10-Q: Varex Reports Q3 Loss Amid $94M Goodwill Impairment

Varex Imaging Corporation reported a significant net loss for the third fiscal quarter of 2025, primarily driven by a $93.9 million goodwill impairment charge in its Medical segment.

Summary

• Varex Imaging Corporation reported a net loss of $89.1 million for the three months ended July 4, 2025, a significant decline from a net income of $1.5 million in the prior year period.
• The loss was primarily due to a $93.9 million goodwill impairment charge recognized in the Medical reporting unit.
• Revenues for the quarter decreased by 2.9% to $203.0 million, down from $209.1 million in the same period last year, with Medical segment revenues decreasing by 4.4% and Industrial revenues increasing by 0.7%.
• Gross profit increased slightly to $67.5 million from $66.9 million, with total gross margin improving to 33.3% from 32.0%.
• For the nine months ended July 4, 2025, the company reported a net loss of $82.1 million, compared to a net income of $2.7 million in the prior year, despite a 1.7% increase in total revenues to $615.7 million.
• Cash provided by operating activities increased to $33.8 million for the nine months ended July 4, 2025, up from $21.4 million in the prior year period.
• The company repaid $200.0 million of Convertible Senior Unsecured Notes that matured on June 1, 2025, partially offset by the issuance of $125.0 million in Senior Secured Notes Add On in December 2024.
• Total debt outstanding, net, decreased to $367.5 million as of July 4, 2025, from $443.4 million at September 27, 2024.
• An accounting error related to deferred tax assets and liabilities in prior periods was identified and corrected, with the cumulative effect deemed material for the current year if not corrected retrospectively.

Sentiment

Score: 3

Explanation: The significant goodwill impairment and resulting net loss, coupled with ongoing geopolitical and trade-related risks (tariffs, MOFCOM investigations) and legal disputes in joint ventures, indicate substantial headwinds and a challenging operating environment. While some operational improvements like gross margin and cash from operations are noted, the overall financial performance is severely impacted, suggesting a negative outlook.

Positives

• Gross profit margin improved to 33.3% for the quarter (up from 32.0%) and 34.5% for the nine months (up from 31.4%), driven by improved productivity and lower material costs in the Medical segment.
• Net cash provided by operating activities increased to $33.8 million for the nine months ended July 4, 2025, compared to $21.4 million in the prior year period.
• Net cash provided by investing activities improved significantly, moving from a net cash used of $13.5 million to a net cash provided of $11.0 million, due to an investment strategy to increase cash for debt repayment.
• Days Sales Outstanding (DSO) improved to 61 days at July 4, 2025, from 70 days at September 27, 2024, indicating better accounts receivable management.
• The company successfully repaid $200.0 million of Convertible Senior Unsecured Notes upon maturity, reducing overall debt.
• The Industrial segment showed a slight revenue increase of 0.7% for the quarter and 4.3% for the nine months, demonstrating some growth in this area.

Negatives

• A significant net loss of $89.1 million for the quarter and $82.1 million for the nine months, primarily due to a $93.9 million goodwill impairment charge.
• Total revenues decreased by 2.9% for the quarter, with the Medical segment experiencing a 4.4% decline in sales, mainly due to decreased sales of CT, fluoroscopy, and radiography modalities.
• Operating loss of $80.7 million for the quarter, a substantial deterioration from an operating income of $9.3 million in the prior year.
• Increased interest expense to $9.4 million for the quarter and $27.6 million for the nine months, driven by additional Senior Secured Notes and the Revolving Credit Facility.
• Income tax expense increased despite a pre-tax loss, primarily due to the non-tax deductible goodwill impairment and valuation allowance positions in the U.S. and certain foreign jurisdictions.
• The Medical reporting unit remains susceptible to future impairment charges, indicating ongoing vulnerability to adverse changes in projections or macroeconomic conditions.

Risks

• Reduction or loss of business from limited OEM customers, with one customer accounting for approximately 18% of revenue and 13.5% of accounts receivable.
• Negative impact from changes in import/export regulatory regimes, tariffs, trade wars (especially US-China), and national policies, leading to increased costs, lower margins, and reduced competitiveness.
• Potential negative impact from China Ministry of Commerce (MOFCOM) investigations into imported medical X-ray tubes and CT Tubes/Inserts, which could lead to increased prices or tariffs.
• Customer-driven changes in order forecasts and unpredictable demand, particularly for security and industrial products, can lead to excess inventory, sales slowdowns, and revenue volatility.
• Intense competition and pricing pressures in highly competitive industries, including from OEM customers who also manufacture components in-house.
• Inability to meet customer needs and demands, or shifts in product preferences, could adversely affect revenue and margins.
• Supply chain disruptions, loss of single-source suppliers, and volatility in raw material prices (e.g., copper, nickel, silver) can impact manufacturing, delay deliveries, and increase costs.
• Vulnerability to interruption or loss due to natural disasters, power loss, strikes, and geopolitical events (e.g., Ukraine-Russia, Israel-Iran wars) affecting operations or supply chains.
• Inability to maintain or defend intellectual property rights, and the high cost of protecting these rights and defending against infringement claims, especially in jurisdictions with weaker IP protections.
• Disruption of critical information systems or material breaches in security could lead to loss of data, litigation, and harm to business and customer relations.
• Increased effective tax rate due to changes in international sales mix, international activities, or new tax laws (e.g., capitalization of research and experimental expenditures).
• Compliance with foreign and U.S. laws and regulations (e.g., medical device certification, product registration, anti-corruption, competition laws) can be costly, and failure to comply may result in penalties or restrictions.
• Product defects or misuse may result in material product liability claims, litigation, regulatory investigations, or product recalls, with limited insurance coverage.
• Ongoing legal disputes with joint venture partners (e.g., VEC Imaging GmbH & Co. KG, Varex Imaging Arabia LLC) could divert management attention, increase costs, and adversely impact business.
• Limitations imposed by operating and financial restrictions of debt financing agreements (Revolving Credit Facility, Senior Secured Notes) could limit flexibility and ability to make payments.
• Failure to maintain effective internal controls and procedures, or changes in accounting standards, could negatively impact financial reporting accuracy and investor confidence.
• Future impairment charges for goodwill or other intangible assets if key assumptions in the analysis are not realized.
• Evolving Environmental, Social, and Governance (ESG) requirements and stakeholder expectations could increase costs and management time, and failure to meet goals could harm reputation and financial performance.

Future Outlook

The company anticipates that the MOFCOM investigations, if recommenced, may take approximately one year to resolve, potentially impacting competitiveness in China. Efforts to mitigate tariff impacts, such as localizing manufacturing, are not expected to fully offset additional costs. The Medical reporting unit remains susceptible to future goodwill impairment charges due to potential adverse changes in projections or macroeconomic conditions. The company expects increased cash tax expense in the United States to continue until normalizing in fiscal year 2027 due to tax law changes requiring capitalization of research and experimental expenditures. The One Big Beautiful Bill Act (OBBBA) is being assessed for its impact on future consolidated financial statements, particularly regarding the restoration of 100% accelerated depreciation. The company is committed to investing approximately 8% to 10% of annual revenues in research and development to support long-term growth and innovation.

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.
• We continue to monitor potential changes in customer procurement decisions resulting from the current trade climate, along with other tariff-related actions, investigations and other activities that might negatively affect our costs or otherwise impact our business and results of operations.
• 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

The X-ray imaging components industry is characterized by rapid technological innovation and intense competition, with a significant portion of demand driven by global OEM customers in medical diagnostics, security, and industrial inspection. The industry is currently navigating complex geopolitical tensions, trade wars, and tariffs, particularly between the United States and China, which are impacting supply chains, costs, and customer purchasing decisions. Regulatory scrutiny, such as the MOFCOM investigations in China, adds further uncertainty. Despite these challenges, there's an ongoing trend towards broader healthcare availability in regions like China, driving demand for new systems and replacement components. The non-destructive testing sector is identified as a significant growth opportunity, leveraging X-ray technology for industrial applications.

Comparison to Industry Standards

• The company's Medical segment gross margin improved to 32.9% for the quarter and 34.5% for the nine months, which is a positive trend, but specific industry benchmarks for X-ray imaging components are not provided to allow for a direct comparison to competitors like Canon Medical Systems Corporation (a major customer and competitor) or other independent X-ray tube manufacturers.
• The company's R&D spending at 10.5% of revenues for the quarter is within its stated target range of 8% to 10% for long-term growth, suggesting a commitment to innovation comparable to leading technology-driven medical device and industrial imaging companies.
• The goodwill impairment charge of $93.9 million in the Medical segment indicates that the carrying value of this unit exceeded its fair value, suggesting underperformance relative to internal projections and market expectations, which could be a red flag compared to peers who may not have reported similar impairments.
• The company's reliance on a limited number of OEM customers (top 10 customers account for 52-54% of revenue) is a common characteristic in the specialized B2B components industry, but it also presents a concentration risk that may be higher than more diversified industry players.
• The improvement in Days Sales Outstanding (DSO) to 61 days from 70 days suggests efficient accounts receivable management, which is a positive operational metric compared to industry averages, though specific comparable company DSOs are not provided.

Management Changes

Corporate Governance

Legal Proceedings

• Ongoing judicial proceedings in Germany between Varex Imaging Deutschland AG and CETTEEN GmbH regarding the VEC Imaging GmbH & Co. KG joint venture, disputing shareholder resolutions and seeking removal/exclusion of managing directors, with the prevailing party required to purchase the non-prevailing party's interest at 75% of fair market value.
• Additional lawsuits filed in Germany and the United States related to intellectual property matters, breach of contracts, and other matters concerning the VEC joint venture, with one October 2024 lawsuit voluntarily dismissed for settlement negotiations.
• Ongoing disputes with the joint venture partner regarding the operation of Varex Imaging Arabia LLC.
• China Ministry of Commerce (MOFCOM) initiated two investigations related to medical products imported into China (X-ray tubes, CT Tubes and Inserts from US/India), currently paused, with potential for negative impact on business if recommenced.
• Subject to various claims, complaints, and legal actions in the normal course of business, including product liability litigation, with no current belief of material adverse effect on operations or financial position.

Related Party Transactions

• 40% ownership interest in dpiX Holding Company LLC, a supplier of amorphous silicon-based thin film transistor arrays. Purchases from dpiX totaled $4.9 million for the three months and $14.7 million for the nine months ended July 4, 2025.
• Fixed cost commitment to dpiX of $13.7 million for calendar year 2025, with $6.8 million remaining as of July 4, 2025.
• Investment in VEC Imaging GmbH & Co. KG, a joint venture with CETTEEN GmbH, with ongoing legal disputes between the partners.
• 75% interest in Varex Imaging Arabia LLC, with ongoing disputes with the joint venture partner.

Stakeholder Impact

• Shareholders: Significant net loss and goodwill impairment could negatively impact share price and investor confidence. Debt repayment and improved cash from operations offer some stability but are overshadowed by the loss.
• Employees: No direct impact mentioned, but potential restructuring in China is not currently planned, which could alleviate some employee concerns. Increased compensation-related costs due to competitive labor market are noted.
• Customers: Tariffs and MOFCOM investigations could lead to increased prices or reduced competitiveness, potentially impacting customer purchasing decisions and relationships. Delays in product delivery due to supply chain issues could also affect customers.
• Suppliers: Participation in voluntary supply chain finance programs provides suppliers with earlier payment options. Reliance on limited or sole-source suppliers creates risk if suppliers fail to meet needs.
• Creditors: Debt repayment of Convertible Notes is positive, but new Senior Secured Notes were issued. Compliance with debt covenants (fixed charge coverage ratio, total net leverage ratio) is critical for continued access to credit.

Next Steps

• Continue to monitor and cooperate with the China Ministry of Commerce (MOFCOM) investigations, which are currently paused but anticipated to take approximately one year to resolve if recommenced.
• Assess the impact of the One Big Beautiful Bill Act (OBBBA) on future consolidated financial statements, particularly regarding the restoration of 100% accelerated depreciation.
• Implement mitigation practices and localize manufacturing to reduce the impact of tariffs, though full offset of costs is not anticipated.
• Continue investing in research and development, targeting 8% to 10% of annual revenues, to support long-term growth and new product introductions.
• Address ongoing legal disputes with joint venture partners in Germany and Saudi Arabia, which are diverting management attention and increasing costs.
• Manage the fixed cost commitments related to the dpiX amended agreement, with $6.8 million remaining for calendar year 2025.

Key Dates

Recommendation

The company reported a substantial net loss driven by a significant goodwill impairment, indicating a deterioration in asset value and profitability. While some operational metrics like gross margin and cash from operations showed improvement, these are overshadowed by the impairment and ongoing macroeconomic and geopolitical headwinds, including tariffs and MOFCOM investigations, which pose significant future risks to revenue and profitability. Legal disputes in joint ventures add further uncertainty and potential costs. The overall financial performance and the susceptibility of the Medical segment to future impairments suggest a challenging outlook, making the stock a 'sell' for seasoned investors.

Keywords

X-ray imaging, Medical devices, Industrial imaging, Goodwill impairment, SEC 10-Q, Financial results, Revenue, Net loss, Tariffs, Trade wars, MOFCOM investigations, Debt repayment, Supply chain, Corporate governance, Risk factors, Varex Imaging