10-Q: Varex Imaging Reports Q1 2025 Results: Revenue Up, Navigating Economic Headwinds

Varex Imaging Corporation reports a revenue increase for the quarter ended January 3, 2025, while addressing ongoing economic and industry challenges.

Summary

• Varex Imaging Corporation reported a net revenue of $199.8 million for the quarter ended January 3, 2025, compared to $190.0 million for the quarter ended December 29, 2023.
• The company experienced a net loss of $0.1 million, with a net loss attributable to Varex of $0.3 million, consistent with the prior year's loss.
• The Medical segment's revenue increased to $144.6 million, while the Industrial segment's revenue rose to $55.2 million.
• Gross profit increased to $68.5 million from $57.1 million in the prior year, with a gross margin of 34.3%.
• Operating expenses totaled $57.3 million, up from $52.9 million in the previous year.
• The company issued an additional $125.0 million of Senior Secured Notes and intends to use the proceeds to repay a portion of the Convertible Notes due in June 2025.
• Varex is monitoring the impact of the Chinese government's anti-corruption campaign on the healthcare industry, which is expected to continue through fiscal year 2025.
• The company's estimated total backlog at January 3, 2025, was approximately $307 million.

Sentiment

Score: 6

Explanation: The document presents a mixed sentiment. Revenue growth and improved gross margins are positive, but the net loss and ongoing economic uncertainties temper the outlook. The capital raise provides financial flexibility but also adds to the company's debt burden.

Positives

• Overall revenue increased by 5.2% year-over-year, indicating growth in both Medical and Industrial segments.
• Gross profit and gross margin improved, reflecting favorable product mix and increased sales volume.
• The issuance of Senior Secured Notes provides financial flexibility to address upcoming debt maturities.
• The company is actively managing its capital structure and liquidity.
• The company is developing CT X-ray tubes and related subsystems for Chinese OEMs as they introduce new systems in China.

Negatives

• The company reported a net loss of $0.1 million, consistent with the prior year.
• The Chinese government's anti-corruption campaign is negatively impacting the Medical business.
• The company is exposed to risks associated with international operations, including currency fluctuations and geopolitical instability.
• The company is exposed to risks associated with the loss of business of one or more of its limited original equipment manufacturing (OEM) customers.

Risks

• Economic and geopolitical uncertainties, supply chain challenges, and trade policy reforms could impact future performance.
• The Chinese government's anti-corruption campaign in the healthcare industry is expected to continue impacting the Medical business through fiscal year 2025.
• The company faces risks related to customer concentration, with a significant portion of revenue derived from a limited number of OEM customers.
• The company faces risks related to the ability to maintain or defend its intellectual property rights.
• The company faces risks related to the disruption of critical information systems or material breaches in the security of its systems.
• The company faces risks related to noncompliance with regulations applicable to marketing, manufacturing, labeling, and distributing its products and delays in obtaining regulatory clearances or approvals.
• The company faces risks related to limitations imposed by operating and financial restrictions of its debt financing agreements.

Future Outlook

The company remains cautious about the general economic environment and is monitoring the impact of the Chinese government's anti-corruption campaign on the healthcare industry, which is expected to continue through fiscal year 2025. Varex believes that its operating cash flow, cash on hand, availability under its Revolving Credit Facility, and access to credit and capital markets are sufficient to meet anticipated operating activities and cash commitments for at least the next 12 months.

Management Comments

• We remain cautious about the general economic environment as many factors remain dynamic and unpredictable.
• We are developing CT X-ray tubes and related subsystems for Chinese OEMs as they introduce new systems 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.

Industry Context

Varex Imaging operates in the medical and industrial imaging components market, facing competition from both OEM customers who manufacture their own components and other independent manufacturers. The company's performance is influenced by factors such as technological innovation, regulatory changes, and economic conditions in various geographic regions.

Comparison to Industry Standards

• It is difficult to compare Varex Imaging's results directly to industry standards without specific competitor data.
• However, the company's gross margin of 34.3% can be benchmarked against other medical device and imaging component manufacturers.
• Companies like Canon Medical Systems Corporation are both customers and competitors, making direct comparisons challenging.
• The company's focus on innovation and long-term customer relationships is a common strategy in the industry.
• The company's exposure to international markets and associated risks is typical for global component manufacturers.

Related Party Transactions

• During the three months ended January 3, 2025 and December 29, 2023, the Company recorded (loss) income on the equity investment in dpiX Holding of $(1.6) million and $0.5 million, respectively.
• During the three months ended January 3, 2025 and December 29, 2023, the Company purchased glass transistor arrays from dpiX totaling $4.6 million and $5.0 million, respectively.
• During the three months ended January 3, 2025 and December 29, 2023, the Company recorded loss on the equity investment in VEC of $0.0 million and $0.1 million, respectively.

Stakeholder Impact

• Shareholders: The company's performance and strategic decisions impact shareholder value.
• Employees: The company's financial health and growth prospects affect employee job security and opportunities.
• Customers: The company's ability to deliver high-quality products and services impacts customer satisfaction.
• Suppliers: The company's financial stability affects its ability to meet its obligations to suppliers.
• Creditors: The company's debt levels and financial performance impact its creditworthiness.

Next Steps

• The company intends to continue to expand its presence internationally and expects to expend significant resources in doing so.
• The company will use the proceeds from the offering to repay a portion of the Convertible Notes on their maturity date of June 1, 2025, or to repurchase a portion of the Convertible Notes prior to the maturity date.
• The company continues to evaluate the Pillar Two rules and their potential impact on future periods but does not expect the rules to have a material impact on the effective tax rate.

Key Dates