What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-01 compared with 2023-05-02 · 76 added, 82 removed, 234 unchanged (40% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of operations should be read together with the unaudited condensed consolidated financial statements and notes thereto that are contained in this Quarterly Report on Form 10-Q (this "Quarterly Report") as well as our Annual Report on Form 10-K for the fiscal year ended September 30, 2022 and our other filings, including the Current Reports on Form 8-K, that have been filed with the Securities and Exchange Commission (" SEC") through the date of this report.

The following discussion and analysis of our financial condition and results of operations should be read together with the unaudited condensed consolidated financial statements and notes thereto that are contained in this Quarterly Report on Form 10-Q (this "Quarterly Report") as well as our Annual Report on Form 10-K for the fiscal year ended September 30, 2022 and our other filings, including the Current Reports on Form 8-K, that have been filed with the Securities and Exchange Commission (" SEC") through the date of this report.

In this Quarterly Report, unless otherwise specified or the context otherwise requires, the "Company," "Varex," "we," "us," and "our" refer to Varex Imaging Corporation.

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Statements concerning supply chain and logistics challenges;

cost increases;

cost increases and expense management;

changes in U.S.

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geopolitical tensions;

the ongoing COVID-19 pandemic;

industry or market segment outlook;

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We are encouraged by the recent improvements that we have seen in the general economic environment but remain cautious as many factors remain unpredictable and recent high rates of inflation have increased our costs and could negatively affect our future profit margins.

The uncertain economic environment, geopolitical tensions, and the impacts from COVID-19 have contributed to, and may continue to contribute to, inflation, higher interest rates and capital costs, increased shipping costs, supply shortages, increased costs of labor and materials, exchange rate volatility, and other similar effects.

We continue to experience some supply chain, manufacturing, and logistics challenges that we expect will continue throughout 2023.

The uncertain economic environment, supply chain and logistic challenges, and geopolitical tensions have contributed to, and may continue to contribute to, inflation, higher interest rates and capital costs, increased shipping costs, supply shortages, increased costs of labor and materials, exchange rate volatility, and other similar effects.

We have experienced some supply chain, manufacturing, and logistics challenges that we expect will continue throughout 2023.

We have experienced and continue to experience shortages of certain materials.

Shortages of certain materials have caused, and may continue to cause, delays in manufacturing products for our customers.

In some cases, raw material shortages and delivery delays from our suppliers has caused operational and customer order fulfillment challenges.

In some cases, raw material shortages and delivery delays from our suppliers have caused operational and customer order fulfillment challenges.

Due to the rising cost environment, in addition to ongoing expense management, we began to raise prices on certain products in fiscal year 2022 and anticipate making further pricing adjustments throughout fiscal year 2023.

During the three months ended March 31, 2023, our manufacturing facilities continued to operate with minimal disruption.

The full extent to which the COVID-19 pandemic and ensuing economic, inflationary, supply chain, manufacturing, and logistics challenges have and will directly or indirectly impact us, including our business, financial condition, and results of operations, will depend on future developments that are highly uncertain and cannot be accurately predicted.

For additional information on risks related to the pandemic and other supply chain, manufacturing and logistics risks that could impact our results, see Part II, Item 1A “ Risk Factors ”.

For additional information on risks related to supply chain and logistics challenges, cost increases, changes in U.S.

and worldwide economic conditions, geopolitical tensions and other risks that could impact our results, see Part II, Item 1A “ Risk Factors ”.

Operating Segments and Products

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Our X-ray imaging components are primarily sold to OEM customers.

These OEM customers then design-in our products into their X-ray imaging systems for a variety of medical modalities.

These OEM customers then design-in our products to their X-ray imaging systems for a variety of medical modalities.

A substantial majority of medical X-ray imaging OEMs globally are our customers, and many of these have been our customers for over 25 years.

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In addition to sales to OEM customers, we sell our products to independent service companies and distributors as well as directly to end-users for replacement purposes.

We are one of the largest global manufacturers of X-ray imaging components, and each year, we produce over 28,000 X-ray tubes and 20,000 X-ray detectors.

We are one of the largest independent global manufacturers of X-ray imaging components, and each year, we produce over 27,000 X-ray tubes and 20,000 X-ray detectors.

We estimate that our world-wide installed base of products includes more than 160,000 X-ray tubes, 170,000 X-ray detectors, 600,000 connect and control components, and 16,500 software instances.

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We believe that the non-destructive testing market represents a significant growth opportunity for our business, and we are actively pursuing new potential applications for our products.

The economic downturn triggered by the COVID-19 pandemic reduced the demand for X-ray imaging equipment utilized in the non-destructive testing and security markets as manufacturers and end users focused on cash preservation and reduced spending for capital equipment.

However, we have seen improved conditions in these markets, which continued during the three months ended March 31, 2023.

Critical Accounting Policies and Estimates

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Fiscal year 2022 was the 52-week period that ended on September 30, 2022.

The fiscal quarters ended March 31, 2023 and April 1, 2022 were both 13-week periods.

The two fiscal periods ended March 31, 2023 and April 1, 2022 were both 26-week periods.

Discussion of Results of Operations for the Three Months Ended March 31, 2023 Compared to the Three Months Ended April 1, 2022

The fiscal quarters ended June 30, 2023 and July 1, 2022 were both 13-week periods.

The three fiscal quarters ended June 30, 2023 and July 1, 2022 were both 39-week periods.

Discussion of Results of Operations for the Three Months Ended June 30, 2023 Compared to the Three Months Ended July 1, 2022

Revenues, net

Three Months Ended

(In millions) March 31, 2023 April 1, 2022 $ Change % Change

(In millions) June 30, 2023 July 1, 2022 $ Change % Change

Medical $ 175.4 $ 167.1 $ 8.3 5.0 %

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Industrial as a percentage of total revenues 24.5 % 22.1 %

Medical revenues increased $3.7 million, primarily due to increased sales of CT X-ray tubes and digital detectors for radiographic modalities, partially offset by lower oncology and fluoroscopic modalities sales.

Industrial revenues increased $9.8 million, primarily due to increased sales of security inspection products and industrial X-ray tubes, partially offset by lower sales of digital detectors for dynamic imaging applications.

Medical revenues increased $8.3 million, primarily due to increased sales of mammography X-ray tubes and digital detectors for radiographic, fluoroscopic, and dental modalities, partially offset by decreased sales in oncology modalities.

Industrial revenues increased $9.4 million, primarily due to increased sales of security inspection products and industrial X-ray tubes.

Three Months Ended

(In millions) March 31, 2023 April 1, 2022 $ Change % Change

(In millions) June 30, 2023 July 1, 2022 $ Change % Change

Medical $ 54.7 $ 54.3 $ 0.4 0.7 %

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Total gross margin 32.9 % 34.2 %

The decrease in Medical segment gross profit was primarily due to increased material costs and an unfavorable shift in product sales mix.

The Industrial segment gross profit increased primarily as a result of increased sales in security inspection products, partially offset by increased material costs.

During the second quarter of fiscal year 2023, we experienced a more balanced operating environment driven by strong demand for certain products and an improved supply chain.

Our product sales mix, primarily in Medical, continued to be impacted by a shift to lower sales of higher margin, higher-end tubes and certain medical detectors.

We believe this shift was a result of our customers being cautious in response to an uncertain economic environment.

These factors contributed to some gross margin pressure during the quarter.

The increase in Medical segment gross profit was primarily due to increased pricing, partially offset by increased material costs and an unfavorable shift in product sales mix.

The Industrial segment gross profit increased primarily as a result of increased sales in security inspection products, partially offset by an unfavorable shift in product sales mix.

Operating Expenses

Three Months Ended

(In millions) March 31, 2023 April 1, 2022 $ Change % Change

(In millions) June 30, 2023 July 1, 2022 $ Change % Change

Research and development $ 20.0 $ 20.2 $ (0.2) (1.0) %

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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.

Research and development costs increased to 10.1% of revenues for the second quarter of fiscal year 2023, primarily due to increased spending on labor and material costs supporting research and development initiatives which includes $2.0 million in costs related to a development agreement with a third-party company.

Research and development costs decreased to 8.6% of revenues for the third quarter of fiscal year 2023, primarily due to decreased spending on material costs supporting research and development initiatives.

Selling, General and Administrative

Selling, general and administrative expenses for the second quarter of fiscal year 2023 increased $8.8 million and increased to 14.9% of total revenues, primarily due to increased compensation costs and environmental remediation costs, when compared to the prior year.

Selling, general and administrative expenses for the third quarter of fiscal year 2023 increased $1.9 million, primarily due to increased compensation costs and fixed cost commitments to a supplier.

Interest and Other Expense, Net

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Three Months Ended

(In millions) March 31, 2023 April 1, 2022 $ Change

(In millions) June 30, 2023 July 1, 2022 $ Change

Interest income $ 0.9 $ 0.1 $ 0.8

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Interest and other expense, net $ (7.1) $ (9.5) $ 2.4

Interest and other expense, net decreased in the second quarter of fiscal year 2023 compared to the second quarter of 2022.

Interest expense decreased due to the redemption of $27 million of our Senior Secured Notes in March 2022, reduced fees on the ABL Facility agreement, and reduced interest expense due to the adoption of ASU 2020-06.

Interest and other expense, net decreased in the third quarter of fiscal year 2023 compared to the third quarter of 2022.

Interest expense decreased due to reduced fees on the ABL Facility agreement, and reduced interest expense due to the adoption of ASU 2020-06.

See Note 1, Summary of Significant Accounting Policies , “Recently Adopted Accounting Pronouncements” for further details concerning the adoption of ASU 2020-06.

Other expense, net decreased due to increased losses in certain investments in privately-held companies and equity investments, partially offset by a decrease in foreign exchange expense.

Other expense, net increased due to increased losses in certain investments in privately-held companies and equity investments and increased foreign exchange expense.

Interest income increased primarily due to an increase in investments made into marketable debt securities.

Taxes on Income

For the three months ended March 31, 2023 we recognized income tax expense of $3.5 million on $7.8 million of pre-tax income.

For the three months ended April 1, 2022 we recognized income tax expense of $6.0 million on $13.6 million of pre-tax income.

Our tax expense for the three months ended March 31, 2023 decreased primarily due to lower pre-tax income in certain jurisdictions, partially offset by valuation allowance positions in the United States on deferred tax attributes, and losses in certain foreign jurisdictions for which no benefit can be recorded.

Discussion of Results of Operations for the Six Months Ended March 31, 2023 Compared to the Six Months Ended April 1, 2022

Six Months Ended

(In millions) March 31, 2023 April 1, 2022 $ Change % Change

For the three months ended June 30, 2023 we recognized income tax expense of $7.9 million on $17.1 million of pre-tax income.

For the three months ended July 1, 2022 we recognized income tax expense of $5.1 million on $13.5 million of pre-tax income.

Our tax expense for the three months ended June 30, 2023 increased, primarily due to increased pre-tax income in certain jurisdictions, valuation allowance positions in the United States on deferred tax attributes, and losses in certain foreign jurisdictions for which no benefit can be recorded.

Discussion of Results of Operations for the Nine Months Ended June 30, 2023 Compared to the Nine Months Ended July 1, 2022

Nine Months Ended

(In millions) June 30, 2023 July 1, 2022 $ Change % Change

Medical $ 509.6 $ 493.2 $ 16.4 3.3 %

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Industrial as a percentage of total revenues 23.5 % 21.5 %

Medical revenues increased $8.1 million, primarily due to increased sales of CT X-ray tubes and digital detectors for dental and radiographic modalities, partially offset by lower oncology and fluoroscopic modalities sales.

Industrial revenues increased $12.2 million, primarily due to increased sales of security inspection products, industrial X-ray tubes, and digital detectors for dynamic imaging applications.

Six Months Ended

(In millions) March 31, 2023 April 1, 2022 $ Change % Change

Medical revenues increased $16.4 million, primarily due to increased sales of CT and mammography X-ray tubes and digital detectors for dental and radiographic modalities, partially offset by lower oncology and fluoroscopic modalities sales.

Industrial revenues increased $21.6 million, primaril y due to increased sales of security inspection products and industrial X-ray tubes.

Nine Months Ended

(In millions) June 30, 2023 July 1, 2022 $ Change % Change

Medical $ 152.7 $ 153.7 $ (1.0) (0.7) %

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The decrease in Medical segment gross profit was primarily due to increased material costs and an unfavorable shift in product sales mix in digital detectors, partially offset by higher sales of CT X-ray tubes.

The Industrial gross profit increased primarily due to increased sales in security inspection products, partially offset by increased material costs.

The Industrial gross profit increased primarily as a result of increased sales in security inspection products and industrial X-ray tubes, partially offset by an unfavorable shift in product sales mix.

Operating Expenses

Six Months Ended

(In millions) March 31, 2023 April 1, 2022 $ Change % Change

Nine Months Ended

(In millions) June 30, 2023 July 1, 2022 $ Change % Change

Research and development $ 63.0 $ 56.8 $ 6.2 10.9 %

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Selling, General and Administrative

Selling, general and administrative expenses for the six months ended March 31, 2023, increased to 14.8% of total revenues primarily due to increased compensation, marketing, and environmental remediation costs, when compared to the prior year.

Selling, general and administrative expenses for the nine months ended June 30, 2023 increased to 14.5% of total revenues primarily due to increased compensation, marketing, and environmental remediation costs, when compared to the prior year.

Interest and Other Expense, Net

The following table summarizes the Company’s interest and other expense, net:

Six Months Ended

(In millions) March 31, 2023 April 1, 2022 $ Change

Nine Months Ended

(In millions) June 30, 2023 July 1, 2022 $ Change

Interest income $ 2.1 $ 0.2 $ 1.9

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Interest and other expense, net $ (22.5) $ (33.2) $ 10.7

Interest and other expense, net decreased during the six months ended March 31, 2023 due to the redemption of $27.0 million of our Senior Secured Notes in March 2022, reduced fees on the ABL Facility agreement, and reduced interest expense due to the adoption of ASU 2020-06.

Other expense, net decreased during the six months ended March 31, 2023 as compared to the six months ended April 1, 2022, primarily due to increased losses in certain investments in privately-held companies and equity investments as well as increased foreign exchange expense.

Interest and other expense, net decreased during the nine months ended June 30, 2023 due to the redemption of $27.0 million of our Senior Secured Notes in March 2022, reduced fees on the ABL Facility agreement, and reduced interest expense due to the adoption of ASU 2020-06.

Other expense, net decreased during the nine months ended June 30, 2023 as compared to the nine months ended July 1, 2022, primarily due to decreased losses in certain investments in privately-held companies and equity investments as well as decreased foreign exchange expense when compared to prior year.

Interest income increased primarily due to an increase in investments made into marketable debt securities.

Taxes on Income

For the six months ended March 31, 2023, we recognized an income tax expense of $5.7 million on $13.2 million of pre-tax income.

For the six months ended April 1, 2022, the Company recognized income tax expense of $7.7 million on $16.9 million of pre-tax income.

Our tax expense for the six months ended March 31, 2023 decreased, compared to the prior year, primarily due to lower pre-tax income in certain jurisdictions, partially offset by valuation allowance positions in the United States on deferred tax attributes, and losses in certain foreign jurisdictions for which no benefit can be recorded.

For the nine months ended June 30, 2023, we recognized an income tax expense of $13.6 million on $30.3 million of pre-tax income.

For the nine months ended July 1, 2022, the Company recognized income tax expense of $12.8 million on $30.4 million of pre-tax income.

Our tax expense for the nine months ended June 30, 2023 increased, primarily due to increased pre-tax income in certain jurisdictions, valuation allowance positions in the United States on deferred tax attributes, and losses in certain foreign jurisdictions for which no benefit can be recorded.

We regularly evaluate the realizability of our net deferred tax assets.

As of June 30, 2023, substantially all of our U.S.

deferred tax assets, net of deferred tax liabilities, were subject to valuation allowance.

If our financial results continue to improve and we conclude that estimates of our future taxable income are objectively verifiable, our assessment of the realization of our net deferred tax assets could result in the release of the valuation allowance.

Such a release would result in a material non-cash income tax benefit in our Condensed Consolidated Statements of Operations in the period of release and an increase to deferred tax assets on our Condensed Consolidated Balance Sheets.

There is a reasonable possibility that within the next several quarters, sufficient positive evidence may become available to reach a conclusion that the valuation allowance against our U.S.

net deferred tax assets would no longer be required.

However, the exact timing and amount of valuation allowance releases are subject to change based on the level of profitability achieved in future periods.

Liquidity and Capital Resources

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however, the borrowing base under the ABL Facility fluctuates from month to month depending on the amount of eligible accounts receivable, inventory, and real estate.

As of March 31, 2023, the amount available under our ABL Facility was $89.8 million, and the ABL Facility remains undrawn.

As of June 30, 2023, the amount available under our ABL Facility was $87.8 million, and the ABL Facility remains undrawn.

See Part II, Item 1A – “ Risk Factors ” for a further discussion.

At March 31, 2023 we had total debt of $443.0 million, net of discounts and deferred issuance costs of $6.4 million.

At June 30, 2023 we had total debt of $442.9 million, net of discounts and deferred issuance costs of $5.8 million.

Cash and Cash Equivalents, Certificates of Deposit, and Marketable Securities

The following table summarizes our cash and cash equivalents, certificates of deposit, and marketable securities:

(In millions) March 31, 2023 September 30, 2022 $ Change

(In millions) June 30, 2023 September 30, 2022 $ Change

Cash and cash equivalents $ 118.5 $ 89.4 $ 29.1

Certificates of deposit not included in cash and cash equivalents

2.3 7.2 (4.9)

Marketable securities not included in cash and cash equivalents

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The following table summarizes the changes in our debt outstanding:

March 31, 2023 September 30, 2022

June 30, 2023 September 30, 2022

(In millions, except for percentages) Amount Amount $ Change

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Refer to Note 1, Summary of Significant Accounting Policies for further details.

Six Months Ended

(In millions) March 31, 2023 April 1, 2022

Nine Months Ended

(In millions) June 30, 2023 July 1, 2022

Net cash flow (used in) provided by:

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Net increase (decrease) in cash and cash equivalents and restricted cash $ 29.3 $ (45.2)

Net cash provided by operating activities.

Net cash provided by operating activities was $23.6 million and $2.5 million for the six months ended March 31, 2023 and April 1, 2022, respectively.

The increase in cash provided by operating activities was primarily due to increased collections from accounts receivable and a reduction in cash outflows for inventory, partially offset by increased payments for accounts payable when compared to the six months ended April 1, 2022.

Net cash provided by (used in) operating activities.

Net cash provided by (used in) operating activities was $61.3 million and $(0.2) million for the nine months ended June 30, 2023 and July 1, 2022, respectively.

Net cash used in investing activities.

Net cash used in investing activities was $7.5 million and $6.6 million for the six months ended March 31, 2023 and April 1, 2022, respectively.

The increase in cash used in investing activities was primarily due increased purchases of property, plant, and equipment, along with increased purchases of marketable equity and debt securities during the six months ended March 31, 2023, partially offset by the settlement of net investment hedges.

Net cash used in investing activities was $30.3 million and $20.9 million for the nine months ended June 30, 2023 and July 1, 2022, respectively.

The increase in cash used in investing activities was primarily due to increased purchases of property, plant, and equipment, along with increased purchases of marketable equity and debt securities during the nine months ended June 30, 2023, partially offset by the settlement of net investment hedges.

Net cash used in financing activities.

Net cash used in financing activities was $0.9 million and $25.4 million for the six months ended March 31, 2023 and April 1, 2022, respectively.

The decrease in cash used in financing activities was primarily due to the debt redemption during the six months ended April 1, 2022.

Net cash used in financing activities was $1.6 million and $24.0 million for the nine months ended June 30, 2023 and July 1, 2022, respectively.

The decrease in cash used in financing activities was primarily due to the partial redemption of our Senior Secured Notes during the nine months ended July 1, 2022.

Contractual Obligations

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The amended agreement requires us to pay for 50% of the fixed costs (as defined in the amended agreement), as determined at the beginning of each calendar year.

In January 2023, the fixed cost commitment was determined to be $9.8 million through the remainder of calendar year 2023.

In January 2023, the Company's fixed cost commitment was determined to be $13.1 million for calendar year 2023.

As of June 30, 2023, the Company estimated it has $6.5 million remaining related to this fixed cost commitment.

The amended agreement will continue unless the ownership structure of dpiX changes (as defined in the amended agreement).

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The annual net payment will continue for the life of the DPLTA, which we anticipate will continue for as long as we remain as the controlling shareholder of MeVis.

As of March 31, 2023, noncontrolling shareholders together held approximately 0.5 million shares of MeVis, representing 26.3% of the outstanding shares.

During the third quarter of fiscal year 2020, we entered into a purchase agreement with a supplier to acquire certain equipment and intellectual property from the supplier that is utilized to manufacture X-ray cables utilized in our products.

The total consideration to be paid was ¥1,084.7 million, subject to potential decreases for costs incurred by the Company.

On April 14, 2022, we entered into a foreign currency hedge related to this Japanese Yen payment, which fixed the purchase price of these assets at approximately $7.9 million.

As of March 31, 2023, the Company has recorded all assets related to this agreement and completed all payments to the supplier.

As of June 30, 2023, noncontrolling shareholders together held approximately 0.5 million shares of MeVis, representing 26.3% of the outstanding shares.

In fiscal year 2022, the Company entered into several agreements with a third-party company, whose stock is publicly traded on a foreign exchange.

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During the second quarter of fiscal year 2023, two more milestones were achieved and the Company paid an additional $2.0 million to the third-party company.

No additional milestones were achieved nor were any payments made during the third quarter of fiscal year 2023.

Payments made under this agreement are recorded in research and development in the Condensed Consolidated Statements of Operations.

The remaining milestones are expected to be achieved in fiscal year 2023.

In addition, the Company agreed to acquire, through two separate purchases, a fixed number of shares for approximately $5.0 million, representing 9.9% of the shares of the third-party company outstanding on the date the agreements were signed.

The Company completed the acquisition of the first tranche of shares during fiscal year 2022 for approximately $2.4 million and the second tranche of shares during the first quarter of fiscal year 2023 for approximately $2.7 million.

The Company has recorded this investment as marketable equity securities, which is included in other assets on the Condensed Consolidated Balance Sheets.

As of June 30, 2023, there were two milestones remaining of $1.0 million each under these agreements.

The Company enters into purchase agreements with its suppliers in the ordinary course of its business for the purchase of goods and services.

Some of these purchase agreements are non-cancellable and thus contractually obligate the Company to future cash payments.

As of March 31, 2023, our non-cancellable supplier purchase obligations totaled $8.9 million.

As of June 30, 2023, our non-cancellable supplier purchase obligations totaled $8.2 million.

Contingencies

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A loss or a range of loss is disclosed when it is reasonably possible that a material loss will be incurred and can be estimated or when it is reasonably possible that the amount of a loss, when material, will exceed the recorded provision.

We did not have any material contingent liabilities as of March 31, 2023 and September 30, 2022.

We did not have any material contingent liabilities as of June 30, 2023 and September 30, 2022.

Legal expenses are expensed as incurred.

Days Sales Outstanding

Trade accounts receivable days sales outstanding (“DSO”) was 64 days at March 31, 2023 and 68 days at September 30, 2022.

Trade accounts receivable days sales outstanding (“DSO”) was 64 days at June 30, 2023 and 68 days at September 30, 2022.

Our accounts receivable and DSO are impacted by a number of factors, including the timing of product shipments, collections performance, payment terms, the mix of revenues from different regions and the effects of economic instability.

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Backlog also includes a small portion of billed service contracts that are included in deferred revenue.

Our estimated total backlog at March 31, 2023 was approximately $404 million.

Our estimated total backlog at June 30, 2023 was approximately $367 million.

Orders may be revised or canceled, either according to their terms or as customers' needs change.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis