S&P issues negative outlook for radiology vendor amid weaker-than-expected operating performance
S&P Global Ratings on Monday downgraded its outlook for radiology vendor Varex Imaging Corp. amid weaker-than-expected operating performance.
Credit analysts noted that the Salt Lake City-based company has faced “macroeconomic headwinds” in China, along with customer “destocking” as radiology providers have sought to reduce their inventory levels. Founded 75 years ago, Varex manufactures X-ray imaging components including tubes and digital detectors.
The company saw its revenues decline 9% in fiscal 2024, falling from $893 million last year down to $811 million as it faces lower demand for medical imaging products.
“Still, we think the unusual demand patterns in 2024-2025 are temporary given healthy procedure volumes and our view that radiology equipment remains a high priority for hospitals,” S&P analysts Alice Kedem and Ryan Gilmore wrote Dec. 16.
On the same day, Varex Imaging also announced it is seeking to add $125 million in new debt to its existing senior secured notes due in 2027. The company plans to use the proceeds—combined with $75 million in cash—to refinance its 4%, $200 million senior notes due in 2025, along with paying related fees and expenses.
Varex did not immediately respond to a Radiology Business request for comment Tuesday. S&P noted that the proposed transaction will result in modestly higher leverage. Combined with weaker projected sales and profitability in 2025, the ratings agency expects Varex’s debt-to-earnings ratio to be about 3.9x. S&P believes that challenges will persist in 2025, with Varex recording “modest” revenue growth of 1% to 2% (down from the previous forecast of 4.3%).
“While we view the soft demand in China as temporary and not a reflection of a weakening in the company's competitive position, we see a risk that the macroeconomic headwinds that drove weaker sales in fiscal 2024 may continue to pressure the company's sales and profitability longer than we previously projected,” Kedem and Gilmore wrote.
Varex Imaging’s profit margin fell from 15% in 2023 down to 10.8% in fiscal 2024. This was mostly due to the company’s high level of fixed costs, including manufacturing and research and development. Such impediments limit Varex’s ability to offset sales contraction, experts noted. In the second half of 2024, Varex has implemented cost-cutting measures, which S&P expects will benefit its profit margin next year. Slow sales growth, however, will continue to pressure margins.
Marty Stempniak has covered healthcare since 2012, with his byline appearing in the American Hospital Association's member magazine, Modern Healthcare and McKnight's. Prior to that, he wrote about village government and local business for his hometown newspaper in Oak Park, Illinois. He won a Peter Lisagor and Gold EXCEL awards in 2017 for his coverage of the opioid epidemic.