Varex Imaging Corporation, the x-ray component manufacturer, published its latest quarterly financial results on Tuesday for its fourth fiscal quarter ending September 27 2019. These results show that overall sales revenue contracted during the previous quarter, reaching $202.4 million, compared with $204.8 million in 2018, a decrease of -1.2% year-on-year (YoY). For the full fiscal year (Oct to Sept) Varex reported sales growth of +1% YoY. That said on a calendar year-to-date basis, sales revenue declined due to weaker sales growth during the first half of 2019, relative to the strong sales growth in 2018. For the first nine months of 2019 overall sales revenue reached $594.9 million, compared with $597.2 million in 2018, a decrease of -0.4% YoY.
Medical Imaging Segment
The company has two reportable operating segments, medical and industrial imaging. The recent contraction in sales revenue has been as a result of lower sales revenue from the medical imaging segment, which accounted for approximately 76% of total revenues during the first nine months. On a calendar year-to-date basis, sales revenue from the medical imaging segment reached $452.9 million, compared with $462.8 million in 2018, a decrease of -2.1% YoY. While overall revenues from medical were lower, the company experienced higher sales volume of medical products for oncology, computed tomography (CT) and dental applications. Sunny Sanyal, CEO of Varex, noted that in China, shipments of CT tubes to local OEM customers more than doubled from the prior-year level, of which approximately 2/3 of these units were for value and mid-range CT systems. This is off the back of various purchase agreements with local Chinese OEMs as well as continued investment into its Wuxi facility to service business in China. The companies “local for local” strategy has been about increasing local X-ray tube and digital detector manufacture as well as service and support with the aim of being global partners for local business. Despite sizeable growth from CT tubes, this growth was more than offset by lower sales of radiographic digital detectors, primarily due to trade-tariff related actions in China. During the earnings conference call, the company stated that it experienced a $20 million reduction in radiographic detector sales due to the tariff-related actions. The reduction in radiographic detector sales was led by the non-OEM aftermarket segment and Howard Goldman, Director Investor & Public Relations, commented that other modalities generally performed as expected. It is estimated that the aggregate impact of trade tariffs reduced overall company revenues by approximately 3% YoY during the fiscal year 2019. The company received a temporary exclusion from section 301 tariffs on certain parts and components being imported into the U.S. from China, effectively neutralising tariffs on exports from China in the short-term.
Industrial Imaging Segment
Lower sales from the medical segment were partially offset by sales growth from the industrial segment which grew by +5.7% YoY during the first nine months. The growth from industrial was driven by the continued adoption of next-generation technology and digitisation of inspection processes across a variety of verticle markets. Growth from the industrial segment was led by higher sales of products for airport baggage screening as well as non-destructive testing applications within oil & gas, food and manufacturing verticles.
Sales revenue expectations for the coming 12-months
Clarence Verhoef, CFO at Varex, comments on the forward-looking revenue expectations for the coming fiscal year 2020. The company expects revenues to be in a range of $790 to $805 million, indicating overall annualised sales growth within the one to three per cent range. Varex doesn’t provide forward guidance on financials by segment, although noted that the “recovery” of the China radiographic detector business is not currently incorporated into this forward revenue estimate. Based on the current distribution of revenues between medical and industrial, if the industrial segment were to continue to grow at a faster pace within the 5-7% range then this would imply growth from medical within the 1-2% range.
Closure of acquired Perkin Elmer Santa Clara operations
During May 2017, the company completed the acquisition of the medical imaging business of PerkinElmer Inc which consisted of PerkinElmer Medical Holdings Inc and Dexela Limited as well as other assets within subsidiary companies relating to digital flat panel X-ray detectors that serve as components for industrial, medical, dental and veterinary X-ray imaging systems. The acquisition included approximately 280 employees, with operations in Santa Clara, California as well as operations in Germany, the Netherlands and the United Kingdom. Following a period of unfavourable performance from the Santa Clara operations, during July 2019, the company announced that it would be closing this facility. The company expects operations at the Santa Clara facility to cease by the end of December 2020 and that the company will close the facility mid-2021. This announcement coincided with the company extending its “local for local” strategy into Europe, by expanding the production capacity of digital x-ray detectors in Germany, while shifting the manufacture of heat exchangers to the Philippines. These global footprint changes are expected to help manage and mitigate any ongoing trade war between US-China.
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