What happened

Shares of Varex Imaging (NASDAQ:VREX), a healthcare company focused on X-ray imaging components, are plunging today, down 15% as of 10:47 a.m. EDT. The double-digit drop is traceable to the announcement that the company is raising capital through a convertible notes offering.

So what

Here are the details of the transaction that we know so far:

  • The company intends to sell $150 million worth of convertible senior notes that mature in 2025. 
  • The initial buyers of the notes will be given a 13-day option to purchase an additional $22.5 million in convertible notes. 
  • The notes can be converted into common stock, cash, or a combination of the two at Varex's election. 
  • The interest rate, conversion rate, and offering price have not yet been determined.
  • The company plans to use the proceeds of the deal to repay debt, to fund the transaction, and for general corporate purposes.
Businessman with coins falling through his hands.

Image source: Getty Images.

Traders do not appear to be thrilled with the idea of a capital raise and are fleeing in response. 

Now what

COVID-19 has hit plenty of companies hard, and even healthcare businesses such as Varex haven't been able to sidestep the carnage. During its last earnings report, management decided to withdraw its full-year guidance due to the "significant uncertainty in demand for certain products for medical and industrial applications, as well as increased variability in its supply chain and manufacturing productivity."

Varex began April with only $24 million in cash and $383 million in debt on its balance sheet. It also drew an additional $65 million through its revolving credit facility after the quarter ended. That's not a pretty financial situation to be in right now given the enormous disruption from the pandemic.

A capital raise looks like a necessity right now, and the pricing details will tell us a lot about what financiers think of the state of this business. Investors will want to dig through those details with a fine-tooth comb when they are released. Stay tuned.