Investing.com -- S&P Global Ratings has downgraded its ratings on Varex Imaging Corp (NASDAQ: VREX ). to ’B+’ from ’BB-’ due to weaker credit metrics and a challenging regulatory environment, including the potential impact of U.S.-China tariffs. The ratings agency now forecasts a leverage above its downside threshold of 3.5x and a free operating cash flow (FOCF) to debt below 12% for fiscal 2025, marking the second consecutive year of such performance.
The downgrade reflects concerns about Varex’s ability to improve its profitability and cash flow in the near term. The company’s guidance for the third fiscal quarter of 2025, ending June 30, indicated a $20 million revenue shortfall compared to the same period in 2024. This is coupled with a 150-200 basis point decrease in its operating margin compared to the fiscal second quarter of 2025.
The company’s projections were made under the assumption of 125% tariffs on U.S. exports to China. Although the two countries have since announced a 90-day pause on tariff escalation, leading to interim tariffs of approximately 30%, the future outcome of tariff negotiations remains uncertain. S&P Global Ratings believes that this uncertainty will limit Varex’s ability to significantly improve its EBITDA margins, which stood at 12% in the first half of 2025.
In terms of sales growth, the ratings agency predicts less than 1.5% for fiscal 2025-2026 due to high macroeconomic volatility disrupting normal demand patterns. However, it forecasts a slightly better growth rate in the industrial segment, driven by recent contract wins expected to be delivered over the next few years.
In the medical segment, despite the approval of a $1.4 trillion government stimulus package in China, demand remains subdued. This, combined with initiatives by the Chinese government to prioritize local vendors, will continue to put pressure on Varex’s sales in the country. In North America and Europe, the Middle East, and Africa (EMEA), slower growth is also expected due to cautious spending by healthcare facilities, stemming from anticipated Medicare and Medicaid budget cuts and increasing costs.
Varex is expected to use $75 million of its cash balance and $125 million proceeds from its recent debt issuance to repay its $200 million convertible notes due in June 2025. However, near-term debt maturities pose some refinancing risk. After the convertible notes mature in June 2025, the company’s senior secured debt is due in October 2027. The lower rating also reflects somewhat weaker refinancing prospects due to factors outside of Varex’s control, such as geopolitical risk and capital market conditions.
Despite these challenges, S&P Global Ratings has given Varex a stable rating outlook. This reflects the expectation that, despite a prolonged earnings recovery amid high macroeconomic volatility, Varex’s leverage will remain below 4.5x and FOCF to debt above 5%. This is due to Varex’s solid competitive position and recent contract wins.
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