10-Q: Varex Imaging Q1 2026: Industrial Growth Drives Net Income

Varex Imaging Corporation reported a net income of $2.3 million for Q1 fiscal year 2026, driven by strong Industrial segment revenue growth and improved operating efficiency, despite challenges in the Medical segment.

Summary

• Net income attributable to Varex was $2.3 million for the three months ended January 2, 2026, a significant improvement from a net loss of $(0.3) million in the prior year period.
• Total revenues, net, increased by 4.9% to $209.6 million, compared to $199.8 million in the same period last year.
• The Industrial segment demonstrated strong growth, with revenues increasing by 17.4% to $64.8 million, while the Medical segment's revenues remained relatively flat at $144.8 million (up 0.1%).
• Gross profit increased by 1.9% to $69.8 million, although the total gross margin slightly decreased to 33.3% from 34.3% in the prior year.
• Operating expenses decreased by 5.1% to $54.4 million, contributing to an increase in operating income to $15.4 million from $11.2 million.
• Net cash used in operating activities was $(16.1) million, a notable shift from $9.5 million provided in the prior year, primarily due to increased inventory for anticipated future demand and lower cash provided by accounts receivable.
• Cash and cash equivalents decreased by $25.5 million to $119.5 million as of January 2, 2026.
• Total debt outstanding, net, remained relatively stable at $367.6 million.
• The company's backlog was approximately $264 million as of January 2, 2026.

Sentiment

Score: 7

Explanation: StockSavvy.ai views this as a moderately positive report, reflecting a return to profitability and strong growth in the Industrial segment, coupled with effective cost management. However, the decline in Medical segment gross margin and negative operating cash flow warrant continued monitoring.

Positives

• Shift from a net loss of $(0.3) million in the prior year to a net income of $2.3 million attributable to Varex.
• Total revenues increased by 4.9% to $209.6 million, demonstrating overall top-line growth.
• The Industrial segment showed robust revenue growth of 17.4% to $64.8 million, driven by increased sales of inspection products and digital detectors.
• Operating expenses decreased by 5.1% to $54.4 million, indicating improved cost management and efficiency.
• Operating income increased significantly to $15.4 million from $11.2 million in the prior year.
• Industrial gross profit increased by $4.8 million, with its gross margin improving to 36.7% from 34.4%.
• Research and development costs decreased to 10.4% of revenues, aligning with the company's target range of 8% to 10% for long-term growth investment.
• The China Ministry of Commerce (MOFCOM) investigations related to medical CT X-ray tubes and tube inserts were indefinitely suspended in November 2025, removing a significant regulatory uncertainty.

Negatives

• Medical segment gross profit decreased by $3.5 million, and its gross margin declined to 31.8% from 34.2%, primarily due to increased material costs.
• Net cash used in operating activities was $(16.1) million, a substantial decrease from $9.5 million provided in the prior year, mainly attributed to a $14.5 million increase in inventory for anticipated future demand and $10.6 million lower cash provided by accounts receivable.
• Cash and cash equivalents decreased by $25.5 million to $119.5 million.
• Interest income decreased by $1.5 million, primarily due to a decline in cash, cash equivalents, and marketable securities balances.
• Other expense, net, increased by $1.5 million, largely due to increased losses of $2.0 million in certain privately-held and equity investments.
• APAC revenues decreased by $5.1 million (6.8%), primarily due to decreased sales of X-ray tubes, digital detectors, and security inspection products in the region.
• Trade accounts receivable days sales outstanding (DSO) increased to 64 days from 62 days.

Risks

• Changes in import/export regulatory regimes, tariffs, trade wars, and national policies, including the potential re-commencement of the indefinitely suspended MOFCOM investigations, could negatively impact business and profitability.
• Reduction in or loss of business from a limited number of OEM customers (one customer accounted for 16% of revenue, top ten for 52%) could materially reduce sales.
• Global, regional, and country-specific economic instability, shifting political environments, and geopolitical tensions (e.g., Ukraine-Russia war, Middle East conflicts) may cause delayed customer purchasing decisions, increased costs, and supply chain disruptions.
• Intense competition, pricing pressures, and potential margin erosion, including from OEM customers manufacturing components in-house, could adversely affect financial results.
• Inability to meet customer needs and demands, anticipate shifts in preferences, or manage pricing expectations due to a strong U.S. Dollar could impact revenue and margins.
• Supply chain disruptions, reliance on limited or sole-source suppliers for key components, and volatility in raw material prices (e.g., copper, nickel, silver, gold) could delay product delivery and increase costs.
• Disruption of critical information systems or material breaches in security (e.g., cyberattacks, ransomware) could lead to loss of information, intellectual property, litigation, and reputational harm.
• Inability to maintain or defend intellectual property rights, and the high costs associated with protecting IP and defending against infringement claims, could harm the competitive position.
• Noncompliance with United States and foreign laws and regulations (e.g., FDA QSR, medical device reporting) applicable to marketing, manufacturing, and distribution of products, or delays in obtaining regulatory clearances/approvals, could result in fines, product recalls, or inability to sell products.
• Limitations imposed by operating and financial restrictions of debt financing agreements (e.g., covenants on additional indebtedness, dividends, asset sales) could restrict operational flexibility and ability to make debt payments.
• Unpredictable demand for security, industrial, and inspection products, heavily influenced by government policies, budgets, and oil prices, can lead to revenue and earnings volatility.
• Risks associated with joint ventures and equity method investments (e.g., dpiX Holding, VEC), including potential investment losses, significant and unpredictable financial losses from non-controlled entities, and ongoing legal disputes.
• Failure to develop and adopt artificial intelligence (AI) technology could hinder competitiveness and growth potential.
• Operations are vulnerable to interruption or loss due to natural or other disasters, adverse effects of climate change, power loss, strikes, and other events beyond control.
• Inability to match manufacturing capacity with demand for products, which have long production cycles, could negatively impact financial results.
• Failure to maintain effective internal controls and procedures, or changes in accounting standards and subjective management judgments, could negatively impact financial reporting.
• Potential for future impairment charges related to goodwill, which could adversely affect financial condition and results of operations.
• Inability to retain, attract, expand, integrate, and train management team and other key personnel could hinder business maintenance or expansion.
• Evolving matters relating to environmental, social, and governance (ESG) and associated reporting could expose the company to numerous risks, including reputational harm and increased compliance costs.
• Product defects or misuse may result in material product or other liability claims, litigation, investigation by regulatory authorities, or product recalls, potentially exceeding insurance coverage.

Future Outlook

Varex Imaging expects to refinance its Senior Secured Notes, which mature in October 2027, during fiscal year 2026. The company aims to maintain long-term research and development expenses at approximately 8% to 10% of annual revenues to drive innovation. Management is actively pursuing tariff mitigation strategies, including localized manufacturing, but does not anticipate fully offsetting all additional costs. No restructuring in China is currently planned. The company's long-term objective is to become the partner of choice for new and replacement CT systems in China, and it sees significant growth opportunities in non-destructive testing applications. Varex is evaluating the impact of new accounting standards, ASU 2024-03 and ASU 2023-09, with disclosures for the latter expected in the fiscal year 2026 Annual Report.

Management Comments

• "We are committed to investing in the business to support long-term growth and believe long-term research and development expenses of approximately 8% to 10% of annual revenues is the appropriate range that will allow us to innovate and bring new products to market for our global OEM customers."
• "We remain committed to working with our customers to minimize the effects of the tariffs. In this regard, we are actively working to implement a number of options that could reduce the impact, including pursuing commonly utilized mitigation practices and localizing more manufacturing in the region. At this time, however, we do not anticipate these efforts will allow us to fully offset the additional costs or other negative impacts resulting from such tariffs."
• "Considering the mitigation efforts we have in flight at this point, we are not currently planning to do any restructuring in China."
• "Over the long term, our objective is to become the partner of choice both for new systems and for replacement components in existing systems as CT systems continue to be more widely adopted throughout China."
• "We believe that non-destructive testing represents a significant growth opportunity for our business, and we are actively pursuing new potential applications for our products."

Industry Context

StockSavvy.ai notes that Varex Imaging operates in a dynamic X-ray imaging market, benefiting from increasing healthcare infrastructure in regions like China, where CT system adoption is growing. The company's focus on innovation and long-term OEM relationships provides stability, while its Industrial segment capitalizes on security and non-destructive testing trends. However, the industry faces ongoing challenges from global economic instability, geopolitical tensions, and supply chain disruptions, which Varex is actively trying to mitigate through localized manufacturing and tariff management. The indefinite suspension of MOFCOM investigations in China is a positive development for its medical X-ray tube exports, potentially easing competitive pressures in a key market.

Legal Proceedings

• Ongoing judicial proceedings in Germany since August 2023 between Varex Germany (50% interest) and its partner in the VEC joint venture, disputing the validity of shareholder resolutions seeking to exclude the other party.
• Varex Germany filed an action in Germany in June 2024 for a negative declaratory judgment and an injunction against business damaging statements made by certain third parties.
• Varex Germany and Varex Imaging Corporation have filed additional lawsuits in Germany and the United States relating to intellectual property matters, breach of contracts, and other matters.
• Ongoing disputes with the joint venture partner in Varex Imaging Arabia LLC (75% interest) relative to the operation of the joint venture.
• Currently a party to certain products liability litigation, which if adversely determined, could have a material adverse impact on financial results.
• The China Ministry of Commerce (MOFCOM) investigations related to medical CT X-ray tubes and tube inserts imported into China were indefinitely suspended in November 2025, but there is a risk they could be recommenced.

Related Party Transactions

• Varex holds a 40% ownership interest in dpiX Holding Company LLC, a major supplier of amorphous silicon-based thin film transistor arrays. A loss of $3.2 million on this equity investment was recorded for the quarter (vs. $1.6 million in prior year).
• Purchases of glass transistor arrays from dpiX totaled $6.4 million for the quarter (vs. $4.6 million in prior year).
• Varex's fixed cost commitment to dpiX for calendar year 2026 was determined to be $13.7 million.
• Varex's investment in VEC Imaging GmbH & Co. KG, a joint venture, was $2.0 million, with loans and other receivables from VEC of $0.8 million.
• Varex has a 75% interest in Varex Imaging Arabia LLC, a partnership in Saudi Arabia, and has ongoing disputes with its joint venture partner regarding operations.

Stakeholder Impact

• Shareholders: Positive impact from the return to net income and strong Industrial segment growth, but diluted EPS remains low. Potential for future growth is balanced by risks from ongoing legal disputes and upcoming debt refinancing.
• Employees: Continued investment in R&D and no planned restructuring in China suggest stability. The competitive labor market may lead to increased compensation costs.
• Customers (OEMs): Benefit from Varex's focus on innovation and long-term relationships, but may face pricing pressures due to a strong U.S. Dollar and tariffs. Supply chain reliability remains a critical factor.
• Suppliers: Varex's reliance on limited/sole-source suppliers creates a dependency. Participation in supplier finance programs helps manage payment terms.
• Creditors: The company's debt covenants and the upcoming refinancing of Senior Secured Notes are key considerations, though Varex believes it has sufficient liquidity.

Next Steps

• Refinance Senior Secured Notes in fiscal year 2026.
• Continue investing in research and development to innovate and bring new products to market, targeting 8% to 10% of annual revenues.
• Actively work on tariff mitigation practices and localize manufacturing to reduce cost impacts.
• Pursue new applications for products in non-destructive testing, identifying it as a significant growth opportunity.
• Provide required disclosures for ASU 2023-09 (Improvements to Income Tax Disclosures) in the Annual Report on Form 10-K for the year ended October 2, 2026.
• Account for a $7.3 million asset acquisition for manufacturing equipment over a 3-year term, entered into on January 20, 2026.

Key Dates

Recommendation

Varex Imaging's return to profitability and robust Industrial segment growth are positive indicators, supported by effective cost management and the indefinite suspension of MOFCOM investigations. However, the decline in Medical segment gross margin, negative operating cash flow, and ongoing legal disputes introduce uncertainty. The upcoming debt refinancing in fiscal year 2026 also presents a key event. A "Hold" recommendation is appropriate as the company navigates these mixed signals, with potential for upside if operational improvements continue and risks are managed, but also downside if challenges persist.

Keywords

X-ray imaging, medical devices, industrial inspection, digital detectors, X-ray tubes, X-ray linear accelerators, X-ray software, X-ray components, OEM, healthcare technology, security screening, non-destructive testing, VREX, quarterly report, financial results