10-Q: Varex Imaging Reports Mixed Q1 Results Amidst Economic Headwinds

Varex Imaging Corporation reported a net loss for the first quarter of fiscal year 2024, with revenue declining year-over-year, while facing ongoing economic and supply chain challenges.

Summary

• Varex Imaging Corporation reported a net loss of $0.5 million for the quarter ended December 29, 2023, compared to a net income of $3.1 million in the same period last year.
• The company's revenue decreased by 7.6% year-over-year, totaling $190 million, with the medical segment experiencing a 12.6% decline.
• Gross profit also decreased to $57.1 million from $63.3 million year-over-year, with a slight decrease in gross margin from 30.8% to 30.1%.
• Operating expenses increased by 5.2% to $52.9 million, driven by higher selling, general, and administrative costs.
• The company's cash and cash equivalents decreased to $141.3 million from $152.6 million at the end of the previous quarter.
• Varex's total debt stood at $443 million, net of deferred issuance costs.
• The company's backlog was approximately $299 million at the end of the quarter.
• The company experienced some supply chain, manufacturing, and logistics challenges during 2023, but anticipates less of an impact in fiscal year 2024.
• The Medical business has been negatively impacted by the China government initiated anti-corruption measures related to the healthcare industry.

Sentiment

Score: 3

Explanation: The document presents a negative outlook due to decreased revenue, a net loss, and increased operating expenses. While there are some positive aspects, the overall tone is cautious and indicates potential challenges ahead.

Positives

• The Industrial segment saw a 10.1% increase in revenue year-over-year.
• The company anticipates supply chain challenges to have less of an impact in fiscal year 2024.
• Interest income increased primarily due to an increase in investments made into marketable debt securities.
• The company recorded a gain on bargain purchase of $1.2 million related to the acquisition of MeVis Breastcare.

Negatives

• The company reported a net loss of $0.5 million for the quarter.
• Total revenue decreased by 7.6% year-over-year.
• The Medical segment experienced a 12.6% decline in revenue.
• Gross profit decreased to $57.1 million.
• Operating expenses increased by 5.2% to $52.9 million.
• Cash and cash equivalents decreased to $141.3 million.
• The Medical business has been negatively impacted by the China government initiated anti-corruption measures related to the healthcare industry.

Risks

• The company faces risks related to economic instability, supply chain disruptions, and geopolitical tensions.
• The company relies on a limited number of OEM customers, and a loss of business from one or more of these customers could materially reduce sales.
• The company is subject to pricing pressures and competition, which could result in margin erosion.
• The company's international operations are subject to currency fluctuations, political instability, and changing tax treatments.
• The company's debt agreements impose significant operating and financial restrictions.
• The company's convertible notes mature in June 2025, and failure to refinance them could adversely affect the company.
• The company is subject to various legal and regulatory risks, including product liability claims and compliance with healthcare laws.
• The company's operations are vulnerable to interruption due to natural disasters and other events beyond its control.
• The company faces risks related to intellectual property and information systems security.
• The company's business is subject to evolving Environmental, Social, and Governance (ESG) requirements and stakeholder expectations.

Future Outlook

The company anticipates supply chain challenges to have less of an impact in fiscal year 2024, but expects the China government's anti-corruption measures to continue to impact revenues in its China business. The company also anticipates refinancing its Convertible Notes due in June 2025 using a combination of future borrowings and cash.

Management Comments

• Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives.
• Management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Industry Context

The report reflects challenges in the medical imaging industry, particularly in China, due to government actions and ongoing economic uncertainties. The company's performance is also influenced by global supply chain issues and competition in the X-ray component market.

Comparison to Industry Standards

• The decrease in revenue and profitability is concerning, especially when compared to other medical device companies that have shown more resilience in the current economic climate.
• The company's reliance on a few major OEM customers is a risk factor that is not unique to Varex, but the magnitude of the impact on their results is significant.
• The company's gross margin of 30.1% is lower than some of its competitors in the medical device industry, such as those with a higher proportion of software or service revenue.
• The increase in operating expenses, particularly in selling, general, and administrative costs, is a concern and should be compared to industry benchmarks to assess efficiency.
• The company's debt level of $443 million is significant and should be compared to its peers to assess its financial leverage and risk.
• The company's backlog of $299 million is a positive sign, but it is important to monitor the conversion of backlog to revenue and compare it to industry averages.
• The company's performance in the industrial segment is a bright spot, but it is important to assess the sustainability of this growth and compare it to other companies in the industrial imaging market.
• The company's exposure to the Chinese market is a risk factor that is shared by many companies in the medical device industry, but the impact of the anti-corruption measures on Varex's results is significant and should be compared to other companies with similar exposure.

Legal Proceedings

• The company is subject to various claims, complaints and legal actions in the normal course of business from time to time.
• The company does not believe it has any current or pending litigation for which the outcome could have a material adverse effect on its operations or financial position.
• The partners to the VEC joint venture filed judicial proceedings in Germany against one another disputing the validity of shareholder resolutions passed in January 2023.

Related Party Transactions

• The company has a 40% ownership interest in dpiX Holding 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 purchased glass transistor arrays from dpiX totaling $5.0 million during the quarter.

Stakeholder Impact

• Shareholders may be concerned about the 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 be impacted by changes in the company's purchasing patterns.
• Creditors may be concerned about the company's ability to meet its debt obligations.

Next Steps

• The company will continue to work to improve the life and quality of its imaging components.
• The company will leverage its scale as one of the largest independent X-ray imaging component suppliers to provide cost-effective solutions for its customers.
• The company will continue to expand manufacturing capabilities at its facilities in China, Germany, the Netherlands, and the Philippines.
• The company will continue to implement local sourcing strategies to offer local content.
• The company will continue to pursue new potential applications for its products in the non-destructive testing market.
• The company anticipates refinancing its Convertible Notes due in June 2025 using a combination of future borrowings and cash.

Key Dates

Keywords

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