMB Alcen in the high-energy sector.
• The company's performance is impacted by the purchasing patterns of large OEMs, such as Canon, United Imaging Healthcare, General Electric Company, Rapiscan Systems, Inc., and Siemens Healthineers AG, which collectively accounted for approximately 41% of total revenue in fiscal year 2024.
• The company's business is also affected by government policies on national and homeland security, border protection, and customs activities, which can lead to unpredictable demand for security and inspection products.

Legal Proceedings

• The company is currently a party to certain products liability litigation which, if adversely determined, could have an adverse material impact on its financial results.
• The company's subsidiary Varex Imaging Deutschland AG is involved in judicial proceedings in Germany against its joint venture partner, disputing the validity of shareholder resolutions.
• The company's subsidiary Varex Imaging International AG has an ongoing dispute with its joint venture partner relative to the operation of the joint venture.

Related Party Transactions

• The company has a 40% ownership interest in dpiX Holding Company LLC, a supplier of amorphous silicon-based thin film transistor arrays.
• The company has a 50% interest in VEC Imaging GmbH & Co. KG, a joint venture formed to develop technology for use in X-ray imaging components.
• The company has a 75% interest in Varex Imaging Arabia LLC, a joint venture in Saudi Arabia.

Stakeholder Impact

• Shareholders may be concerned about the company's net loss and decreased revenue.
• Employees may be affected by potential cost-cutting measures or restructuring.
• Customers may experience delays or changes in product availability due to supply chain issues.
• Suppliers may face increased pressure due to the company's cost-reduction efforts.
• Creditors may be concerned about the company's ability to repay its debt obligations.

Next Steps

• The company anticipates refinancing the convertible notes due in June 2025 using a combination of future borrowings under its Revolving Credit Facility and cash.
• The company will continue to monitor developments in the area of potential changes to tariffs as a result of the outcome of the recent United States presidential and congressional elections.
• The company will continue to monitor the impact of the Chinese government's anti-corruption campaign on its business.

Key Dates

Keywords

X-ray imaging, medical devices, industrial inspection, digital detectors, X-ray tubes, healthcare, security, manufacturing, supply chain, financial results