10-Q: Varex Imaging Reports Q3 2024 Results: Revenue Declines Amidst Market Headwinds

Varex Imaging Corporation reported a decrease in revenue for the third quarter of 2024, primarily due to lower sales in its Medical segment, while the Industrial segment showed modest growth.

Summary

• Varex Imaging Corporation's net revenue for the third quarter of 2024 was $209.1 million, a decrease from $232.2 million in the same period last year.
• The Medical segment experienced a 15.3% revenue decrease, while the Industrial segment saw a 6.5% increase.
• Gross profit for the quarter was $66.9 million, down from $76.3 million year-over-year.
• Operating expenses increased to $57.6 million from $52.1 million in the prior year.
• Net income attributable to Varex was $1.4 million, a significant decrease from $9.1 million in the third quarter of 2023.
• For the nine months ended June 28, 2024, net revenue was $605.3 million, compared to $666.0 million for the same period in 2023.
• The company's backlog was approximately $310 million as of June 28, 2024.
• The company has a $155 million revolving credit facility and a $20 million equipment credit facility, both undrawn as of June 28, 2024.

Sentiment

Score: 3

Explanation: The document indicates a negative sentiment due to significant revenue and profit declines, increased operating expenses, and ongoing market challenges. While there are some positives, the overall tone is cautious and reflects a difficult quarter for the company.

Positives

• The Industrial segment experienced a 6.5% increase in revenue, driven by security inspection products.
• Interest income increased due to higher investments in marketable debt securities.
• The company has secured a $155 million revolving credit facility and a $20 million equipment credit facility, providing financial flexibility.
• The company has implemented local sourcing strategies to offer local content, which acts as a natural hedge against trade wars and other potential supply chain disruptions.

Negatives

• The Medical segment experienced a 15.3% decrease in revenue, impacting overall performance.
• Net income attributable to Varex decreased significantly to $1.4 million from $9.1 million year-over-year.
• Gross profit decreased due to lower sales volume and an unfavorable product mix.
• Operating expenses increased due to higher fixed cost commitments, litigation costs, and environmental remediation costs.
• The company's tax expense decreased due to decreased pre-tax income in certain jurisdictions and favorable impacts of international tax provisions and tax credits in the U.S., partially offset by losses in certain foreign jurisdictions for which no benefit can be recorded.

Risks

• The company faces risks related to reliance on a limited number of OEM customers, some of whom are also competitors.
• Pricing pressures and competition could lead to margin erosion and loss of customers.
• Global economic instability, geopolitical tensions, and supply chain disruptions could impact operations and sales.
• The company is exposed to risks related to intellectual property rights and potential infringement claims.
• The company is subject to various legal proceedings and regulatory compliance requirements.
• The company's debt agreements impose significant operating and financial restrictions.
• The company's convertible notes mature in June 2025, requiring refinancing.
• The company is exposed to foreign currency exchange rate risk, interest rate risk, and commodity price risk.
• The company's business is subject to evolving Environmental, Social, and Governance (ESG) requirements and stakeholder expectations that could expose the company to numerous risks.
• The company is subject to federal, state, and foreign laws governing business practices which, if violated, could result in substantial penalties.

Future Outlook

The company expects the negative trends in its Medical business, including the impact of the China government's anti-corruption campaign and cautious customer purchasing behavior, to continue through the remainder of fiscal year 2024. The company anticipates refinancing its Convertible Notes due in June 2025 using a combination of future borrowings under its Revolving Credit Facility and cash.

Management Comments

• Management remains cautious about the general economic environment due to various dynamic and unpredictable factors.
• The company is focused on improving the life and quality of its imaging components and leveraging its scale to provide cost-effective solutions.
• The company continues to expand manufacturing capabilities at its facilities in China, Germany, the Netherlands, and the Philippines to mitigate the impact of tariffs and be closer to its global customer base.

Industry Context

The report reflects challenges in the medical imaging sector, particularly in China, due to government investigations and economic uncertainties. The company's efforts to diversify its manufacturing and sourcing are in line with broader industry trends to mitigate supply chain risks and geopolitical tensions. The growth in the industrial segment aligns with the increasing demand for security and inspection technologies.

Comparison to Industry Standards

• Varex's revenue decline in the medical segment is concerning, as many medical device companies have shown resilience in recent quarters. For example, companies like Siemens Healthineers and GE Healthcare have reported more stable results, although they also face challenges in certain markets.
• The growth in Varex's industrial segment is a positive sign, but it is not enough to offset the decline in the medical segment. Companies like Teledyne Technologies, which also have a strong presence in industrial imaging, have shown more consistent growth across their segments.
• Varex's gross margin of 32.0% is lower than some of its competitors in the medical imaging space, such as Canon Medical Systems, which often achieve higher margins due to their integrated systems approach.
• The company's operating expenses as a percentage of revenue are higher than some of its peers, indicating a need for better cost management. Companies like Philips have been focusing on streamlining operations to improve profitability.
• Varex's net income decline is significant compared to the previous year, suggesting that the company is facing more severe headwinds than some of its competitors. Companies like Hologic have shown better profitability despite facing similar market challenges.

Legal Proceedings

• The company is involved in a dispute with its joint venture partner in VEC Imaging GmbH & Co. KG, which could result in the removal of managing directors and a potential purchase of the non-prevailing party's interest.
• The company is involved in a dispute with its joint venture partner in Varex Imaging Arabia LLC.
• The company is a party to certain products liability litigation which, if adversely determined, could have an adverse material impact on our financial results.

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 will be concerned about the significant decrease in net income and the challenges in the Medical segment.
• Employees may be affected by potential cost-cutting measures and restructuring efforts.
• Customers may experience delays or changes in product availability due to supply chain issues.
• Suppliers may face changes in demand and payment terms.
• Creditors may be concerned about the company's ability to meet its debt obligations.

Next Steps

• The company will continue to monitor the impact of the China government's anti-corruption campaign on its Medical business.
• The company will focus on managing costs and improving operational efficiency.
• The company will continue to expand its manufacturing capabilities in various regions to mitigate supply chain risks.
• The company will work to refinance its Convertible Notes due in June 2025.

Key Dates

Keywords

X-ray imaging, medical devices, industrial imaging, digital detectors, X-ray tubes, OEM, revenue, gross profit, net income, supply chain, financial results, backlog, credit facility, China, tariffs