10-Q: Varex Imaging Reports Q3 Results Amid Teledyne Acquisition Talks

Varex Imaging's Q3 filing reveals revenue growth driven by the Industrial segment and a significant boost from tariff refunds, though Medical segment sales declined.

Summary

• Varex Imaging reported revenues of $210.5 million for the third quarter ended July 3, 2026, an increase of 3.7% compared to the prior year quarter.
• The Industrial segment saw a significant revenue increase of 25.6% to $76.5 million, while the Medical segment revenue decreased by 5.7% to $134.0 million.
• Gross profit increased by 13.6% to $76.7 million, with a gross margin of 36.4%, significantly improved by $17.0 million in IEEPA tariff refunds.
• Net income for the quarter was $15.7 million, a substantial improvement from a net loss of $89.1 million in the prior year quarter, largely due to the absence of a $93.9 million goodwill impairment charge.
• The company announced an Agreement and Plan of Merger with Teledyne Technologies Incorporated on August 10, 2026, with an expected closing in early calendar year 2027.
• Cash provided by operating activities for the nine months ended July 3, 2026 was $3.4 million, which includes $17.7 million in IEEPA tariff refunds.

Sentiment

Score: 6

Explanation: StockSavvy.ai views this filing as cautiously optimistic, with significant positive impacts from tariff refunds partially masking underlying operational pressures. The pending acquisition by Teledyne introduces a major variable.

Positives

• Revenue increased by 3.7% to $210.5 million in the third quarter, driven by strong performance in the Industrial segment.
• The Industrial segment revenue grew by 25.6% to $76.5 million.
• Gross profit improved significantly by 13.6% to $76.7 million, with gross margin increasing to 36.4% from 33.3% in the prior year.
• A substantial boost to gross profit and net income came from $17.0 million in IEEPA tariff refunds received.
• Net income turned positive at $15.7 million for the quarter, compared to a net loss of $89.1 million in the prior year.
• The company has a strong installed base of over 170,000 X-ray tubes and 170,000 X-ray detectors, providing a recurring revenue stream from replacement and service.

Negatives

• Medical segment revenue decreased by 5.7% to $134.0 million, impacted by lower sales across several modalities.
• Excluding the impact of tariff refunds, the gross margin for the third quarter would have been approximately 30.6%, a decline from the prior-year period.
• Operating expenses increased in R&D by 8.9% to $23.3 million, while SG&A decreased by 7.0% to $30.6 million.
• Interest and other expense, net increased by 11.9% to $6.6 million for the quarter, primarily due to increased foreign exchange expense.
• Cash provided by operating activities for the nine months was only $3.4 million, and would have been a use of cash of $14 million without the tariff refunds.

Risks

• The pending acquisition by Teledyne Technologies Incorporated introduces significant uncertainty regarding future operations, potential disruptions to business relationships, and diversion of management attention.
• Tariffs and trade policy changes, including potential new tariffs under Section 301 and Section 338 of the Trade Act, could increase costs, reduce competitiveness, and negatively impact business.
• Dependence on a limited number of large OEM customers (top ten accounted for 53% of revenue) poses a risk if business from any of these customers is delayed, reduced, or lost.
• Customer-driven changes in order forecasts create challenges in predicting demand and delivery schedules, potentially leading to excess inventory or missed sales opportunities.
• Intense competition and pricing pressures in both Medical and Industrial segments could lead to margin erosion and loss of customers.
• Disruptions to critical information systems or material breaches in security could adversely affect operations, customer relations, and financial reporting.
• The company's business is subject to global economic instability, shifting political environments, and geopolitical tensions, which can impact demand, costs, and supply chains.
• Failure to obtain or maintain regulatory approvals for products in various international markets could restrict sales and harm the business.

Future Outlook

The company's outlook is heavily influenced by the pending acquisition by Teledyne, expected to close in early 2027. Management believes current operating cash flow, cash on hand, and credit facility availability are sufficient for the next 12 months. However, the dynamic economic and trade environment, including ongoing tariff uncertainties, presents ongoing challenges.

Management Comments

• "Our success depends, among other things, on our ability to anticipate and respond to changes in our business, the direction of technological innovation, and the demand from our customers."
• "We continue to monitor these developments and to take actions intended to reduce their impact, including qualifying alternative suppliers, shifting production within our manufacturing footprint, localizing additional manufacturing in affected regions, adjusting pricing, and other duty mitigation practices."
• "We do not expect these efforts to fully offset the additional costs or other negative impacts resulting from tariffs."

Industry Context

StockSavvy.ai notes that Varex operates in a critical but evolving sector of medical and industrial imaging. The significant impact of tariff refunds highlights the sensitivity of global supply chains and manufacturing costs. The pending acquisition by Teledyne, a larger player in related technologies, suggests a consolidation trend or a strategic move to leverage scale and market position.

Legal Proceedings

• The company is subject to various claims, complaints, and legal actions in the normal course of business, but currently does not believe any pending litigation will have a material adverse effect on its operations or financial position.

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. Purchases from dpiX totaled $17.9 million for the nine months ended July 3, 2026.
• The company has a 50% interest in VEC Imaging GmbH & Co. KG, a joint venture for X-ray imaging component technology. No income was recorded from this investment in the nine months ended July 3, 2026.

Stakeholder Impact

• Shareholders: The pending acquisition by Teledyne offers shareholders $18.90 in cash per share, providing a definitive exit value, but they forego potential future growth as an independent company.
• Employees: The acquisition may lead to integration challenges and potential workforce changes. Key personnel retention is crucial during this transition.
• Customers: The acquisition may lead to changes in product offerings, support, or supply chain. Uncertainty around the merger could cause some customers to delay purchasing decisions.
• Suppliers: Integration of Varex into Teledyne could lead to changes in procurement practices, supplier relationships, and contract terms.

Next Steps

• Complete the merger with Teledyne Technologies Incorporated, subject to regulatory approvals and stockholder adoption.
• Continue to manage operations in the ordinary course of business pending the merger.
• Monitor and respond to evolving economic and trade environments, including tariff impacts.
• Continue investment in research and development to support innovation and new product introductions.

Key Dates

Recommendation

The pending acquisition by Teledyne at a fixed cash price of $18.90 per share provides a clear valuation and limits upside potential for shareholders. While operational improvements are evident, particularly in the Industrial segment and due to tariff refunds, the Medical segment's weakness and ongoing industry risks warrant a cautious approach. The 'hold' recommendation reflects the certainty of the acquisition price and the need to await deal closure, while acknowledging the operational performance.

Keywords

X-ray imaging components, Medical imaging, Industrial inspection, X-ray tubes, Digital detectors, Teledyne acquisition, Tariff refunds, Form 10-Q