Varex Imaging(VREX) - 2024 Q4 - Annual Report

Part I Business Varex Imaging Corporation is a leading designer and manufacturer of X-ray imaging components, operating through Medical and Industrial segments, serving global OEMs with a focus on innovation and customer relationships - Varex is a leading innovator, designer, and manufacturer of X-ray imaging components such as X-ray tubes, flat panel detectors, linear accelerators, and image processing software[11] - The company operates through two reportable segments: Medical and Industrial[14] - A significant portion of revenue comes from a concentrated group of OEM customers, with the top five accounting for approximately 41% of total revenue in fiscal year 2024, and the largest customer, Canon, representing about 18%[18] - As of September 27, 2024, the company had approximately 2,300 full-time equivalent employees worldwide[46] Operating Segments and Products The company's operations are divided into Medical and Industrial segments, providing X-ray components for healthcare and security applications, with the Industrial segment generally achieving higher gross profit margins - The Medical segment designs and manufactures components like X-ray tubes, flat panel detectors, and software for various medical imaging applications including CT, mammography, and oncology[15] - The Industrial segment provides products such as Linatron® X-ray linear accelerators for security (cargo/baggage screening) and non-destructive testing, generally achieving higher gross profit margins compared to the Medical business[17] - The company is developing CT X-ray tubes for Chinese OEMs to capitalize on the expansion of healthcare services in China, despite short-term purchasing delays caused by a new stimulus program[15] Competition The imaging components business is highly competitive, with Varex facing in-house manufacturing by major OEMs and independent manufacturers, particularly in China, across both Medical and Industrial segments - In the Medical segment, Varex competes with the in-house manufacturing of major diagnostic imaging companies and other X-ray tube manufacturers, including emerging competitors in China[20] - Key competitors in the digital flat panel detector business include Trixell S.A.S., Canon, Vieworks Co., Ltd., and iRay Technology (Shanghai) Limited[22] - In the Industrial segment, competitors include iRay, Teledyne, Comet AG, Nuctech, and Siemens AG, with Varex also competing with some OEM customers it supplies, such as Rapiscan and Smiths[23] Manufacturing and Supplies Varex operates ISO-certified manufacturing facilities globally but relies on limited or single-source suppliers for critical components and raw materials, exposing it to supply chain volatility - Manufacturing facilities are located in the United States, the United Kingdom, the Netherlands, Germany, Finland, the Philippines, China, and India[25] - The company is dependent on a limited group or single-source suppliers for critical components, including transistor arrays, cesium iodide coatings, X-ray tube targets, and specialized integrated circuits[25] Government Regulation and Trade The company is subject to extensive regulation by the FDA and international bodies for medical devices, with recent challenges including China's anti-corruption campaign impacting sales and the U.S.-China trade war increasing costs - Products are subject to extensive regulation by the FDA in the U.S. and require CE mark certification for sale in the EU[30][36] - China's anti-corruption campaign in the healthcare industry negatively impacted Medical business sales in fiscal year 2024[37] - The U.S.-China trade war has increased costs and competitive pressures, prompting Varex to expand manufacturing and implement a 'local-for-local' sourcing strategy in various global locations[40] Human Capital Resources As of September 27, 2024, Varex had approximately 2,300 employees and focuses on attracting and retaining talent through competitive compensation, benefits, and diversity and inclusion initiatives - As of September 27, 2024, the company had approximately 2,300 full-time equivalent employees[46] - The company offers a 401(k) plan with a dollar-for-dollar match up to 4% of an employee's base compensation, with approximately 91% of eligible employees participating[48] - Diversity and inclusion initiatives include establishing a global employee resource group, focusing on STEM internships, and regularly analyzing pay equity[50] Risk Factors The company faces significant risks from customer concentration, intense competition, international operations, supply chain disruptions, regulatory hurdles, and substantial debt, including convertible notes maturing in June 2025 - The company is highly dependent on a limited number of OEM customers, with one customer accounting for 18% of revenue in fiscal year 2024, and the ten largest customers accounting for 53%[56] - International sales account for approximately 68% of total revenues in FY2024 and are subject to risks including currency fluctuations, political instability, and trade restrictions[62] - The U.S.-China trade war and China's policy of reducing dependence on foreign manufacturers pose significant risks, with China's anti-corruption campaign in its healthcare industry having slowed sales[81] - The company has significant debt, including $200.0 million of Convertible Notes maturing in June 2025, which creates refinancing risk and could adversely affect liquidity[97][99] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[108] Cybersecurity Varex manages cybersecurity risks through a dedicated program aligned with NIST and CIS frameworks, overseen by the Audit Committee, and has not experienced any material incidents in the last three fiscal years - The company has a risk-based cybersecurity program aligned with frameworks from the National Institute of Standards and Technology (NIST) and the Center for Internet Security (CIS)[109] - Oversight is provided by the Board of Directors and the Audit Committee, which receives at least an annual overview from management on cybersecurity strategy and risks[112] - In the last three fiscal years, the company has not experienced any material cybersecurity incidents, and related expenses have been immaterial[111] Properties The company's corporate headquarters is an owned 495,000 square foot facility in Salt Lake City, Utah, supplemented by 30 other owned or leased facilities globally totaling over 864,000 square feet for various operations - Corporate headquarters is an owned 495,000 sq. ft. facility in Salt Lake City, Utah[113] - The company owns or leases 30 other facilities worldwide, totaling over 864,000 square feet[113] Legal Proceedings The company is subject to various claims and legal actions in the normal course of business, but management does not believe any pending litigation will have a material adverse effect on its operations or financial position - The company does not believe any current or pending litigation will have a material adverse effect on its operations or financial position[114] Mine Safety Disclosures This item is not applicable to the company - Not applicable[116] Part II Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Varex's common stock trades on the Nasdaq Global Select Market under 'VREX', the company has not paid cash dividends and has no current plans to do so, with approximately 1,234 holders of record as of November 14, 2024 - Varex common stock is traded on the Nasdaq Global Select Market under the symbol 'VREX'[118] - The company has not paid any cash dividends and has no current plan to pay them[118] Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal year 2024, Varex's net revenues decreased by 9% to $811.0 million, driven by a 14% decline in the Medical segment, resulting in a net loss of $47.2 million and a substantial decrease in operating cash flow, with ongoing challenges in China and upcoming debt refinancing | Metric | FY 2024 | FY 2023 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues, net | $811.0M | $893.4M | (9)% | | Gross Profit | $256.9M | $290.3M | (12)% | | Gross Margin | 31.7% | 32.5% | -80 bps | | Operating Income | $32.1M | $77.1M | (58)% | | Net (Loss) Income | ($47.2M) | $48.7M | N/A | | Diluted EPS | ($1.17) | $1.08 | N/A | - The Medical business was negatively impacted by the Chinese government's anti-corruption campaign in the healthcare industry, which is expected to continue through fiscal year 2025[122] - The company has $200.0 million of Convertible Notes due in June 2025, which it anticipates refinancing using its Revolving Credit Facility and cash[135] Results of Operations For fiscal year 2024, total net revenues fell 9% to $811.0 million due to a 14% decrease in Medical revenues, partially offset by a 4% increase in Industrial revenues, leading to a 12% decline in gross profit and a 5% rise in operating expenses Revenues by Segment (FY 2024 vs. FY 2023) | Segment | FY 2024 Revenue | FY 2023 Revenue | % Change | | :--- | :--- | :--- | :--- | | Medical | $581.7 M | $673.3 M | (14)% | | Industrial | $229.3 M | $220.1 M | 4% | | Total | $811.0 M | $893.4 M | (9)% | Revenues by Region (FY 2024 vs. FY 2023) | Region | FY 2024 Revenue | FY 2023 Revenue | % Change | | :--- | :--- | :--- | :--- | | Americas | $266.5 M | $281.8 M | (5)% | | EMEA | $280.3 M | $290.7 M | (4)% | | APAC | $264.2 M | $320.9 M | (18)% | Gross Profit and Margin by Segment (FY 2024) | Segment | Gross Profit | Gross Margin | | :--- | :--- | :--- | | Medical | $176.7 M | 30.4% | | Industrial | $80.2 M | 35.0% | | Total | $256.9 M | 31.7% | - SG&A expenses increased primarily due to decreased revenue, increased fixed cost commitments to a supplier, higher litigation costs, and increased severance costs[131] Liquidity and Capital Resources As of September 27, 2024, Varex had $212.9 million in cash and marketable securities and $443.4 million in total debt, with net cash from operating activities significantly decreasing to $47.3 million, and plans to refinance $200.0 million of Convertible Notes due in June 2025 Cash and Debt Position (as of Sept 27, 2024) | Metric | Amount | | :--- | :--- | | Cash, Cash Equivalents & Marketable Securities | $212.9 M | | Total Debt Outstanding, net | $443.4 M | | Availability under Revolving Credit Facility | $155.0 M | Cash Flow Summary (FY 2024 vs. FY 2023) | Cash Flow Activity | FY 2024 | FY 2023 | | :--- | :--- | :--- | | Operating Activities | $47.3 M | $108.4 M | | Investing Activities | ($27.5 M) | ($44.9 M) | | Financing Activities | ($3.3 M) | ($0.2 M) | - Days Sales Outstanding (DSO) increased to 70 days at the end of FY2024 from 65 days at the end of FY2023[141] Critical Accounting Estimates Management identifies three critical accounting estimates requiring significant judgment: valuation of inventories, assessment of goodwill and intangible asset recoverability, and income taxes, with a quantitative goodwill impairment test performed in Q4 2024 resulting in no impairment - Critical accounting estimates include: valuation of inventories, recoverability of goodwill and intangible assets, and income taxes[147] - In Q4 2024, a quantitative impairment analysis for goodwill was triggered by reduced demand for medical products and a sustained decrease in stock price, concluding that the fair values of both the Medical and Industrial reporting units exceeded their carrying amounts, so no impairment was recorded[151] - The valuation allowance for deferred tax assets increased significantly to $74.7 million as of Sept 27, 2024, from $18.7 million a year prior[152] Quantitative and Qualitative Disclosures about Market Risk The company is exposed to foreign currency exchange rate, credit and counterparty, interest rate, and commodity price risks, using derivatives to hedge some foreign currency exposure and facing potential impacts from a strong U.S. dollar and commodity price volatility - Primary market risks are foreign currency exchange, credit/counterparty, interest rate, and commodity price risk[157] Market Risk Sensitivity Analysis (as of Sept 27, 2024) | Market Risk Category | Hypothetical Change | Estimated Impact (In millions) | Impact Category | | :--- | :--- | :--- | :--- | | Foreign Currency - Revenue | 10% decrease in foreign exchange rates | $13.5 | Earnings | | Interest Rate - Marketable Securities | 100 basis point decrease in interest rate | $1.6 | Earnings | | Commodity Price | 10% increase in commodity prices | $3.7 | Earnings | Financial Statements and Supplementary Data This section presents Varex Imaging Corporation's consolidated financial statements for fiscal year 2024, audited by Deloitte & Touche LLP, who issued an unqualified opinion but identified two Critical Audit Matters related to inventory valuation and goodwill impairment - The independent registered public accounting firm, Deloitte & Touche LLP, issued an unqualified opinion on the consolidated financial statements and on the company's internal control over financial reporting as of September 27, 2024[208][173] - The auditor identified two Critical Audit Matters: 1) Valuation of excess and obsolete inventories, due to significant management judgment on future sales estimates, and 2) Valuation of the Medical reporting unit's goodwill, due to significant judgments in forecasting revenues and selecting a discount rate for the impairment test[212][215] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of September 27, 2024, a conclusion affirmed by the independent auditor's unqualified opinion - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 27, 2024[167] - Management concluded that the company maintained effective internal control over financial reporting as of September 27, 2024, based on the COSO framework[168] - Deloitte & Touche LLP, the independent auditor, audited and issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[173] Part III Directors, Executive Officers and Corporate Governance Information regarding directors and corporate governance is incorporated by reference from the upcoming 2025 Proxy Statement, with executive officer details provided in Item 1 of this report, and the company has adopted a Code of Conduct for all executive officers and directors - Information required by this item is largely incorporated by reference from the company's definitive proxy statement for the 2025 Annual Meeting of Stockholders[183] - Biographical summaries of executive officers are provided under Item 1 of the Form 10-K[184][53] Executive Compensation Detailed information regarding executive compensation is incorporated by reference from the company's definitive proxy statement for the 2025 Annual Meeting of Stockholders - The information required by this item is incorporated by reference from the company's 2025 Proxy Statement[187] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides information on equity compensation plans, showing 3.767 million securities to be issued upon exercise of outstanding options and other rights with a weighted-average exercise price of $26.79, and 5.276 million securities remaining available for future issuance Equity Compensation Plan Information (as of Sept 27, 2024) | Plan Category | Securities to be Issued Upon Exercise (a) | Weighted-Average Exercise Price (b) | Securities Remaining for Future Issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 3,767,000 | $26.79 | 5,276,000 | | Total | 3,767,000 | $26.79 | 5,276,000 | Part IV Exhibits and Financial Statement Schedules This section lists all documents filed as part of the annual report, including consolidated financial statements and a comprehensive list of exhibits such as key agreements and compensation plan documents - This item lists all consolidated financial statements, schedules, and exhibits filed with the Form 10-K[193] - Exhibits filed include key agreements such as the Indenture for the 4.00% Convertible Senior Notes due 2025 and the Indenture for the 7.875% Senior Secured Notes due 2027[194]