Varex Imaging Corporation
Fiscal Year 2020 Annual Report on Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________
FORM 10-K
____________________________________________________________
☒ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the year ended October 2, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-37860
____________________________________________________________
VAREX IMAGING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
1678 S. Pioneer Road, Salt Lake City, Utah
(Address of principal executive offices)
81-3434516
(I.R.S. Employer
Identification Number)
84104
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
(801) 972-5000
(Registrant’s telephone number, including area code)
____________________________________________________________
Title of each class
Common Stock
Trading Symbol(s)
Name of each exchange on which registered
VREX
The Nasdaq Global Select Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No ý
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No ý
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer
Non-Accelerated filer
☒
☐
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
☐
☐
☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 3, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of shares of
the registrant’s common stock held by non-affiliates of the registrant (based upon the closing sale price of such shares on the NASDAQ Global Select
Market on April 3, 2020) was approximately $597.5 million. Shares of the registrant’s common stock held by the registrant’s executive officers and
directors and by each entity that owned 10% or more of the registrant’s outstanding common stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of November 3, 2020, there were 39.2 million shares of the registrant’s common stock outstanding.
Portions of registrant’s proxy statement relating to registrant’s 2021 annual meeting of stockholders have been incorporated by reference in Part III of
this annual report on Form 10-K.
Documents Incorporated by Reference
VAREX IMAGING CORPORATION
INDEX
Part I.
Financial Information
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Part II.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Part III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV.
Item 15.
Item 16.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Marketing for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
Signatures
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Forward-Looking Statements
This Annual Report on Form 10-K (this “Annual Report”), including the section entitled “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” (“MD&A”) contains “forward-looking” statements within the meaning of
the Private Securities Litigation Reform Act of 1995, which provides a "safe harbor" for statements about future events, products and
financial performance that are based on the beliefs of, estimates made by, and information currently available to the management of
Varex Imaging Corporation (“we,” “our,” “us,” the “Company,” “Varex,” or “Varex Imaging”). Actual results and the outcome or
timing of certain events described in these forward-looking statements are subject to risk and uncertainties and may differ significantly
from those projected in these forward-looking statements. Important factors that could cause our actual results and financial condition
to differ significantly from those projections or expectations include, among other things, the risks described in the Summary of
Principal Risk Factors below and further described in the Risk Factors listed under Part I, Item 1A of this Annual Report, MD&A and
other factors described from time to time in our other filings with the U.S. Securities and Exchange Commission (the “SEC”), or other
reasons.
Statements concerning: the impact of the ongoing COVID-19 pandemic on the global economy or the Company; industry or
market segment outlook; market acceptance of or transition to new products or technology such as advanced X-ray tube and digital flat
panel detector products; growth drivers; future orders, revenues, backlog, earnings or other financial results; and any statements using
the terms “believe,” “expect,” “anticipate,” “can,” “should,” “would,” “could,” “estimate,” “may,” “intended,” “potential,” and
“possible” or similar statements are forward-looking statements that involve risks and uncertainties that could cause our actual results
and the outcome and timing of certain events to differ materially from those projected or management’s current expectations.
Any forward-looking statement made in this Annual Report (including in any exhibits or documents incorporated by
reference) is based only on information currently available to Varex and its management and speaks only as of the date on which it is
made. We have not assumed any obligation to, and you should not expect us to, update or revise those statements because of new
information, future events or otherwise.
Summary of Principal Risk Factors
Investing in our common stock involves risks. See Item 1A. “Risk Factors” beginning on page 14 of this Annual Report for a
discussion of the following principal risks and other risks that make an investment in Varex speculative or risky:
•
Our operations, cash flow, and financial position, and the demand for our security, industrial and inspection products, have
been adversely impacted, and in the future could continue to be adversely impacted by the coronavirus (COVID-19)
pandemic and associated economic disruptions.
• We sell products and services to a limited number of OEM customers, many of which are also competitors, and a reduction in
or loss of business of one or more of these customers may materially reduce our sales.
• We may not be able to accurately predict customer demand for our products, which is subject to matters beyond our control
• We compete in highly competitive markets, and we may lose business to our customers or other companies with greater
•
•
•
•
•
resources or the ability to develop more effective technologies, or we could be forced to reduce our prices.
Our success depends on the successful development, introduction, and commercialization of new generations of products and
enhancements to or simplifications of existing product lines.
Changes in import/export regulatory regimes and tariffs could continue to negatively impact our business.
A disruption at our manufacturing facilities, as well as fluctuating manufacturing costs, could materially and adversely affect
its business.
The loss of a supplier or any inability to obtain supplies of important components could restrict our ability to manufacture
products, cause product delivery delays, or significantly increase costs.
Our international manufacturing operations subject us to volatility and other risks, including high security risks, which could
result in harm to our employees and contractors or substantial costs.
• Warranty claims may materially and adversely affect our business.
•
Product defects or misuse may result in material product liability or professional errors and omissions claims, litigation,
investigation by regulatory authorities, or product recalls that could harm our future revenues and require us to pay material
uninsured claims.
Our competitive position would be harmed if we are not able to maintain our intellectual property rights and protecting our
intellectual property can be costly.
Disruption of critical information systems or material breaches in the security of our systems may materially and adversely
affect our business and customer relations.
Compliance with laws and regulations across the globe applicable to the marketing, manufacture, and distribution of our
products may be costly, and failure to comply may result in significant penalties and other harm to our business.
•
•
•
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• We identified material weaknesses in our internal control over financial reporting which, if not remediated appropriately or
•
timely, could result in loss of investor confidence and adversely impact our stock price.
Conversion of our Convertible Notes may dilute the ownership interest of Varex’s stockholders or may otherwise depress the
market price of Varex’s common stock.
• We have significant debt obligations that could adversely affect our business, profitability and ability to meet our obligations.
Our ABL Credit Facility and our indentures impose significant operating and financial restrictions that may limit current and
•
future operating flexibility, and make it difficult to respond to economic or industry changes or to take certain actions, which
could harm our long-term interest.
Potential indemnification liabilities to Varian could materially and adversely affect our business, financial condition, results
of operations, and cash flows.
•
Item 1. Business
Overview
PART I
Varex Imaging Corporation is a leading innovator, designer and manufacturer of X-ray tubes, digital detectors, linear
accelerators and other image software processing solutions, which are mission critical components of a variety of X-ray based
diagnostic imaging equipment. These products are used in medical imaging as well as in industrial and security imaging applications
such as general X-ray, computed tomography (“CT”), C-arms, angiography, fluoroscopy, mammography, and dental. In addition, our
components are also used in security and quality inspection systems, as well as for analysis and measurement applications in industrial
manufacturing applications. Global original equipment manufacturers (“OEMs”) incorporate our X-ray imaging components in their
systems to detect, diagnose, protect and inspect. Varex has approximately 2,000 full-time employees, located at manufacturing and
service center sites in North America, Europe, and Asia.
Founded as a Delaware corporation in July 2016, Varex was established as an independent publicly traded company in
January 2017 as a result of its spin-off from Varian Medical Systems, Inc. (“Varian”). We expanded our business in May 2017, when
we acquired certain assets of PerkinElmer, Inc. (“PKI”) relating to digital detectors that serve as components for medical and
industrial X-ray imaging systems. In April 2019, we acquired approximately 98% of Direct Conversion AB (publ), a manufacturer and
marketer of linear array digital detectors utilizing direct conversion and photon counting technology.
Our products are sold worldwide in three geographic regions: the Americas, EMEA, and APAC. The Americas includes
North America and South America. EMEA includes Europe, Russia, the Middle East, India and Africa. APAC includes Asia (other
than India) and Australia. Revenues by region are based on the destination of products being sold.
Our success depends, among other things, on our ability to anticipate and respond to changes in our markets, the direction of
technological innovation and the demand from our customers. We continually invest in research and development and employ
approximately 500 individuals in product development related activities. Our focus on innovation and product performance along with
strong and long-term customer relationships allows us to collaborate with our customers to bring industry-leading products to the X-
ray imaging market. We continue to work to improve the life and quality of our imaging components and leverage our scale as one of
the largest independent X-ray imaging component suppliers to provide cost-effective solutions for our customers.
Impact of COVID-19
The COVID-19 pandemic and its impact on the global economy has disrupted our business, increased uncertainty in demand
for certain medical and industrial products, and increased variability in our supply chain and manufacturing activities. The economic
downturn triggered by COVID-19 has led to significantly lower demand from our customers and delays in their equipment
installations. In conjunction with this reduced demand and uncertainty beyond the forecast horizon, we evaluated our product offering
and decided to discontinue certain low margin, low demand products. As a result, during the third quarter of fiscal year 2020 we took
an approximately $15.8 million pre-tax charge for the write-down of associated inventory and restructuring activity, impaired
$2.8 million of intangible assets and wrote off a $2.7 million cost investment in a privately-held company.
The COVID-19 pandemic has had a significant effect on hospitals, clinics and outpatient imaging centers as they have
encountered declines in surgeries and other non-emergency procedures. In some cases, healthcare facilities have been closed and non-
emergency procedures have been deferred. As a result, many hospitals, clinics and outpatient imaging centers have reduced their
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capital purchases of imaging equipment from OEM’s which has led to lower demand for X-ray imaging components. In addition,
reduced usage of certain X-ray equipment has resulted in less demand for replacement components that wear-out with use.
Additionally, equipment installations were delayed, due to reduced access to healthcare institutions. Partially offsetting this has been
an increased demand for CT and certain radiographic diagnostic imaging equipment used to screen for or assist in the treatment of
respiratory diseases (such as COVID-19).
While healthcare systems and economies around the world have begun to reopen, customer demand for our products has not
returned to pre-pandemic levels, and the adverse effect of COVID-19 on our results of operations has been significant. While we
believe that the drivers for long-term demand in both our medical and industrial segments remain intact, we believe that in the near-
term, reduced demand in our industrial segment and for certain higher end medical products will continue to depress our results of
operations. While our manufacturing sites are currently up and running, COVID-19 and associated economic disruptions have had an
adverse impact on our manufacturing capacity, supply chain and distribution systems, including as a result of impacts associated with
preventive and precautionary measures that we, other businesses and governments are taking. Supply chain logistics have also become
more challenging and while we have had success in localizing our supply chain through our “local-for-local” initiative, supply chain
logistics could remain challenging.
The actions taken to combat COVID-19 have had, and we believe will continue to have, a negative impact on our operating
results, cash flows and financial condition. We expect uncertainty related to the COVID-19 pandemic to continue well into calendar
year 2021. While we have implemented safeguards and procedures and taken other measures to counter the impact of the COVID-19
pandemic, the full extent to which the COVID-19 pandemic has and will directly or indirectly impact us, including our business,
financial condition, and results of operations, will depend on future developments that are highly uncertain and cannot be accurately
predicted. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be
required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, suppliers, and
stockholders.
Operating Segments and Products
Our Chief Executive Officer, who is our Chief Operating Decision Maker (“CODM”), evaluates our product groupings and
measures our business performance in two reportable operating segments: Medical and Industrial. The segments align our products
and service offerings with customer use in medical and industrial markets and are consistent with how the CODM evaluates the
business for the allocation of resources. The CODM allocates resources to and evaluates the financial performance of each operating
segment primarily based on revenues and gross profit.
Medical
In our Medical business segment, we design, manufacture, sell and service X-ray imaging components, including X-ray
tubes, digital detectors, high voltage connectors, image-processing software and workstations, 3D reconstruction software, computer-
aided diagnostic software, collimators, automatic exposure control devices, generators, heat exchangers, ionization chambers and
buckys (a component of X-ray units that holds X-ray film cassettes). These components are used in a range of medical imaging
applications including CT, mammography, oncology, cardiac, surgery, dental, and other diagnostic radiography uses.
Our X-ray imaging components are primarily sold to OEM customers. These OEM customers then design-in our products
into their X-ray imaging systems for a variety of medical modalities. A substantial majority of medical X-ray imaging OEMs globally
are our customers, and many of these have been our customers for over 25 years. We believe one of the reasons for customer loyalty is
that our hardware and software products are tightly integrated with our customers' systems. We work very closely with our customers
to create custom built components for their systems based on technology platforms that we have developed. Because our products are
often customized for our customers' specific equipment, it can be costly and complex for our customers to switch to another provider.
Once our components are designed into our customers' equipment, our customers will typically continue to use us to supply any
replacement components and for service and support for that equipment. Some of our products are also included in product
registrations for our customers' equipment that require regulatory approval to change. In addition to sales to OEM customers, we sell
our products to independent service companies and distributors and directly to end-users for replacement purposes.
We are one of the largest global manufacturers of X-ray components and each year we produce over 27,000 X-ray tubes and
20,000 X-ray detectors. We estimate that our world-wide installed base of products includes more than 150,000 X-ray tubes, 150,000
X-ray detectors, 300,000 connect and control components and 15,000 software instances. Replacement and service of our existing
installed base makes up a significant portion of our revenue. Many of our components need to be replaced regularly. For example, CT
X-ray tubes generally need to be replaced every 2 to 4 years. In China, the replacement cycle for CT X-ray tubes can be as frequent as
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every 6 to 12 months due to high utilization of imaging equipment. Other products such as X-ray detectors have a useful life of as
much as 7 years, but can require more frequent service and repairs during their useful life. In addition, our detector customers often
elect to upgrade products to newer technology before the end of a current product’s useful life. X-ray imaging software is a relatively
small part of our business and includes maintenance revenue for software licenses.
The COVID-19 pandemic has had a significant effect on hospitals, clinics and outpatient imaging centers as they have
encountered declines in surgeries and other elective procedures. Subsequently, they have reduced their capital purchases of imaging
equipment from OEM’s which has led to lower demand for X-ray imaging components. Additionally, equipment installations were
delayed, due to reduced access to healthcare institutions. Partially offsetting this has been increased demand for imaging equipment
used to diagnose respiratory diseases, such as radiographic X-ray imaging systems and CT imaging systems. The Company expects
uncertainty in demand to continue well into calendar year 2021.
In China, the government is broadening the availability of healthcare services. As a result, the number of diagnostic X-ray
imaging systems, including CT, has grown significantly. We are developing CT X-ray tubes and related subsystems for Chinese
OEMs as they introduce new systems in China. We have entered into multi-year agreements for providing CT tubes to eight medical
X-ray imaging OEMs in China. Over the long-term, our objective is to become the partner of choice both for OEMs and in the
replacement market as CT systems become more widely adopted throughout the Chinese market. In China, despite a COVID-19
related slowdown in the beginning of the year, demand for our products has returned, and full fiscal year 2020 results for China
exceeded our pre-pandemic expectations.
In recent years our growth in China has been impacted by the trade war with the United States. Our business has been
impacted in two principal ways: (1) imports of raw materials from China to the U.S. have become more expensive and (2) importing
finished U.S. manufactured products into China has become more difficult and expensive. In order to mitigate the impact of tariffs on
materials imported from China, we have implemented changes to secure more non-China sources of materials used to manufacture our
X-ray imaging products. With respect to imports into China, the additional tariffs imposed by the Chinese government have led to a
decrease in sales of radiographic detectors manufactured outside of China. To help address these issues, and to be closer to our global
customer base, we continue to expand manufacturing capabilities at our facilities in China, Germany and the Philippines and have
implemented local sourcing strategies to lower our costs and offer local content. This local-for-local strategy has been well received by
both our local customers as well as global OEMs, and acts as a natural hedge against trade wars and other potential supply chain
disruptions.
Industrial
In our Industrial segment, we design, develop, manufacture, sell and service X-ray imaging products for use in a number of
markets, including security applications for cargo screening at ports and borders and baggage screening at airports, and nondestructive
testing and inspection applications used in a number of other markets. Our Industrial products include Linatron® X-ray linear
accelerators, X-ray tubes, digital detectors and high voltage connectors. In addition, we license proprietary image-processing and
detection software designed to work with other Varex products to provide packaged sub-assembly solutions to our Industrial
customers. Our Industrial business benefits from the research and development investment as well as manufacturing economies of
scale in the Medical side of our business, as we continue to find new applications for our technology. In addition, our Industrial
business benefits from long-term service agreements for our Linatron® products.
The security market primarily consists of airport security for carry-on baggage, checked baggage and palletized cargo, as well
as cargo security for the screening of trucks, trains and cargo containers at ports and borders. The end customers for border protection
systems are typically government agencies, many of which are in oil-based economies and war zones where there has been significant
variation in buying patterns.
Non-destructive testing and inspection markets utilize X-ray imaging to scan items for inspection of manufacturing defects
and product integrity in a wide range of industries including the aerospace, automotive, electronics, oil and gas, food packaging, metal
castings and 3D printing industries. In addition, new applications for X-ray sources are being developed, such as sterilization of food
and its packaging. We provide X-ray sources, digital detectors, high voltage connectors and image processing software to OEM
customers, system integrators and manufacturers in a variety of these markets. We believe that the nondestructive testing market
represents a significant growth opportunity for our business and we are actively pursuing new potential applications for our products.
The economic downturn triggered by the COVID-19 pandemic has reduced the demand for X-ray imaging equipment utilized
in the non-destructive testing market as manufacturers have focused on cash preservation and have reduced spending for capital
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equipment. Additionally, the unprecedented decrease in passenger air traffic has led to decrease in demand in the security market. We
expect uncertainty in demand to continue well into the next calendar year.
Customers
Our customers are primarily large OEMs. Our top five customers, measured by revenue, are Canon Medical Systems
Corporation (“Canon”), General Electric Company, Hologic, Inc., Elekta AB, and Varian Medical Systems, Inc., which collectively
accounted for approximately 40% of total revenue in fiscal year 2020. Our largest customer, Canon, accounted for approximately
21%, 17% and 18% of our total revenue for fiscal years 2020, 2019, and 2018, respectively, while our ten largest customers as a group
accounted for approximately 52%, 51% and 49% of our revenue for fiscal years 2020, 2019 and 2018, respectively.
Competition
The imaging components market is highly competitive. OEMs may choose to develop and manufacture X-ray imaging
components in-house or they may choose to out-source to a supplier such as Varex or our competitors. Our success depends upon our
ability to anticipate changes in our markets, the direction of technological innovation and the demand from our customers. To remain
competitive, we must continually invest in research and development focused on innovation, improve product performance and
quality, and continue to reduce the cost of our imaging components. Significant capital investment is required for imaging component
manufacturers. We believe we have sufficient manufacturing scale to leverage our high volume to reduce overall costs by spreading
fixed costs over more units.
Medical
We often compete with the in-house X-ray tube manufacturing operations of major diagnostic imaging systems companies,
which are the primary OEM customers for our Medical products. To effectively compete with these in-house capabilities, we must
have a competitive advantage in one or more significant areas, such as innovative technology and greater product performance, better
product quality or lower product price. We sell a significant volume of our X-ray tubes to OEM customers that have in-house X-ray
tube production capability. In addition, we compete with some OEM customers, such as Canon, Philips Healthcare and other
companies who sell X-ray tubes to smaller OEMs and other manufacturers, such as Industria Applicazioni Elettroniche S.p.A, as well
as emerging X-ray tube manufacturers in China. High capital costs and mastery of complex manufacturing processes that drive
production yield and product life are significant characteristics of the X-ray tubes business.
The market for digital detectors is also highly competitive. We sell our digital detectors to a number of OEM customers that
incorporate our detectors into their medical diagnostic, oncology, 3D dental and veterinary imaging systems. Our amorphous silicon
based digital detector technology, our photon counting technology and our complementary metal-oxide-semiconductor technology
competes with other detector technologies, such as amorphous selenium, charge-coupled devices and variations of amorphous silicon
scintillators. We believe that our products provide a competitive advantage due to product quality and performance and lower total
cost of ownership over the product lifecycle. In the digital flat panel detector market, we primarily compete against Trixell S.A.S.,
Canon, Vieworks Co., Ltd., Hamamatsu Corporation, iRay Technology (Shanghai) Limited and Jiangsu CareRay Medical Systems
Co., Ltd.
Industrial
In the low-energy market of the Industrial segment, we compete with other OEM suppliers, such as General Electric, Canon,
Nuctech Company Limited (“Nuctech”) and Comet AG. While there are other manufacturers of low-energy X-ray tubes and digital
detectors for specialized and niche industrial applications, our products are designed for a broad range of applications in inspection,
analysis, and testing. In the high-energy market, we compete against technologies from Nuctech, Siemens AG, and Foton Ltd., whose
X-ray sources are used in applications that include cargo and container scanning, border security, aerospace applications, castings and
pressure vessel inspections.
Customer Services and Support
We generally warranty our products for 12 to 24 months. In certain cases, the warranty is specified by usage metrics such as
number of scans. We provide technical advice and consultation to major OEM customers from our U.S. offices in Utah, California,
Nevada, South Carolina, New York and Illinois; and internationally in the Philippines, China, the Netherlands, Germany, France,
Sweden, Switzerland, the United Kingdom, Italy and Japan. Our application specialists and engineers make recommendations to meet
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the customer’s technical requirements within the customer’s budgetary constraints. We often develop specifications for a unique
product that will be designed and manufactured to meet a specific customer’s requirements.
Manufacturing and Supplies
We manufacture our products at facilities in Salt Lake City, Utah; Las Vegas, Nevada; Liverpool, New York; Franklin Park,
Illinois; Doetinchem and Heerlen, the Netherlands; Walluf and Bremen, Germany; Espoo, Finland; Calamba City, Philippines; and
Wuxi, China. These facilities employ state-of-the-art manufacturing techniques and several have been recognized by the press,
governments and trade organizations for their commitment to quality improvement. Each of these manufacturing facilities are certified
by International Standards Organization (“ISO”) under ISO 9001 (for industrial products) or ISO 13485 (for medical devices). In
addition, we have regional service centers in North Charleston, South Carolina; and Willich, Germany. The combined medical and
industrial manufacturing infrastructure enables us to leverage production scale to achieve productivity and low cost advantage as well
as research and development synergies.
Manufacturing processes at our various facilities include machining, fabrication, subassembly, system assembly and final
testing. We have invested in various automated and semi-automated equipment for the fabrication and machining of the parts and
assemblies that we incorporate into our products. We may, from time to time, invest further in such equipment. Our quality assurance
program includes various quality control measures from inspection of raw materials, purchased parts and assemblies through in-line
inspection. In some cases, we outsource the manufacturing of sub-assemblies while still performing system design, final assembly and
testing in-house. In such cases, we believe outsourcing enables us to reduce or maintain fixed costs and capital expenditures, while
also providing the flexibility to increase production capacity. We purchase material and components from various suppliers that are
either standard products or customized to our specifications. Some of the components included in our products may be sourced from a
limited group of suppliers or from a single source supplier, such as the wave guides for linear accelerators; transistor arrays and
cesium iodide coatings for digital detectors and specialized integrated circuits, X-ray tube targets, housings, bearings and various other
components. We require certain raw materials, such as copper, lead, tungsten, iridium, rhenium, molybdenum zirconium, and various
high grades of steel alloy for X-ray tubes and industrial products. Worldwide demand, availability and pricing of these raw materials
have been volatile, and we expect that availability and pricing will continue to fluctuate in the future.
In the fourth quarter of 2019, we announced the closure of the remainder of our Santa Clara facility and that we would
relocate production to other existing facilities. We ceased all operations at the Santa Clara facility as of October 2, 2020 and all
activities related to the closure of the facility are expected to be complete by the end of December 2020.
Research and Development
Innovation and developing products, systems and services based on advanced technology is essential to our ability to compete
effectively in the marketplace. We maintain a research and development and engineering staff responsible for product design and
engineering.
Research and development are primarily conducted domestically at our facilities in Salt Lake City, Utah; San Jose,
California; Las Vegas, Nevada; Liverpool, New York; and Franklin Park, Illinois and internationally at our facilities in the
Netherlands, Sweden and Germany. Our research and development activities are primarily focused on developing and improving
imaging component technology. Current X-ray source development areas include smaller footprint linear accelerators, improvements
to tube life and tube stability, reductions of tube noise and tube designs that will enable OEMs to continue to reduce dose delivered,
and improve image resolution, cost effectively. In addition, through our joint venture, VEC Imaging Verwaltungsgesellschaft GmbH
(“VEC”), we are developing cold cathode nanotube technology. Research in digital detector imaging technology is aimed at
developing new panel technologies (such as photon counting) with better dose utilization, improved image quality and materials
discrimination, lower product costs and new image processing tools for advanced applications.
Industrial products share some of the same base technology competencies and platforms as medical products and our medical
and industrial development teams are therefore co-located in Salt Lake City, San Jose, Doetinchem, Danderyd and Walluf. One of our
competitive advantages is that some of the foundational technologies and software components developed for medical applications
may also be applicable in industrial components, and vice versa. In addition to these product development synergies, we are also able
to realize sourcing, production, service center, and logistics synergies across the different products and market sectors.
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Product and Other Liabilities
Our business exposes us to potential product liability claims that are inherent in the manufacture, sale, installation, servicing
and support of X-ray imaging devices, related software and other devices that contain hazardous material or deliver radiation. Because
our products are involved in the intentional delivery of radiation to the human body and other situations where people may come in
contact with radiation (for example, when our Industrial products are being used to scan cargo) as well as the detection, planning and
treatment of medical problems, the possibility for significant injury or death exists if our products fail to work or are not used properly.
We may face substantial liability to patients, our customers and others for damages resulting from the faulty, or allegedly faulty,
design, manufacture, installation, servicing, support, testing or interoperability of our products and our customers’ products, or their
misuse or failure. We may also be subject to claims for property damages or economic loss related to or resulting from any errors or
defects in our products, or the installation, servicing and support of our products. Any accident or mistreatment could subject us to
legal costs, litigation, adverse publicity and damage to our reputation, whether or not our products or services were a factor. In
addition, if a product we design or manufacture were defective (whether due to design, labeling or manufacturing defects, improper
use of the product or other reasons), or found to be so by a regulatory authority, we may be required to correct or recall the product
and notify other regulatory authorities. We maintain limited product liability, professional liability and omissions liability insurance
coverage.
Government Regulation
U.S. Regulations
Laws governing marketing a medical device. In the United States, as a manufacturer and seller of medical devices and
devices emitting radiation or utilizing radioactive by-product material, we and some of our suppliers and distributors are subject to
extensive regulation by federal governmental authorities, such as the U.S. Food and Drug Administration (the “FDA”), Nuclear
Regulatory Commission (“NRC”), and state and local regulatory agencies, to ensure the devices are safe and effective and comply
with laws governing products which emit, produce or control radiation. Similar international regulations apply overseas. These
regulations, which include the U.S. Food, Drug and Cosmetic Act (the “FDC Act”) and regulations promulgated by the FDA, govern,
among other things, the design, development, testing, manufacturing, packaging, labeling, distribution, import/export, sale and
marketing and disposal of medical devices, post market surveillance and reporting of serious injuries and death, repairs, replacements,
recalls and other matters relating to medical devices, radiation emitting devices and devices utilizing radioactive by-product material.
State regulations are extensive and vary from state to state. Our X-ray tube products, imaging workstations and flat panel detectors are
considered medical devices. Under the FDC Act, each medical device manufacturer must comply with quality system regulations that
are strictly enforced by the FDA.
Unless an exception applies, the FDA requires that the manufacturer of a new medical device or a new indication for use of,
or other significant change in, existing currently marketed medical device obtain 510(k) pre-market notification clearance before it can
market or sell those products in the United States. The 510(k) clearance process is applicable when the device introduced into
commercial distribution is substantially equivalent to a legally marketed device. Obtaining the 510(k) clearance generally takes at least
six months from the date an application is filed, but could take significantly longer, and generally requires submitting supporting
testing data. After a product receives 510(k) clearance, any modifications or enhancements to a product that could significantly affect
its safety or effectiveness, or that would constitute a major change in the intended use of the device, technology, materials, labeling,
packaging, or manufacturing process, may require a new 510(k) clearance. The FDA requires each manufacturer to make this
determination in the first instance, but the FDA can review any such decision. If the FDA disagrees with the manufacturer’s decision,
it may retroactively require the manufacturer to submit a request for 510(k) pre-market notification clearance and may require the
manufacturer to cease marketing and recall the product until 510(k) clearance is obtained. The FDA adopted guidance in September
2019 that we expect will increase the number and frequency of clearances for changes made to legally marketed devices. Most of our
products are non-classified or Class I medical devices, which do not require 510(k) clearance.
Quality systems. Our manufacturing operations for medical devices, and those of our third-party manufacturers, are required
to comply with the FDA’s Quality System Regulation (“QSR”), which addresses a company’s responsibility for product design,
testing, and manufacturing quality assurance, and the maintenance of records and documentation. The QSR requires that each
manufacturer establish a quality systems program by which the manufacturer monitors the manufacturing process and maintains
records that show compliance with FDA regulations and the manufacturer’s written specifications and procedures relating to the
devices. QSR compliance is necessary to receive and maintain FDA clearance or approval to market new and existing products. The
FDA makes announced and unannounced periodic and ongoing inspections of medical device manufacturers to determine compliance
with the QSR. If in connection with these inspections the FDA believes the manufacturer has failed to comply with applicable
regulations and/or procedures, it may issue observations that would necessitate prompt corrective action. If FDA inspection
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observations are not addressed and/or corrective action is not taken in a timely manner and to the FDA’s satisfaction, the FDA may
issue a warning letter (which would similarly necessitate prompt corrective action) and/or proceed directly to other forms of
enforcement action. Failure to respond timely to FDA inspection observations, a warning letter or other notice of noncompliance and
to promptly come into compliance could result in the FDA bringing enforcement action against us, which could include the total
shutdown of our production facilities, denial of importation rights to the United States for products manufactured in overseas locations
and denial of export rights for U.S. products and criminal and civil fines.
The FDA and the Federal Trade Commission (the “FTC”) regulate advertising and promotion of our products to ensure that
the claims we make are consistent with our regulatory clearances, that we have adequate and reasonable scientific data to substantiate
the claims and that our promotional labeling and advertising is neither false nor misleading. We may not promote or advertise our
products for uses not within the scope of our intended use statement in our clearances or approvals or make unsupported safety and
effectiveness claims.
It is also important that our products comply with electrical safety and environmental standards, such as those of
Underwriters Laboratories (“UL”), the Canadian Standards Association (“CSA”), and the International Electrotechnical Commission
(“IEC”). In addition, the manufacture and distribution of medical devices utilizing radioactive material requires a specific radioactive
material license. For the United States, manufacture and distribution of these radioactive sources and devices also must be in
accordance with a model-specific certificate issued by either the NRC or by an Agreement State. In essentially every country and state,
installation and service of these products must be in accordance with a specific radioactive materials license issued by the applicable
radiation control agency. Service of these products must be in accordance with a specific radioactive materials license. We are also
subject to a variety of additional environmental laws regulating our manufacturing operations and the handling, storage, transport and
disposal of hazardous substances, and which impose liability for the cleanup of any contamination from these substances.
Other applicable U.S. regulations. As a participant in the healthcare industry, we are also subject to extensive laws and
regulations protecting the privacy and integrity of patient medical information that we receive, including the Health Insurance
Portability and Accountability Act of 1996 (“HIPAA”), “fraud and abuse” laws and regulations, including physician self-referral
prohibitions, and false claims laws. From time to time, these laws and regulations may be revised or interpreted in ways that could
make it more difficult for our customers to conduct their businesses, such as recent proposed revisions to the laws prohibiting
physician self-referrals, and such revisions could have an adverse effect on the demand for our products, and therefore our business
and results of operations. We also must comply with numerous federal, state and local laws of more general applicability relating to
such matters as environmental protection, safe working conditions, manufacturing practices, fire hazard control and other matters.
The laws and regulations and their enforcement are constantly undergoing change, and we cannot predict what effect, if any,
changes to these laws and regulations may have on our business. For example, national and state laws regulate privacy and may
regulate our use of data. Furthermore, HIPAA was amended by the HITECH Act to provide that business associates who have access
to patient health information provided by hospitals and healthcare providers are now directly subject to HIPAA, including the
associated enforcement scheme and inspection requirements.
Medicare and Medicaid Reimbursement
The federal and state governments of the United States establish guidelines and pay reimbursements to hospitals and free-
standing clinics for diagnostic examinations and therapeutic procedures under Medicare at the federal level and Medicaid at the state
level. Private insurers often establish payment levels and policies based on reimbursement rates and guidelines established by the
government.
The federal government and Congress review and adjust rates annually, and from time to time consider various Medicare and
other healthcare reform proposals that could significantly affect both private and public reimbursement for healthcare services in
hospitals and free-standing clinics. In the past, we have seen demand for our customers’ systems (in which our products are
incorporated) negatively impacted by the uncertainties surrounding reimbursement rates in the United States. State government
reimbursement for services is determined pursuant to each state’s Medicaid plan, which is established by state law and regulations,
subject to requirements of federal law and regulations.
Various healthcare reform proposals have also emerged at the state level, and we are unable to predict which, if any, of these
proposals will be enacted. In addition, it is possible that changes in federal health care law and policy could result in additional
proposals and/or changes to health care system legislation which could have a material adverse effect on our business. Uncertainty
created by healthcare reform complicates our customers’ decision-making process and, therefore, impacts our business, and may
continue to do so.
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The sale of medical devices, the referral of patients for diagnostic examinations and treatments utilizing such devices, and the
submission of claims to third-party payors (including Medicare and Medicaid) seeking reimbursement for such services, are subject to
various federal and state laws pertaining to healthcare “fraud and abuse.” Anti-kickback laws make it illegal to solicit, induce, offer,
receive or pay any remuneration in exchange for the referral of business, including the purchase of medical devices from a particular
manufacturer or the referral of patients to a particular supplier of diagnostic services utilizing such devices. False claims laws prohibit
anyone from knowingly and willfully presenting, or causing to be presented, claims for payment to third-party payors (including
Medicare and Medicaid) that are false or fraudulent, for services not provided as claimed, or for medically unnecessary services. The
Office of the Inspector General prosecutes violations of fraud and abuse laws and any violation may result in criminal and/or civil
sanctions, including, in some instances, imprisonment and exclusion from participation in federal healthcare programs such as
Medicare and Medicaid, which may negatively impact the demand for our products.
Foreign Regulations
Our operations, sales and service of our products outside the United States are subject to regulatory requirements that vary
from country to country and may differ significantly from those in the United States. In general, our products are regulated outside the
United States as medical devices by foreign governmental agencies similar to the FDA.
Marketing a medical device internationally. For us to market our products internationally, we must obtain clearances or
approvals for products and product modifications. We are required to affix the CE mark to our products to sell them in member
countries of the European Union (“EU”). The CE mark is an international symbol of adherence to certain essential principles of safety
and effectiveness, which once affixed enables a product to be sold in member countries of the EEA. The CE mark is also recognized in
many countries outside the EU, such as Switzerland and Norway and can assist in the clearance process. To receive permission to affix
the CE mark to our medical devices products, we must obtain Quality System certification, e.g., ISO 13485, through an accredited
Notified Body and must otherwise have a quality management system that complies with the EU Medical Device Directive to be
superseded by the EU MDR-Medical Device Regulations in May 2020. The ISO promulgates standards for certification of quality
assurance operations. We are certified as complying with the ISO 9001 for our security and inspection products and ISO 13485 for our
medical devices. Several Asian countries, including Japan and China, have adopted regulatory schemes that are comparable, and in
some cases more stringent, than the EU scheme. To import medical devices into Japan, the requirements of Japan’s New Medical
Device Regulation must be met and an approval to sell medical products in Japan, must be obtained. Similarly, a registration
certification issued by the National Medical Products Administration and a China Compulsory Certification mark for certain products
are required to sell medical devices in China. Obtaining such certifications on our products can be time-consuming and can cause us to
delay marketing or sales of certain products in such countries. Similarly, prior to selling a device in Canada, manufacturers of Class II
devices must obtain a medical device license in Canada. Additionally, many countries have laws and regulations relating to radiation
and radiation safety that apply to our products. In most countries, radiological regulatory agencies require some form of licensing or
registration by the facility prior to acquisition and operation of an X-ray generating device or a radiation source. The handling,
transportation and recycling of radioactive metals and source materials are also highly regulated.
A number of countries, including the members of the EU, have implemented or are implementing regulations that would
require manufacturers to dispose, or bear certain disposal costs, of products at the end of a product’s useful life and restrict the use of
some hazardous substances in certain products sold in those countries. While these regulations could impose a future cost on the
Company, the compliance programs are in place to anticipate or establish best estimates of what the potential exposure of such costs
could be should they arise.
Manufacturing and selling a device internationally. We are subject to laws and regulations outside the United States
applicable to manufacturers of radiation-producing devices and products utilizing radioactive materials, and laws and regulations of
general applicability relating to matters such as environmental protection, safe working conditions, manufacturing practices and other
matters, in each case that are often comparable to, if not more stringent than, regulations in the United States. In addition, our sales of
products in foreign countries are subject to regulation of matters such as product standards, packaging requirements, labeling
requirements, import restrictions, environmental and product recycling requirements, tariff regulations, duties and tax requirements. In
some countries, we rely on our foreign distributors and agents to assist us in complying with foreign regulatory requirements.
Other applicable international regulations. In addition to the U.S. laws regarding the privacy and integrity of patient medical
information, we are subject to similar laws and regulations in foreign countries covering data privacy and other protection of health
and employee information. Particularly within Europe, data protection legislation is comprehensive and complex and there has been a
recent trend toward more stringent enforcement of requirements regarding protection and confidentiality of personal data, as well as
enactment of stricter legislation. We are also subject to international “fraud and abuse” laws and regulations, as well as false claims
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and misleading advertisement laws. We also must comply with numerous international laws of more general applicability relating to
such matters as environmental protection, safe working conditions, manufacturing practices, fire hazard control and other matters.
Anti-Corruption Laws and Regulations
We are subject to the U.S. Foreign Corrupt Practices Act and anti-corruption laws, and similar laws in foreign countries, such
as the U.K. Bribery Act of 2010 and the law “On the Fundamentals of Health Protection in the Russian Federation”. In general, there
is a worldwide trend to strengthen anti-corruption laws and their enforcement, and the healthcare industry and medical equipment
manufacturers have been particular targets of these investigation and enforcement efforts. Any violation of these laws by us or our
agents or distributors could create a substantial liability for us, subject our officers and directors to personal liability and also cause a
loss of reputation in the market.
Transparency International’s 2015 Corruption Perceptions Index measured the degree to which public sector corruption is
perceived to exist in 168 countries/territories around the world, and found that two-thirds of the countries in the index, including many
that we consider to be high-growth areas for our products, such as China and India, scored below 50, on a scale from 100 (very clean)
to 0 (highly corrupt). We currently operate in many countries where the public sector is perceived as being more or highly corrupt and
our strategic business plans include expanding our business in regions and countries that are rated as higher risk for corruption activity
by Transparency International.
Increased business in higher-risk countries could subject us and our officers and directors to increased scrutiny and increased
liability. In addition, becoming familiar with and implementing the infrastructure necessary to comply with laws, rules and regulations
applicable to new business activities and mitigating and protecting against corruption risks could be quite costly. Failure by us or our
agents or distributors to comply with these laws, rules and regulations could delay our expansion into high-growth markets and could
materially and adversely affect our business.
Competition and Trade Compliance Laws
We are subject to various competition and trade compliance laws in the jurisdictions where we operate. Regulatory or
government authorities where we operate may have enforcement powers that can subject us to sanctions and can impose changes or
conditions in the way we conduct our business. For example, local authorities may disagree with how we classify our products, and we
may be required to change our classifications, which could increase our operating costs or subject us to increased taxes or fines and
penalties. In addition, an increasing number of jurisdictions also provide private rights of action for competitors or consumers to seek
damages asserting claims of anti-competitive conduct. Increased government scrutiny of our actions or enforcement or private rights
of action could materially and adversely affect our business or damage our reputation. In addition, we may conduct, or we may be
required to conduct, internal investigations or face audits or investigations by one or more domestic or foreign government or
regulatory agencies, which could be costly and time-consuming, and could divert our management and key personnel from our
business operations. An adverse outcome under any such investigation or audit could subject us to increased costs, fines or criminal or
other penalties, which could materially and adversely affect our business and financial results. Furthermore, competition laws may
prohibit or increase the cost of future acquisitions that we may desire to undertake.
International sales of certain of our Linatron® X-ray accelerators are subject to U.S. export licenses that are issued at the
discretion of the U.S. government. Orders and revenues for our security and inspection products have been and may continue to be
unpredictable as governmental agencies may place large orders with us or with our customers over a short period of time and then may
not place additional orders until complete deployment and installation of previously ordered products. We have seen domestic and
international governments postpone purchasing decisions and delay installations of products for security and inspection systems.
Furthermore, tender awards in this business may be subject to challenge by third parties, as we have previously encountered, which
can make the conversion of orders to revenues unpredictable for some security and inspection products. The market for border
protection systems has slowed significantly and end customers, particularly in oil-based economies and war zones in which we have a
significant customer base, are delaying system deployments or tenders and have considered moving to alternative sources.
Intellectual Property
We place considerable importance on obtaining and maintaining patent, copyright and trade secret protection for significant
new technologies, products and processes, because of the length of time and expense associated with bringing new products through
the development process and to the marketplace.
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We generally rely on a combination of patents, copyrights, trademarks, trade secret and other laws, and contractual
restrictions on disclosure, copying and transferring title, including confidentiality agreements with vendors, strategic partners, co-
developers, employees, consultants and other third parties, to protect our proprietary rights in the developments, improvements and
inventions that we have originated and which are incorporated in our products or that fall within our fields of interest. As of October 2,
2020, we own over 275 patents issued in the United States, over 400 patents issued throughout the rest of the world and had
approximately another 125 patent applications pending with various patent agencies worldwide. The patents and patents issuing from
the pending applications generally expire between 2020 and 2039. We intend to file additional patent applications as appropriate. We
have trademarks, both registered and unregistered, that are maintained and enforced to provide customer recognition for our products
in the marketplace. We also have agreements with third parties that provide for licensing of patented or proprietary technology,
including royalty-bearing licenses and technology cross-licenses. These licenses generally can only be terminated for breach. See Item
1A. “Risk Factors - Risks Relating to our Intellectual Property and Information Systems.”
In conjunction with the January 2017 separation from Varian, we entered into an Intellectual Property Matters Agreement
with Varian, pursuant to which, among other things, we each granted the other licenses to use certain intellectual property.
Environmental Matters
Our operations and facilities, past and present, are subject to environmental laws, including laws that regulate the handling,
storage, transport and disposal of hazardous substances. Certain of those laws impose cleanup liabilities under certain circumstances.
In connection with those laws and certain of our past and present operations and facilities, we are obligated to indemnify Varian for
20% of the cleanup liabilities related to prior corporate restructuring activities while a division of Varian and fully indemnify Varian
for other liabilities arising from the operations of the business transferred to it as part of those activities. Those include facilities sold
as part of Varian’s electron devices business in 1995 and thin film systems business in 1997. The U.S. Environmental Protection
Agency (“EPA”) or third parties have named Varian as a potentially responsible party under the amended Comprehensive
Environmental Response Compensation and Liability Act of 1980 (“CERCLA”), at sites to which Varian or the facilities of the
businesses sold in 1995 and 1997 were alleged to have shipped waste for recycling or disposal (the “CERCLA sites”). We anticipate
that we will be obligated to reimburse Varian for 20% of the liabilities of Varian related to these CERCLA sites (after adjusting for
any insurance proceeds or tax benefits received by Varian). In connection with the CERCLA sites, to date Varian has been required to
pay only a small portion of the total cleanup costs and we anticipate that any reimbursement to Varian in the future will not be
material. As of October 2, 2020, we had an existing environmental liability of approximately $0.9 million related to the CERCLA
sites.
Working Capital
Our working capital needs and our credit practices are comparable to those of other companies manufacturing and selling
similar products in similar markets. We endeavor to carry sufficient levels of inventory to meet the product delivery needs of our
customers. We also provide payment terms to customers in the normal course of business. The product warranty obligations contained
in our standard terms and conditions typically range from 12 to 24 months, depending on the product.
Human Capital Resources
Talent Management
To remain a leading innovator, designer and manufacturer of critical components of X-ray based diagnostic equipment, it is
crucial that we continue to attract and retain exceptional talent. Our business results depend on our ability to successfully manage our
human capital resources, including attracting, identifying, and retaining key talent. Factors that may affect our ability to attract and
retain qualified employees include employee morale, our reputation, competition from other employers, and availability of qualified
individuals.
As of October 2, 2020, we had approximately 2,000 full-time and part-time employees worldwide. None of our employees
based in the United States are unionized or subject to collective bargaining agreements. Employees based in some foreign countries
may, from time to time, be represented by works councils or unions or subject to collective bargaining agreements. We consider our
relations with our employees to be good.
As part of our people management strategy, we monitor employee morale and our market reputation. To better understand
how to measure the effectiveness of our people management strategy, and to establish a baseline understanding of employee loyalty
and retention, we have recently solicited feedback from our employees in the form of an employee net promoter survey. The results of
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this survey will be aggregated, and we expect to hold meetings with employees to share and discuss areas of improvement. We
believe this will be an effective process to inform how future decisions are made to improve employee morale and engagement.
Total Rewards
We invest in our workforce by offering a competitive total rewards package that includes a combination of salaries and
wages, health and wellness benefits, equity incentives, retirement benefits, and educational benefits. We strive to offer competitive
total rewards package that is responsive to local needs. In the United States., where our largest employee base resides, our benefits for
eligible employees have included:
Affordable health insurance coverage available to full-time employees;
Tuition reimbursement up to a specified dollar amount on an annual basis;
•
•
• Matching contributions to a tax-qualified defined contribution savings ("401K") plan, on a dollar-for-dollar basis up to six
percent of the employee’s base compensation;
An employee assistance program; and
Training and development programs designed to help employees improve workplace performance.
•
•
Approximately 94% of our eligible employees participate in our 401K plan, which positions us as a top performer among
similarly situated companies. In addition, in an effort to further align the interests of our employees with our stockholders, we have an
equity-based incentive plan that provides for the grant of nonqualified stock options and restricted stock units to directors, officers and
other eligible employees. Additionally, to create performance incentives and to encourage share ownership by our employees, we
have implemented an employee stock purchase plan, which enables eligible employees to purchase our common stock at a discount
through payroll contributions.
Due to the impact of COVID-19 on our business, it was necessary to modify or freeze certain benefits historically provided to
our employees, such as 401K plan matching contributions and tuition reimbursements. We plan on reinstating both the 401K
matching contributions and tuition reimbursement program in January 2021. Earlier this year, we furloughed certain employees, and
when it became clear that the effect of COVID-19 on our business would be more protracted than originally contemplated, we
implemented a reduction in force. We provided employees impacted by the reduction in force with severance packages.
Safety and Wellness
The health and safety of our workforce is fundamental to the success of our business. We provide our employees upfront and
ongoing safety training to ensure that safety policies and procedures are effectively communicated and implemented. Personal
protective equipment is provided to those employees where needed for the employee to safely perform their job function. We have
experienced personnel on site at each of our manufacturing locations that are tasked with environmental, health and personal safety
education and compliance and, in Salt Lake City, we have an onsite nurse practitioner available to our employees for medical needs.
Because our business involves the manufacture of physical products, many of our employees are unable to work from home.
In an effort to keep our employees safe and to maintain operations during the COVID-19 pandemic, we have implemented a number
of new health-related measures, including social-distancing, restrictions on visitors to our facilities, limiting in-person meetings and
other gatherings, and providing employees with additional time-off for COVID-19 related absences.
Information Available to Investors
The Securities and Exchange Commission (“SEC”) maintains an internet site, www.sec.gov, that contains reports, proxy and
information statements, and other information regarding the Company and other issuers that file electronically with the SEC. As soon
as reasonably practicable after filing with or furnishing to the SEC, we also make the following reports and information available free
of charge on the Investors page of our website www.vareximaging.com:
•
•
•
•
our annual reports on Form 10-K;
quarterly reports on Form 10-Q;
current reports on Form 8-K (including any amendments to those reports); and
proxy statements.
Additionally, our Code of Conduct, Corporate Governance Guidelines and the charters of the Audit Committee,
Compensation and Management Development Committee, and Nominating and Corporate Governance Committee are also available
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on the Investors page of our website. Investors and others should note that we announce material financial and operational information
to our investors using our investor relations website (http://investors.vareximaging.com/), press releases, SEC filings and public
conference calls and webcasts. Please note that information on, or that can be accessed through, our website is not deemed “filed” with
the SEC and is not to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended (the “Securities
Act”), or the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Executive Officers of the Registrant
The biographical summaries of our executive officers are as follows:
Sunny S. Sanyal, 56, has served as President, Chief Executive Officer, and Director since January 2017. Prior to the
separation of Varex from Varian, Sunny served as senior vice president and president of Varian’s Imaging Components business for
Varian since February 2014. Prior to joining Varian in 2014, Sunny was chief executive officer of T-System, a privately held company
providing information technology solutions and services to hospitals and urgent care facilities. He also served as president of
McKesson Provider Technologies, where he led the company to significant market expansion with its clinical software, medical
imaging technology, and services solutions. Sunny has held executive positions at GE Healthcare, Accenture, and IDX Systems. He
received a Master of Business Administration ("MBA") from Harvard Business School, a Master of Science in industrial engineering
from Louisiana State University, and a Bachelor of Engineering in electrical engineering from the University of Bombay.
Shubham Maheshwari, 49, joined Varex as its Chief Financial Officer ("CFO") on July 27, 2020. Shubham (Sam) joins
Varex from SiFive, Inc., a leading provider of hardware and software solutions for developing RISC-V based processors and
semiconductor chips, where he served as CFO. Before SiFive, Sam served for six years as CFO, and later as CFO and COO, of Veeco
Instruments Inc. (Nasdaq: VECO), a manufacturer of semiconductor process equipment. Previous notable positions include Senior
Vice President, Finance for semiconductor company Spansion, Inc., where he helped lead the company through its restructuring and
IPO in 2010, and more than 10 years in various senior positions, including Vice President of M&A and Corporate Controller, at KLA-
Tencor Corp., a global semiconductor equipment company. Sam holds an MBA in Finance from Wharton, and a bachelor’s degree in
chemical engineering from the Indian Institute of Technology, Delhi.
Kimberley E. Honeysett, 49, has served as Senior Vice President, General Counsel, and Corporate Secretary since January
2017. Prior to the separation of Varex from Varian, Kim served as vice president and assistant general counsel and assistant corporate
secretary for Varian, where she advised Varian’s Board of Directors, executive management and corporate functions, including
business development, investor relations, human resources, information technology and was responsible for corporate governance,
general compliance matters, litigation and global subsidiary governance. Prior to joining Varian in 2005, Kim served as group director,
legal affairs at Siebel Systems, Inc., an enterprise software company, and as an associate with the law firm Brobeck, Phleger &
Harrison LLP. Kim holds a juris doctor degree from Cornell Law School and a bachelor’s degree in communications from the
University of California, Los Angeles.
Brian W. Giambattista, 61, has served as Senior Vice President, and General Manager - X-ray Detectors since May 2017 and
joined Varex after the acquisition of the PerkinElmer Medical Imaging business. He has nearly 30 years of experience in the industry,
having held various management and engineering roles at PerkinElmer and General Electric, and received his doctorate degree in
physics from the University of Virginia.
Mark S. Jonaitis, 58, has served as Senior Vice President and General Manager - X-Ray Sources since 2017. Prior to the
separation of Varex from Varian, Mark served in various management positions at Varian, including most recently vice president and
general manager, X‑ray Tube Products and global manufacturing. Mark joined Varian’s predecessor, Varian Associates, in 1983,
where he served in various product and engineering positions. Mark received his Bachelor of Science in physics from the University
of Utah.
Item 1A. Risk Factors
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully
considered. Although the risk factors described below are the ones management deems material, additional risks and uncertainties not
presently known to us or that we presently deem not material may also adversely affect our business operations. If any of the
following risks or additional risks and uncertainties actually occur, our business, operating results, and financial condition could be
adversely affected.
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Risks Relating to Our Business
Our operations, cash flow, and financial position have been adversely affected, and in the future could continue to be adversely
impacted, by the coronavirus ("COVID-19") pandemic and associated economic disruptions.
The pandemic caused by the spread of COVID-19 has created significant volatility, uncertainty and economic disruption.
Decreased demand for certain products. As an initial response to the pandemic, governments around the world imposed
measures designed to reduce the transmission of COVID-19 and individuals responded to the fears of contracting COVID-19 by
modifying their behavior. In particular, restrictions on the movement of people and goods were put into place, overall economic
activity decreased, elective procedures and exams were delayed or cancelled, there was a significant reduction in physician office
visits, and hospitals were postponing or cancelling capital purchases as well as limiting or eliminating services. Those factors, among
others, caused customers to delay or cancel orders for certain Varex products. While healthcare systems and economies around the
world have begun to reopen, customer demand has not returned to pre-pandemic levels, and the adverse effects of COVID-19 on our
financial statements and results of operations are expected to be more persistent, and have been more severe, than previously assumed.
Specifically, we now believe that reduced demand in our industrial segment and for certain higher end medical products will continue
to depress our results of operations. In addition, new or continuing outbreaks of COVID-19 could lead to further decreases in demand
for certain of our products. The actions taken to combat COVID-19 have had, and we believe will continue to have, a negative impact
on our operating results, cash flows and financial condition. We believe that COVID-19’s adverse impact on our operating results,
cash flows and financial condition will be primarily driven by: the severity and duration of the COVID-19 pandemic; the COVID-19
pandemic’s impact on the U.S. and international healthcare systems, the U.S. economy and worldwide economy; and the timing, scope
and effectiveness of U.S. and international governmental responses to the COVID-19 pandemic and associated economic disruptions.
Disruption in manufacturing, distribution, supply chain and other operations. In addition to adversely affecting demand for
our products, COVID-19 and associated economic disruptions have had and could continue to have an adverse impact on our
manufacturing capacity, supply chains and distribution systems, including as a result of impacts associated with preventive and
precautionary measures that we, other businesses and governments are taking. For example, at our manufacturing facility in the
Philippines, many employees have had significant difficulty getting to work, which caused the facility to operate at a decreased
capacity and caused us to shift some manufacturing to another location. A reduction or interruption in any of our manufacturing
processes could have a material adverse effect on our business. Supply chain logistics have also become more challenging and could
remain challenging and result in higher costs. Our ability to move unfinished goods and finished products around the world have been
impacted by the decreased availability of global transportation networks. In addition, regulatory approvals for certain of our products
may continue to be delayed due to COVID-19 related closures.
Varex sells its products and services to a limited number of OEM customers, many of which are also its competitors, and a
reduction in or loss of business of one or more of these customers may materially reduce its sales.
Varex had one customer during fiscal year 2020 that accounted for 21% of its revenue. Varex’s ten largest customers as a
group accounted for approximately 52%, 51% and 49% of its revenue for fiscal years 2020, 2019 and 2018, respectively.
Varex sells its products to a limited number of OEM customers, many of which are also its competitors with in-house X-ray
component manufacturing operations. Although Varex seeks to broaden its customer base, it will continue to depend on sales to a
relatively small number of major customers. Because it often takes significant time to replace lost business, it is likely that Varex’s
operating results would be materially and adversely affected if one or more of its major OEM customers were to cancel, delay, or
reduce orders in the future.
Furthermore, Varex generates significant accounts receivables from the sale of its products and the provision of services
directly to its major customers. If one or more of these customers were to cancel a product order or service contract (whether in
accordance with its terms or otherwise), become insolvent or otherwise be unable or fail to pay for Varex products and services,
Varex’s operating results and financial condition could be materially and adversely affected.
Varex may not be able to accurately predict the demand for its products by its customers.
End-user product demand, economic uncertainties, the COVID-19 pandemic, natural disasters, and other matters beyond
Varex’s control make it difficult for its customers to accurately forecast and plan future business activities; which makes it difficult for
Varex to accurately predict the demand for its products. Because the manufacture of our products requires some lead-time, changes in
customer purchasing forecasts have previously impacted Varex’s business, resulting in excess inventory and slowdowns in sales.
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Similar inventory adjustments and slowdowns in sales are likely to occur in the future. Changes to customer forecasts can occur on
short notice. Varex’s customers also face inherent competitive issues and new product introduction delays which can result in changes
in forecasts. The market and regulatory risks faced by Varex’s customers also ultimately impact Varex’s ability to forecast future
business. Varex’s agreements for imaging components, such as its three-year pricing agreement with Canon Medical Systems, may
contain purchasing estimates that are based on its customers’ historical purchasing patterns rather than firm commitments, and actual
purchasing volumes under the agreements may vary significantly from these estimates. The variation from forecasted purchasing
volume may be due, in part, to the increasing life of X-ray tubes, which can result in reduced demand for replacement X-ray tubes in
ways Varex may not be able to accurately forecast. Reductions in purchasing patterns have in the past and may in the future materially
and adversely affect Varex’s operating results. Decreased economic activity associated with the COVID-19 pandemic has had a
significant negative impact on the demand for our industrial products and that impact is likely to continue.
Varex competes in highly competitive markets, and it may lose business to its customers or other companies with greater resources
or the ability to develop more effective technologies, or it could be forced to reduce its prices.
Rapidly-evolving technology, intense competition and pricing pressure characterize the market in which Varex competes.
Varex often competes with companies that have greater financial, marketing and other resources than Varex. Some of the major
diagnostic imaging systems companies, which are the primary OEM customers for Varex’s X-ray components, also manufacture X-
ray components, including X-ray tubes, for use in their own imaging systems products. Varex must compete with these in-house
manufacturing operations for business. If these customers manufacture a greater percentage of their components in-house or otherwise
decrease purchases from external sources, which may occur for a number of reasons, including a strong U.S. Dollar, or a general
economic slowdown, Varex could experience reductions in purchasing volume by, or loss of, one or more of these customers. Such a
reduction or loss may have a material and adverse effect on its business. In addition, Varex competes against other stand-alone,
independent X-ray tube manufacturers for both the OEM business of major diagnostic imaging equipment manufacturers and the
independent servicing business for X-ray tubes.
The market for flat panel detectors is also very competitive, and Varex faces intense competition from over a dozen smaller
competitors. As a result of these competitive dynamics, to effectively retain the business of its customers and compete with its
competitors Varex must have an advantage in one or more significant areas, such as lower product cost, better product quality and/or
superior technology and/or performance. Varex has made price concessions to maintain existing customers and attract new customers,
and may have to make additional price concessions in the future.
In its industrial segment, Varex competes with other OEM suppliers, primarily outside of the United States. The market for
its X-ray tube and flat panel products used for nondestructive testing in industrial applications is small and highly fragmented. Some
of Varex’s competitors outside the United States may have resources and support from their governments that Varex does not, such as
preferences for local manufacturers, and may not be subject to the same trade compliance regulations as Varex. Therefore, Varex’s
ability to compete in certain high-growth markets may be limited compared to its competitors.
Varex’s competitors could develop technologies and products that are more effective than those Varex currently uses or
produces or that could render its products obsolete or noncompetitive. In addition, the timing of Varex’s competitors’ introduction of
products into the market could affect the market acceptance and sales of Varex’s products. Some competitors offer specialized
products that provide, or may be perceived by customers to provide, an advantage over Varex’s products. Also, some of Varex’s non-
U.S. competitors may not be subject to the same standards, regulatory and/or other legal requirements to which Varex is subject and,
therefore, they could have a competitive advantage in developing, manufacturing and marketing products and services. Any inability
to develop, gain regulatory approval for and supply commercial quantities of competitive products to the market as quickly and
effectively as Varex’s competitors could limit market acceptance of Varex’s products and reduce its sales. Any of these competitive
factors could negatively and materially affect Varex’s pricing, sales, revenues, market share and gross margins and its ability to
maintain or increase its operating margins.
Varex’s success depends on the successful development, introduction, and commercialization of new generations of products and
enhancements to or simplifications of existing product lines.
Rapid change and technological innovation characterize the markets in which Varex operates, particularly with respect to flat
panel technology. Varex’s customers use its products in their medical diagnostic, security, and industrial imaging systems, and Varex
must continually introduce new products at competitive costs while also improving existing products with higher quality, lower costs,
and increased features. To be successful, Varex must anticipate its customers’ needs and demands, as well as potential shifts in market
preferences. Varex’s failure to do so has in the past resulted, and may in the future result, in the loss of customers and an adverse
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impact to its financial performance. With a relatively strong U.S. Dollar, Varex’s ability to meet its customers’ pricing expectations is
particularly challenging and may result in erosion of product margin and market share.
Varex has in the past spent, and in the future may need to spend, more time and money than it expects to develop, market and
introduce new products or enhancements, and, even if Varex succeeds, Varex may not be able to recover all or a meaningful part of its
investment. Once introduced, new products may materially and adversely impact sales of Varex’s existing products or make them less
desirable or even obsolete, which could materially and adversely impact Varex’s revenues and operating results. In addition, certain
costs, including installation and warranty costs, associated with new products may be proportionately greater than the costs associated
with other products and may therefore disproportionately, materially, and adversely affect Varex’s gross and operating margins. If
Varex is unable to lower these costs over time, Varex’s operating results could be materially and adversely affected. Some of the
electronic components and integrated circuits used in Varex’s flat panel detectors are susceptible to discontinuance and obsolescence
risks, which may force Varex to incorporate newer generations of these components, resulting in unplanned additional R&D expenses,
delays in the launch of new products, supply disruption, or inventory write downs.
Varex’s ability to successfully develop and introduce new products and product enhancements and simplifications, and the
revenues and costs associated with these efforts, are affected by Varex’s ability to, among other things:
•
•
•
•
•
•
•
properly identify customer needs or long-term customer demands;
prove the feasibility of new products;
properly manage and control research and development costs;
limit the time required from proof of feasibility to routine production;
timely and efficiently comply with internal quality assurance systems and processes;
limit the timing and cost of regulatory approvals;
accurately predict and control costs associated with inventory overruns caused by the phase-in of new products and the phase-
out of old products;
price its products competitively and profitably, which can be particularly difficult with a strong U.S. Dollar;
•
• manufacture, deliver, and install its products in sufficient volumes on time and accurately predict and control costs associated
with manufacturing installation, warranty, and maintenance of the products;
appropriately manage its supply chain;
•
• manage customer acceptance and payment for products; and
•
anticipate, respond to, and compete successfully with competitors.
Furthermore, as discussed in greater detail elsewhere in this “Risk Factors” section, Varex cannot be sure that it will be able
to successfully develop, manufacture, or introduce new products or enhancements, the roll-out of which involves compliance with
complex quality assurance processes, including the Quality System Regulation of the U.S. Food and Drug Administration (“FDA”).
Failure to complete these processes timely and efficiently could result in delays that could affect Varex’s ability to attract and retain
customers or cause customers to delay or cancel orders, which would materially and adversely affect Varex’s revenues and operating
results.
More than half of Varex’s revenues are generated from customers located outside the United States, and economic, political, and
other risks associated with international sales and operations could materially and adversely affect Varex’s sales or make them less
predictable.
Varex conducts business globally. Revenues generated from customers located outside the United States accounted for
approximately 66%, 65% and 65% of Varex’s total revenues during fiscal years 2020, 2019, and 2018, respectively. As a result, Varex
must provide significant service and support globally. Varex intends to continue to expand its presence in international markets and
expects to expend significant resources in doing so. Varex cannot be sure that it will be able to meet its sales, service, and support
objectives or obligations in these international markets or recover its investment in these international markets. Varex’s future results
could be harmed by a variety of factors, including:
•
•
•
currency fluctuations, and in particular the strength of the U.S. Dollar (which is our functional and reporting currency)
relative to many currencies, which have and may in the future adversely affect Varex’s financial results and cause some
customers to delay purchasing decisions or move to in-sourcing supply or migrate to lower cost alternatives or ask for
additional discounts;
the longer payment cycles associated with many customers located outside the United States;
difficulties in interpreting or enforcing agreements and collecting receivables through many foreign countries’ legal systems;
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•
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•
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•
changes in restrictions on trade between the United States and other countries or unstable regional political and economic
conditions;
changes in the political, regulatory, safety or economic conditions in a country or region
the imposition by governments of additional taxes, tariffs, global economic sanctions programs, or other restrictions on
foreign trade such as the tariffs recently put into place by both China and the United States;
any inability to obtain required export or import licenses or approvals, including the inability to obtain required export
licenses during a U.S. government shutdown;
natural disasters and pandemics;
failure to comply with export laws and requirements, which may result in civil or criminal penalties and restrictions on
Varex’s ability to export its products, particularly its industrial linear accelerator products;
risks unique to the Chinese market, including import barriers and preferences for local manufacturers;
failure to obtain proper business licenses or other documentation or to otherwise comply with local laws and requirements
regarding marketing, sales, service, or any other business Varex conducts in a foreign jurisdiction, which may result in civil
or criminal penalties and restrictions on its ability to conduct business in that jurisdiction; and
difficulties in protecting Varex’s intellectual property in foreign countries.
Although Varex’s sales fluctuate from period to period, in recent years Varex’s international operations have represented a
larger share of its business. The more Varex depends on international sales, the more vulnerable Varex becomes to these factors.
A change in the percentage of Varex’s total earnings from international sales or additional changes in tax laws could increase
Varex’s effective tax rate.
Varex’s effective tax rate is impacted by tax laws in both the United States and in foreign countries. Earnings from Varex’s
international subsidiaries are generally taxed at rates that differ from U.S. rates. A change in the percentage of Varex’s total earnings
from the international subsidiaries, a change in the mix of particular tax jurisdictions between the international subsidiaries, or a
change in currency exchange rates could cause Varex’s effective tax rate to increase. The Tax Cuts and Jobs Act of 2017 (“U.S. Tax
Reform”) was signed into law on December 22, 2017. Prior to the enactment of U.S. Tax Reform, Varex was not taxed in the United
States on certain undistributed earnings of certain foreign subsidiaries. While U.S. Tax Reform imposed a current tax on cumulative
undistributed earnings, these earnings could also become subject to incremental foreign withholding or U.S. state taxes should they be
actually remitted to the United States, in which case Varex’s financial results could be materially and adversely affected.
The changes included in U.S. Tax Reform are broad, complex, and subject to change and interpretation. Additional statutory
changes or interpretive guidance issued by Federal or local authorities could have a material impact on income tax expense, the
effective rate, or the value of deferred tax assets and liabilities. In addition, significant judgments and estimates are required to
evaluate our tax position and the impact of the new tax law. If these judgments and estimates are incorrect, or if the underlying
assumptions are modified by subsequent guidance or are different from what we expect, our tax liability could differ significantly from
our current estimates. Changes in the valuation of Varex’s deferred tax assets or liabilities, additional changes in tax laws or rates,
changes in the interpretation of tax laws in other jurisdictions, or other changes beyond Varex’s control could materially and adversely
affect its financial position and results of operations.
Varex has entities in certain jurisdictions with cumulative net operating losses for which no income tax benefit can be
recorded due to full valuation allowance positions. There could be additional future losses in these and other jurisdictions that would
negatively impact Varex's effective tax rate.
Varex may face additional risks from the acquisition or development of new lines of business.
From time to time, Varex may acquire or develop new lines of business. There are substantial risks and uncertainties
associated with new lines of business, particularly in instances where the markets are not fully developed. Risks include developing
knowledge of and experience in the new business, recruiting market professionals, increasing research and development expenditures,
and developing and capitalizing on new relationships with experienced market participants. This may mean significant investment and
involvement of Varex’s senior management to acquire or develop, then integrate, the business into its operations. Timelines for
integration of new businesses may not be achieved, and price and profitability targets may not prove feasible, as new products can
carry lower gross margins than existing products. External factors, such as compliance with regulations, competitive alternatives, and
shifting market preferences may also impact whether implementation of a new business will be successful. Failure to manage these
risks could have a material and adverse effect on Varex’s business, results of operations, and/or financial condition.
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Varex may be unable to complete future acquisitions or realize expected benefits from acquisitions of or investments in new
businesses, products, or technologies, which could harm Varex’s business.
Varex’s ability to identify and take advantage of attractive acquisitions or other business development opportunities is an
important component in implementing its overall business strategy. Varex must grow its businesses in response to changing
technologies, customer demands, and competitive pressures. In some circumstances, Varex may decide to grow its business through
the acquisition of complementary businesses, products, or technologies, rather than through internal development; however, there is no
guarantee that these acquisitions will be successful or that Varex will realize a return on its investment.
Identifying suitable acquisition candidates can be difficult, time consuming, and costly, and Varex may not be able to identify
suitable candidates or successfully complete or finance identified acquisitions, including as a result of failing to obtain regulatory or
competition clearances, which could impair Varex’s growth and ability to compete. In addition, completing an acquisition can divert
Varex’s management and key personnel from its current business operations, which could harm its business and affect its financial
results. Even if Varex completes an acquisition, Varex may not be able to successfully integrate newly-acquired organizations,
products, technologies, or employees into its operations or may not fully realize some of the expected synergies.
Integrating an acquisition can also be expensive and time consuming and may strain Varex’s resources. It may cost Varex
more to commercialize new products than originally anticipated or cause Varex to increase its expenses related to research and
development, either of which could materially and adversely impact its results of operations. In many instances, integrating a new
business will also involve implementing or improving internal controls appropriate for a public company into a business that lacks
them. It is also possible that an acquisition could increase Varex’s risk of litigation, as a third party may be more likely to assert a legal
claim following an acquisition because of perceived deeper pockets or a perceived greater value of a claim. In addition, Varex may be
unable to retain the employees of acquired companies or the acquired company’s customers, suppliers, distributors, or other partners
for a variety of reasons, including the fact that these entities may be Varex’s competitors or may have close relationships with its
competitors.
Further, Varex may find that it needs to restructure or divest acquired businesses or assets of those businesses. Even if it does
so, an acquisition may not produce the full efficiencies, growth, or benefits that were expected. If Varex decides to sell assets or a
business, it may be difficult to identify buyers or alternative exit strategies on acceptable terms, in a timely manner, or at all, which
could delay the accomplishment of its strategic objectives. Varex may be required to dispose of a business at a lower price or on less
advantageous terms, or to recognize greater losses than it had anticipated.
If Varex acquires a business, it allocates the total purchase price to the acquired business’ tangible assets and liabilities,
identifiable intangible assets, and liabilities based on their fair values as of the date of the acquisition and records the excess of the
purchase price over those values as goodwill. If it fails to achieve the anticipated growth from an acquisition, or if it decides to sell
assets or a business, it may be required to recognize an impairment loss on the write down of its assets and goodwill, which could
materially and adversely affect its financial results. In addition, acquisitions can result in potentially dilutive issuances of equity
securities or the incurrence of debt, contingent liabilities or expenses, or other charges, any of which could harm Varex’s business and
affect its financial results.
Additionally, Varex participates in joint ventures and has investments in privately-held companies (for example, its 40%
ownership in dpiX LLC, its major supplier of its amorphous silicon-based thin film transistor arrays (flat panels used in its digital
detectors) that are subject to risk of loss of investment capital. These investments are inherently risky, in some instances because the
markets for the technologies or products these companies have under development may never materialize. If these companies do not
succeed, Varex could lose some or all of its investment in these companies.
Warranty claims may materially and adversely affect Varex’s business.
Varex could experience an increase in warranty claims as a result of issues with product quality or product failures as a direct
result of Varex’s design, manufacturing, or issues in its supply chain. Such an occurrence may damage Varex’s market reputation,
cause sales to decline, or require repairs or voluntary remedial measures to enhance customer satisfaction, which could materially and
adversely impact Varex’s financial results. Increased warranty claims on any given product could cause Varex to halt production on
that product and significantly impair Varex’s liquidity and profitability, and cause reputational harm to Varex. Because some
categories of products tend to experience higher numbers of warranty claims than others, a shift in the types of products that Varex’s
customers purchase could lead to an increase in warranty claims. If actual levels of warranty claims are greater than the level of claims
Varex estimates, cost of sales could increase, and Varex’s financial condition could be materially and adversely affected. In addition,
product quality issues could result in significant follow-on effects for Varex, including, among other things, reputational harm to
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Varex and its customers, loss of customers, and liability as a result of product quality issues. These outcomes would materially and
adversely affect Varex’s business and financial condition.
Product defects or misuse may result in material product liability or professional errors and omissions claims, litigation,
investigation by regulatory authorities, or product recalls that could harm Varex’s future revenues and require it to pay material
uninsured claims.
Varex’s business exposes it to potential product liability claims that are inherent in the manufacture, sale, installation,
servicing, and support of components that are used in medical devices and other devices that deliver radiation. Because Varex’s
products, through incorporation in OEMs’ systems, are involved in the intentional delivery of radiation to the human body and other
situations where people may come into contact with radiation (for example, when Varex’s security and inspection products are being
used to scan cargo or in the diagnosis of medical problems), the possibility for significant personal injury or loss of life exists.
Although Varex’s products are incorporated into OEMs’ systems, and thus only perform pursuant to the design and operating systems
of OEMs, Varex may also be subject to claims for property damage, personal injury, or economic loss related to or resulting from any
errors or defects in its products or the installation, servicing, or support of its products. Any accident or mistreatment could subject
Varex to legal costs, litigation, adverse publicity, and damage to its reputation, whether or not its products or services were a factor.
If Varex’s X-ray inspection systems fail to detect the presence of bombs, explosives, weapons, contraband, or other threats to
personal safety, Varex could be subject to product and other liability claims or negative publicity, which could result in increased
costs, reduced sales, and a decline in the market price of Varex’s common stock. There are many factors beyond Varex’s control that
could result in the failure of its products to detect the presence of bombs, explosives, weapons, contraband, or other threats to personal
safety, including operator error and misuse of or malfunction of Varex equipment. The failure of Varex’s systems to detect the
presence of these dangerous materials may lead to personal injury, loss of life, and extensive property damage and may result in
potential claims against Varex.
Product liability actions are subject to uncertainty and may be expensive, time consuming, and disruptive to Varex’s
operations. For these and other reasons, Varex may choose to settle product liability claims against it regardless of their actual merit. A
product liability action determined against Varex could result in adverse publicity or significant damages, including the possibility of
punitive damages, and Varex’s combined financial position, results of operations, or cash flows could be materially and adversely
affected.
If a product Varex designs or manufactures were defective (whether due to design, labeling or manufacturing defects,
improper use of the product, or other reasons), Varex may be required to correct or recall the product and notify regulatory authorities.
The adverse publicity resulting from a correction or recall could damage Varex’s reputation and cause customers to review and
potentially terminate their relationships with Varex. A product correction or recall could consume management time and have an
adverse financial impact on its business, including incurring substantial costs, losing revenues, and accruing losses.
Varex maintains limited product liability insurance coverage. Varex’s product liability insurance policies are expensive and
have high deductible amounts and self-insured retentions. Varex’s insurance coverage may prove to be inadequate, and future policies
may not be available on acceptable terms or in sufficient amounts, if at all. If a material claim is not insured or is in excess of Varex’s
insurance coverage, Varex could have to pay substantial damages, which could have a material and adverse effect on its financial
position and/or results of operations.
Varex’s business may suffer if it is not able to hire and retain qualified personnel.
Varex’s future success depends, to a great degree, on its ability to retain, attract, expand, integrate, and train its management
team and other key personnel, such as qualified engineering, service, sales, marketing, and other staff. Varex competes for key
personnel with other medical equipment and software manufacturers and technology companies, as well as universities and research
institutions. Because this competition is intense, particularly in Utah, where unemployment rates are relatively low, compensation-
related costs could increase significantly if the supply of qualified personnel decreases or demand increases. If Varex is unable to hire
and train qualified personnel, Varex may not be able to maintain or expand its business. Additionally, if Varex is unable to retain key
personnel, Varex may not be able to replace them readily or on terms that are reasonable, which also could hurt its business.
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Risks Relating to the Manufacture of our Products
A disruption at Varex’s manufacturing facilities, as well as fluctuating manufacturing costs, could materially and adversely affect
its business.
The majority of Varex’s products are manufactured at its facility in Salt Lake City, Utah. Varex’s manufacturing operations
are subject to potential power failures, the breakdown, failure, or substandard performance of equipment, the improper installation or
operation of equipment, pandemics, and natural or other disasters. Loss or damage to its manufacturing facility due to any of these
factors or otherwise could materially and adversely affect Varex’s ability to manufacture sufficient quantities of its products or
otherwise deliver products to meet customer demand or contractual requirements, which may result in a loss of revenue and other
adverse business consequences. Because of the time required to obtain regulatory approval and licensing of a manufacturing facility,
Varex may not be available on a timely basis to replace any lost manufacturing capacity. The occurrence of these or any other
operational issues at Varex’s manufacturing facilities could have a material and adverse effect on Varex’s business, financial
condition, and results of operations.
Some of Varex’s products are manufactured in Wuxi, China; Walluf, Germany; Heerlen and Doetinchem, the Netherlands;
and Calamba City, Philippines, which are subject to similar risks but may also face additional regulatory and political risks, which
could impact Varex’s ability to manufacture and ship products in a timely manner or at all. Varex also manufactures security products
in Las Vegas, Nevada, and these operations are also subject to potential power failures, the breakdown, failure, or substandard
performance of equipment, the improper installation or operation of equipment, earthquakes, and other disasters, all of which could
materially and adversely affect Varex’s ability to deliver products to meet customer demand. In addition, Varex’s costs associated with
manufacturing its products can vary significantly from quarter to quarter, and fluctuations thereof may adversely affect its business,
operating results, and/or financial condition.
Varex’s results have been and may continue to be affected by continuing worldwide economic instability, including changes in
foreign currency exchange rates and fluctuations in the price of crude oil and other commodities.
The global economy has been impacted by a number of economic and political factors. In many markets, these conditions
have shrunk capital equipment budgets, slowed decision-making and made it difficult for Varex’s customers and vendors to accurately
forecast and plan future business activities. This, in turn, has caused Varex’s customers to be more cautious with, and sometimes
freeze, delay, or dramatically reduce purchases and capital project expenditures. Some countries have adopted and may in the future
adopt austerity or stimulus programs that could negatively affect Varex’s results from period to period. In addition, actions taken by
the current U.S. administration may also create global economic uncertainty, which may cause our customers to reduce their spending,
which, in turn, could adversely affect our business, financial condition, operating results, and cash flows. An uncertain economic
environment may also disrupt supply or affect our service business, as customers’ constrained budgets may result in pricing pressure,
extended warranty provisions, and even cancellation of service contracts. In addition, concerns over continued economic instability
could make it more difficult for Varex to collect outstanding receivables. A weak or deteriorating healthcare market would inevitably
materially and adversely affect Varex’s business, financial conditions, and results of operations.
Because Varex’s products are generally priced in U.S. Dollars, the strengthening of the U.S. Dollar in the last several years
has caused, and could continue to cause, some customers to ask for discounts, delay purchasing decisions, or consider moving to in-
sourcing such components or migrating to lower cost alternatives. Further, because Varex’s business is global and some payments
may be made in local currency, fluctuations in foreign currency exchange rates can impact its results by affecting product demand,
revenues and expenses, and/or the profitability in U.S. Dollars of products and services that Varex provides in foreign markets.
Changes in monetary or other policies here and abroad, including as a result of economic and/or political instability or in
reaction thereto, would also likely affect foreign currency exchange rates. Furthermore, if one or more European countries were to
replace the Euro with another currency, Varex’s sales in these countries, or in Europe generally, would likely be materially and
adversely affected until stable exchange rates are established.
Additionally, fluctuations in commodities prices could materially and adversely affect Varex’s performance. Rising
commodities prices will increase Varex’s costs and those of Varex’s medical OEM customers, which could in turn result in reduced
demand for Varex’s products. Further, Varex’s security product revenues from oil-producing countries, in which Varex has a
significant customer base, have in the past suffered as a result of volatility in oil prices and remain sensitive to fluctuations in the
future.
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The loss of a supplier or any inability to obtain supplies of important components could restrict Varex’s ability to manufacture
products, cause delays in its ability to deliver products, or significantly increase its costs.
Varex obtains from a limited group of suppliers or from sole-source suppliers some of the components included in its
products, such as wave guides for industrial linear accelerators, transistor arrays, cesium iodide coatings and specialized integrated
circuits for flat panel detectors, X-ray tube targets, housings, glass frames, high-voltage cable, bearings and various other components.
For example, Varex’s major supplier of its amorphous silicon-based thin film transistor arrays (flat panels) used in its digital image
detectors is dpiX LLC. Although Varex holds a 40% ownership interest in dpiX, Varex does not have majority voting rights and does
not have the power to direct the activities of dpiX. In addition, Varian is Varex’s sole source supplier for a key component in linear
accelerators used in Varex’s security and inspection products subsystems, which are specially made for Varex. If current suppliers
cease producing these components, there can be no assurance that the components will be available from other suppliers on reasonable
terms or at all.
If Varex loses any of these limited- or sole-source suppliers, if their operations are substantially interrupted, or if any of them
fail to meet performance or quality specifications or delivery deadlines, Varex may be required to obtain and qualify one or more
replacement suppliers. Such an event (1) may then also require Varex to redesign or modify its products to incorporate new parts and/
or further require Varex to obtain clearance, qualification, or certification of these products, including by the FDA, or obtain other
applicable regulatory approvals in other countries, or (2) could significantly increase costs for the affected products and cause material
delays in delivery of those and other related products. In addition, manufacturing capacity limitations of any of Varex’s suppliers or
other inability of these suppliers to meet increasing demand or delivery deadlines could limit growth opportunities for the affected
product lines and damage customer relationships. Shortage of, and greater demand for, components and subassemblies could also
increase manufacturing costs if the supply/demand imbalance increases the price of the components and subassemblies. Any of these
events could materially and adversely affect Varex’s business and financial results.
A shortage or change in source of, or increase in price of, raw materials could restrict Varex’s ability to manufacture products,
cause delays, or significantly increase its cost of goods.
Varex relies on the supplies of certain raw materials such as tungsten, lead, iridium, and copper for security and inspection
products and copper, lead, tungsten, rhenium, molybdenum zirconium, and various high grades of steel alloy for X-ray tubes.
Worldwide demand, availability, and pricing of these raw materials have been volatile, and Varex expects that availability and pricing
will continue to fluctuate in the future. If supplies are restricted or become unavailable or if prices increase, this could constrain
Varex’s manufacturing of affected products, reduce its profit margins, or otherwise materially and adversely affect its business.
Varex is required to disclose (1) the presence in a company’s products of certain metals known as “conflict minerals,” which
are metals mined from the Democratic Republic of the Congo and adjoining countries, and (2) procedures regarding a manufacturer’s
efforts to identify the sourcing of those minerals from this region. Varex’s complex supply chain may inhibit Varex’s ability to
sufficiently verify the origins of the relevant minerals used in its products through the due diligence procedures that it implements,
which may harm Varex’s reputation. In addition, Varex may encounter challenges in satisfying customers who require that all of the
components of Varex products are certified as conflict-free, which could place Varex at a competitive disadvantage if it is unable to do
so. Moreover, complying with these rules requires investigative efforts, which has and will continue to cause Varex to incur associated
costs and could materially and adversely affect the sourcing, supply, and pricing of materials used in Varex’s products or result in
process or manufacturing modifications, all of which could materially and adversely affect its results of operations.
If Varex is not able to match its manufacturing capacity with demand for its products, its financial results may suffer.
Many of Varex’s products have a long production cycle, and Varex must anticipate demand for its products to ensure
adequate manufacturing or testing capacity. If Varex is unable to anticipate demand, and its manufacturing or testing capacity does not
keep pace with product demand, Varex will not be able to fulfill orders in a timely manner, which may negatively impact its financial
results and overall business. Conversely, if demand for Varex’s products decreases, the fixed costs associated with excess
manufacturing capacity may harm its financial results, including by decreasing gross margins and increasing research and
development costs as a percentage of revenue.
Delivery schedules for Varex’s security, industrial, and inspection products tend to be unpredictable.
Varex designs, manufactures, sells, and services Linatron® X-ray accelerators, image-processing software, and image
detection products for security and inspection, such as cargo screening at ports and borders and nondestructive examination for a
variety of applications, as well as industrial applications. Varex generally sells security and inspection products to OEMs who
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incorporate its products into their inspection systems, which are then sold to customs and other government agencies, as well as to
commercial organizations in the casting, power, aerospace, chemical, petro-chemical, and automotive industries. Varex believes
growth in its security and inspection products will be driven by security cargo screening and border protection needs, as well as by the
needs of customs agencies to verify shipments for assessing duties and taxes. This business is heavily influenced by domestic and
international government policies on border and port security, political change, and government budgets. In addition, Varex believes
growth in this product line may be driven in part by industrial customers engaged in 3-D printing, which, as a developing market, may
be difficult to predict. Orders for Varex’s security and inspection products have been and may continue to be unpredictable, as
governmental agencies may place large orders with Varex or its OEM customers in a short time period and then may not place any
orders for a long time period thereafter. Because it is difficult to predict Varex’s OEM customer delivery, the actual timing of sales
and revenue recognition varies significantly. The market for border protection systems has slowed significantly, and end customers,
particularly in oil-based economies and war zones in which Varex has a significant customer base, are delaying system deployments or
tenders and considering moving to alternative sources, resulting in a decline in the demand for security and inspection products.
The demand for Varex’s security and inspection products is heavily influenced by U.S. and foreign governmental policies on
national and homeland security, border protection, and customs activities, which depend upon government budgets and appropriations
that are subject to economic conditions, as well as political changes and oil prices. Varex has seen customers freeze or dramatically
reduce purchases and capital project expenditures, delay projects, or act cautiously as governments around the world wrestle with
spending priorities. As economic growth remains sluggish in various jurisdictions and appears to be deteriorating in others, and as
concerns about levels of government employment and government debt continue, Varex expects that these effects will also continue.
Bid awards in this business may be subject to challenge by third parties, as Varex has previously encountered with a large government
project. These factors make this business more unpredictable and could cause volatility in Varex’s revenues and earnings.
Varex’s international manufacturing operations subject it to volatility and other risks, including high security risks, which could
result in harm to its employees and contractors or substantial costs.
Varex conducts certain manufacturing operations internationally to reduce costs and streamline its manufacturing operations.
There are administrative, legal, and governmental risks to operating internationally that could increase operating expenses or hamper
the development of these operations. The risks from operating internationally that could increase Varex’s operating expenses and
materially and adversely affect its operating results, financial condition, and ability to deliver its products and grow its business
include, among others:
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difficulties in staffing and managing employee relations and foreign operations, particularly in attracting and retaining
personnel qualified to design, sell, test, and support its products;
fluctuations in currency exchange rates;
difficulties in coordinating its operations globally and in maintaining uniform standards, controls, procedures, and policies
across its operations;
difficulties in enforcing contracts and protecting intellectual property;
diversion of management attention;
imposition of burdensome governmental regulations, including changing laws and regulations with respect to collection and
maintenance of personally identifiable data;
regional and country-specific political and economic instability, as discussed in greater detail below; and
inadequacy of the local infrastructure to support its operations.
Varex’s international locations expose it to higher security risks compared to its United States locations, which could result in
both harm to its employees and contractors or substantial costs. Some of its services are performed in or adjacent to high-risk locations
where the country or location and surrounding area is suffering from political, social, or economic turmoil, war or civil unrest, or has a
high level of criminal or terrorist activity. In those locations where Varex has employees or operations, Varex may incur substantial
costs to maintain the safety of its personnel. Despite these precautions, the safety of its personnel in these locations may continue to be
at risk, and Varex may in the future suffer the loss of employees and contractors, which could harm its business reputation and
operating results.
Varex’s operations are vulnerable to interruption or loss due to natural or other disasters, power loss, strikes, and other events
beyond its control.
Varex conducts some of its activities, including manufacturing, research and development, administration, and data
processing at facilities located in areas that have in the past experienced or may in the future experience natural disasters. Varex’s
insurance coverage for such disasters may not be adequate or continue to be available at commercially-reasonable terms, or at all. A
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major disaster (such as a major fire, hurricane, earthquake, flood, tsunami, volcanic eruption or terrorist attack) affecting Varex’s
facilities, or those of its suppliers, could significantly disrupt its operations and delay or prevent product manufacture and shipment
during the time required to repair, rebuild, or replace its or its suppliers’ damaged manufacturing facilities. These delays could be
lengthy and costly. If any of Varex’s customers’ facilities are adversely affected by a disaster, shipments of its products could be
delayed. Additionally, customers may delay purchases of Varex’s products until its operations return to normal. For example,
following the earthquake and tsunami disasters in Japan in 2011, the operations of Canon Medical Systems, our largest customer, were
impacted, and, as a consequence, orders to and product shipment from our business were delayed for several months. Even if Varex's
suppliers or customers are able to quickly respond to a disaster, the ongoing effects of the disaster could create some uncertainty in the
operations of its business. In addition, Varex’s facilities may be subject to a shortage of available electrical power and other energy
supplies. Any shortages may increase its costs for power and energy supplies or could result in blackouts, which could disrupt the
operations of its affected facilities and harm its business. Further, Varex’s products are typically shipped from a limited number of
ports, and any disaster, strike, or other event blocking shipment from these ports could delay or prevent shipments and harm its
business. In addition, concerns about terrorism, the effects of a terrorist attack, political turmoil, or an outbreak of epidemic diseases
could have a negative effect on Varex’s business operations, those of its suppliers and customers, and the ability to travel, resulting in
adverse consequences on its revenues and financial performance.
Risks Relating to our Intellectual Property and Information Systems
Varex’s competitive position would be harmed if it is not able to maintain its intellectual property rights and protecting Varex’s
intellectual property can be costly.
Varex files applications as appropriate for patents covering new products and manufacturing processes. Varex cannot be sure,
however, that patents will be issued from any of Varex’s pending or future patent applications. Varex also cannot be sure that its
current patents, the claims allowed under its current patents, or patents for technologies licensed to Varex will be sufficiently broad to
protect its technology position against competitors. Issued patents owned by, or licensed to, Varex may be challenged, invalidated, or
circumvented, or the rights granted under the patents may not provide Varex with competitive advantages. Asserting Varex’s patent
rights against others in litigation or other legal proceedings is costly and diverts managerial resources. For example, during fiscal year
2019, Varex initiated litigation asserting claims of patent infringement against a third party. Varex intends to prosecute its claims
vigorously, and Varex has experienced, and will continue to experience, increased legal expenses related to this litigation that could
adversely affect its financial results. An adverse finding in this or similar patent infringement litigation could adversely impact
Varex’s competitive position. In addition, Varex may not be able to detect patent infringement by others or may lose its competitive
position in the market before Varex is able to do so.
Varex also relies on a combination of copyright, trade secret, and other laws, and contractual restrictions on disclosure,
copying and transferring title (including confidentiality agreements with vendors, strategic partners, co-developers, employees,
consultants, and other third parties), to protect its proprietary, and other confidential rights. These protections may prove to be
inadequate, since agreements may still be breached, and Varex may not have adequate remedies for a breach. Varex’s trade secrets
may become known to or be independently developed by others, including as a result of misappropriation by unauthorized access to
Varex’s technology systems. If Varex’s proprietary or confidential information is misappropriated, its business and financial results
could be materially and adversely impacted. Varex has trademarks, both registered and unregistered, that are maintained and enforced
to provide customer recognition for its products in the marketplace, but unauthorized parties may still use them. Varex also licenses
certain patented or proprietary technologies from others. In some cases, products with substantial revenues may depend on these
license rights. If Varex were to lose the rights to license these technologies, or its costs to license these technologies were to materially
increase, its business would suffer. As Varex expands its manufacturing capabilities outside of the United States, more of Varex’s
intellectual property may be held in jurisdictions that do not have robust intellectual property protections, which may make it harder
for Varex to adequately protect its Intellectual Property.
Third parties may claim that Varex is infringing upon their intellectual property, and Varex could suffer significant litigation or
licensing expenses or be prevented from selling its products.
There is a substantial amount of litigation over patent and other intellectual property rights in the industries in which Varex
competes. Varex’s competitors, like companies in many high technology businesses, continually review other companies’ activities for
possible conflicts with their own intellectual property rights. In addition, non-practicing entities may review Varex’s activities for
conflicts with their patent rights. Determining whether a product infringes on a party’s intellectual property rights involves complex
legal and factual issues, and the outcome of this type of litigation is often uncertain. Parties may claim that Varex is infringing upon
their intellectual property rights. Varex may not be aware of intellectual property rights of others that relate to its products, services, or
technologies. From time to time, Varex has received notices from parties asserting infringement, and Varex has been subject to
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lawsuits alleging infringement of patent or other intellectual property rights. Any dispute regarding patents or other intellectual
property could be costly and time consuming and could divert Varex’s management and key personnel from its business operations.
Varex may not prevail in a dispute. Varex does not maintain insurance for intellectual property infringement, so costs of defense,
whether or not Varex is successful in defending an infringement claim, will be borne by Varex and could be significant. If Varex is
unsuccessful in defending or appealing an infringement claim, Varex may be subject to significant damages, and its combined
financial position, results of operations, or cash flows could be materially and adversely affected. Varex may also be subject to
injunctions against development and sale of its products, the effect of which could be to materially reduce its revenues. Furthermore, a
third party claiming infringement may not be willing to license its rights to Varex, and even if a third-party rights holder is willing to
do so, the amounts Varex might be required to pay under the associated royalty or license agreement could be significant. Varex could
decide to alter its business strategy or voluntarily cease the allegedly infringing actions rather than face litigation or pay a royalty,
which could materially and adversely impact its business and results of operations.
Disruption of critical information systems or material breaches in the security of Varex’s systems may materially and adversely
affect its business and customer relations.
Information technology (including technology from third party providers) helps Varex operate efficiently, interface with and
support its customers, maintain financial accuracy and efficiency, and produce its financial statements. In the ordinary course of its
business, Varex collects, processes and stores sensitive data, including intellectual property, proprietary business information and that
of customers, suppliers and business partners, third parties accessing its website, patient data and personally identifiable information of
customers and employees, in Varex’s data centers, and on its networks, as well as third party off-site infrastructure. Despite security
measures, there is an increasing threat of information security attacks, including from computer viruses or other malicious codes,
unauthorized access attempts, and cyber-attacks that pose risks to companies, including Varex. Because the techniques used to obtain
unauthorized access, or to sabotage systems, change frequently, have become increasingly sophisticated and generally are not
recognized until launched against a target, Varex may be unable to anticipate these techniques or to implement adequate preventative
measures, which could result in data leaks or otherwise compromise our confidential or proprietary information and disrupt our
operations. If Varex does not allocate and effectively manage the resources necessary to build and sustain the proper technology
infrastructure, Varex could be subject to, among other things, transaction errors, processing inefficiencies, the loss of customers,
business disruptions, or the loss of or damage to intellectual property through a security breach or misappropriation of intellectual
property. Such security breaches could expose Varex to a risk of loss of information, litigation, and possible liability to employees,
customers, and/or regulatory authorities. If Varex’s data management systems do not effectively collect, secure, store, process, and
report relevant data for the operation of its business, whether due to equipment malfunction or constraints, software deficiencies, or
human error, Varex’s ability to effectively plan, forecast, and execute its business plan and comply with applicable laws and
regulations will be impaired, perhaps materially. Any such impairment could materially and adversely affect Varex’s financial
condition, results of operations, cash flows, and the timeliness with which Varex reports its operating results internally and externally.
Varex uses certain cloud-based software. A security breach, whether of Varex’s products, of Varex’s customers’ network
security and systems, or of third-party hosting services could disrupt access to Varex’s customers’ stored information and could lead
to the loss of, damage to or public disclosure of Varex’s customers’ stored information, including patient health information. Such an
event could have serious negative consequences, including possible patient injury, regulatory action, fines, penalties and damages,
reduced demand for Varex’s solutions, an unwillingness of its customers to use its solutions, harm to its reputation and brand, and
time-consuming and expensive litigation, any of which could have a material and adverse effect on Varex’s financial results.
Risks Relating to Our Legal and Regulatory Environment
Changes in import/export regulatory regimes and tariffs could continue to negatively impact our business.
Tariffs and changes in international trade agreements or trade-related laws and regulations may have an indirect adverse
impact on our business. As a component manufacturer, our products are integrated into the systems and products of our OEM
customers. If the United States, China or other countries levy tariffs, duties or other additional taxes or restrictions on our customer’s
products, the demand for such products, and our components included in such products, could decrease, which could have a material
adverse effect on our business. Uncertainty over tariffs and trade wars could also cause our customers to delay or cancel orders for our
products.
In recent years, the United States has imposed tariffs on items imported from China that are incorporated into our products.
Tariffs on items imported by us from China and other countries have increased our costs and has increased prices and lowered gross
margins on some of our products. These tariffs have had a direct adverse impact on our business and results of operations, and future
tariffs could have a more significant impact on our business. China has imposed retaliatory tariffs that impact a number of Varex
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products including U.S. origin X-ray tubes, heat exchange units, and certain flat panel detectors. The tariffs levied by China have
increased our customers’ costs for products imported into China, which has caused us to make price concessions on some products and
has caused some customers to stop purchasing products from us. We expect that tariffs will continue to have a negative effect on our
business and results of operations, including the possibility of continued price concessions or loss of business. Tariffs could limit our
ability to compete for increased market share in China, which could cause our long-term prospects in China to suffer. The imposition
of additional tariffs by the United States could result in the adoption of additional tariffs by China and other countries, as well as
further retaliatory actions by any affected country, which could negatively impact the global market for imaging equipment and could
have a significant adverse effect on our business.
Compliance with foreign laws and regulations applicable to the marketing, manufacture, and distribution of Varex’s products may
be costly, and failure to comply may result in significant penalties and other harm to Varex’s business.
Regulatory requirements affecting Varex’s operations and sales outside the United States vary from country to country, often
differing significantly from those in the United States. In general, outside the United States, some of Varex’s products are regulated as
medical devices by foreign governmental agencies similar to the FDA.
For Varex to market its products internationally, Varex must obtain clearances or approvals for products and product
modifications. These processes (including, for example, in the EU, the European Economic Area (“EEA”), Switzerland, Brazil,
Australia, China, Japan and Canada) can be time consuming, expensive and uncertain, which can delay Varex’s ability to market
products in those countries. Delays in the receipt of or failure to receive regulatory approvals, the inclusion of significant limitations
on the indicated uses of a product, the loss of previously obtained approvals or failure to comply with existing or future regulatory
requirements could restrict or prevent Varex from doing business in a country or subject Varex to a variety of enforcement actions and
civil or criminal penalties, which would materially and materially and adversely affect its business. In addition, compliance with
changing regulatory schemes may add additional complexity, cost and delays in marketing or selling Varex’s products.
Within the EU/EEA, Varex must obtain, and in turn affix, a CE mark certification, which is a European marking of
conformity that indicates that a product meets the essential requirements of the Medical Device Directive. Compliance with the
Medical Device Directive is done through a self-certification process that is then verified by an independent certification body called a
“Notified Body,” which is an organization empowered by the legislature to conduct this verification. Once the CE mark is affixed, the
Notified Body will regularly audit Varex to ensure that it remains in compliance with the applicable European laws and Medical
Device Directive. By affixing the CE mark to its product, Varex is certifying that its products comply with the laws and regulations
required by the EU/EEA countries, thereby allowing the free movement of its products within these countries and others that accept
CE mark standards. If Varex cannot support its performance claims and demonstrate compliance with the applicable European laws
and the Medical Device Directive, Varex would lose its right to affix the CE mark to its products, which would prevent Varex from
selling its products within the EU/EEA/Switzerland territory and in other countries that recognize the CE mark. In April 2017, the
European Commission adopted two new regulations on medical devices. These new regulations impose stricter requirements for
placing medical devices in the EU market, as well as for Notified Bodies. These new regulations have resulted in the limited
availability of recognized Notified Bodies, which could delay our ability to obtaining CE marks. Varex may be subject to risks
associated with additional testing, modification, certification, or amendment of its existing market authorizations, or Varex may be
required to modify products already installed at its customers’ facilities to comply with the official interpretations of these revised
regulations.
Varex is also subject to international laws and regulations of general applicability relating to matters such as environmental
protection, safe working conditions, and manufacturing practices, as well as others. These are often comparable to, if not more
stringent than, the equivalent regulations in the United States. Sales overseas are also affected by regulation of matters such as product
standards, packaging, labeling, environmental and product recycling requirements, import and export restrictions, tariffs, duties, and
taxes.
In addition, Varex is required to timely file various reports with international regulatory authorities similar to the reports it is
required to timely file with U.S. regulatory authorities, including reports required by international adverse event reporting regulations.
If these reports are not timely filed, regulators may impose sanctions, including temporarily suspending Varex’s market authorizations
or CE mark, and sales of its products may suffer.
Further, as Varex enters new businesses or pursues new business opportunities internationally, or as regulatory schemes
change, Varex may become subject to additional laws, rules, and regulations. Becoming familiar with and implementing the
infrastructure necessary to comply with these laws, rules, and regulations is costly. Additionally, in some countries, Varex relies or
may rely in the future on foreign distributors and agents to assist in complying with foreign regulatory requirements, and Varex cannot
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be sure that they will always do so. The failure of Varex or its agents to comply with these laws, rules, and regulations could delay the
introduction of new products, cause reputational harm, or result in investigations, fines, injunctions, civil penalties, criminal
prosecution, or an inability to sell Varex’s products in or to import its products into certain countries, which could materially and
adversely affect Varex’s business.
Compliance with U.S. laws and regulations applicable to the marketing, manufacture, and distribution of Varex’s products may be
costly, and failure or delays in obtaining regulatory clearances or approvals or failure to comply with applicable laws and
regulations could prevent Varex from distributing its products, require Varex to recall its products, or result in significant penalties
or other harm to Varex’s business.
Some of Varex’s products and those of OEMs that incorporate Varex’s products are subject to extensive and rigorous
government regulation in the United States. Compliance with these laws and regulations is expensive and time-consuming, and failure
to comply with these laws and regulations could materially and adversely affect Varex’s business.
Generally, Varex’s manufacturing operations for medical devices, and those of its third-party manufacturers, are required to
comply with the Quality System Regulations (“QSR”) of the FDA, as well as other federal and state regulations for medical devices
and radiation-emitting products. The FDA makes announced and unannounced periodic and on-going inspections of medical device
manufacturers to determine compliance with QSR and, in connection with these inspections, issues reports known as Form FDA 483
reports when the FDA believes the manufacturer has failed to comply with applicable regulations and/or procedures. If observations
from the FDA issued on Form FDA 483 reports are not addressed and/or corrective action is not taken in a timely manner and to the
FDA’s satisfaction, the FDA may issue a warning letter and/or proceed directly to other forms of enforcement action. Similarly, if a
warning letter were issued, prompt corrective action to come into compliance would be required. Failure to respond in a timely manner
to Form FDA 483 observations, a warning letter, or any other notice of noncompliance and to promptly come into compliance could
result in the FDA bringing an enforcement action, which could include the total shutdown of Varex’s production facilities, denial of
importation rights to the United States for products manufactured in overseas locations, adverse publicity, and criminal and civil fines.
The expense and costs of any corrective actions that Varex may take, which may include product recalls, correction and removal of
products from customer sites, and/or changes to its product manufacturing and quality systems, could materially and adversely impact
Varex’s financial results and may also divert management resources, attention, and time. Additionally, if a warning letter were issued,
customers could delay purchasing decisions or cancel orders, and Varex could face increased pressure from its competitors, who could
use the warning letter against Varex in competitive sales situations, either of which could materially and adversely affect Varex’s
reputation, business, and stock price.
In addition, Varex is required to timely file various reports with the FDA, including reports required by the medical device
reporting regulations (“MDRs”), that require Varex report to regulatory authorities if its devices may have caused or contributed to a
death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction
were to recur. If Varex initiates a correction or removal of a device to reduce a risk to health posed by the device, Varex would be
required to submit a publicly-available correction and removal report to the FDA and, in many cases, similar reports to other
regulatory agencies. This report could be classified by the FDA as a device recall, which could lead to increased scrutiny by the FDA,
other international regulatory agencies, and Varex’s customers regarding the quality and safety of Varex’s devices. If these MDRs or
correction and removal reports are not filed on a timely basis, regulators may impose sanctions, sales of Varex’s products may suffer,
and Varex may be subject to product liability or regulatory enforcement actions, all of which could harm its business.
Government regulation may also cause significant delays or even prevent the marketing and full commercialization of future
products or services that Varex may develop and/or may impose costly requirements on Varex’s business. Further, as Varex enters
new businesses or pursues new business opportunities, Varex will become subject to additional laws, rules, and regulations, including
FDA and foreign rules and regulations. Becoming familiar with and implementing the infrastructure necessary to comply with these
laws, rules, and regulations is costly and time consuming. In addition, failure to comply with these laws, rules and regulations could
delay the introduction of new products and could materially and adversely affect Varex’s business.
If Varex or any of its suppliers, distributors, agents, or customers fail to comply with FDA, Federal Trade Commission, or
other applicable U.S. regulatory requirements or are perceived to have failed to comply with regulations, Varex may face:
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adverse publicity affecting both Varex and its customers;
increased pressures from competitors;
investigations by governmental authorities;
fines, injunctions, civil penalties, and criminal prosecution;
partial suspension or total shutdown of production facilities or the imposition of operating restrictions;
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increased difficulty in obtaining required clearances or approvals or losses of clearances or approvals already granted;
seizures or recalls of Varex products or those of its customers;
delays in purchasing decisions by customers or cancellation of existing orders;
the inability to sell Varex products; and
difficulty in obtaining product liability or operating insurance at a reasonable cost, or at all.
Varex is also subject to federal and state laws and regulations of general applicability relating to matters such as
environmental protection, safe working conditions, manufacturing practices, and other matters. Insurance coverage is not
commercially available for violations of law, including the fines, penalties, or investigatory costs that Varex may incur as the
consequence of regulatory violations. Consequently, Varex does not have insurance that would cover this type of liability.
Varex sells certain X-ray tube products as replacements which are subject to medical device certification and product registration
laws and regulations, which vary by country and are subject to change, and Varex may be unable to receive registration approval
or renewal of existing registrations if it fails to meet regulatory approval requirements or if the approval process becomes
commercially infeasible or impractical.
Varex markets and distributes certain X-ray tubes through distributors and third-party/multi-vendor service organizations that
are used as equivalent replacements for specific OEM tubes. Varex is subject to medical device certification and product registration
laws, which vary by country and are subject to periodic reviews and changes by regulatory authorities in those countries. For example,
to sell X-ray tubes for replacement applications in China, product registrations must be approved by the new National Medical
Products Administration (“NMPA”). Varex must comply with the requirements of the NMPA, and Varex may not be able to receive
registration approval or renewal of existing registrations if it fails to meet regulatory approval requirements or if the process of gaining
approval becomes commercially infeasible or impractical. Certain of these local laws and regulations have the effect of serving as a
barrier to trade and can be difficult to navigate predictably.
In addition, certain countries in which Varex products are sold require products to undergo re-registration if the product is
altered in any significant way, and it may be determined that the separation of Varex from Varian, including Varex’s new name, will
require these products to be re-registered as Varex products, even if they are physically unchanged.
These registration processes can be costly and time consuming, and customers may decide to purchase products from Varex’s
competitors that do not have to be involved in a re-registration process. In addition, Varex’s inability to receive or renew product
registrations may prevent Varex from marketing and/or distributing those particular products for replacement applications in the
specific country.
Existing and future healthcare reforms, including the Affordable Care Act and changes to reimbursement rates, may indirectly
have a material adverse effect on Varex’s business and results of operations.
Sales of Varex’s products to OEMs in the medical sector indirectly depend on whether adequate reimbursement is available
for its customers’ products from a variety of sources, such as government healthcare insurance programs, including U.S. Medicare and
Medicaid programs, foreign government programs, private insurance plans, health maintenance organizations, and preferred provider
organizations. Without adequate reimbursement, the demand for Varex’s customers’ products, and therefore indirectly Varex’s
products, may be limited.
Healthcare reform proposals and medical cost containment measures in the United States and in many foreign countries could
limit the use of both Varex’s and its customers’ products, reduce reimbursement available for such use, further tax the sale or use of
Varex’s products, and further increase the administrative and financial burden of compliance. These reforms and measures, including
the uncertainty in the medical community regarding their nature and effect, could have a material and adverse effect on Varex’s and its
customers’ purchasing decisions regarding its products and treatments and could harm Varex’s business, results of operations,
financial condition, and prospects. Varex cannot predict the specific healthcare programs and regulations that will be ultimately
implemented by local, regional, and national governments globally. However, any changes that lower reimbursements for Varex’s or
its customers’ products and/or procedures using these products, including, for example, existing reimbursement incentives to convert
from analog to digital X-ray systems, or changes that reduce medical procedure volumes or increase cost containment pressures on
Varex or others in the healthcare sector could materially and adversely affect Varex’s business and results of operations.
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Varex is subject to federal, state, and foreign laws governing its business practices which, if violated, could result in substantial
penalties. Additionally, challenges to or investigations into Varex’s practices could cause adverse publicity and be costly to respond
to and thus could harm its business.
Anti-corruption laws and regulations. Varex is subject to the U.S. Foreign Corrupt Practices Act and anti-corruption laws, as
well as similar laws in foreign countries, such as the U.K. Bribery Act and the Law On the Fundamentals of Health Protection in the
Russian Federation. In general, there is a worldwide trend to strengthen anti-corruption laws and their enforcement, and the healthcare
industry and medical equipment manufacturers have been particular targets of these investigation and enforcement efforts. Any
violation of these laws by Varex or its agents or distributors could create substantial liability for Varex, subject its officers and
directors to personal liability, and cause a loss of reputation in the market. Varex operates in many countries, including India and
China, where the public sector is perceived as being corrupt. Varex’s strategic business plans include expanding its business in regions
and countries that are rated as higher risk for corruption activity by Transparency International e.V., an international non-profit that
publishes an annual corruption perception index. Becoming familiar with and implementing the infrastructure necessary to comply
with laws, rules, and regulations applicable to new business activities and mitigating and protecting against corruption risks could be
costly. Failure by Varex or its agents or distributors to comply with these laws, rules, and regulations could delay its expansion into
high-growth markets and could materially and adversely affect its business. Varex will likely do more business, directly and
potentially indirectly, in countries where the public sector is perceived to be corrupt. Increased business in higher-risk countries could
subject Varex and its officers and directors to increased scrutiny and increased liability from its business operations.
Competition and trade compliance laws. Varex is subject to various competition and trade compliance laws in the
jurisdictions where it operates. Regulatory authorities in those jurisdictions may have the power to subject Varex to sanctions and
impose changes or conditions in the way Varex conducts its business. An increasing number of jurisdictions provide private rights of
action for competitors or consumers to assert claims of anti-competitive conduct and seek damages. Increased government scrutiny of
Varex’s actions or enforcement or private rights of action could materially and adversely affect its business or damage its reputation.
Varex may be required to conduct internal investigations or face audits or investigations by one or more domestic or foreign
government agencies, which could be costly and time consuming and could divert its management and key personnel from its business
operations. An adverse outcome under any such investigation or audit could subject Varex to fines and/or or criminal or other
penalties, which could materially and adversely affect Varex’s business and financial results. Furthermore, competition laws may
prohibit or increase the cost of future acquisitions that Varex may desire to undertake.
Laws and ethical rules governing interactions with healthcare providers. Varex does not generally sell its products directly to
healthcare providers, but may occasionally sell its products to healthcare providers through distributors. The U.S. Medicare and
Medicaid “anti-kickback” laws, and similar state laws, prohibit payments or other remuneration that is intended to induce hospitals,
physicians, or others either to refer patients or to purchase, lease, or order, or to arrange for or recommend the purchase, lease, or order
of healthcare products or services for which payment may be made under federal and state healthcare programs, such as Medicare and
Medicaid. These laws affect Varex’s sales, marketing, and other promotional activities by limiting the kinds of financial arrangements
Varex may have with hospitals, physicians, or other potential purchasers of its products. They particularly impact how Varex
structures its sales offerings, including discount practices, customer support, education and training programs, physician consulting,
research grants, and other fee-for-service arrangements. These laws are broadly written, and it is often difficult to determine precisely
how these laws will be applied to specific circumstances.
Federal and state “false claims” laws generally prohibit knowingly presenting, or causing to be presented, claims for payment
from Medicare, Medicaid, or other government payors that are false or fraudulent, or for items or services that were not provided as
claimed. Although Varex does not submit claims directly to payors, manufacturers can be, and have been, held liable under these laws
if they are deemed to “cause” the submission of false or fraudulent claims by providing inaccurate billing or coding information to
customers or through certain other activities, including promoting products for uses not approved or cleared by the FDA, which is
called off-label promotion. Violating “anti-kickback” and “false claims” laws can result in civil and criminal penalties, which can be
substantial, as well as potential mandatory or discretionary exclusion from healthcare programs for noncompliance. Even an
unsuccessful challenge or investigation into Varex’s practices could cause adverse publicity and be costly to defend and thus could
harm its business and results of operations. Additionally, several recently-enacted state and federal laws, including laws in
Massachusetts and Vermont, and the federal Physician Payment Sunshine Act, now require, among other things, extensive tracking
and maintenance of databases regarding the disclosure of equity ownership and payments to physicians, healthcare providers, and
hospitals. These laws may require Varex to implement the necessary and costly infrastructure to track and report certain payments to
healthcare providers. Failure to comply with these new tracking and reporting laws could subject Varex to significant civil monetary
penalties.
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Varex is subject to similar laws in foreign countries where it conducts business. For example, within the EU, the control of
unlawful marketing activities is a matter of national law in each of the member states. The member states of the EU closely monitor
perceived unlawful marketing activity by companies. Varex could face civil, criminal, and administrative sanctions if any member
state determines that Varex has breached its obligations under such state’s national laws. Industry associations also closely monitor the
activities of member companies. If these organizations or authorities name Varex as having breached its obligations under their
regulations, rules, or standards, its reputation would suffer, and its business and financial condition could be materially and adversely
affected.
Certain of Varex’s products are subject to regulations relating to use of radioactive material, compliance with which may be costly,
and a failure to comply therewith may materially and adversely affect Varex’s business.
As a manufacturer and seller of medical devices and devices emitting radiation or utilizing radioactive by-product material,
Varex and some of its suppliers and distributors are subject to extensive regulation by United States governmental authorities, such as
the FDA, the Nuclear Regulatory Commission (“NRC”), and state and local regulatory agencies, which is intended to ensure the
devices are safe and effective and comply with laws governing products which emit, produce, or control radiation. These regulations
govern, among other things, the design, development, testing, manufacturing, packaging, labeling, distribution, import/export, sale,
and marketing and disposal of Varex’s products. Varex is also subject to international laws and regulations that apply to manufacturers
of radiation-emitting devices and products utilizing radioactive materials. These are often comparable to, if not more stringent than,
the equivalent regulations in the United States.
Varex’s industrial and medical devices utilizing radioactive material are subject to NRC clearance and approval requirements,
and the manufacture and sale of these products are subject to extensive federal and state regulation that varies from state to state and
among regions. Varex’s manufacture, distribution, installation, service, and removal of industrial devices utilizing radioactive material
or emitting radiation also requires Varex to obtain a number of licenses and certifications for these devices and materials. Service of
these products must also be in accordance with a specific radioactive materials licenses. Obtaining licenses and certifications may be
time consuming, expensive, and uncertain.
The handling and disposal of radioactive materials resulting from the manufacture, use, or disposal of Varex’s products may
impose significant costs and requirements. Disposal sites for the lawful disposal of materials generated by the manufacture, use, or
decommissioning of Varex’s products may no longer accept these substances in the future or may accept them on unfavorable terms.
If Varex is unable to obtain required FDA clearances or approvals for a product or is unduly delayed in doing so, or the uses of
that product were limited, Varex’s business could suffer.
Typically, Varex’s OEM customers are responsible for obtaining 510(k) pre-market notification clearance on their systems
that integrate Varex products. A substantial majority of Varex’s products are “Class I” devices that do not require 510(k) clearance,
but Varex does produce software that is classified as a Class II device subject to 510(k) clearance. Unless an exception applies, Varex
may be required by FDA regulations to obtain a 510(k) pre-market notification clearance in connection with the manufacture of a new
medical device or a new indication for use of, or other significant change in, an existing currently marketed medical device before it
can market or sell those products in the United States. Modifications or enhancements to a product that could significantly affect its
safety or effectiveness, or that would constitute a major change in the intended use of the device, technology, materials, labeling,
packaging, or manufacturing process also require a new 510(k) clearance. Although manufacturers make the initial determination
whether a change to a cleared device requires a new 510(k) clearance, Varex cannot ensure that the FDA will agree with its decisions
not to seek additional approvals or clearances for particular modifications to its products or that Varex will be successful in obtaining
new 510(k) clearances for modifications. Obtaining clearances or approvals is time consuming, expensive, and uncertain. Varex may
not be able to obtain the necessary clearances or approvals or may be unduly delayed in doing so, which could harm its business.
Furthermore, even if Varex is granted regulatory clearances or approvals, they may include significant limitations on the indicated
uses of the product, which may limit the market for the product. If Varex is unable to obtain required FDA clearance or approval for a
product or is unduly delayed in doing so, or the uses of that product were limited, Varex’s business could suffer.
Unfavorable results of legal proceedings could materially and adversely affect Varex’s financial results.
From time to time, Varex is a party to or otherwise involved in legal proceedings, claims, government inspections, audits or
investigations, and other legal matters, both inside and outside the United States, arising in the ordinary course of its business or
otherwise. Legal proceedings are often lengthy, taking place over a period of years with interim motions or judgments subject to
multiple levels of review (such as appeals or rehearings) before the outcome is final. Litigation and other legal proceedings, claims,
government inspections, audits and investigations are subject to significant uncertainty and may be expensive, time consuming, and
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disruptive to Varex’s operations. For these and other reasons, Varex may choose to settle legal proceedings and claims, regardless of
their actual merit.
If a legal proceeding were ultimately resolved against Varex, it could result in significant compensatory damages, and, in
certain circumstances, punitive damages, disgorgement of revenue or profits, remedial corporate measures, or injunctive relief
imposed on Varex. If Varex’s existing insurance does not cover the amount or types of damages awarded, or if other resolution or
actions taken as a result of such legal proceeding were to restrain its ability to market one or more of its material products or services,
its combined financial position, results of operations, or cash flows could be materially and adversely affected. In addition, legal
proceedings, and any adverse resolution thereof, can result in adverse publicity and damage to Varex’s reputation, which could
materially and adversely impact its business.
New accounting pronouncements or changes in interpretation or application of generally accepted accounting principles may
materially and adversely affect Varex’s operating results.
Varex prepares its financial statements in accordance with GAAP. These principles are subject to interpretation by the FASB,
American Institute of Certified Public Accountants, the SEC, and various other regulatory and/or accounting bodies. New accounting
pronouncements, or a change in interpretations of, or its application of, existing principles can have a significant effect on Varex’s
reported results and may even affect its reporting of transactions completed before a change is announced. In addition, when Varex is
required to adopt new accounting standards, Varex’s methods of accounting for certain items may change, which could cause its
results of operations to fluctuate from period to period, make it more difficult to compare its financial results to prior periods, and
could cause Varex to delay required filings under the Exchange Act.
As its operations evolve over time, Varex may introduce new products and/or new technologies that require Varex to apply
different accounting principles, including ones regarding revenue recognition, than Varex has applied in past periods. The application
of different types of accounting principles and related potential changes may make it more difficult to compare its financial results
from quarter to quarter, and the trading price of Varex common stock could suffer or become more volatile as a result.
Environmental laws impose compliance costs on Varex’s business and may also result in liability.
Varex is subject to environmental laws around the world. These laws regulate many aspects of its operations, including its
handling, storage, transport, and disposal of hazardous substances, such as the chemicals and materials that Varex uses in the course of
its manufacturing operations. They can also impose cleanup liabilities, including with respect to discontinued operations. As a
consequence, Varex can incur significant environmental costs and liabilities, some recurring and others not recurring. Although it
follows procedures intended to comply with existing environmental laws, Varex, like other businesses, may mishandle or inadequately
manage hazardous substances used in its manufacturing operations and can never completely eliminate the risk of contamination or
injury from certain materials that it uses in its business and, therefore, it cannot completely eliminate the prospect of resulting claims
and damage payments. Varex may also be assessed fines and/or other penalties for failure to comply with environmental laws and
regulations. Insurance has provided coverage for portions of cleanup costs resulting from historical occurrences, but Varex does not
expect to maintain insurance coverage for costs or claims that might result from any future contamination.
Future changes in environmental laws could also increase its costs of doing business, perhaps significantly. Several countries,
including some in the EU, now require medical equipment manufacturers to bear certain disposal costs of products at the end of the
product’s useful life, increasing its costs. The EU has also adopted directives that may lead to restrictions on the use of certain
hazardous substances or other regulated substances in some of its products sold there. These directives, along with another that
requires substance information to be provided upon request, could increase Varex’s operating costs in order to maintain its access to
certain markets. All of these costs, and any future violations or liabilities under environmental laws or regulations, could have a
material adverse effect on its business.
Fulfilling obligations incidental to being a public company place significant demands on Varex’s management, administrative, and
operational resources, including accounting and information technology resources.
As a public company, Varex is subject to the reporting requirements of the Securities Exchange Act of 1934 (the “Exchange
Act”), and is required to prepare its financial statements according to the rules and regulations required by the SEC. The Exchange Act
requires that Varex file annual, quarterly, and current reports. Varex’s failure to prepare and disclose this information in a timely
manner or to otherwise comply with applicable law could subject it to penalties under federal securities laws, cause it to be out of
compliance with applicable stock exchange listing requirements, and expose it to lawsuits and restrict its ability to access financing.
For example, as a result of the delayed filing of our 2019 Annual Report on Form 10-K, we received a notification letter from Nasdaq
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advising us that we were not in compliance with Nasdaq listing requirements. While we promptly regained compliance with the
Nasdaq listing requirements, if we had failed to regain compliance in a timely manner, it would have negatively impacted Varex.
Varex must, among other things, establish and maintain effective internal controls and procedures for financial reporting and
disclosure purposes. Internal control over financial reporting is complex and may be revised over time to adapt to changes in Varex’s
business or changes in applicable accounting rules. As described in the following risk factor, Varex has identified material weaknesses
in its internal control over financial reporting. Varex cannot assure that its internal control over financial reporting will be effective in
the future or that additional material weaknesses will not be discovered with respect to a prior period for which it had previously
believed that internal controls were effective.
Matters impacting Varex’s internal controls may cause Varex to be unable to report its financial information on a timely basis
or may cause Varex to restate previously-issued financial information, thereby subjecting Varex to adverse regulatory consequences,
including sanctions or investigations by the SEC or in respect of violations of applicable stock exchange listing rules. There could also
be a negative reaction in the financial markets due to a loss of investor confidence in Varex and the reliability of its financial
statements, which could affect Varex’s stock price.
Varex identified material weaknesses in its internal control over financial reporting which, if not remediated appropriately or
timely, could result in loss of investor confidence and adversely impact our stock price.
As further described in Item 9A in our Annual Report on Form 10-K, for the fiscal year ended October 2, 2020, management
determined that Varex’s internal control over financial reporting and its disclosure controls and procedures were not effective and that
there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or
detected on a timely basis. Management has identified material weaknesses within our risk assessment process and control
environment, which in turn, contributed to additional material weaknesses related to (1) inventory and cost of sales, and (2) financial
reporting. Until remediated, these material weaknesses could result in a material misstatement to the annual or interim consolidated
financial statements that would not be prevented or detected on a timely basis. There can be no assurance that the remedial measures
being implemented by Varex's management will be successful. In addition, because of the COVID-19 pandemic, a larger number of
Varex’s employees are working remotely, which may make it harder to remediate existing material weaknesses and might make it
harder to maintain proper internal controls over financial reporting. If Varex is unable to remediate the material weaknesses, or is
otherwise unable to maintain effective internal control over financial reporting or disclosure controls and procedures, Varex's ability to
record, process and report financial information accurately, and to prepare financial statements within required time periods, could be
adversely affected, which could subject Varex to litigation or investigations requiring management resources and payment of legal and
other expenses, including civil penalties, negatively affect investor confidence in our financial statements and adversely impact our
stock price.
Risks Relating to Our Indebtedness
Varex has significant debt obligations that could adversely affect its business, profitability and ability to meet its obligations.
As of October 2, 2020, Varex’s total combined indebtedness was approximately $511.3 million. The borrowings under
Varex’s unsecured convertible senior notes due 2025 (the “Convertible Notes”) bear interest at a fixed rate of 4.00% and borrowings
under Varex’s senior secured notes due 2027 (the “Senior Secured Notes”) bear interest at a fixed rate of 7.875%.
Varex's debt could potentially have important consequences to Varex and its investors, including:
limiting Varex’s flexibility in planning for, or reacting to, changes in its business and the industry; and
limiting Varex’s ability to borrow additional funds as needed or increasing the costs of any such borrowing.
•
•
• make it more difficult for us to satisfy our obligations, including our debt obligations;
•
increase our vulnerability to adverse economic and general industry conditions, including interest rate fluctuations, because a
portion of our borrowings are and will continue to be at variable rates of interest;
require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, which would reduce the
availability of our cash flow from operations to fund working capital, capital expenditures or other general corporate
purposes;
place us at a disadvantage compared to competitors that may have proportionately less debt; and
limit our ability to obtain additional debt or equity financing due to applicable financial and restrictive covenants in our debt
agreements.
•
•
•
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If Varex’s cash requirements in the future are greater than expected, its cash flow from operations may not be sufficient to
repay all of the outstanding debt as it becomes due, and Varex may not be able to borrow money, sell assets, or otherwise raise funds
on acceptable terms, or at all, to refinance Varex’s debt. For example, holders of the Convertible Notes will have the right to require
Varex to repurchase all or a portion of the Convertible Notes on the occurrence of a fundamental change at a repurchase price equal to
100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding,
the fundamental change repurchase date. Further, if a make-whole fundamental change as defined in the Indenture governing the
Convertible Notes occurs prior to the maturity date of the Convertible Notes, Varex will in some cases be required to increase the
conversion rate for a holder that elects to convert its Convertible Notes in connection with such make-whole fundamental change. On
the conversion of the Convertible Notes, unless Varex elects to deliver solely shares of common stock to settle such conversion (other
than paying cash in lieu of delivering any fractional share), Varex will be required to make cash payments for the Convertible Notes
being converted. However, Varex may not have enough available cash or be able to obtain financing at the time Varex is required to
make such repurchases of the Convertible Notes surrendered or pay cash with respect to the Convertible Notes being converted.
Despite our substantial indebtedness, we may still be able to incur significantly more debt. This could intensify the risks described
above.
We and our subsidiaries may be able to incur substantial indebtedness in the future. As of October 2, 2020, we had
approximately $100 million of additional available borrowing capacity (subject to borrowing base availability) under the new
revolving credit agreement that we entered into on September 30, 2020 (the “Asset-Based Loan”, or "ABL Facility"). In addition to
any amounts that might be available to us for borrowing under the ABL Facility, subject to certain conditions, we will have the right to
request an increase of aggregate commitments under the ABL Facility by an aggregate amount of up to $75 million by obtaining
additional commitments either from one or more of the lenders under the ABL Facility or other lending institutions.
Although the ABL Facility and the indenture governing our Senior Secured Notes contain restrictions on our and our
subsidiaries’ ability to incur additional indebtedness, these restrictions are subject to a number of important qualifications and
exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. Furthermore, the covenants in the
indenture governing our Convertible Notes do not restrict the incurrence of indebtedness by the company or any of its subsidiaries,
and the covenants that may be contained in any future debt instruments could allow us to incur a significant amount of additional
indebtedness.
The more leveraged we become, the more we, and in turn holders of our notes, will be exposed to certain risks described
above under “— Varex has significant debt obligations that could adversely affect its business, profitability and ability to meet its
obligations.”
The ABL Facility and the indenture governing our Senior Secured Notes impose significant operating and financial restrictions
that may limit our current and future operating flexibility, particularly our ability to respond to changes in the economy or our
industry or to take certain actions, which could harm our long term interests and may limit our ability to make payments on the
notes.
Our ABL Facility and the indenture governing our Senior Secured Notes impose significant operating and financial
restrictions on us.
These restrictions limit our ability, among other things, to:
•
•
incur, assume or permit to exist additional indebtedness (including guarantees thereof);
pay dividends or certain other distributions on our capital stock or repurchase our capital stock or prepay subordinated
indebtedness;
prepay, redeem or repurchase certain debt;
issue certain preferred stock or similar equity securities;
incur liens on assets;
•
•
•
• make certain loans, investments or other restricted payments;
•
•
•
•
allow to exist certain restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to us;
engage in transactions with affiliates;
alter the business that we conduct; and
sell certain assets or merge or consolidate with or into other companies.
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As a result of these restrictions, we may be:
•
•
•
limited in how we conduct our business;
unable to raise additional debt or equity financing to operate during general economic or business downturns; or
unable to compete effectively or to take advantage of new business opportunities.
A breach of the covenants under the indenture governing our Senior Secured Notes or the ABL Facility could result in an
event of default under the applicable indebtedness. Such a default, if not cured or waived, may allow the creditors to accelerate the
related debt and may result in the acceleration of any other debt that is subject to an applicable cross-acceleration or cross-default
provision. In addition, an event of default under the ABL Facility would permit the lenders under the ABL Facility to terminate all
commitments to extend further credit under the ABL Facility. Furthermore, if we were unable to repay the amounts due and payable
under the ABL Facility, those lenders could proceed against the collateral securing such indebtedness. In the event our lenders or
holders of the notes offered hereby accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets
to repay that indebtedness.
Our ability to continue to have the necessary liquidity to operate our business may be adversely impacted by a number of factors,
including uncertain conditions in the credit and financial markets, which could limit the availability and increase the cost of
financing. A deterioration of our results of operations and cash flow resulting from decreases in consumer spending, could, among
other things, impact our ability to comply with the fixed charge coverage ratio contained in our ABL Facility.
Our historical sources of liquidity to fund ongoing cash requirements include cash flows from operations, cash and cash
equivalents, borrowings through our previous credit facility and convertible debt offerings. The sufficiency and availability of credit
may be adversely affected by a variety of factors, including, without limitation, the tightening of the credit markets, including lending
by financial institutions who are sources of credit for our borrowing and liquidity; an increase in the cost of capital; the reduced
availability of credit; our ability to execute our strategy; the level of our cash flows, which will be impacted by customer demand for
our products; compliance with a fixed charge coverage ratio that is included in our ABL Facility, interest rate fluctuations and the
adverse impact of the COVID-19 outbreak on the U.S. and world-wide economies and on our business. Interest rates in the U.S.
generally increased in fiscal 2018 and 2019, but decreased in fiscal 2020. We cannot predict the future level of interest rates or the
effect of any increase in interest rates on the availability or aggregate cost of our borrowings. We cannot be certain that any additional
required financing, whether debt or equity, will be available in amounts needed or on terms acceptable to us, if at all.
The ABL Facility contains a minimum Fixed Charge Coverage Ratio of 1.00 to 1.00 that is tested when excess availability
under the ABL is less than the greater of (i) 10.0% of the Line Cap (the lesser of (a) the aggregate commitments under the ABL
Facility and (b) the aggregate borrowing base) and (ii) $7.5 million. If we have to borrow in excess of 10.0% of the Line Cap and $7.5
million, and we do not increase our earnings, we also would be at risk of not being in compliance with the ABL Facility’s fixed charge
coverage ratio. Compliance with the fixed charge coverage ratio is dependent on the results of our operations, which are subject to a
number of factors including current economic conditions. Adverse developments in the economy, including as a result of the
COVID-19 outbreak, could lead to reduced spending by our customers and end-users which could adversely impact our net sales and
cash flow, which could affect our ability to comply with the fixed charge coverage ratio. In addition, the ABL Facility contains other
affirmative and negative covenants that restrict Varex’s operating and financing activities. These provisions may limit our ability to,
among other things, incur future indebtedness, contingent obligations or liens, guarantee indebtedness, make certain investments and
capital expenditures, sell stock or assets, pay dividends and consummate certain mergers or acquisitions. Failure to comply with the
fixed charge coverage ratio and other covenants, including the requirement to timely deliver financial statements within applicable
grace periods, could result in an event of default. Upon an event of default, if the ABL Facility is not amended or the event of default
is not waived, the lender could declare all amounts then outstanding, together with accrued interest, to be immediately due and
payable. If this happens, Varex may not be able to make those payments or borrow sufficient funds from alternative sources to make
those payments. Even if Varex were to obtain additional financing, that financing may be on unfavorable terms.
We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy
our obligations under our indebtedness, which may not be successful.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or
delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness,
including the notes. These alternative measures may not be successful and may not permit us to meet our scheduled debt service
obligations. If our operating results and available cash are insufficient to meet our debt service obligations, we could face substantial
liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We
may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them, and these proceeds may
not be adequate to meet any debt service obligations then due. Any future refinancing of our indebtedness could be at higher interest
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rates and may require us to comply with more onerous covenants which could further restrict our business operations. Additionally,
the Indenture will limit the use of the proceeds from any disposition of our assets. As a result, the Indenture may prevent us from using
the proceeds from such dispositions to satisfy our debt service obligations.
Our credit rating and ability to access well-functioning capital markets are important to our ability to secure future debt financing
on acceptable terms. Our credit ratings may not reflect all risks associated with an investment in our secured notes.
Our access to the debt markets and the terms of such access depend on multiple factors including the condition of the debt
capital markets, our operating performance and our credit ratings. These ratings are based on a number of factors including an
assessment of our financial strength and financial policies. Our borrowing costs will be dependent to some extent on the rating
assigned to our debt. However, there can be no assurance that any particular rating assigned to us will remain in effect for any given
period of time or that a rating will not be changed or withdrawn by a rating agency if, in that rating agency’s judgment, future
circumstances relating to the basis of the rating so warrant. Incurrence of additional debt by us could adversely affect our credit rating.
Any disruptions or turmoil in the capital markets or any downgrade of our credit rating could adversely affect our cost of funds,
liquidity, competitive position and access to capital markets, which could materially and adversely affect our business operations,
financial condition and results of operations. In addition, downgrading the credit rating of our debt securities or placing us on a watch
list for possible future downgrading would likely have an adverse effect on the market price of our securities.
Varex entered into certain hedging positions that may affect the value of the Convertible Notes and the volatility and value of
Varex’s common stock.
In connection with the issuance of the Convertible Notes, Varex entered into certain convertible note hedge transactions.
These hedge transactions are expected generally to reduce potential dilution of our common stock on any conversion of the
Convertible Notes or offset any cash payments we are required to make in excess of the principal amount of such converted
Convertible Notes, as the case may be, with such reduction or offset subject to a cap. The counterparties to these hedging positions or
their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to Varex’s
common stock or purchasing or selling Varex’s common stock in secondary market transactions prior to the maturity of the
Convertible Notes (and are likely to do so during any observation period related to a conversion of Convertible Notes or following any
repurchase of Convertible Notes by Varex on any fundamental change repurchase date or otherwise). This activity could cause or
avoid an increase or a decrease in the market price of Varex common stock or the Convertible Notes. In addition, if any such hedging
positions fail to become effective, the counterparties to these hedging positions or their respective affiliates may unwind their hedge
positions, which could adversely affect the value of Varex common stock.
Risks Relating to Our Common Stock
The trading price of Varex’s common stock may decline or fluctuate significantly and fluctuations in Varex’s operating results,
including quarterly revenues, and margins, may cause its stock price to be volatile, which could cause losses for its stockholders.
In the past year, Varex's stock price has ranged from a low of $10.37 to a high of $33.00. Varex cannot guarantee that an
active trading market will be sustained for its common stock. Nor can Varex predict the prices at which shares of its common stock
may trade. Varex has experienced and expects in the future to experience fluctuations in its operating results, including revenues and
margins, from period to period. These fluctuations may cause Varex’s stock price to be volatile, which could cause losses for its
stockholders.
Varex’s quarterly and annual operating results, including its revenues and margins, may be affected by a number of other
factors, including:
•
•
•
•
•
•
•
•
the introduction and timing of announcement of new products or product enhancements by Varex and its competitors;
change in its or its competitors’ pricing or discount levels;
changes in foreign currency exchange rates and other economic uncertainty;
changes in import/export regulatory regimes including the imposition of tariffs on our products or those of our customers;
changes in the relative portion of its revenues represented by its various products, including the relative mix between higher
margin and lower-margin products;
the ability to identify and remediate significant deficiencies and material weaknesses in internal controls;
changes in the relative portion of its revenues represented by its international region as a whole and by regions within the
overall region, as well as by individual countries (notably, those in emerging markets);
fluctuation in its effective tax rate, which may or may not be known to Varex in advance;
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•
•
•
•
•
•
the availability of economic stimulus packages or other government funding, or reductions thereof;
disruptions in the supply or changes in the costs of raw materials, labor, product components or transportation services;
changes to its organizational structure, which may result in restructuring or other charges;
disruptions in its operations, including its ability to manufacture products, caused by events such as earthquakes, fires, floods,
terrorist attacks or the outbreak of epidemic diseases;
the unfavorable outcome of any litigation or administrative proceeding or inquiry, including governmental audits, as well as
ongoing costs associated with legal proceedings and governmental audits; and
accounting changes and adoption of new accounting pronouncements.
Because many of Varex’s operating expenses are based on anticipated capacity levels, and a high percentage of these
expenses are fixed for the short term, a small variation in the timing of revenue recognition can cause significant variations in
operating results from quarter to quarter. If Varex’s gross margins fall below the expectation of securities analysts and investors, the
trading price of Varex common stock may decline.
Conversion of the Convertible Notes may dilute the ownership interest of Varex’s stockholders or may otherwise depress the
market price of Varex’s common stock.
The conversion of the Convertible Notes may dilute the ownership interests of Varex’s stockholders. On conversion of the
Convertible Notes, Varex has the option to pay or deliver, as the case may be, cash, shares of common stock, or a combination of cash
and shares of common stock. If Varex elects to settle our conversion obligation in shares of common stock or a combination of cash
and shares of common stock, any sales of Varex common stock issuable on such conversion could adversely affect prevailing market
prices of Varex’s common stock. In addition, the existence of the Convertible Notes may encourage short selling by market
participants because the conversion of the Convertible Notes could be used to satisfy short positions, or anticipated conversion of the
Convertible Notes into shares of Varex’s common stock, any of which could depress the market price of Varex’s common stock.
The conditional conversion feature of the Convertible Notes, if triggered, may adversely affect our financial condition and
operating results.
In the event the conditions for optional conversion of the Convertible Notes by holders are met before the close of business
on the business day immediately preceding June 1, 2025, holders of the Convertible Notes will be entitled to convert the Convertible
Notes at any time during specified periods at their option. If Varex elects to satisfy our conversion obligation by settling all or a
portion of its conversion obligation in cash, it could adversely affect Varex’s liquidity. In addition, even if holders do not elect to
convert their Convertible Notes, Varex could be required under applicable accounting rules to reclassify all or a portion of the
outstanding principal of the Convertible Notes as a current rather than long-term liability, which would result in a material reduction
of Varex net working capital and may seriously harm Varex’s business.
Certain provisions in Varex’s Amended and Restated Certificate of Incorporation, its Amended and Restated Bylaws, its Indenture,
and of Delaware law, may prevent or delay an acquisition of Varex, which could decrease the trading price of Varex’s common
stock.
Varex’s Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws contain, and Delaware law
contains, provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or
bids unacceptably expensive to the bidder and to encourage prospective acquirers to negotiate with Varex’s board of directors rather
than to attempt a hostile takeover. These provisions include, among others:
•
•
•
•
•
•
•
•
the inability of Varex’s stockholders to call a special meeting;
the inability of Varex’s stockholders to act without a meeting of stockholders;
rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings;
the right of Varex’s board of directors to issue preferred stock without stockholder approval;
the division of Varex’s board of directors into three classes of directors, with each class serving a staggered three-year term,
and this classified board provision could have the effect of making the replacement of incumbent directors more time-
consuming and difficult, until the 2022 annual meeting of stockholders, after which directors will be elected annually;
a provision that stockholders may only remove directors with cause while the board is classified;
the ability of Varex’s directors, and not stockholders, to fill vacancies on Varex’s board of directors; and,
the requirement that the affirmative vote of stockholders holding at least 66 2/3% of Varex’s voting stock is required to
amend certain provisions in Varex’s Amended and Restated Certificate of Incorporation (relating to the term and removal of
its directors, the filling of its board vacancies, the calling of special meetings of stockholders, stockholder action by written
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consent, the elimination of liability of directors to the extent permitted by Delaware law and indemnification of directors and
officers), although this requirement will expire on the completion of the 2021 annual meeting of stockholders, after which
Varex's Amended and Restated Certificate of Incorporation may be amended by the affirmative vote of the holders of at least
a majority of the outstanding voting stock.
In addition, because Varex did not elect to be exempt from Section 203 of the Delaware General Corporation Law (the
“DGCL”), this provision could also delay or prevent a change of control that stockholders may favor. Section 203 provides that,
subject to limited exceptions, persons that acquire, or who are affiliated with a person that acquires, more than 15% of the outstanding
voting stock of a Delaware corporation (an “interested stockholder”) shall not engage in any business combination with that
corporation, including by merger, consolidation, or acquisitions of additional shares, for a three-year period following the date on
which the person became an interested stockholder, unless: (1) prior to such time, the board of directors of such corporation approved
either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (2) upon
consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of such corporation at the time the transaction commenced; or (3) on or subsequent to such time the
business combination is approved by the board of directors of such corporation and authorized at a meeting of stockholders by the
affirmative vote of at least two-thirds of the outstanding voting stock of such corporation not owned by the interested stockholder.
These provisions are not intended to make Varex immune from takeovers. However, these provisions will apply even if the
offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that Varex’s board of directors
determines is not in the best interests of Varex and Varex’s stockholders. These provisions may also prevent or discourage attempts to
remove and replace incumbent directors.
Furthermore, certain provisions in Varex’s Indenture governing the Convertible Notes may make it more difficult or
expensive for a third party to acquire Varex. For example, the Indenture requires Varex, at the holders’ election, to repurchase the
Convertible Notes for cash on the occurrence of a fundamental change and, in certain circumstances, to increase the conversion rate
for a holder that converts its Convertible Notes in connection with a make-whole fundamental change. A takeover of Varex may
trigger the requirement that we repurchase the Convertible Notes or increase the conversion rate, which could make it costlier for a
third party to acquire Varex. Varex’s Indenture also prohibits Varex from engaging in a merger or acquisition unless, among other
things, the surviving entity assumes the obligations under the Convertible Notes and Varex’s Indenture. These and other provisions in
Varex’s Indenture could deter or prevent a third party from acquiring Varex even when the acquisition may be favorable to holders of
the Convertible Notes or Varex’s stockholders.
Liabilities related to Varex’s operations when it was part of Varian, or liabilities associated with its spin-off from Varian, could
materially and adversely affect Varex’s business, financial condition, results of operations, and cash flows.
Varex entered into a Separation and Distribution Agreement when it spun off from Varian. The agreement provides for,
among other things, indemnification obligations designed to make Varian financially responsible for liabilities allocable to Varian
before the spin-off, and to make Varex financially responsible for liabilities allocable to Varex before the spin-off and for information
contained in the Varex registration statement that describes the separation, Varex, and the transactions contemplated by the Separation
and Distribution Agreement. Varex may be subject to substantial liabilities if it required to indemnify Varian or if Varian is required,
but unable, to indemnify Varex. Either of these could negatively affect Varex’s business, financial position, results of operations, and/
or cash flows.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our business is primarily located in Salt Lake City, Utah, where we own approximately 37 acres of land and approximately
494,000 square feet of space used for manufacturing, administrative functions and research and development, for both our Medical
and Industrial segments. We also own or lease 34 other facilities throughout North America, Europe and Asia (located in 8 states and
17 foreign countries) that comprise over 2 million square feet of manufacturing facilities, warehouses, sales and service, research and
development and office space, which are used for our Medical and/or Industrial segments, depending on the location.
37
In addition to our location in Salt Lake City, Utah, our other primary owned facilities are located in Las Vegas, Nevada and
Franklin Park, Illinois. Our Las Vegas, Nevada, facility has approximately 5 acres of land and 94,000 square feet of space used for
manufacturing, administrative functions and research and development, for our Industrial segments. Our Franklin Park, Illinois,
facility has approximately 3 acres of land and approximately 61,000 square feet of space used for manufacturing, administrative
functions and research and development, for both our Medical and Industrial segments. Subsequent to the end of fiscal year 2020,
construction on our owned facility in Doetinchem, the Netherlands, which is approximately 4 acres and approximately 107,000 square
feet, was completed.
Primary leased facilities include approximately 144,000 square feet in Laguna, Philippines, approximately 46,000 square feet
in Wuxi, China, approximately 34,000 square feet in Bremen, Germany, approximately 34,000 of square feet in Walluf, Germany and
approximately 26,000 square feet in San Jose, California, all of which are used for manufacturing and administrative functions for our
Medical and Industrial segments.
Item 3. Legal Proceedings
We are subject to various claims, complaints and legal actions in the normal course of business from time to time. We do not
believe we have any currently pending litigation for which the outcome could have a material adverse effect on our operations or
financial position. See Item 1A. "Risk Factors - Unfavorable results of legal proceedings could materially and adversely affect Varex's
financial results."
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Varex's common stock is traded on the NASDAQ Global Select Market (the “NASDAQ”) under the symbol “VREX.”
Since our inception, we have not paid any cash dividends and have no current plan to pay cash dividends on Varex common
stock. As of November 3, 2020, there were 1,576 holders of record of Varex common stock.
This graph shows the total return on VREX common stock since listing on NASDAQ on January 20, 2017, with comparative
total returns for the Russell 2000 Index (“RUT”) and the Dow Jones Medical Equipment Index (“DJUSAM”). The graph below
assumes that $100.00 was invested on January 20, 2017 in our common stock and the companies listed in the RUT and the DJUSAM,
as well as a reinvestment of dividends paid on such investments throughout the period.
39
Period EndingIndex ValueJanuary 20, 2017 - October 2, 2020VREX USRUTDJUSAM01/20/1703/31/1709/29/1703/29/1809/28/1803/29/1909/27/1904/03/2010/02/20050100150200250
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Item 6. Selected Financial Data
In January 2017, we separated from Varian. Prior to the date of separation, the financial statements were prepared on a stand-
alone basis and derived from Varian’s consolidated financial statements as we operated as part of Varian.
The following data, in so far as it relates to each of the fiscal years from 2016 through 2020, has been derived from annual
consolidated financial statements, including the consolidated balance sheets at October 2, 2020 and September 27, 2019 and the
related consolidated statements of (loss) earnings, of comprehensive (loss) earnings, and of cash flows for the fiscal years 2020, 2019
and 2018 and notes thereto appearing elsewhere herein. In addition, the following financial data should be read in conjunction with our
consolidated financial statements and the accompanying notes and the MD&A included elsewhere herein.
Summary of Operations:
(In millions, except per share amounts)
2020
2019
2018
2017(1)
2016
Fiscal Years
Revenues
Gross profit
(Loss) earnings before taxes
Taxes on (loss) earnings
Net (loss) earnings
Less: Net earnings attributable to noncontrolling interests
Net (loss) earnings attributable to Varex
(Loss) earnings per share attributable to Varex
(Loss) earnings per share - basic
(Loss) earnings per share - diluted
Financial Position at Fiscal Year End:
Working capital
Total assets
Total debt (excluding current maturities, net of deferred costs)
$
$
$
$
$
$
738.3 $
780.6 $
773.4 $
698.1 $
190.2 $
256.7 $
253.9 $
253.5 $
(72.6)
(15.2)
(57.4)
0.5
21.5
5.7
15.8
0.3
25.7
(2.6)
28.3
0.8
74.8
22.8
52.0
0.4
(57.9) $
15.5 $
27.5 $
51.6 $
(1.49) $
(1.49) $
0.41 $
0.40 $
0.73 $
0.72 $
1.37 $
1.36 $
361.4 $
263.3 $
306.1 $
343.5 $
1,139.5
452.8
1,038.9
364.4
987.9
364.8
1,040.1
463.9
620.1
248.4
105.0
36.0
69.0
0.5
68.5
1.83
1.82
282.1
622.4
—
(1) The summary of operations for fiscal year 2017 includes operating results from the Acquired Detector Business for the period from May 1, 2017 through
September 29, 2017.
Selected Quarterly Financial Data (Unaudited)
The following table sets forth selected financial data from our unaudited quarterly consolidated statements of (loss) earnings
for the eight quarters ended fiscal year 2020. The information for each quarter has been derived from unaudited consolidated financial
statements and in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for
a fair statement of the results for the unaudited interim periods and includes certain reclassifications and rounding differences. The
quarterly data should be read together with our consolidated financial statements and related notes appearing elsewhere in this annual
report.
(In millions, except per share amounts, unaudited)
Total revenues
Gross profit
Net (loss)
Net (loss) attributable to Varex
(Loss) per share - basic
(Loss) per share - diluted
Fiscal Year 2020
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total Year
$
$
$
$
$
$
200.1 $
197.0 $
171.2 $
170.0 $
61.1 $
(1.2) $
(1.3) $
(0.03) $
(0.03) $
57.6 $
(1.8) $
(1.9) $
(0.05) $
(0.05) $
26.3 $
(28.2) $
(28.3) $
(0.73) $
(0.73) $
45.2 $
(26.2) $
(26.4) $
(0.68) $
(0.68) $
738.3
190.2
(57.4)
(57.9)
(1.49)
(1.49)
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(In millions, except per share amounts, unaudited)
Total revenues
Gross profit
Net earnings (loss)
Net earnings (loss) attributable to Varex
Earnings (loss) per share - basic
Earnings (loss) per share - diluted
Fiscal Year 2019
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total Year
$
$
$
$
$
$
185.7 $
195.8 $
196.7 $
202.4 $
60.0 $
64.4 $
3.0 $
3.0 $
0.08 $
0.08 $
5.9 $
5.8 $
0.15 $
0.15 $
60.7 $
(1.3) $
(1.4) $
(0.04) $
(0.04) $
71.6 $
8.2 $
8.1 $
0.21 $
0.21 $
780.6
256.7
15.8
15.5
0.41
0.40
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Basis of Presentation
We became an independent publicly-traded company in January 2017 following our separation from Varian and subsequent
distribution of shares of our common stock to Varian stockholders.
The following discussion and analysis contains forward-looking statements relating to future events or our future financial or
operating performance that involve risks and uncertainties, as set forth above under "Forward-Looking Statements." Our actual results
could differ materially from those anticipated in these forward-looking statements as a result of certain factors described in this
Annual Report on Form 10-K.
Our Business
Varex Imaging Corporation is a leading innovator, designer and manufacturer of X-ray tubes, digital detectors, linear
accelerators and other image software processing solutions, which are mission critical components of a variety of X-ray based
diagnostic imaging equipment. These products are used in medical imaging as well as in industrial and security imaging applications
such as general X-ray, computed tomography (“CT”), C-arms, angiography, fluoroscopy, mammography, and dental. In addition, our
components are also used in security and quality inspection systems, as well as for analysis and measurement applications in industrial
manufacturing applications. Global original equipment manufacturers (“OEMs”) incorporate our X-ray imaging components in their
systems to detect, diagnose, protect and inspect. As of October 2, 2020, we had approximately 2,000 full-time equivalent employees,
located at manufacturing and service center sites in North America, Europe, and Asia.
Our products are sold in three geographic regions: the Americas, EMEA, and APAC. The Americas includes North America
(primarily the United States) and Latin America. EMEA includes Europe, Russia, the Middle East, India and Africa. APAC includes
Asia and Australia. Revenues by region are based on the known final destination of products sold.
Our success depends, among other things, on our ability to anticipate and respond to changes in our markets, the direction of
technological innovation and the demands of our customers. We continue to invest in research and development and employ
approximately 500 individuals in product development. Combining this focus on innovation and product performance with strong
long-term customer relationships allows us to collaborate with our customers to bring industry-leading products to the X-ray imaging
market. We continue to work to improve the life and quality of our imaging components and leverage our scale as one of the largest
independent X-ray imaging component suppliers to provide cost-effective solutions for our customers.
Impact of COVID-19
The unprecedented nature of the COVID-19 pandemic and its impact on the global economy has created a disruption to our
business that includes increased uncertainty in demand for certain products for medical and industrial applications, as well as
increased variability in our supply chain and manufacturing productivity. The economic downturn triggered by COVID-19 has led to
significantly lower demand from our customers and delays in equipment installations. In conjunction with this reduced forecast and
uncertainty beyond the forecast horizon, we evaluated our product offering and decided to discontinue certain low margin, low
demand products. As a result, during the third quarter of fiscal year 2020 we took an approximately $15.8 million pre-tax non-cash
charge for the write-down of associated inventory and restructuring activity, impaired $2.8 million of intangible assets and wrote off a
$2.7 million cost investment in a privately-held company.
The COVID-19 pandemic has had a significant effect on hospitals, clinics and outpatient imaging centers as they have
encountered declines in surgeries and other non-emergency procedures. In some cases, certain healthcare facilities have been closed
and non-emergency procedures have been deferred. As a result, many hospitals, clinics and outpatient imaging centers have reduced
their capital purchases of imaging equipment from OEMs which has led to lower demand for X-ray imaging components. In addition,
reduced usage of certain X-ray equipment has resulted in less demand for replacement components that wear-out with use.
Additionally, equipment installations were delayed, due to reduced access to healthcare institutions. Partially offsetting this has been
increased demand for CT and certain radiographic diagnostic imaging equipment used to screen for or assist in the treatment of
respiratory diseases (such as COVID-19).
While healthcare systems and economies around the world have begun to reopen, customer demand has not returned to pre-
pandemic levels, and the adverse effects of COVID-19 on our financial statements and results of operations have been significant.
While we believe that the fundamentals driving long-term demand in both our medical and industrial segments remain intact, we
believe that in the near-term, reduced demand in our industrial segment and for certain higher end medical products will continue to
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depress our results of operations. While our manufacturing sites are currently up and running, COVID-19 and associated economic
disruptions have had an adverse impact on our manufacturing capacity, supply chains and distribution systems, including as a result of
impacts associated with preventive and precautionary measures that we, other businesses and governments are taking. Supply chain
logistics have also become more challenging and while we have had success in localizing our supply chain through our “local-for-
local” initiative, supply chain logistics could remain challenging.
The actions taken to combat COVID-19 have had, and we believe will continue to have, a negative impact on our operating
results, cash flows and financial condition. We expect uncertainty related to the COVID-19 pandemic to continue into the beginning of
calendar year 2021. While we have implemented safeguards and procedures and taken other measures to counter the impact of the
COVID-19 pandemic, the full extent to which the COVID-19 pandemic has and will directly or indirectly impact us, including our
business, financial condition, and results of operations, will depend on future developments that are highly uncertain and cannot be
accurately predicted. We will continue to actively monitor the situation and may take further actions that alter our business operations
as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers,
suppliers, and stockholders.
Subsequent Measurement of Goodwill
Goodwill is not amortized but is tested annually, or more often if impairment indicators are present, for impairment at a
reporting unit level, based on a comparison of the fair value of the reporting unit with its carrying amount. Goodwill is tested for
impairment via a one-step process by comparing the fair value of goodwill with its carrying amount. We recognize an impairment for
the amount by which the carrying amount exceeds the fair value. We generally use both an income approach utilizing the discounted
cash flow method ("DCF") and a market approach utilizing the public company market multiple method, when testing for impairment.
In the third quarter of 2020, changes in facts and circumstances and general market declines from COVID-19 resulted in
reduced operating results. We considered these circumstances and the potential long-term impact on cash flows associated with our
reporting units and determined that an indicator of possible impairment existed within our Medical and Industrial reporting units.
Accordingly, we performed a quantitative impairment analysis to determine the fair values of those reporting units. We used both an
income approach utilizing the discounted cash flow method ("DCF") and a market approach utilizing the public company market
multiple method. We developed multiple forecasted future cash flow scenarios for the reporting units with varied recovery timing and
sales impact assumptions. Based on the output of the analysis, we determined that the fair values of both the Medical and Industrial
reporting units exceeded their carrying amounts. Accordingly, no impairment charges were required as of July 3, 2020. However, an
impairment charge was required for the Company's in-process R&D.
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates,
and market factors. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding our
future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated future
annual net cash flows, income tax rates, discount rates, revenue growth rates, forecasted gross margins, market multiples, terminal
value and other market factors. This fair value measurement was based on significant inputs not observable in the market and thus
represents a Level 3 fair value measurement. If current expectations of future revenue growth rates and forecasted gross margins, both
in size and timing, are not met, if market factors outside of our control, such as discount rates, change, if market multiples decline, or
if management’s expectations or plans otherwise change, including as a result of the development of our global five-year operating
plan, then one or more of our reporting units might become impaired in the future. The Company will continue to monitor the financial
performance of and assumptions for its reporting units. A future impairment charge for goodwill could have a material effect on the
Company's consolidated financial position and results of operations.
Refer to Note 12. Goodwill and Intangible Assets, in the accompanying notes to the consolidated financial statements for
more information regarding goodwill.
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Operating Segments and Products
Our Chief Executive Officer, who is our Chief Operating Decision Maker (“CODM”), evaluates our product groupings and
measures our business performance in two reportable operating segments: Medical and Industrial. The segments align our products
and service offerings with customer use in medical and industrial markets and are consistent with how the CODM evaluates the
business for the allocation of resources. The CODM allocates resources to and evaluates the financial performance of each operating
segment primarily based on revenues and gross profit.
Medical
In our Medical segment, we design, develop, manufacture, sell and service X-ray imaging components, including X-ray
tubes, digital detectors, high voltage connectors, image-processing software and workstations, 3D reconstruction software, computer-
aided diagnostic software, collimators, automatic exposure control devices, generators, heat exchangers, ionization chambers and
buckys. These components are used in a range of medical imaging applications, including CT, mammography, oncology, cardiac,
surgery, dental, and for other diagnostic radiography uses.
Our X-ray imaging components are sold primarily to OEM customers. These OEM customers then design-in our products
into their X-ray imaging systems for a variety of medical modalities. A substantial majority of medical X-ray imaging OEMs globally
are our customers, and many of these have been customers for over 25 years. We believe one of the reasons for customer loyalty is
that our hardware and software products are tightly integrated with our customers’ systems. We work very closely with our customers
to create custom built components for their systems based on technology platforms that we have developed. Because our products are
often customized for our customers’ specific equipment, it can be costly and complex for our customers to switch to another provider.
Once our components are designed into our customer’s equipment, our customers will typically continue to use us to supply any
replacement components and for service and support for that equipment. Some of our products are also included in product
registrations for our customer’s equipment that require regulatory approval to change. In addition to sales directly to OEM customers,
we also sell our products to independent service companies and distributors and directly to end-users for replacement purposes.
We are one of the largest global manufacturers of X-ray components and each year we produce over 27,000 X-ray tubes and
20,000 X-ray detectors. We estimate that our worldwide installed base of products is over 150,000 X-ray tubes, 150,000 X-ray
detectors, 300,000 connect and control components and 15,000 software instances. Replacement and service of our existing installed
base makes up a significant portion of our revenue. Many of our components need to be replaced regularly. For example, CT X-ray
tubes generally need to be replaced every 2 to 4 years. In China, the replacement cycle for CT X-ray tubes can be as frequent as every
6 to 12 months due to high utilization of imaging equipment. Other products such as X-ray Detectors have a useful life of as much as 7
years, but can require service and repairs during their useful life. In addition, our detector customers often elect to upgrade products to
newer technology before the end of a current product’s useful life. X-ray imaging software is a relatively small part of our business
with room to grow and includes consistent maintenance revenue on software licenses.
In China, the government is broadening the availability of healthcare services. As a result, the number of diagnostic X-ray
imaging systems, including CT imaging systems, has grown significantly. We are developing CT X-ray tubes and related subsystems
for Chinese OEMs as they introduce new systems in China. We presently have multi-year pricing agreements for CT tubes with 8
medical X-ray imaging OEMs in China. Over the long-term, our objective is to become the partner of choice both for OEMs and in the
replacement market as CT systems become more widely adopted throughout the Chinese market. In China, despite a COVID-19
related slowdown in the beginning of the year, demand for our products has returned, and full year fiscal 2020 results for China
exceeded our pre-pandemic expectations.
In recent years our growth in China has been impacted by the trade war with the United States. Our business has been
impacted in two principal ways: (1) imports of raw materials from China have become more expensive and (2) importing finished U.S.
manufactured products into China has also become more difficult and more expensive. In order to mitigate the impact of tariffs on
materials imported from China, we have implemented changes to secure more non-China sources of materials used to manufacture our
X-ray imaging products. With respect to imports into China, the additional tariffs imposed by the Chinese government have led to a
decrease in sales of radiographic detectors manufactured outside of China. To help address these issues, as well as to be closer to our
global customer base, we continue to expand manufacturing capabilities at our facilities in China, Germany and the Philippines and
also implemented local sourcing strategies to lower our costs and offer local content. This local-for-local strategy has been well
received by both our local customers as well as global OEMs, and acts as a natural hedge against trade wars and other potential supply
chain disruptions.
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Industrial
In our Industrial segment, we design, develop, manufacture, sell and service X-ray imaging products for use in a number of
markets, including security applications for cargo screening at ports and borders and also baggage screening at airports, and
nondestructive testing and inspection applications used in a number of other vertical markets. Our Industrial products include
Linatron® X-ray linear accelerators, X-ray tubes, digital detectors and high voltage connectors. In addition, we license proprietary
image-processing and detection software designed to work with other Varex products to provide packaged sub-assembly solutions to
our Industrial customers. Our Industrial business benefits from the research and development investment as well as manufacturing
economies of scale on the Medical side of our business, as we continue to find new applications for our technology. Along with more
favorable pricing dynamics, this allows us to generally achieve higher gross profit for Industrial products relative to our Medical
business. In addition, our Industrial business benefits from our long-term service agreements for our Linatron® products.
The security market primarily consists of airport security for carry-on baggage, checked baggage and palletized cargo, as well
as cargo security for the screening of trucks, trains and cargo containers at ports and borders. The end customers for border protection
systems are typically government agencies, many of which are in oil-based economies and war zones where there has been significant
year over year variation in buying patterns.
Non-destructive testing and inspection verticals utilize X-ray imaging to scan items for inspection of manufacturing defects
and product integrity in a wide range of industries including the aerospace, automotive, electronics, oil and gas, food packaging, metal
castings and 3D printing industries. In addition, new applications for X-ray sources are being developed, such as sterilization of food
and its packaging. We provide X-ray sources, digital detectors, high voltage connectors and image processing software to OEM
customers, system integrators and manufacturers in a variety of these verticals. We believe that the non-destructive testing market
represents a significant growth opportunity for our business and we are actively pursuing new potential applications for our products.
The economic downturn triggered by the COVID-19 pandemic has reduced the demand for X-ray imaging equipment utilized
in the non-destructive testing market as manufacturers have focused on cash preservation and have reduced spending for capital
equipment. Additionally, the unprecedented decrease in passenger air traffic has led to decrease in demand in the security market. The
Company expects uncertainty in demand to continue for at least the remainder of the current calendar year.
Fiscal Year
Our fiscal year is the 52- or 53-week period ending on the Friday nearest September 30. Fiscal year 2020 was the 53-week
period that ended October 2, 2020, fiscal year 2019 was the 52-week period that ended September 27, 2019, and fiscal year 2018 was
the 52-week period ended September 28, 2018. Set forth below is a discussion of our results of operations for fiscal years 2020, 2019
and 2018.
Comparison of Results of Operations for Fiscal Year 2020 and 2019
Our annual report on Form 10-K for the fiscal year ended September 27, 2019, filed December 20, 2019, includes a
discussion and analysis of our year-over-year changes, financial condition, and results of operations for the fiscal years ended
September 27, 2019 and September 28, 2018 in Item 7 of Part II therein.
Revenues, net
(In millions)
Medical
Industrial
Total revenues, net
Medical as a percentage of total revenues
Industrial as a percentage of total revenues
2020
% Change
2019
% Change
2018
$
$
584.5
153.8
738.3
79 %
21 %
(2)%
(16)%
(5)%
$
$
596.8
183.8
780.6
76 %
24 %
(1)%
7%
1%
$
$
602.0
171.4
773.4
78 %
22 %
Medical revenues decreased $12.3 million primarily due to decreased sales of X-ray tubes and digital detectors for oncology,
dental, mammography and fluoroscopic applications, offset by increase in sales of OEM X-ray tubes for CT applications and full year
impact of revenues related to the acquisition of Direct Conversion in April of 2019.
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Industrial revenues decreased $30.0 million due to decreased sales of X-ray tubes for airport security, digital detectors for
inspection applications and were partially offset by the full year impact of revenues related to the acquisition of Direct Conversion in
April of 2019.
Revenues by Region
(In millions)
Americas
EMEA
APAC
Total revenues, net
Americas as a percentage of total revenues
EMEA as a percentage of total revenues
APAC as a percentage of total revenues
2020
% Change
2019
% Change
2018
$
$
255.0
231.5
251.8
738.3
35 %
31 %
34 %
(10) % $
(14) %
10 %
(5) % $
282.6
269.0
229.0
780.6
36 %
34 %
29 %
2 % $
6 %
(6) %
1 % $
275.8
254.5
243.1
773.4
36 %
33 %
31 %
The Americas revenues decreased $27.6 million primarily due to decreased sales of X-ray tubes, lower sales of digital
detectors and computer-aided detection software as a result of the COVID-19 pandemic. EMEA revenues were also impacted by
COVID-19, and decreased $37.5 million primarily due to decreased sales of digital detectors, lower sales of high voltage cables, and
lower sales of X-ray tubes partially offset by the full year impact of revenues from the acquisition of Direct Conversion in April of
2019. APAC revenues increased $22.8 million primarily due to increased sales of OEM X-ray tubes in China and the full year impact
of revenues from the acquisition of Direct Conversion.
Gross Profit
(In millions)
Medical
Industrial
Total gross profit
Medical gross margin
Industrial gross margin
Total gross margin
2020
% Change
2019
% Change
2018
$
$
136.4
53.8
190.2
23 %
35 %
26 %
(28) % $
(21) %
(26) % $
188.9
67.8
256.7
32 %
37 %
33 %
(1) % $
7 %
1 % $
190.5
63.4
253.9
32 %
37 %
33 %
Gross margin decreased for fiscal year 2020 compared to 2019. The gross profit for fiscal year 2020 included $22.2 million
of restructuring and product discontinuation charges and purchase price accounting adjustments. The gross profit for fiscal year 2019
included $9.4 million of restructuring charges and purchase price accounting adjustments. The medical segment gross margin in 2020
decreased primarily due to restructuring and product discontinuation charges, higher manufacturing costs, and unfavorable product
mix. The industrial segment gross margin in 2020 decreased primarily due to lower sales volume and higher manufacturing costs.
Operating Expenses
(In millions)
Research and development
As a percentage of total revenues
Selling, general and administrative
As a percentage of total revenues
Impairment of intangible assets
As a percentage of total revenues
Operating expenses
As a percentage of total revenues
2020
% Change
2019
% Change
2018
$
$
$
$
78.9
10.7 %
142.2
19.3 %
2.8
0.4 %
223.9
30.3 %
1 % $
78.1
10.0 %
(6) % $
83.0
10.7 %
11 % $
128.1
4 % $
123.4
(42) % $
16.4 %
4.8
0.6 %
60 % $
16.0 %
3.0
0.4 %
6 % $
211.0
1 % $
209.4
27.0 %
27.1 %
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Research and Development
Research and development costs for fiscal year 2020 increased to 10.7% of revenues due to higher prototype material costs.
We are committed to investing in research and development efforts to support long-term growth objectives by bringing new and
innovative products to market for our customers.
Selling, General and Administrative
Selling, general and administrative expenses as a percentage of total revenues increased to 19.3% for fiscal year 2020 from
16.4% for fiscal year 2019 due to higher audit and consulting fees associated with the remediation of internal control deficiencies and
increased legal fees for patent litigation. These were partially offset by reductions in personnel and travel related expenses.
Impairment of intangible assets
Impairment of intangible assets decreased for fiscal year 2020 to $2.8 million as compared to $4.8 million for fiscal year
2019. In connection with the July 2019 announcement of the Santa Clara facility shut down we discontinued further efforts on certain
in-process research and development intangible assets. As a result, we recorded a corresponding impairment charge of $4.8 million in
fiscal year 2019. See Note 6. Restructuring, included in the accompanying notes to our consolidated financial statements for further
information.
Interest and Other Expense, Net
The following table summarizes our interest and other expense, net:
(In millions)
Interest income
Interest expense
Other income (expense), net
Interest and other expenses, net
2020
% Change
2019
% Change
2018
$
$
0.1
(31.4)
(7.6)
(38.9)
— % $
49 %
138 %
61 % $
0.1
(21.1)
(3.2)
(24.2)
(50) % $
(3) %
(219) %
29 % $
0.2
(21.7)
2.7
(18.8)
Interest and other expense, net increased in fiscal year 2020 compared to fiscal year 2019, primarily due to increased interest
expense related the issuance of the Convertible Notes in June 2020, early extinguishment of debt and interest rate hedges in September
2020, and increased losses related to equity method investments compared to the prior fiscal year.
Taxes on Earnings
Effective tax rate
Fiscal Years
2020
2019
20.9 %
26.5 %
We had an income tax benefit of $15.2 million and an income tax expense of $5.7 million, for effective rates of 20.9% and
26.5%, for fiscal years 2020 and 2019, respectively.
During fiscal year 2020, our effective tax rate varied from the U.S. federal statutory rate of 21% primarily because of the
favorable impact of U.S. net operating losses to be carried back to tax years with greater U.S. federal statutory rates. These favorable
tax items are mostly offset by the unfavorable impact of additional losses in certain foreign jurisdictions, limitations on interest
expense, and R&D credits for which no benefit is recognized.
During fiscal year 2019, our effective tax rate varied from the U.S. federal statutory rate of 21% primarily because of the
favorable impact of changes to the U.S. corporate tax structure resulting from U.S. Tax Reform, and U.S. research and development
tax credits. These favorable U.S. tax items were offset by losses in certain foreign jurisdictions for which no benefit is recognized as
well as earnings in certain other foreign jurisdictions that are taxed at higher rates.
During fiscal year 2020, U.S. Tax Reform provisions, including GILTI (global intangible low-taxed income), BEAT (base-
erosion anti-abuse tax), FDII (foreign-derived intangible income), limitations on interest expense deductions, and other components, if
applicable, have been included in the calculation of the fiscal year 2020 tax provision. The determination of the tax effects of U.S. Tax
Reform may change following future legislation or further interpretation of U.S. Tax Reform from U.S. Federal and state tax
authorities. These provisions became effective for us during fiscal year 2019. The guidance for accounting for U.S. Tax Reform
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required taxpayers to make an election regarding the accounting for GILTI. This policy election is to either: (1) treat GILTI as a period
cost if and when incurred, or (2) recognize deferred taxes for basis differences that are expected to reverse as GILTI in future years.
We made the accounting policy election to account for GILTI under the period cost method.
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate cash to fund our operations, including working capital and
investing activities. We continue to generate cash from operating activities and believe that our operating cash flow, cash on our
balance sheet and availability under our new ABL Facility will be sufficient to allow us to continue to invest in our existing
businesses, consummate strategic acquisitions and manage our capital structure on a short and long-term basis, and are sufficient to
meet our anticipated operating cash need for at least the next 12 months. The maximum availability under our ABL Facility was
$100.0 million as of October 2, 2020, however, the borrowing base under the ABL Facility fluctuates from month-to-month depending
on the amount of eligible accounts receivable and inventory. See Item 1A. “Risk Factors” for a further discussion. At October 2, 2020
we had $452.8 million in long-term debt and $2.5 million of current maturities of long-term debt, net of deferred issuance costs of
$56.0 million. See Note 10. Borrowings, in the accompanying notes to our consolidated financial statements for more information
regarding our indebtedness.
Cash and Cash Equivalents
The following table summarizes our cash and cash equivalents:
(In millions)
October 2, 2020
September 27, 2019
$ Change
% Change
Cash and cash equivalents
$
100.6 $
29.9 $
70.7
236.5 %
Borrowings
The following table summarizes the changes in our debt outstanding:
(In millions)
October 2, 2020
September 27, 2019
$ Change
% Change
Current portion of Term Facility
$
— $
29.4 $
Current portion of Other debt
Revolving Credit Facility
Asset-Based Loan
Term Facility
Convertible Senior Unsecured Notes
Senior Secured Notes
Other debt
Total debt outstanding, gross
Debt issuance costs - Credit Agreement
Unamortized discount and issuance costs -
Convertible Notes
Debt issuance costs - Senior Secured Notes
2.5
—
—
—
200.0
300.0
8.8
511.3
—
(50.4)
(5.6)
1.3
59.0
—
308.6
—
—
2.5
400.8
(5.7)
—
—
Total debt outstanding, net
$
455.3 $
395.1 $
(29.4)
1.2
(59.0)
—
(308.6)
200.0
300.0
6.3
110.5
5.7
(50.4)
(5.6)
60.2
(100.0) %
92.3 %
(100.0) %
N/A
(100.0) %
N/A
N/A
252.0 %
27.6 %
(100.0) %
N/A
N/A
15.2 %
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Cash Flows
(In millions)
Net cash flow provided by (used in):
Operating activities
Investing activities
Financing activities
Effects of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Fiscal Years
2020
2019
2018
$
$
13.2 $
71.9 $
(26.9)
83.6
0.9
(93.2)
(0.1)
(0.7)
70.8 $
(22.1) $
85.3
(25.2)
(90.4)
(0.5)
(30.8)
Net Cash Provided by Operating Activities. Cash from operating activities consists primarily of net earnings adjusted for
certain non-cash items, including share-based compensation, depreciation, amortization and impairment of intangible assets, inventory
write-downs, deferred income taxes, amortization of deferred loan costs, income and loss from equity investments and the effect of
changes in operating assets and liabilities.
For fiscal year 2020, compared to fiscal year 2019, net cash provided by operating activities were as follows:
•
•
•
Net losses were $(57.4) million compared to net earnings of $15.8 million,
Non-cash adjustments to net earnings were $84.5 million compared to $51.4 million,
Operating assets and liabilities activity:
◦
◦
◦
◦
◦
◦
Accounts receivable decreased by $17.7 million compared to a decrease of $14.8 million,
Inventories increased by $42.7 million compared to an increase of $11.1 million,
Prepaid expenses and other assets increased $9.3 million compared to a decrease of $4.3 million,
Accounts payable increased by $14.3 million compared to a decrease of $9.0 million,
Accrued liabilities and other long-term operating liabilities increased by $8.1 million compared to an increase of
$10.9 million, and
Deferred revenues decreased by $2.0 million compared to a decrease of $5.2 million.
Net cash used in investing activities. Cash used in investing activities was $26.9 million and $93.2 million for the fiscal years
2020 and 2019, respectively. Net cash used in investing activities for fiscal year 2020 related primarily to the building of our facility in
the Netherlands as well as capital expenditures in our sources and detectors businesses. Net cash used in investing activities for fiscal
year 2019 related primarily to the acquisition of 98.2% of the outstanding shares of common stock of Direct Conversion for
$69.5 million in cash, net of cash acquired, and capital expenditures for property plant and equipment of $19.8 million.
Net Cash Provided by (Used in) Financing Activities. Financing activities for the fiscal year 2020 consisted of the issuance of
$200.0 million in aggregate principal amount of 4.00% unsecured convertible senior notes due 2025 (“Convertible Notes”). The net
proceeds from the issuance of the Convertible Notes, after deducting transaction fees, were approximately $193.1 million. In
connection with offering the Convertible Notes, we separately entered into privately negotiated convertible note hedge transactions.
We used $11.2 million of the net proceeds from the issuance of the Convertible Notes to pay the cost of the convertible note hedge
transactions.
Additionally, during fiscal year 2020 we issued $300.0 million aggregate principal amount of 7.875% Senior Secured Notes
due 2027 (the "Senior Secured Notes"). The net proceeds from the Senior Secured Notes after initial purchasers’ discount,
commissions and estimated fees and expenses of $5.6 million, were approximately $294.4 million. We used $267.5 million of the
proceeds from the offering to terminate and repay our previously existing credit agreement.
Financing activities for the fiscal year 2019 primarily consisted of borrowings under our credit agreements of $85.4 million,
repayments of borrowings of $87.0 million, and net proceeds from equity plans of $2.5 million.
Days Sales Outstanding
Trade accounts receivable days sales outstanding (“DSO”) was 66 days and 63 days at October 2, 2020 and September 27,
2019, respectively. Our accounts receivable and DSO are impacted by a number of factors, primarily including the timing of product
shipments, collections performance, payment terms, the mix of revenues from different regions and the effects of economic instability.
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Contractual Obligations
The following table summarizes, as of October 2, 2020, the total amount of future payments due in various future periods:
(In millions)
Operating lease obligations
Principal payments on borrowings
dpiX fixed cost commitment
Dividends to MeVis noncontrolling interest
Supplier equipment acquisition
Payments Due by Period
Total
Fiscal Year
2021
Fiscal Years
2022-2023
Fiscal Years
2024-2025
Beyond
$
34.1 $
7.1 $
10.8 $
6.8 $
511.3
3.2
3.8
10.4
2.5
3.2
0.5
6.3
5.0
—
1.1
4.1
202.9
—
1.1
—
9.4
300.9
—
1.1
—
Total
$
562.8 $
19.6 $
21.0 $
210.8 $
311.4
We lease office space under non-cancelable operating leases. The leases expire at various dates through 2026, excluding
extensions at our option, and contain provisions for rental adjustments, including in certain cases, adjustments based on increases in
the Consumer Price Index. The leases generally contain renewal provisions for varying periods of time.
For further discussion regarding our borrowings, see Note 10. Borrowings, included in the accompanying notes to our
consolidated financial statements.
In October 2013, we entered into an amended agreement with dpiX and other parties that, among other things, provides us
with the right to 50% of dpiX’s total manufacturing capacity produced after January 1, 2014. The amended agreement requires us to
pay for 50% of the fixed costs (as defined in the amended agreement), as determined at the beginning of each calendar year. For the
remainder of calendar year 2020, we estimate that we have fixed cost commitments of $3.2 million related to this amended agreement.
The fixed cost commitment for future periods will be determined and approved by the dpiX board of directors at the beginning of each
calendar year. The amended agreement will continue unless the ownership structure of dpiX changes (as defined in the amended
agreement).
In October 2015, pursuant to a Domination and Profit and Loss Transfer Agreement (the “MeVis Agreement”), we
committed to grant the noncontrolling shareholders of MeVis: (1) an annual recurring net compensation of €0.95 per MeVis share;
and, (2) a put right for their MeVis shares at €19.77 per MeVis share. The annual net payment will continue for the life of the MeVis
Agreement, which we anticipate will continue for as long as we remain as the controlling shareholder of MeVis. The put right for the
MeVis shares expired in September 2020. As of October 2, 2020, noncontrolling shareholders together held approximately 0.5 million
shares of MeVis, representing 26.3% of the outstanding shares.
Contingencies
From time to time, we are a party to or otherwise involved in legal proceedings, claims and government inspections or
investigations, customs and duty audits and other matters both inside and outside the United States, arising in the ordinary course of
our business or otherwise. Such matters are subject to many uncertainties and outcomes are not predictable with assurance.
See Part 1, Item 3 of this Annual Report for additional information regarding legal proceedings and Note 13. Commitments
and Contingencies, in the notes to our consolidated financial statements for further information regarding certain of our contractual
obligations and contingencies, which discussion is incorporated herein by reference.
Off-Balance Sheet Arrangements
In conjunction with the sale of our products in the ordinary course of business, and consistent with industry practice, we
provide standard indemnification of business partners and customers for losses suffered or incurred for property damages, death and
injury and for patent, copyright or any other intellectual property infringement claims by any third parties with respect to our products.
The terms of these indemnification arrangements are generally perpetual. Except for losses related to property damages, the maximum
potential amount of future payments we could be required to make under these arrangements is unlimited. As of October 2, 2020, we
have not incurred any material costs to defend lawsuits or settle claims related to these indemnification arrangements. As a result, we
believe the estimated fair value of these arrangements is minimal.
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We also have indemnification obligations to our directors and officers and certain of our employees that serve as officers or
directors of our foreign subsidiaries that may require us to indemnify our directors and officers and those certain employees against
liabilities that may arise by reason of their status or service as directors or officers, and to advance their expenses incurred as a result
of any legal proceeding against them as to which they could be indemnified.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements and related disclosures in conformity with GAAP requires us to
make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and
assumptions are based on historical experience and on various other factors that we believe are reasonable under the circumstances.
Our critical accounting policies that are affected by accounting estimates require us to use judgments, often as a result of the need to
make estimates and assumptions regarding matters that are inherently uncertain, and actual results could differ materially from these
estimates. For a discussion of how these estimates and other factors may affect our business, see Item 1A. “Risk Factors.”
We periodically review our accounting policies, estimates and assumptions and make adjustments when facts and
circumstances dictate. Such accounting policies require us to use judgments, often as a result of the need to make estimates and
assumptions regarding matters that are inherently uncertain, and actual results could differ materially from these estimates. For a
discussion of how these estimates and other factors may affect our business, see Item 1A. “Risk Factors.”
Inventories
Inventories are valued at the lower of cost or net realizable value. Costs include materials, labor and manufacturing overhead
and is computed using standard cost (which approximates actual cost) on a first-in-first-out basis. We evaluate the carrying
value of our inventories taking into consideration such factors as historical and anticipated future sales compared to quantities on hand
and the prices we expect to obtain for products in our various markets. We adjust excess and obsolete inventories to net realizable
value and write-downs of excess and obsolete inventories are recorded as a component of cost of revenues.
Goodwill and Intangible Assets
Goodwill is initially recorded when the purchase price paid for a business acquisition exceeds the estimated fair value of the
net identified tangible and intangible assets acquired. Our future operating performance will be impacted by the future amortization of
these acquired intangible assets and potential impairment charges related to these intangibles or to goodwill if indicators of impairment
exist. The allocation of the purchase price from business acquisitions to goodwill and intangible assets could have a material impact on
our future operating results. In addition, the allocation of the purchase price of the acquired businesses to goodwill and intangible
assets requires us to make significant estimates and assumptions, including estimates of future cash flows expected to be generated by
the acquired assets and the appropriate discount rate for those cash flows. Should conditions differ from management’s estimates at the
time of the acquisition, material write-downs of intangible assets and/or goodwill may be required, which would adversely affect our
operating results.
We evaluate goodwill for impairment at least annually or whenever an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying amount. The evaluation includes consideration of qualitative
factors including industry and market considerations, overall financial performance, and other relevant events and factors affecting the
reporting unit. If we determine that a quantitative analysis is necessary, we perform a quantitative analysis which consists of a
comparison of the fair value of a reporting unit against its carrying amount, including the goodwill allocated to each reporting unit. We
determine the fair value of our reporting units based on a combination of income and market approaches. The income approach is
based on the present value of estimated future cash flows of the reporting units and the market approach is based on a market multiple
calculated for each reporting unit based on market data of other companies engaged in similar business. If the carrying amount of the
reporting unit is in excess of its fair value, the difference between the fair value and carrying amount is recorded as an impairment
loss. The impairment test for intangible assets with indefinite useful lives, if any, consists of a comparison of fair value to carrying
value, with any excess of carrying value over fair value being recorded as an impairment loss.
In fiscal years 2020, 2019 and 2018, we performed the annual goodwill impairment test for our two reporting units and found
no impairment. We performed the annual goodwill analysis as of the first day of the fourth quarter of each fiscal year (using balances
as of the end of the third quarter of that fiscal year). For both reporting units, based upon the annual goodwill analysis that we
performed as of the first day of the fourth quarter of the respective fiscal years, either a quantitative analysis of the impairment test
was not completed based on evaluation of qualitative factors or, if quantitative analysis was completed, the fair value was substantially
in excess of carrying value. However, significant changes in our projections about our operating results or other factors could cause us
to make interim assessments of impairments in any quarter that could result in some or all of the goodwill being impaired.
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In the third quarter of 2020, changes in facts and circumstances and general market declines from COVID-19 resulted in
reduced operating results. We considered these circumstances and the potential long-term impact on cash flows associated with our
reporting units and determined that an indicator of possible impairment existed within our Medical and Industrial reporting units.
Accordingly, we performed a quantitative impairment analysis to determine the fair values of those reporting units. We used both an
income approach utilizing the discounted cash flow method ("DCF") and a market approach utilizing the public company market
multiple method. We developed multiple forecasted future cash flow scenarios for the reporting units with varied recovery timing and
sales impact assumptions. Based on the output of the analysis, we determined that the fair values of both the Medical and Industrial
reporting units substantially exceeded their carrying amounts. Accordingly, no impairment charges were required as of July 3, 2020.
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates,
and market factors. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding our
future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated future
annual net cash flows, income tax rates, discount rates, revenue growth rates, forecasted gross margins, market multiples, terminal
value and other market factors. This fair value measurement was based on significant inputs not observable in the market and thus
represents a Level 3 fair value measurement. If current expectations of future revenue growth rates and forecasted gross margins, both
in size and timing, are not met, if market factors outside of our control, such as discount rates, change, if market multiples decline, or
if management’s expectations or plans otherwise change, including as a result of the development of our global five-year operating
plan, then one or more of our reporting units might become impaired in the future. The Company will continue to monitor the financial
performance of and assumptions for its reporting units. A future impairment charge for goodwill could have a material effect on the
Company's consolidated financial position and results of operations.
We will continue to make assessments of impairment on an annual basis or more frequently if indicators of potential
impairment arise.
Taxes on Earnings
Current income tax expense or benefit is the amount of income taxes expected to be payable or receivable for the current
year. Deferred income tax liabilities or assets are established for the expected future tax consequences resulting from the differences in
financial reporting and tax bases of assets and liabilities. A valuation allowance is provided if it is more likely than not that some or all
of the deferred tax assets will not be realized. In addition, we provide reserves for uncertain tax positions when such tax positions do
not meet the recognition thresholds or measurement standards prescribed by the authoritative guidance for accounting for income
taxes. Amounts for uncertain tax positions are adjusted in periods when new information becomes available or when positions are
effectively settled. Interest and penalties related to uncertain tax positions are recognized as a component of income tax expense.
On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts
and Jobs Act of 2017 (“U.S. Tax Reform”). U.S. Tax Reform significantly revised the U.S. corporate income tax structure including a
lower corporate statutory rate and changes to the way foreign earnings are taxed. U.S. GAAP requires that the impact of tax legislation
be recognized in the period in which the law is enacted. In accordance with these rules, we are including the impact of certain
provisions of U.S. Tax Reform to the extent they are effective during the current reporting period.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the
COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable
income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be
carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. On July 2, 2020, the US
Treasury Department issued a regulation providing an election to waive NOL carryback to a former consolidated group. We have
evaluated the impact of the CARES Act and concluded the NOL carryback provision of the CARES Act will result in a material cash
tax benefit. The CARES Act retroactively clarified treatment of qualified improvement property as 15-year property instead of 39-year
property as defined under U.S. Tax Reform. Certain qualified improvement property is also eligible for bonus depreciation.
Recent Accounting Standards or Updates Not Yet Effective
See Note 1. Summary of Significant Accounting Policies, of the notes to the consolidated financial statements for a
description of recent accounting standards, including the expected dates of adoption and the estimated effects on our consolidated
financial statements.
52
Table of Contents
Backlog
Backlog is the accumulation of all orders for which revenues have not been recognized and are still considered valid. Backlog
also includes a small portion of billed service contracts that are included in deferred revenue. Our total backlog at October 2, 2020 was
$207.6 million, a decrease of 21.7% from the backlog of $265.2 million at September 27, 2019.
Orders may be revised or canceled, either according to their terms or as customers’ needs change. Consequently, it is difficult
to predict with certainty the amount of backlog that will result in revenues. We perform a quarterly review to verify that outstanding
orders in the backlog remain valid. Aged orders that are not expected to be converted to revenues are deemed dormant and are
reflected as a reduction in the backlog amounts in the period identified.
In addition to orders for which revenues have not been recognized and are still considered valid, we have pricing agreements
with many of our established customers that span multi-year periods. These pricing agreements include volume ranges under which
orders are placed.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks
We are exposed to four primary types of market risks: foreign currency exchange rate risk, credit and counterparty risk,
interest rate risk and commodity price risk.
Foreign Currency Exchange Rate Risk
A significant portion of our customers are outside the United States, while our financial statements are denominated, and our
products are generally priced in U.S. Dollars. A strong U.S. Dollar may result in pricing pressure for our customers that are located
outside the United States and that conduct their businesses in currencies other than the U.S. Dollar. Such pricing pressure has caused,
and could continue to cause, some of our customers to ask for discounted prices, delay purchasing decisions, consider moving to in-
sourcing supply of components or migrating to lower cost alternatives. In addition, because our business is global and some payments
may be made in local currency, fluctuations in foreign currency exchange rates can impact our revenues and expenses and/or the
profitability in U.S. Dollars of products and services that we provide in foreign markets.
We may enter into foreign currency forward and option contracts with financial institutions to protect against foreign
exchange risks associated with certain existing assets and liabilities, and net investments in foreign subsidiaries. We generally hedge
portions of forecasted foreign currency, typically for one month. In addition, we hold a cross-currency swap between the Euro and
U.S. Dollar as a Net Investment Hedge of our acquisition of Direct Conversion. Depending on the spot rate between the Euro and
U.S. Dollar at the time of settlement and whether we have sufficient Euros available, we may have to borrow incrementally in U.S.
Dollars to settle this obligation. However, we may choose not to hedge certain foreign exchange exposures for a variety of reasons
including, but not limited to, accounting considerations or the prohibitive economic cost of hedging particular exposures.
Credit and Counterparty Risk
We use a centralized approach to manage substantially all of our cash and to finance our operations. Our cash and cash
equivalents may be exposed to a concentration of credit risk and we may also be exposed to credit risk and interest rate risk to the
extent that we enter into credit facilities.
We perform ongoing credit evaluations of our customers and we maintain what we believe to be strong credit controls in
evaluating and granting customer credit, including performing ongoing evaluations of our customers’ financial condition and
creditworthiness and often using letters of credit and requiring certain industrial customers to provide a down payment.
Interest Rate Risk
Borrowings under our ABL Facility bear interest at floating interest rates. At October 2, 2020, we had no borrowings subject
to floating interest rates. See Note 10. Borrowings, of the notes to our consolidated financial statements for further information.
Commodity Price Risk
We are exposed to market risks related to volatility in the prices of raw materials used in our products. The prices of these
raw materials fluctuate in response to changes in supply and demand fundamentals and our product margins and level of profitability
tend to fluctuate with changes in these raw materials prices. We try to protect against such volatility through various business
53
strategies. During the fiscal year ended October 2, 2020, we did not have any commodity derivative instruments in place to manage
our exposure to price changes.
Item 8. Financial Statements and Supplementary Data.
The Consolidated Financial Statements and Schedules listed in the Index to Financial Statements, Schedules and Exhibits on
page F-1 are filed as part of this Annual Report and incorporated in this Item 8 by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange
Commission and to ensure that such information required to be disclosed is accumulated and communicated to management, including
our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.
The Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), with assistance from other members of
management, have evaluated the effectiveness of our disclosure controls and procedures as of October 2, 2020 and, based on their
evaluation, the CEO and CFO have concluded that the disclosure controls and procedures were not effective as of such date due to the
material weaknesses in internal control over financial reporting described in "Management's Annual Report on Internal Control Over
Financial Reporting" below.
Management's Annual Report on Internal Control Over Financial Reporting
Management, under the supervision of our CEO and CFO, is responsible for establishing and maintaining adequate internal
control over our financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes
those policies and procedures that:
(1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the
dispositions of our assets;
(2) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in
accordance with appropriate authorizations; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on our financial statements.
Our management, including the CEO and CFO, believes that any disclosure controls and procedures or internal control over
financial reporting, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of internal controls are met. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, we assessed the effectiveness of our internal control
over financial reporting as of October 2, 2020, using the criteria described in Internal Control-Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As a result of that evaluation, our management
concluded that the Company's internal control over financial reporting was not effective as of October 2, 2020, the end of the period
covered by this Form 10-K, because of the material weaknesses in our internal control over financial reporting.
54
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or
detected on a timely basis.
We have identified the following control deficiencies that constituted material weaknesses in our internal control over
financial reporting as of October 2, 2020:
•
•
Control Environment: We did not maintain an effective control environment as we had an insufficient complement of
resources with the requisite knowledge and experience to create the proper environment for effective internal control over
financial reporting such that corrective activities to our internal control over financial reporting are appropriately applied,
prioritized, and implemented in a timely manner.
Risk Assessment: We did not design and maintain an effective risk assessment process to identify and assess the risks in our
business processes. Specifically, we did not adequately identify new and evolving risks of material misstatement and design
and implement controls to address those risks as a result of changes to our business operating environment.
These material weaknesses contributed to the following material weaknesses:
•
•
Inventory and cost of revenues: We did not design and maintain effective controls related to accounting for inventory and
cost of revenues, including maintaining effective business process controls to prevent or detect misstatements in the
existence, accuracy, and presentation and disclosure of inventory. Specifically we did not maintain effective controls related
to the verification of inventory at third party vendor locations and the presentation and disclosure of inventory classification.
Financial Reporting: We did not design and maintain effective controls over our financial reporting close process to prevent
or detect material misstatements in our financial statements. Specifically, we did not design and maintain effective controls
related to the completeness, accuracy and elimination of intercompany balances and ensuring appropriate segregation of
duties as it relates to the preparation and review of journal entries.
The deficiencies relating to inventory and financial reporting resulted in immaterial audit adjustments and out of period
adjustments to the Company's consolidated financial statements for the fiscal year ended and as of October 2, 2020. Additionally,
these control deficiencies could result in misstatements impacting the aforementioned accounts or disclosures that would result in a
material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
The effectiveness of the Company’s internal control over financial reporting as of October 2,2020 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included in “Item 8.
Financial Statements and Supplementary Data.”
Remediation of Previously Reported Material Weaknesses in Fiscal Year 2019 Form 10-K
We previously identified and disclosed in our Annual Report on Form 10-K for the year ended September 27, 2019, the
following material weaknesses in our internal control over financial reporting, of which certain aspects have been remediated:
• We did not design and maintain effective controls related to accounting for revenue, deferred revenue and related accounts
receivable, including maintaining business process controls to prevent or detect misstatements in the processing of customer
transactions. Specifically, we did not design and maintain effective controls related to the review of the completeness and
accuracy of customer order entry, quantity and pricing. Additionally, we did not design and maintain effective controls for
the effect of the adoption of and continuous accounting for Revenue from Contracts with Customers (“ASC 606”) to prevent
and detect misstatements.
• We did not design and maintain effective controls related to accounting for inventory and cost of revenues, including
maintaining effective business process controls to prevent or detect misstatements in the accuracy and valuation of inventory.
Specifically, we did not maintain effective controls related to inventory count procedures and the valuation of inventory at
lower of cost and net realizable value.
• We did not design and maintain effective controls over our financial reporting close process to prevent or detect material
misstatements in our financial statements. Specifically, we did not maintain an effective business performance monitoring
review control at our international entities, design and maintain controls to identify post-close events which occur before the
55
financial statements are available to be issued and design and maintain effective control over the review of the statement of
cash flows.
During the first three quarters of fiscal 2020, we substantially completed our plans to remediate certain of these material
weaknesses by performing the following:
•
•
•
Implementing or enhancing controls in the revenue business process over (i) standard contract reviews, (ii) customer invoice
reviews, (iii) review of monthly sales order changes and (iv) an addition of a control that reviews and approves the summary
of service billings for the period, and (v) improved our controls for the continuing accounting of ASC 606.
Implementing or enhancing controls in the inventory business process over (i) inventory count procedures, (ii) review of
inventory adjustments and approvals, (iii) review over variance analysis, and (iv) review of the valuation of inventory at
lower of cost and net realizable value.
Implementing or enhancing controls in the financial reporting close process over (i) international business performance
reviews to include improved documentation of items for follow-up and resolution, (ii) identification of post-close events
which occur before the financial statements are available to be issued and (iii) the review of the statement of cash flows.
During the quarter ended October 2, 2020, we completed the testing and evaluation of the operating effectiveness of the
newly designed and implemented and enhanced controls and concluded these material weaknesses have been remediated as of October
2, 2020.
Ongoing Remediation Efforts and Status of Remaining Material Weaknesses
We continue to devote substantial effort to remediating the identified material weaknesses. We are continuing to enhance our
overall control environment through the following:
•
•
•
•
Control Environment: During fiscal year 2020, management invested significantly in the quality of our accounting talent
including management, technical, process improvement and financial system roles. Additionally, we implemented programs
to: improve our talent acquisition and retention platforms; enhance technical, transactional and control knowledge of our
accounting teams; and create a culture of accountability and control. These programs have significantly improved the stability
of our global accounting organization. While significant progress has been made in response to the material weakness,
additional time is needed to demonstrate sustainability as it relates to our internal control over financial reporting and
improvements made to our complement of resources.
Risk Assessment: We continue to enhance our comprehensive risk assessment process to identify, design, implement, and re-
evaluate our control activities, including monitoring controls related to the design and operating effectiveness of certain
control activities pertaining to our business process environment.
Inventory and cost of revenues: We continue to enhance controls related to the verification of inventory at third party vendor
locations as well as our controls over presentation and disclosure of inventory classification.
Financial Reporting: We continue to enhance controls related to the monitoring of journal entry posting rights and
responsibilities. To the extent certain conflicts remain, we will implement controls to review the remaining conflicts and
permissions and document the appropriate control that effectively mitigates the risk associated with the conflicts and/or
permissions. We also continue to enhance the design of controls over the completeness, accuracy and elimination of
intercompany balances.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the quarter ended October 2, 2020 that have
materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
None.
56
Table of Contents
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers
The information required by this item with respect to our executive officers is set forth in Part I of this Annual Report on
Form 10-K and information relating to the availability of our code of conduct for executive officers and directors is set out below. The
other information required by this item is incorporated by reference from our definitive proxy statement for the 2021 Annual Meeting
of Stockholders under the captions “Proposal One — Election of Directors.” and “Stock Ownership-Section 16(a) Beneficial
Ownership Reporting Compliance.” Our definitive proxy statement for the 2021 Annual Meeting of Stockholders will be filed with the
SEC no later than 120 days after October 2, 2020.
Code of Conduct
We have adopted a Code of Conduct that applies to all of our executive officers and directors. The Code of Conduct is
available on our website at http://www.vareximaging.com.
We intend to satisfy the disclosure requirements under Item 5.05(c) of Form 8-K regarding an amendment to, or waiver from,
a provision of the Code of Conduct that applies to our principal executive officer, principal financial officer, principal accounting
officer or controller or persons performing similar functions by posting such information on our website, specified above.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference from our definitive proxy statement for the 2021 Annual
Meeting of Stockholders under the caption “Executive Compensation.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Equity Compensation Plan Information
The following table provides information as of October 2, 2020 with respect to the shares of our common stock that may be
issued under our existing equity compensation plans.
Plan Category (amounts in thousands except per share data)
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights (2)
(a)
Weighted average
exercise price of
outstanding options,
warrants, and rights (1)
(b)
Number of securities
remaining available for
future issuance under
equity compensation
plans (3) (excluding
securities reflected in
columns (a) and (b))
3,677 $
—
3,677 $
29.23
—
29.23
5,328
—
5,328
(1) The weighted average exercise price does not take into account the shares issuable upon vesting of outstanding RSUs and DSUs, which have no exercise price.
(2) Consists of stock options, RSUs, and DSUs granted under the Varex Imaging Corporation 2017 Omnibus Stock Plan and the 2020 Stock Plan. Excludes purchase
rights under the ESPP.
(3) Includes 4,786 thousand shares available for future issuance under the 2020 Stock Plan. Also includes 542 thousand shares available for future issuance under the
ESPP, including shares subject to purchase during the current purchase period, which commenced on November 2, 2020 (the exact number of which will not be known
until the purchase date on April 30, 2021). Subject to the number of shares remaining in the share reserve, the maximum number of shares purchasable by any
participant on any one purchase date for any purchase period, including the current purchase period may not exceed 2,000 shares.
The information required by this item with respect to the security ownership of certain beneficial owners and the security
ownership of directors and executive officers is incorporated by reference from our definitive proxy statement for the 2021 Annual
Meeting of Stockholders under the caption “Stock Ownership—Beneficial Ownership of Certain Stockholders, Directors and
Executive Officers.”
57
Item 13. Certain Relationships and Related Transactions and Director Independence.
The information required by this item with respect to certain relationships and related transactions is incorporated by
reference from our definitive proxy statement for the 2021 Annual Meeting of Stockholders under the caption “Certain Relationships
and Related Transactions.” The information required by this item with respect to director and committee member independence is
incorporated by reference from our definitive proxy statement for the 2021 Annual Meeting of Stockholders under the caption
“Proposal One-Election of Directors.”
Item 14. Principal Accountant Fees and Services.
The information required by this item is incorporated by reference from our definitive proxy statement for the 2021 Annual
Meeting of Stockholders under the caption “Proposal Four-Ratification of the Appointment of Our Independent Registered Public
Accounting Firm.”
58
Table of Contents
PART IV
Item 15. Exhibits, Consolidated Financial Statements and Financial Statement Schedules.
Documents filed as part of this annual report include:
1.
2.
3.
Consolidated Financial Statements. We have filed the consolidated financial statements listed in the index to
Consolidated Financial Statements, Schedules and Exhibits on page F-1 as part of this annual report on Form-10K.
Financial Statement Schedules and Other. All financial statement schedules have been omitted because they are not
applicable, or not material or the required information is shown in the consolidated financial statements or the notes
thereto.
Exhibits. The exhibits listed below are filed as part of this annual report on Form 10-K.
Exhibit
Number
Description
2.1*
2.2*
2.3*
2.4*
2.5*
3.1*
3.2*
4.1
4.2*
4.3
10.1*
10.2*
10.3*
Separation and Distribution Agreement, dated as of January 27, 2017, by and between Varian and (incorporated
by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed January 30, 2017).
Master Purchase and Sale Agreement, dated as of December 21, 2016, by and between Varian Medical
Systems, Inc. and PerkinElmer, Inc. (incorporated by reference to Exhibit 2.2 to the Company’s Amendment
No. 3 to the Registration Statement on Form 10 filed December 30, 2016).
Amendment No.1 to Master Purchase and Sale Agreement, entered into as of January 17, 2017, by and between
PerkinElmer, Inc. and Varian Medical Systems, Inc. (incorporated by reference to Exhibit 2.2 to the Company’s
Quarterly Report on Form 10-Q filed May 12, 2017).
Amendment No.2 to Master Purchase and Sale Agreement, entered into as of April 28, 2017, by and between
PerkinElmer, Inc. and Varex Imaging Corporation (incorporated by reference to Exhibit 2.4 to the Company’s
Quarterly Report on Form 10-Q filed May 12, 2017).
Assignment and Assumption Agreement, dated January 27, 2017, by and between Varian Medical Systems, Inc.
and Varex Imaging Corporation (incorporated by reference to Exhibit 2.3 to the Company’s Quarterly Report
on Form 10-Q filed May 12, 2017).
Amended and Restated Certificate of Incorporation, dated January 27, 2017 (as corrected December 11, 2017)
(incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed November 27,
2018).
Amended and Restated Bylaws of Company, as amended January 27, 2017 (incorporated by reference to
Exhibit 3.2 to the Company’s Current Report on Form 8-K filed January 30, 2017).
Information required by Item 202(a) through (d) and (f) of Regulation S-K for each class of Company securities
that is registered under Section 12 of the Exchange Act.
Indenture, dated June 9, 2020, by and among Varex Imaging Corporation and Wells Fargo Bank, National
Association, as Trustee, including form of 4.00% Convertible Senior Notes due 2025 (incorporated by reference
to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed June 9, 2020).
Indenture, dated as of September 30, 2020, by and among Varex Imaging Corporation, the Guarantors party
thereto and Wells Fargo Bank, National Association, as trustee and collateral agent, including the form of
7.875% Senior Secured Notes due 2027 as Exhibit A.
Transition Services Agreement, dated as of January 27, 2017, by and between Varian and Company
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 30,
2017).
Tax Matters Agreement, dated as of January 27, 2017 by and between Varian and Company (incorporated by
reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed January 30, 2017).
Employee Matters Agreement, dated as of January 27, 2017, by and between Varian and Company
(incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed January 30,
2017).
59
Table of Contents
10.4*
10.5*
10.6*†
10.7*†
10.8*†
10.9*†
10.10*†
10.11*†
10.12*†
10.13*†
10.14*†
10.15*†
10.16*†
10.17*†
10.18
10.19*
10.20*
10.21*
10.22*
Intellectual Property Matters Agreement, dated as of January 27, 2017, by and between Varian and Company
(incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed January 30,
2017).
Trademark License Agreement, dated as of January 27, 2017, by and between Varian and Company
(incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed January 30,
2017).
Varex Imaging Corporation 2017 Omnibus Stock Plan (incorporated by reference to Exhibit 99.1 to the
Company’s Form S-8, filed January 27, 2017).
Form of Nonqualified Stock Option Agreement under the 2017 Omnibus Stock Plan (incorporated by reference
to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 16, 2017).
Form of Restricted Stock Unit Award Agreement under the 2017 Omnibus Stock Plan (incorporated by
reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed February 16, 2017).
Varex Imaging Corporation 2017 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit
99.2 to the Company’s Form S-8, filed January 27, 2017).
Varex Imaging Corporation Management Incentive Plan (incorporated by reference to Exhibit 10.9 to the
Company’s Current Report on Form 8-K filed January 30, 2017).
Form of Change in Control Agreement (incorporated by reference to Exhibit 10.10 to the Company’s Current
Report on Form 8-K filed January 30, 2017).
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.11 to the Company’s Current
Report on Form 8-K filed January 30, 2017).
Varex Imaging Corporation 2016 Deferred Compensation Plan (incorporated by reference to Exhibit 10.6 to
Amendment No. 2 to Form 10 filed by the Company on December 8, 2016).
Varex Imaging Corporation Frozen Deferred Compensation Plan (incorporated by reference to Exhibit 10.7 to
Amendment No. 2 to Form 10 filed by the Company on December 8, 2016).
Form of Grant Agreement for Deferred Stock Units under the 2017 Omnibus Stock Plan (incorporated by
reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K filed December 13, 2017.
Form of Grant Agreement for Deferred Stock Units under the 2017 Omnibus Stock Plan (incorporated by
reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K filed December 20, 2019).
Varex Imaging Corporation 2020 Omnibus Stock Plan, including the Form of Nonqualified Stock Option
Agreement, the Form of Restricted Stock Unit Agreement and the Form of Grant Agreement – Deferred Stock
Units (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on
February 14, 2020).
Credit Agreement dated as of September 30, 2020, by and among Varex Imaging Corporation, Varex Imaging
West, LLC, Varex Imaging Deutschland AG, the Guarantors party thereto and Bank of America N.A., as
administrative and collateral agent, and the lenders party thereto.
Form of Base Convertible Bond Hedge Confirmation, dated June 4, 2020, between Varex Imaging Corporation
and each of the counterparties thereto (incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K filed June 9, 2020).
Form of Base Warrant Confirmation, dated June 4, 2020, between Varex Imaging Corporation and each of the
counterparties thereto (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K
filed June 9, 2020).
Form of Additional Convertible Bond Hedge Confirmation, dated June 5, 2020, between Varex Imaging
Corporation and each of the counterparties thereto (incorporated by reference to Exhibit 10.3 to the Company's
Current Report on Form 8-K filed June 9, 2020).
Form of Additional Warrant Confirmation, dated June 5, 2020, between Varex Imaging Corporation and each of
the Counterparties (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K
filed June 9, 2020).
60
Table of Contents
10.23*
10.24*†
Share Purchase Agreement dated March 21, 2019 between Varex Imaging Corporation, Varex Imaging
Investments, B.V. and certain shareholders of Direct Conversions AB (publ) (incorporated by reference to
Exhibit 10.1 to Company's Quarterly Report on Form 10-Q filed on May 8, 2019).
Transition Agreement dated February 11, 2020 between Clarence Verhoef and Varex Imaging Corporation
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on May 13,
2020).
10.25†
Offer Letter dated June 8, 2020 by Varex Imaging Corporation to Shubham Maheshwari.
21.1
23.1
31.1
31.2
32.1
32.2
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
*
†
++
List of Subsidiaries as of November 3, 2020
Consent of Independent Registered Public Accounting Firm
Chief Executive Officer Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act.
Chief Financial Officer Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act.
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its
XBRL tags are embedded within the Inline XBRL document.
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
Incorporated herein by reference
Management contract or compensatory agreement.
Portions of this exhibit have been omitted pursuant to a confidential treatment request filed pursuant to Rule
24b-2 of the Securities Exchange Act of 1934, as amended.
Item 16. Form 10-K Summary
None
61
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
Date:
November 30, 2020
By:
VAREX IMAGING CORPORATION
/s/ Shubham Maheshwari
Shubham Maheshwari
Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Signature
Capacity
Date
/s/ SUNNY S. SANYAL
Sunny S. Sanyal
/s/ SHUBHAM MAHESHWARI
Shubham Maheshwari
/s/ KEVIN B. YANKTON
Kevin B. Yankton
President and Chief Executive Officer and Director
(Principal Executive Officer)
November 30, 2020
Chief Financial Officer
(Principal Financial Officer)
November 30, 2020
Corporate Controller and Chief Accounting Officer
(Principal Accounting Officer)
November 30, 2020
/s/ RUEDIGER NAUMANN-ETIENNE Chairman of the Board
November 30, 2020
Ruediger Naumann-Etienne
/s/ JOCELYN D. CHERTOFF
Director
November 30, 2020
Jocelyn D. Chertoff
/s/ TIMOTHY E. GUERTIN
Director
November 30, 2020
Timothy E. Guertin
/s/ JAY K. KUNKEL
Jay K. Kunkel
Director
November 30, 2020
/s/ WALTER M ROSEBROUGH, JR.
Walter M Rosebrough, Jr.
Director
/s/ CHRISTINE A. TSINGOS
Christine A. Tsingos
Director
November 30, 2020
November 30, 2020
62
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Statements of (Loss) Earnings for the fiscal years ended 2020, 2019 and 2018
Consolidated Statements of Comprehensive (Loss) Earnings for the fiscal years ended 2020, 2019 and 2018
Consolidated Balance Sheets as of the end of fiscal years 2020 and 2019
Consolidated Statements of Cash Flows for the fiscal years ended 2020, 2019 and 2018
Consolidated Statements of Stockholders' Equity for the fiscal years 2020, 2019 and 2018
Notes to the Consolidated Financial Statements
F-1
F-4
F-5
F-6
F-8
F-7
F-9
63
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Varex Imaging Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Varex Imaging Corporation and its subsidiaries (the
“Company”) as of October 2, 2020 and September 27, 2019, and the related consolidated statements of (loss) earnings, of comprehensive
(loss) earnings, of stockholders’ equity, and of cash flows for each of the three years in the period ended October 2, 2020, including the
related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control
over financial reporting as of October 2, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of October 2, 2020 and September 27, 2019, and the results of its operations and its cash flows for each of
the three years in the period ended October 2, 2020 in conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as
of October 2, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because material
weaknesses in internal control over financial reporting existed as of that date related to (i) ineffective control environment as the
Company had an insufficient complement of resources with the requisite knowledge and experience to create the proper environment for
effective internal control over financial reporting such that corrective activities to the Company’s internal control over financial reporting
are appropriately applied, prioritized, and implemented in a timely manner, (ii) ineffective risk assessment process to identify and assess
the risks in the Company’s business processes, (iii) ineffective controls related to the accounting for inventory and cost of revenues,
including controls related to the existence, accuracy, and presentation and disclosure of inventory, and (iv) ineffective controls over the
Company’s financial reporting close process to prevent or detect misstatements in the financial statements, including controls related to
the elimination of intercompany balances and to ensure appropriate segregation of duties over the preparation and review of journal
entries.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a
timely basis. The material weaknesses referred to above are described in Management's Annual Report on Internal Control Over
Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of
audit tests applied in our audit of the October 2, 2020 consolidated financial statements, and our opinion regarding the effectiveness of
the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.
Changes in Accounting Principles
As discussed in Notes 1, 2 and 3 to the consolidated financial statements, the Company changed the manner in which it accounts
for leases as of September 28, 2019 and the manner in which it accounts for revenues as of September 29, 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in management's
report referred to above. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the
Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due
to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.
F-1
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such
other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures
that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.
The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a
whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on
the accounts or disclosures to which they relate.
Consolidated Financial Statements - Impact of Resources and Controls Related to Risk Assessment and Financial Reporting
The completeness and accuracy of the consolidated financial statements, including the financial condition, results of operations
and cash flows, is dependent on, in part, (i) maintaining sufficient resources to create the proper environment for effective internal
control over financial reporting, (ii) designing and maintaining monitoring controls related to the identification and assessment of risk in
the business process environment, and (iii) designing and maintaining financial reporting controls, including controls related to the
elimination of intercompany balances and segregation of duties over the preparation and review of journal entries.
The principal considerations for our determination that performing procedures relating to the consolidated financial statements -
impact of resources and controls related to risk assessment and financial reporting is a critical matter are the high degree of auditor
judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to businesses processes which affect
substantially all financial statement account balances and disclosures. As described above in the “Opinions on the Financial Statements
and Internal Control over Financial Reporting” section, material weaknesses were identified as of October 2, 2020 related to (i)
ineffective control environment, (ii) ineffective risk assessment component of internal control, and (iii) the financial reporting close
process.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included, among others, evaluating and determining the nature and
extent of audit procedures performed and evidence obtained that are responsive to the material weaknesses identified. These procedures
also included testing the completeness and accuracy and the elimination of intercompany balances, testing manual journal entries, and
evaluating whether segregation of duties was maintained over the recording of entries.
Inventories
As described in Note 1 to the consolidated financial statements, the Company’s consolidated inventory balance was $271.9
million as of October 2, 2020. Management values inventories at the lower of cost or net realizable value. Costs include materials, labor
and manufacturing overhead and is computed on a first-in-first-out basis. Management evaluates the carrying value of its inventories
F-2
taking into consideration such factors as historical and anticipated future sales compared to quantities on hand and the prices
management expects to obtain for products in its various markets. Management adjusts excess and obsolete inventories to net realizable
value and write-downs of excess and obsolete inventories are recorded as a component of cost of revenues.
The principal considerations for our determination that performing procedures relating to inventories is a critical audit matter
are the high degree of auditor judgment, subjectivity and effort in performing procedures and in evaluating audit evidence related to the
existence and valuation of inventory. As described above in the “Opinions on the Financial Statements and Internal Control over
Financial Reporting” section, material weaknesses were identified as of October 2, 2020 related to the Company’s control environment,
the risk assessment component of internal control, and the accounting for inventory, including maintaining effective controls related to
the verification of inventory at third party vendor locations and presentation and disclosure of inventory classification.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included, among others, performing procedures to test the existence
of inventory, including inventory maintained at third party vendor locations, evaluating and testing management’s process for
determining the valuation of inventory, and testing the classification of inventory.
Goodwill Impairment Assessment
As described in Notes 1 and 12 to the consolidated financial statements, the Company’s consolidated goodwill balance was
$293.1 million as of October 2, 2020. Management evaluates goodwill for impairment at least annually at the beginning of the fourth
quarter of each fiscal year or whenever an event occurs or circumstances change that would more likely than not reduce the fair value of
a reporting unit below its carrying amount. Management determines the fair value of its reporting units based on a combination of
income and market approaches. The income approach is based on the present value of estimated future cash flows of the reporting units,
and the market approach is based on a market multiple calculated for each reporting unit based on market data of other companies
engaged in similar business. These assumptions and estimates include estimated future annual net cash flows, income tax rates, discount
rates, revenue growth rates, forecasted gross margins, market multiples, terminal value and other market factors. In the third quarter of
2020, changes in facts and circumstances and general market declines from COVID-19 resulted in reduced expectations of future
operating results. Management considered these circumstances and the potential long-term impact on cash flows associated with its
reporting units and determined that an indicator of possible impairment existed within its Medical and Industrial reporting units.
Accordingly, management performed a quantitative impairment analysis to determine the fair values of those reporting units. Based on
the output of the analysis, management determined that the fair values of both the Medical and Industrial reporting units exceeded their
carrying amounts.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment is
a critical audit matter are the significant judgment by management when determining the fair value measurement of the reporting units;
this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s
significant assumptions related to the discount rates, revenue growth rates, forecasted gross margins, and market multiples. In addition,
the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to
management’s quantitative goodwill impairment assessment, including controls over the determination of the fair value of the
Company’s reporting units. These procedures also included, among others, testing management’s process for determining the fair value
estimate of the reporting units; evaluating the appropriateness of the income and market approaches; testing the completeness, accuracy,
and relevance of underlying data used in the estimates; and evaluating the significant assumptions used by management, including the
discount rates, revenue growth rates, forecasted gross margins, and market multiples. Evaluating management’s assumptions related to
revenue growth rates and forecasted gross margins involved evaluating whether the assumptions used by management were reasonable
considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market and industry data, and (iii)
whether the assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and
knowledge were used to assist in the evaluation of the income and market approaches and the discount rates and market multiples
assumptions.
/s/ PricewaterhouseCoopers LLP
Salt Lake City, Utah
November 30, 2020
We have served as the Company’s auditor since 2016.
F-3
Table of Contents
VAREX IMAGING CORPORATION
CONSOLIDATED STATEMENTS OF (LOSS) EARNINGS
(In millions, except per share amounts)
Revenues, net
Cost of revenues
Gross profit
Operating expenses:
Research and development
Selling, general and administrative
Impairment of intangible assets
Total operating expenses
Operating (loss) earnings
Interest income
Interest expense
Other (expense) income, net
Interest and other expense, net
(Loss) earnings before taxes
Taxes (benefit) on earnings
Net (loss) earnings
Less: Net earnings attributable to noncontrolling interests
Net (loss) earnings attributable to Varex
(Loss) earnings per common share attributable to Varex
Basic
Diluted
Weighted average common shares outstanding
Basic
Diluted
2020
Fiscal Years
2019
2018
$
738.3 $
780.6 $
548.1
190.2
78.9
142.2
2.8
223.9
(33.7)
0.1
(31.4)
(7.6)
(38.9)
(72.6)
(15.2)
(57.4)
0.5
523.9
256.7
78.1
128.1
4.8
211.0
45.7
0.1
(21.1)
(3.2)
(24.2)
21.5
5.7
15.8
0.3
$
$
$
(57.9) $
15.5 $
(1.49) $
(1.49) $
38.8
38.8
0.41 $
0.40 $
38.2
38.6
773.4
519.5
253.9
83.0
123.4
3.0
209.4
44.5
0.2
(21.7)
2.7
(18.8)
25.7
(2.6)
28.3
0.8
27.5
0.73
0.72
37.9
38.4
See accompanying notes to the consolidated financial statements.
F-4
Table of Contents
VAREX IMAGING CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) EARNINGS
(In millions)
Net (loss) earnings
Other comprehensive (loss) earnings, net of tax:
Unrealized gain (loss) on interest rate swap contracts
Unrealized gain (loss) on defined benefit obligations
Foreign currency translation adjustments
Comprehensive (loss) earnings
Less: Comprehensive earnings attributable to noncontrolling interests
Comprehensive (loss) earnings attributable to Varex
$
2020
Fiscal Years
2019
2018
$
(57.4) $
15.8 $
0.4
0.6
1.5
2.5
(54.9)
0.5
(55.4) $
(6.2)
(1.3)
—
(7.5)
8.3
0.3
8.0 $
28.3
5.2
(0.2)
—
5.0
33.3
0.8
32.5
See accompanying notes to the consolidated financial statements.
F-5
Table of Contents
(In millions, except share amounts)
Assets
Current assets:
Cash and cash equivalents
VAREX IMAGING CORPORATION
CONSOLIDATED BALANCE SHEETS
Accounts receivable, net of allowance for doubtful accounts of $0.3 million and $1.0
million at October 2, 2020 and September 27, 2019, respectively
Inventories
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets, net
Investments in privately-held companies
Deferred tax assets
Operating lease assets
Other assets
Total assets
Liabilities, redeemable noncontrolling interests and stockholders' equity
Current liabilities:
Accounts payable
Accrued liabilities and other current liabilities
Current operating lease liabilities
Current maturities of long-term debt
Deferred revenues
Total current liabilities
Long-term debt, net
Deferred tax liabilities
Operating lease liabilities
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 13)
Redeemable noncontrolling interests
Stockholders' Equity:
Preferred stock, $0.01 par value: 20,000,000 shares authorized, none issued
Common stock, $0.01 par value: 150,000,000 shares authorized
Shares issued and outstanding: 39,059,094 and 38,371,305 at October 2, 2020 and
September 27, 2019, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total Varex stockholders' equity
Noncontrolling interests
Total stockholders' equity
October 2, 2020
September 27, 2019
$
100.6 $
123.8
271.9
25.7
522.0
145.2
293.1
67.5
51.3
0.5
27.7
32.2
29.9
141.0
248.2
19.3
438.4
142.3
290.8
86.3
53.6
—
—
27.5
$
$
1,139.5 $
1,038.9
72.9 $
70.5
6.1
2.5
8.6
160.6
452.8
2.3
23.1
34.9
673.7
—
—
0.4
434.4
0.8
16.1
451.7
14.1
465.8
58.2
75.7
—
30.7
10.5
175.1
364.4
8.2
—
32.5
580.2
10.5
—
0.4
371.8
(1.7)
74.4
444.9
3.3
448.2
Total liabilities, redeemable noncontrolling interests and stockholders' equity
$
1,139.5 $
1,038.9
See accompanying notes to the consolidated financial statements.
F-6
Table of Contents
VAREX IMAGING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
Shares
Amount
37.6
—
0.2
0.2
(0.1)
—
—
—
—
—
(In millions)
September 29, 2017
Net earnings
Exercise of stock options
Common stock issued upon vesting of restricted shares
Shares withheld on vesting of restricted stock
Common stock issued under employee stock purchase plan
0.1
Share-based compensation
—
Unrealized gain on interest rate swap contracts, net of tax
—
Unrealized loss on defined benefit obligations, net of tax
—
Capital contribution by noncontrolling interest
Other
September 28, 2018
Effect of adoption of ASC 606
Net earnings
Exercise of stock options
Common stock issued upon vesting of restricted shares
0.2
Shares withheld on vesting of restricted stock
—
Common stock issued under employee stock purchase plan
0.2
Share-based compensation
—
Unrealized loss on interest rate swap contracts, net of tax
—
Unrealized loss on defined benefit obligations, net of tax
—
Noncontrolling interest acquired/consolidated
—
Additional
Paid-in
Capital
342.7
—
3.8
—
(2.2)
3.3
10.0
—
—
—
—
Accumulated
Other
Comprehensive
Income (Loss)
0.8
—
—
—
—
—
—
5.2
(0.2)
—
—
Retained
Earnings
35.1
27.5
—
Total
Varex
Equity
379.0
27.5
3.8
—
—
—
—
—
—
—
(0.2)
—
(2.2)
3.3
10.0
5.2
(0.2)
—
(0.2)
Noncontrolling
Interests
Total
Stockholders'
Equity
—
0.3
—
—
—
—
—
—
—
1.8
—
379.0
27.8
3.8
—
(2.2)
3.3
10.0
5.2
(0.2)
1.8
(0.2)
0.4
—
—
—
—
—
—
—
—
—
38.0
$
0.4
$
357.6
$
5.8
$
62.4
$
426.2
$
2.1
$
428.3
—
—
—
—
—
—
—
—
—
—
—
—
0.8
—
(2.1)
3.8
11.7
—
—
—
—
—
—
—
—
—
—
(6.2)
(1.3)
—
(3.5)
15.5
—
—
—
—
—
—
—
—
(3.5)
15.5
0.8
—
(2.1)
3.8
11.7
(6.2)
(1.3)
—
September 27, 2019
38.4
$
0.4
$
371.8
$
(1.7) $
74.4
$
444.9
$
Cumulative effect of accounting change
Net loss
Exercise of stock options
Common stock issued upon vesting of restricted shares
Shares withheld on vesting of restricted stock
Common stock issued under employee stock purchase plan
Share-based compensation
Unrealized gain on interest rate swap contracts, net of tax
Unrealized gain on defined benefit obligations, net of tax
Conversion feature of Convertible Notes, net of issuance
costs
Purchase of hedges
Issuance of warrants
Currency translation adjustments
Shares issued to settle deferred consideration
Reclassification from mezzanine equity to equity for
noncontrolling interest in MeVis Medical Solutions, AG
Other
October 2, 2020
—
—
0.1
0.2
(0.1)
0.2
—
—
—
—
—
—
—
0.3
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1.5
—
(1.8)
3.6
13.4
—
—
49.7
(61.0)
49.8
—
7.4
—
—
—
—
—
—
—
—
—
0.4
0.6
—
—
—
1.5
—
—
—
(0.3)
(57.9)
—
—
—
—
—
—
—
—
—
—
—
—
—
(0.1)
(0.3)
(57.9)
1.5
—
(1.8)
3.6
13.4
0.4
0.6
49.7
(61.0)
49.8
1.5
7.4
—
(0.1)
—
(0.2)
—
—
—
—
—
—
—
1.4
3.3
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
11.3
(0.5)
(3.5)
15.3
0.8
—
(2.1)
3.8
11.7
(6.2)
(1.3)
1.4
448.2
(0.3)
(57.9)
1.5
—
(1.8)
3.6
13.4
0.4
0.6
49.7
(61.0)
49.8
1.5
7.4
11.3
(0.6)
39.1
$
0.4
$
434.4
$
0.8
$
16.1
$
451.7
$
14.1
$
465.8
See accompanying notes to the consolidated financial statements.
F-7
Table of Contents
VAREX IMAGING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Cash flows from operating activities:
Net (loss) earnings
Adjustments to reconcile net (loss) earnings to net cash provided by operating
activities:
Share-based compensation expense
Depreciation
Amortization of intangible assets
Impairment of intangible assets
Other assets impairment charges
Inventory write-down
Deferred taxes
Amortization of deferred loan costs
Loss (gain) from equity method investments, net of dividends received
Other, net
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued operating liabilities and other long-term operating liabilities
Deferred revenues
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property, plant and equipment
Acquisitions of businesses, net of cash acquired
Investments in privately-held companies
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of debt
Repayments of borrowings
Payment of debt issuance costs
Proceeds from issuance of warrant
Purchases of hedges
Proceeds from shares issued under employee stock purchase plan
Proceeds from exercise of stock options
Taxes related to net share settlement of equity awards
Contributions from noncontrolling partner
Other financing activities
Net cash provided by (used in) financing activities
Effects of exchange rate changes on cash and cash equivalents and restricted cash
Net increase (decrease) in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash at beginning of period
Cash and cash equivalents and restricted cash at end of period
Supplemental cash flow information:
Cash paid for interest
Cash paid for income tax, net of refunds
Supplemental non-cash activities:
Purchases of property, plant and equipment financed through accounts payable
$
$
$
2020
Fiscal Years
2019
2018
$
(57.4) $
15.8 $
28.3
13.4
22.3
17.2
2.8
2.7
18.1
(3.1)
5.1
1.3
4.7
17.7
(42.7)
(9.3)
14.3
8.1
(2.0)
13.2
(23.5)
(1.6)
(1.8)
(26.9)
593.8
(483.9)
(16.7)
49.8
(61.0)
3.6
1.5
(1.8)
—
(1.7)
83.6
0.9
70.8
31.3
102.1 $
16.7 $
4.2
11.7
23.5
15.7
4.8
—
3.1
(12.9)
2.4
2.3
0.8
14.8
(11.1)
4.3
(9.0)
10.9
(5.2)
71.9
(19.8)
(69.5)
(3.9)
(93.2)
85.4
(87.0)
(0.5)
—
—
3.8
0.8
(2.1)
—
(0.5)
(0.1)
(0.7)
(22.1)
53.4
31.3 $
19.9 $
8.2
1.6 $
1.8 $
10.0
26.0
16.2
3.0
1.3
3.1
(7.7)
2.3
(3.9)
0.7
9.0
(2.4)
2.0
5.2
(10.2)
2.4
85.3
(20.4)
(4.8)
—
(25.2)
10.0
(106.0)
(0.4)
—
—
3.3
3.8
(2.3)
1.8
(0.6)
(90.4)
(0.5)
(30.8)
84.2
53.4
19.3
13.8
2.0
See accompanying notes to the consolidated financial statements.
F-8
Table of Contents
VAREX IMAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Varex Imaging Corporation (the “Company,” “Varex” or “Varex Imaging”) designs, manufactures, sells and services a broad
range of Medical products, which include X-ray tubes, digital detectors and accessories, high voltage connectors, image processing
software and workstations, computer-aided diagnostic software, collimators, automatic exposure control devices, generators,
ionization chambers and buckys, for use in a range of applications, including radiographic or fluoroscopic imaging, mammography,
computed tomography, oncology and computer-aided detection. The Company sells its products to imaging system original equipment
manufacturer (“OEM”) customers for incorporation into new medical diagnostic, radiation therapy, dental, and veterinary, to
independent service companies, distributors and directly to end-users for replacement purposes.
The Company also designs, manufacturers, sells and services industrial products, which include Linatron® X-ray accelerators,
imaging processing software and image detection products for security and inspection purposes, such as cargo screening at ports and
borders and nondestructive examination in a variety of applications. The Company generally sells security and inspection products to
OEM customers who incorporate Varex’s products into their inspection systems. The Company conducts an active research and
development program to focus on new technology and applications in both the medical and industrial X-ray imaging markets.
Basis of Presentation and Principle of Consolidation
The accompanying consolidated financial statements have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission (“SEC”) and prepared in accordance with accounting principles generally
accepted in the United States (“GAAP”).
Segment Reporting
The Company has two reportable operating segments; (i) Medical and (ii) Industrial, which aligns with how its Chief
Executive Officer ("CEO"), who is the Company's Chief Operating Decision Maker (“CODM”), reviews the Company’s performance.
See Note 17. Segment Information, included in this report, for further information on the Company’s segments.
Fiscal Year
The fiscal years of the Company as reported are the 52 or 53-week period ending on the Friday nearest September 30. Fiscal
year 2020 was the 53-week period that ended October 2, 2020, fiscal year 2019 was the 52-week period that ended September 27,
2019, and fiscal year 2018 was the 52-week period ended September 28, 2018.
Variable Interest Entities
For entities in which the Company has variable interests, the Company focuses on identifying which entity has the power to
direct the activities that most significantly impact the variable interest entity’s economic performance and which enterprise has the
obligation to absorb losses or the right to receive benefits from the variable interest entity. If the Company is the primary beneficiary
of a variable interest entity, the assets, liabilities and results of operations of the variable interest entity will be included in the
Company’s consolidated financial statements. As of October 2, 2020, the Company had two variable interest entities neither of which
were consolidated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates
include the valuation of inventories, goodwill and intangible assets, warranties, contract liabilities, long-lived asset valuations,
impairment on investments, financial instruments, and taxes on earnings. Actual results could differ from these estimates.
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Impact of COVID-19
The coronavirus (“COVID-19”) pandemic and the mitigation efforts by governments to attempt to control its spread created
uncertainties and disruptions in the economic and financial markets. The extent to which COVID-19 will continue to impact the
Company’s business and financial results will depend on numerous evolving factors including, but not limited to: the magnitude and
duration of COVID-19, the extent to which it will impact worldwide macroeconomic conditions including interest rates,
unemployment rates, the speed of the anticipated recovery, and governmental and business reactions to the pandemic. During the 2020
fiscal year, as a result of the economic downturn resulting from COVID-19, the Company experienced reduced demand in the
Company’s industrial segment and for certain higher end medical products that negatively impacted revenues and gross margin. The
Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with
the information reasonably available to the Company and the currently estimated future impacts of COVID-19 as of October 2, 2020
and through the date of filing this report. The accounting matters assessed included, but were not limited to, the Company’s carrying
value of goodwill, intangibles, long-lived assets, equity method investments, inventory and related reserves, and allowance for
doubtful accounts. The Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could
result in material negative impacts to the Company’s consolidated financial statements in future reporting periods. These future
developments are highly uncertain and the outcomes cannot be estimated with certainty. Actual results may differ from those
estimates, and such differences may be material to the financial statements.
As described in Note 1 to the Company’s consolidated financial statements for the year ended September 27, 2019, as
reissued on September 22, 2020 in our Current Report on Form 8-K, the Company concluded that there was substantial doubt about its
ability to continue as a going concern. This assessment was based on the Company’s financial projections, which included the
anticipated adverse effects of the COVID-19 pandemic on the Company’s financial condition and results of operations, and which
indicated that it was probable that the Company would be in violation of certain leverage ratio covenants contained in its previously
existing credit agreement.
As described more fully in Note 10. Borrowings, on September 30, 2020, the Company issued $300.0 million aggregate
principal amount of 7.875% Senior Secured Notes due in 2027, the proceeds from which were used to repay the principal amounts
outstanding under the Company’s previously existing credit agreement (which was then terminated), and entered into a new revolving
credit agreement consisting of a $100.0 million asset-based loan revolving credit facility. The Senior Secured Notes do not contain any
financial covenants and the asset-based loan revolving credit facility’s financial covenant is limited to when excess availability falls
below a specified threshold. Management has concluded that the replacement of the Company's previously existing credit agreement
with the Senior Secured Notes, combined with our current and anticipated future cash flows, has alleviated the substantial doubt about
the Company's ability to continue as a going concern and the Company has sufficient liquidity to satisfy our obligations over the
twelve-month period from the issuance date of these consolidated financial statements.
Cash and Cash Equivalents
The Company considers currency on hand, demand deposits, time deposits and all highly-liquid investments with an original
maturity of three months or less at the date of purchase to be cash and cash equivalents.
Restricted Cash
Restricted cash primarily consists of cash collateral related to certain leases and inventory arrangements. Restricted cash is
included in other assets on the consolidated balance sheet. Cash and cash equivalents and restricted cash as reported within
the consolidated statements of cash flows consisted of the following:
(In millions)
Cash and cash equivalents
Restricted cash
Cash and cash equivalents and restricted cash as reported per statement of
cash flows
Twelve Months Ended
October 2, 2020
Twelve Months Ended
September 27, 2019
Beginning of
Period
End of Period
Beginning of
Period
End of Period
$
$
29.9 $
100.6
$
51.9 $
1.4
1.5
1.5
31.3 $
102.1
$
53.4 $
29.9
1.4
31.3
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Fair Value
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the
measurement date. There is a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy
requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used
to measure fair value are as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and
liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active;
or, other inputs that are observable or can be corroborated by observable market data.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
assets or liabilities.
Derivative instruments and hedging activities
The Company records all derivatives on the consolidated balance sheets at fair value as of the reporting date. For derivative
instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative is reported as a component of other
comprehensive income or loss and reclassified from accumulated other comprehensive loss into earnings when the hedged transaction
affects earnings. For derivatives that are designated and qualify as net investment hedges, the gain or loss on the derivative is reported
as a component of other comprehensive income or loss until the hedged item is sold. The portion of the change in fair value of the
Company's net investment hedges (or cross currency swaps) related to the cross-currency basis spread is an excluded component in the
assessment of the effectiveness of these net investment hedges (or cross currency swaps). These changes in fair value are recognized
as an adjustment to interest expense. A qualitative assessment of hedge effectiveness is performed on a quarterly basis, unless facts
and circumstances indicate the hedge may no longer be highly effective, in which case, a quantitative assessment of hedge
effectiveness is performed.
Concentration of Risk
Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of cash, cash
equivalents and trade accounts receivable. Cash held with financial institutions may exceed the Federal Deposit Insurance Corporation
insurance limits or similar limits in foreign jurisdictions. The Company has not experienced any losses on its deposits of cash and cash
equivalents. The Company performs ongoing credit evaluations of its customers and, except for government tenders, group purchases
and orders with a letter of credit, its industrial customers often provide a down payment. The Company maintains an allowance for
doubtful accounts based upon the expected collectability of all accounts receivable. The Company obtains some of the components in
its products from a limited group of suppliers or from a single-source supplier. The Company has neither experienced nor expects any
significant disruptions to its operations due to supplier concentration.
Credit is extended to customers based on an evaluation of the customer’s financial condition, and collateral is not required.
During the periods presented, one of the Company's Medical segment customers accounted for a significant portion of revenues,
which is as follows:
Canon Medical Systems Corporation
2020
Fiscal Year
2019
2018
20.5 %
17.3 %
18.1 %
Canon Medical Systems Corporation accounted for 12.0% and 10.1% of the Company’s accounts receivable as of October 2,
2020 and September 27, 2019, respectively.
Inventories
Inventories are valued at the lower of cost or net realizable value. Costs include materials, labor and manufacturing overhead
and is computed on a first-in-first-out basis. The Company evaluates the carrying value of its inventories taking into consideration
such factors as historical and anticipated future sales compared to quantities on hand and the prices the Company expects to obtain for
products in its various markets. The Company adjusts excess and obsolete inventories to net realizable value and write-downs of
excess and obsolete inventories are recorded as a component of cost of revenues.
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The following table summarizes the Company’s inventories, net:
(In millions)
Raw materials and parts
Work-in-process
Finished goods
Total inventories
October 2, 2020
September 27,
2019
$
$
184.6 $
23.9
63.4
271.9 $
160.1
27.9
60.2
248.2
As a result of the economic downturn resulting from COVID-19, during the three months ended July 3, 2020, the Company
discontinued certain products and wrote-down approximately $15.8 million of inventory associated with discontinued products and
restructuring activity.
Property, Plant and Equipment, net
Property, plant and equipment are stated at cost, net of accumulated depreciation. Major improvements are capitalized, while
repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful
lives of the assets or remaining lease term. Land is not subject to depreciation, but land improvements are depreciated over fifteen
years. Land leasehold rights and leasehold improvements are depreciated over the lesser of their estimated useful lives or remaining
lease terms. Buildings are depreciated over twenty years. Machinery and equipment are depreciated over a range from three to seven
years. Assets subject to lease are depreciated over the lesser of their estimated useful lives or remaining lease terms. Estimated useful
lives are periodically reviewed and, when appropriate, changes are made prospectively. When certain events or changes in operating
conditions occur, asset lives may be adjusted, and an impairment assessment may be performed on the recoverability of the carrying
amounts. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are removed from the
accounts.
The following table summarizes the Company’s property, plant and equipment, net:
(In millions)
Land
Buildings and leasehold improvements
Machinery and equipment
Construction in progress
Accumulated depreciation and amortization
Property, plant, and equipment, net
October 2, 2020
September 27,
2019
$
$
$
8.3 $
137.2
175.5
35.4
356.4 $
(211.2)
145.2 $
8.3
134.4
170.7
28.5
341.9
(199.6)
142.3
The Company recorded depreciation expense of $22.3 million, $23.5 million and $26.0 million, in fiscal years 2020, 2019
and 2018, respectively. During fiscal years 2020, 2019 and 2018 the Company recorded accelerated depreciation of $2.9 million,
$4.5 million and $4.2 million, respectively, which primarily related to the machinery and equipment used at the Santa Clara, CA
facility. See Note 6. Restructuring, included in this report, for further information.
Investments
The Company accounts for its equity investments in privately-held companies under the equity method of accounting if the
Company has the ability to exercise significant influence in these investments. Distributions received from an equity method
investment are classified using the cumulative earnings approach. Under the cumulative earnings approach, distributions up to the
amount of cumulative equity in earnings recognized will be treated as returns on investment as operating cash flows and those in
excess of that amount will be treated as returns of investment as investing cash flows. The Company monitors these equity
investments for impairment and makes appropriate reductions in carrying values if the Company determines that impairment charges
are required based primarily on the financial condition and near-term prospects of these companies. During the three months ended
July 3, 2020, the Company wrote off a $2.7 million cost investment in a privately-held company, the related expense is included as
part of other expenses, net in the Company's consolidated financial statements.
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Goodwill and Intangible Assets
Goodwill is recorded when the purchase price of an acquisition exceeds the fair value of the net identified tangible and
intangible assets acquired. Purchased intangible assets are carried at cost, net of accumulated amortization, and are included in
intangible assets in the Company's consolidated balance sheets. Intangible assets with finite lives are amortized over their estimated
useful lives of primarily two to seven years using the straight-line method.
Impairment of Long-lived Assets, Intangible Assets and Goodwill
The Company reviews long-lived assets and identifiable intangible assets with finite lives for impairment whenever events or
changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The Company assesses these assets
for impairment based on their estimated undiscounted future cash flows. If the carrying value of the assets exceeds the estimated
future undiscounted cash flows, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair
value of the assets.
The Company evaluates goodwill and indefinite lived intangible assets for impairment at least annually at the beginning of
the fourth quarter of each fiscal year or whenever an event occurs or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount. The evaluation includes consideration of qualitative factors including industry
and market considerations, overall financial performance, and other relevant events and factors affecting the reporting unit. If the
Company determine that a quantitative analysis is necessary, the Company performs a step one analysis, which consists of a
comparison of the fair value of a reporting unit against its carrying amount, including the goodwill allocated to each reporting unit.
The Company determines the fair value of its reporting units based on a combination of income and market approaches. The income
approach is based on the present value of estimated future cash flows of the reporting units, and the market approach is based on a
market multiple calculated for each reporting unit based on market data of other companies engaged in similar business. If the carrying
amount of the reporting unit is in excess of its fair value, the difference between the fair value and carrying amount is recorded as an
impairment loss. The impairment test for intangible assets with indefinite useful lives, if any, consists of a comparison of fair value to
carrying value, with any excess of carrying value over fair value being recorded as an impairment loss. In fiscal years 2020, 2019 and
2018, the Company performed the annual goodwill impairment test for our two reporting units and found no impairment.
In the third quarter of 2020, changes in facts and circumstances and general market declines due to COVID-19 resulted in
reduced expectations of future operating results. The Company considered these circumstances and the potential long-term impact on
cash flows associated with its reporting units and indefinite-lived intangible assets and determined that an indicator of possible
impairment existed within its Medical and Industrial reporting units and indefinite-lived intangible assets. Accordingly, the Company
performed a quantitative impairment analysis to determine the fair values of those reporting units and indefinite-lived intangible
assets. Based on the output of the analysis, the Company determined that the fair values of both the Medical and Industrial reporting
units substantially exceeded their carrying amounts. Accordingly, no impairment charges were required as of July 3, 2020 related to
Goodwill. However, an impairment charge of $2.8 million was required for the Company's in-process R&D. See Note 12. Goodwill
and Intangible Assets for more information.
During the fiscal years ended October 2, 2020, September 27, 2019 and September 28, 2018, the Company recognized $2.8
million, $4.8 million, and $3.0 million of impairments of intangible assets, respectively. No goodwill impairment charges were
recognized for any of the periods presented.
Loss Contingencies
From time to time, the Company is involved in legal proceedings, claims and government inspections or investigations,
customs and duties audits, other contingency matters, both inside and outside the United States, arising in the ordinary course of its
business or otherwise. The Company accrues amounts for probable losses, to the extent they can be reasonably estimated, that it
believes are adequate to address any liabilities related to legal proceedings and other loss contingencies that the Company believes will
result in a probable loss (including, among other things, probable settlement value). A loss or a range of loss is disclosed when it is
reasonably possible that a material loss will be incurred and can be estimated or when it is reasonably possible that the amount of a
loss, when material, will exceed the recorded provision. When a loss contingency is probable but not reasonably estimable the nature
of the contingency and the fact that an estimate cannot be made is disclosed. See Note 13. Commitments and Contingencies, for further
information regarding certain of our contractual obligations and contingencies.
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Product Warranty
The Company warrants most of its products for a specific period of time, usually 12 to 24 months from delivery or
acceptance, against material defects. The Company provides for the estimated future costs of warranty obligations in cost of revenues
when the related revenues are recognized. The accrued warranty costs represent the best estimate at the time of sale of the total costs
that the Company will incur to repair or replace product parts that fail while still under warranty.
The amount of the accrued estimated warranty costs obligation for established products is primarily based on historical
experience as to product failures adjusted for current information on repair costs. For new products, estimates include the historical
experience of similar products, as well as a reasonable allowance for warranty expenses associated with new products. On a quarterly
basis, the Company reviews the accrued warranty costs and updates the historical warranty cost trends, if required.
The following table reflects the changes in the Company’s accrued product warranty:
(In millions)
Accrued product warranty, at beginning of period
Charged to cost of revenues
Actual product warranty expenditures
Accrued product warranty, at end of period
Leases
Fiscal Years
2020
2019
$
$
8.1 $
15.1
(15.1)
8.1 $
7.3
12.9
(12.1)
8.1
The Company determines if an arrangement is or contains a lease at the inception of an arrangement. The Company's
operating lease right-of-use ("ROU") assets represent the right to use an underlying asset over the lease term and lease liabilities
represent its obligation to make lease payments arising from the lease. ROU assets may also include initial direct costs incurred and
prepaid lease payments, less lease incentives. Lease liabilities and their corresponding ROU assets are recognized based on the present
value of lease payments over the lease term, discounted using the Company's incremental borrowing rate ("IBR"). The Company
recognizes operating leases with lease terms of more than twelve months in operating lease assets, current operating lease liabilities,
and operating lease liabilities on its consolidated balance sheets. The Company recognizes finance leases with lease terms of more
than twelve months in property, plant, and equipment, net, accrued liabilities and other current liabilities, and other long-term
liabilities on its consolidated balance sheets. For purposes of calculating lease liabilities and the corresponding ROU assets, the
Company's lease term may include options to extend or terminate the lease when it is reasonably certain that it will exercise that
option.
Revenue Recognition
Effective September 29, 2018, the Company adopted the requirements of Accounting Standards Update (“ASU”) 2014-09
and related amendments, Revenue from Contracts with Customers (“ASC 606”), which superseded all prior revenue recognition
methods and industry-specific guidance. The Company’s revenues are derived primarily from the sale of hardware and services. The
Company recognizes its revenues net of any value-added or sales tax and net of sales discounts.
The Company sells a high proportion of its X-ray products to a limited number of OEM customers. X-ray tubes, digital
detectors and image-processing tools and security and inspection products are generally sold on a stand-alone basis. However, the
Company occasionally sells its digital detectors, X-ray tubes and imaging processing tools as a package that is optimized for digital X-
ray imaging and sells its Linatron ® X-ray accelerators together with its imaging processing software and image detection products to
OEM customers that incorporate them into their inspection systems. Service contracts are often sold with certain security and
inspection products and computer-aided detection products.
The Company determines revenue recognition through the following steps:
•
•
•
•
•
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, a performance obligation is satisfied
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Transaction price and allocation to performance obligations
Transaction prices of products or services are typically based on contracted rates. To the extent that the transaction price
includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction
price utilizing the expected value method when there is a large number of transactions with similar characteristics or the most likely
amount method when there are two possible outcomes, depending on the circumstances of the transaction, to which the Company
expects to be entitled. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a
significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and
determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s
anticipated performance and all information (historical, current and forecasted) that is reasonably available.
The Company allows customers to return specific parts of purchased X-ray tubes for a partial refund credit, which is
identified as variable consideration. ASC 606-10-55-23 requires that for sales with a right of return, revenue is reduced for expected
returns, a liability is recorded for expected returns, and an asset is recorded for the right to recover products from customers on settling
the liability. The Company recognizes a reduction to revenue and cost of sales at the time of sale and a corresponding contract liability
and contract asset. The Company records this estimate based on the historical volume of product returns and adjusts the estimate on a
quarterly basis based on the current quarter sales and current quarter returns.
If a contract contains a single performance obligation, the entire transaction price is allocated to the single performance
obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price based on the
estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The
Company determines standalone selling prices based on the price at which the performance obligation is sold separately.
Contracts and performance obligations
The Company accounts for a contract with a customer when there is an approval and commitment from both parties, the
rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of the
consideration is probable. The Company's performance obligations consist mainly of transferring control of products and services
identified in the contracts or purchase orders. For each contract, the Company considers the obligation to transfer products and
services to the customer, which are distinct, to be performance obligations.
Recognition of revenue
Revenue is recognized when, or as, obligations under the terms of a contract are satisfied, which occurs when control of the
promised products or services is transferred to customers. Revenue is measured as the amount of consideration the Company expects
to receive in exchange for transferring products or services to a customer.
Product revenue is generally recognized when the customer obtains control of the Company’s product, which occurs at a
point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract.
Service revenue is generally recognized over time as the services are rendered to the customer based on the extent of progress
towards completion of the performance obligation. The Company recognizes service revenue over the term of the service contract.
Services are expected to be transferred to the customer throughout the term of the contract and the Company believes recognizing
revenue ratably over the term of the contract best depicts the transfer of value to the customer.
Disaggregation of Revenue
Revenue is disaggregated from contracts between geography and by reportable operating segment, which the Company
believes best depicts how the nature, amount, timing, and uncertainty of revenues and cash flows are affected by economic factors.
Refer to Note 17. Segment Information, included in this report, for the disaggregation of the Company’s revenue based on reportable
operating segments and disaggregated by geographic region.
Contract Balances
Contract assets are included within the prepaid expenses and other current assets, and other assets balances in the
consolidated balance sheets. Contract liabilities, which also includes refund obligations, are included within the accrued liabilities and
other current liabilities, deferred revenues, and other long-term liabilities balances in the consolidated balance sheets.
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Costs to Obtain or Fulfill a Customer Contract
The Company has certain costs to obtain and fulfill a customer contract, such as commissions and shipping costs. The
Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets
that the Company otherwise would have recognized is one year or less. Incremental costs of obtaining contracts that would be
recognized over greater than one year are not material. The Company accounts for shipping and handling activities related to contracts
with customers as costs to fulfill the promise to transfer the associated products. These costs are included as a component of cost of
revenues.
Deferred Revenues
Deferred revenue primarily represents (i) the amount received applicable to non-software products for which parts
and services under the warranty contracts have not been delivered, and (ii) the amount received for service contracts for
which the services have not been rendered.
Allowance for Doubtful Accounts
The Company evaluates the creditworthiness of customers prior to authorizing shipment for all major sale transactions. On a
quarterly basis, the Company evaluates aged items in the accounts receivable aging report and provides an allowance in an amount
deemed adequate for doubtful accounts. If the evaluation of customers’ financial conditions does not reflect a future ability to collect
outstanding receivables, additional provisions may be needed. The Company had an allowance for doubtful accounts of $0.3 million
and $1.0 million as of October 2, 2020 and September 27, 2019, respectively.
Share-Based Compensation Expense
The Company has an equity-based incentive plan that provides for the grant of nonqualified stock options and restricted stock
units to directors, officers and other employees. The Company also permits employees to purchase shares under the Varex employee
stock purchase plan.
The Company values stock options granted and the option component of the shares of common stock purchased under the
equity-based incentive plans and stock purchased under the employee stock purchase plan using the Black-Scholes option-pricing
model. Share-based compensation expense for restricted stock units is measured using the fair value of the Company’s stock on the
date of grant and is amortized over the award’s respective service period. The Black-Scholes option-pricing model requires the input
of certain assumptions, and changes in the assumptions can materially affect the fair value estimates of share-based payment awards.
The Company measures and recognizes expense for all share-based payment awards based on their fair values. Share-based
compensation expense recognized in the consolidated statements of (loss) earnings includes compensation expense for the share-based
payment awards based on the grant date fair value estimated in accordance with the guidance on share-based compensation. The
Company records forfeitures as they occur. The Company attributes the value of share-based compensation to expense using the
straight-line method. The Company considers only the direct tax impacts of share-based compensation awards when calculating the
amount of tax windfalls or shortfalls. For additional information, see Note 15. Employee Stock Plans, included in this report.
Shipping and Handling Costs
Shipping and handling costs are included as a component of cost of revenues.
Software Development Costs
Costs for the development of new software products and substantial enhancements to existing software products are expensed
as incurred until technological feasibility has been established, at which time any additional costs would be capitalized. No costs
associated with the development of software have been capitalized, as the Company believes its current software development process
is essentially completed concurrent with the establishment of technological feasibility.
Research and Development
Research and development costs are expensed as incurred. These costs primarily include employees’ compensation,
consulting fees and material costs.
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Taxes on Earnings
Current income tax expense or benefit is the amount of income taxes expected to be payable or receivable for the current
year. Deferred income tax liabilities or assets are established for the expected future tax consequences resulting from the differences in
financial reporting and tax bases of assets and liabilities. A valuation allowance is provided if it is more likely than not that some or all
of the deferred tax assets will not be realized. In addition, we provide reserves for uncertain tax positions when such tax positions do
not meet the recognition thresholds or measurement standards prescribed by the authoritative guidance for accounting for income
taxes. Amounts for uncertain tax positions are adjusted in periods when new information becomes available or when positions are
effectively settled. Interest and penalties related to uncertain tax positions are recognized as a component of income tax expense.
On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts
and Jobs Act of 2017 (“U.S. Tax Reform”). U.S. Tax Reform significantly revised the U.S. corporate income tax structure including a
lower corporate statutory rate and changes to the way foreign earnings are taxed. U.S. GAAP requires that the impact of tax legislation
be recognized in the period in which the law is enacted. In accordance with these rules, we are including the impact of certain
provisions of U.S. Tax Reform to the extent they are effective during the current reporting period.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the
COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable
income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be
carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. On July 2, 2020, the US
Treasury Department issued a regulation providing an election to waive NOL carryback to a former consolidated group. The Company
has evaluated the impact of the CARES Act and concludes the NOL carryback provision of the CARES Act will result in a material
cash tax benefit. The CARES Act retroactively clarified treatment of qualified improvement property as 15-year property instead of
39-year property as defined under U.S. Tax Reform. Certain qualified improvement property is also eligible for bonus depreciation.
Foreign Currency Translation
The Company uses the U.S. Dollar predominately as the functional currency of its foreign operations. Gains and losses from
remeasurement of foreign currency balances into U.S. Dollars are included in the consolidated statements of (loss) earnings. For the
foreign subsidiaries where the local currency is the functional currency, translation adjustments of foreign currency financial
statements into U.S. dollars are recorded to a separate component of accumulated other comprehensive loss.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update ASU No. 2016-02, Leases, referred to as ASC 842. The
purpose of ASC 842 is to increase the transparency and comparability among organizations by recognizing lease assets and liabilities
on the balance sheet, including those previously classified as operating leases under U.S. GAAP, and disclosing key information about
leasing arrangements. ASC 842, as amended, is effective for public entities for annual periods beginning after December 15, 2018,
including interim periods within those annual periods and was effective for the Company beginning in fiscal year 2020. The Company
adopted the standard using the transition method provided by ASU No. 2018-11, Leases ("Topic 842"): Targeted Improvements.
Under this method, the Company applied the new leasing rules on September 28, 2019, rather than at the earliest comparative period
presented in the financial statements. Prior periods were presented in accordance with the previously existing lease guidance under
ASC Topic 840.
Upon transition, the Company applied the package of practical expedients permitted under ASC 842 transition guidance to its
entire lease portfolio at September 28, 2019. As a result, the Company was not required to reassess (i) whether any expired or existing
contracts are or contain leases, (ii) the classification of any expired or existing leases, and (iii) initial direct costs for any existing
leases. Also, the Company applied the hindsight practical expedient. Furthermore, as a lessee the Company elected to combine lease
and non-lease components for the majority of its leases, which means that the Company accounted for each separate lease component
and the non-lease components associated with that lease component as a single lease component. The only asset class that did not
combine lease and non-lease components were vehicle leases.
The most significant impact of the standards for the Company relate to the recognition of the right-of-use assets and lease
liabilities for the operating leases in the balance sheet. Upon adoption of the new lease standard, the Company recognized operating
lease right-of-use assets and finance lease right-of-use assets of $26.8 million and $0.6 million, respectively, and corresponding
operating lease liabilities and finance lease liabilities of $27.5 million and $0.6 million, respectively. This includes the recording of the
Company’s existing capital leases as finance leases at transition. The cumulative impact of adoption was a $0.3 million decrease to
retained earnings. Refer to Note 3. Leases, for a detailed description of the impact of adopting this standard and its impact on the
consolidated financial statements and related disclosures.
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In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income, which provides the option to reclassify certain income tax effects related to the Tax Cuts and Jobs Act passed
in December of 2017 between accumulated other comprehensive income and retained earnings and also requires additional
disclosures. The amendments in this ASU were effective for all entities for fiscal years beginning after December 15, 2018, and
interim periods within those fiscal years. Effective September 28, 2019, the Company adopted ASU 2018-02 and it did not have a
material effect on the Company’s financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other, Simplifying the Test for Goodwill
Impairment, which simplified the testing required for the impairment of goodwill by removing Step 2 from the goodwill impairment
test. Step 2 of the goodwill impairment test measures a goodwill impairment loss by comparing the implied fair value of a reporting
unit's goodwill with the carrying amount of that goodwill. ASU 2017-04 allows an entity to measure the impairment based off Step 1
of the impairment test, which calculates the impairment as the difference between the carrying amount of the reporting unit and its fair
value. Adoption of this ASU was required for the Company in the first quarter of fiscal year 2021. The Company elected to early
adopt this standard effective April 4, 2020. This adoption was made on a prospective basis, as required by the standard.
Recent Accounting Standards Updates Not Yet Effective
In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own
Equity, to address issues identified as a result of the complexity associated with applying GAAP for certain financial instruments with
characteristics of liabilities and equity. In addressing the complexity, this ASU is focused on amending the guidance for convertible
instruments and the derivatives scope exception for contracts in an entity’s own equity. The Company is evaluating the impact of
adopting this guidance to its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting,
to provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of)
reference rate reform on financial reporting. The Company is currently evaluating the impact from the replacement of the London
Interbank Offered Rate (LIBOR) and whether the Company will elect the adoption of the optional guidance.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the
accounting for income taxes by removing certain exceptions to the current guidance, and improving the consistent application of and
simplification of other areas of the guidance. The standard is effective for the Company beginning in the first quarter of fiscal year
2022. Early adoption is permitted. The Company is evaluating the impact of adopting this guidance to its consolidated financial
statements.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU replaces
the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a
broader range of reasonable and supportable information to inform credit loss estimates. In addition, the ASU requires new
disclosures. This standard will be effective for the Company's interim and annual periods beginning with the first quarter of fiscal
2021 and must be applied on a modified retrospective basis. This standard will not materially impact the Company's consolidated
financial statements.
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2. REVENUE RECOGNITION
The Company adopted ASC 606 on September 29, 2018, using the modified retrospective method for all contracts not
completed as of the date of adoption. The reported results for fiscal year 2020 and 2019 reflect the application of ASC 606 guidance
while the reported results for fiscal year 2018 were prepared under the guidance of ASC 605, Revenue Recognition.
The following tables summarize the changes in the contract assets and refund liabilities for the twelve months ended October 2,
2020 and September 27, 2019:
(In millions)
Balance at September 28, 2018
Costs recovered from product returns during the period
Contract asset from shipments of products, subject to return during the period
Balance at September 27, 2019
Costs recovered from product returns during the period
Contract asset from shipments of products, subject to return during the period
Balance at October 2, 2020
(In millions)
Balance at September 28, 2018
Release of refund liability included in beginning of year refund liability
Additions to refund liabilities
Balance at September 27, 2019
Release of refund liability included in beginning of year refund liability
Additions to refund liabilities
Balance at October 2, 2020
Contract Assets
24.4
(6.4)
5.7
23.7
(5.6)
6.5
24.6
Refund Liabilities
27.1
(7.0)
6.3
26.4
(6.2)
7.2
27.4
$
$
$
$
$
$
During fiscal year 2020, the Company recognized revenue of $8.4 million related to deferred revenue which existed at
September 27, 2019. During fiscal year 2019, the Company recognized revenue of $10.5 million related to deferred revenue which
existed at September 28, 2018.
Remaining Performance Obligations
Remaining performance obligations represent the transaction price of firm orders for which revenue has not yet been
recognized, which are primarily related to contracts where control will be transferred to customers over the next 12 months. See Note
1. Summary of Significant Accounting Policies, for details on the nature of the remaining performance obligations within these
contracts and how they will be resolved.
3. LEASES
On September 28, 2019, the Company adopted ASC 842, which amends the guidance for the accounting and reporting of
leases. The determination of whether an arrangement is, or contains, a lease is performed at the inception of the arrangement. The
Company has operating and finance leases for office space, warehouse and manufacturing space, vehicles and certain equipment. The
Company's lease agreements do not contain any material residual value guarantees, variable lease costs, bargain purchase options or
restrictive covenants. The Company does not have any lease transactions with related parties. Leases with an initial term of 12 months
or less are generally not recorded on the balance sheet and expense for these leases is recognized on a straight-line basis over the lease
term. The Company's leases have remaining lease terms of one year to approximately seven years, some of which may include options
to extend the leases for up to six years and some include options to terminate early. These options have been included in the
determination of the lease liability when it is reasonably certain that the option will be exercised.
Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent
the Company's obligation to make lease payments arising from the lease contract. Operating lease liabilities and their corresponding
right-of-use assets are recorded based on the present value of fixed lease payments over the expected lease term. The interest rate
implicit in lease contracts is typically not readily determinable. As such, the Company's incremental borrowing rate is based on a
credit-adjusted risk-free rate, which best approximates a secured rate over a similar term of lease.
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The following table presents supplemental balance sheet information related to the Company's operating and finance leases:
(In millions)
Assets
Balance Sheet Location
Operating Leases
Finance Leases
October 2, 2020
Operating lease right-of-use assets
Operating lease assets
Finance lease right-of-use assets
Property, plant and equipment, net
Liabilities
Operating lease liabilities (current)
Current operating lease liabilities
Finance lease liabilities (current)
Accrued liabilities and other current
liabilities
Operating lease liabilities (non-current)
Operating lease liabilities
Finance lease liabilities (non-current)
Other long-term liabilities
$
$
$
$
$
$
27.7 $
— $
6.1 $
— $
23.1 $
— $
—
0.5
—
0.2
—
0.4
The following table presents the weighted average remaining lease term and discount rate information related to the
Company's operating and finance leases:
Weighted average remaining lease term (in years)
Weighted average discount rate
October 2, 2020
Operating Leases
Finance Leases
6.6
4.5 %
3.3
4.1 %
The following table provides information related to the Company’s operating and finance leases:
(In millions)
Total operating lease costs (a)
Total finance lease costs
Operating cash flows from operating leases
Financing cash flows from finance leases
Total cash paid for amounts included in the measurement of lease liabilities
Noncash operating right-of-use assets obtained in exchange for new lease liabilities (b)
Noncash finance right-of-use assets obtained in exchange for new lease liabilities (b)
Total right-of-use assets obtained in exchange for new lease liabilities (b)
(a) Includes variable and short-term lease expense, which were immaterial for fiscal year 2020.
(b) Excludes the impact of adopting the new leases standard in the first quarter of 2020.
Fiscal Year 2020
8.4
0.3
8.0
0.3
8.3
10.6
0.2
10.8
$
$
$
$
$
$
For fiscal year 2019 and 2018 the Company's lease expense was $5.1 million and $5.3 million, respectively.
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As of October 2, 2020, maturities of operating lease and finance lease liabilities for each of the following five years and a
total thereafter were as follows:
(In millions)
Fiscal years:
2021
2022
2023
2024
2025
Thereafter
Total future lease payments
Less: imputed interest
Present value of lease liabilities
Operating Leases
Finance Leases
$
$
$
7.1 $
6.6
4.2
3.5
3.3
9.4
34.1 $
(4.9)
29.2 $
0.2
0.2
0.2
—
—
—
0.6
—
0.6
As of October 2, 2020, the Company had not entered into any material leases that have not yet commenced.
At September 27, 2019, the Company was committed to minimum rentals under non-cancelable operating leases (including
rent escalation clauses) for fiscal years 2020 through 2024 and thereafter, as follows: $7.5 million, $5.4 million, $4.7 million,
$1.8 million, $0.9 million, and $0.2 million, respectively.
4. BUSINESS COMBINATIONS
Acquisition of Direct Conversion AB
In April 2019, Varex completed the acquisition of 98.2% of the outstanding shares of common stock of Direct Conversion
AB (publ) (“Direct Conversion”) for $69.5 million in cash, net of cash acquired, the assumption of Direct Conversion's debt of
$4.5 million and deferred consideration equal to $9.9 million or 0.3 million shares of the Company’s common stock. The acquisition
of Direct Conversion expanded our detector product portfolio to include photon counting technology. This technology will allow
Varex to expand its range of imaging applications and offer new solutions to both Medical and Industrial customers. To settle the
deferred consideration, in April 2020, the Company issued the 0.3 million shares of its common stock valued at $7.4 million to certain
shareholders of Direct Conversion.
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The following table summarizes the purchase price allocation for Direct Conversion:
(In millions)
Allocation of the purchase consideration:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Property, plant, and equipment
Goodwill
Intangible assets
Total assets acquired
Accounts payable
Accrued liabilities
Current maturities of long-term debt
Deferred revenues
Long-term debt
Other long-term liabilities
Total liabilities assumed
Noncontrolling interest
Net assets acquired, less noncontrolling interest
Net cash paid
Deferred consideration
Total consideration
Fair Value
2.4
5.7
0.7
0.9
47.2
32.9
89.8
(1.0)
(1.5)
(1.0)
(0.9)
(3.5)
(1.1)
(9.0)
(1.4)
79.4
69.5
9.9
79.4
$
$
$
$
The Company recorded the assets acquired and liabilities assumed at their fair values. Intangibles were valued primarily
using a discounted cash flow, which included estimated revenue growth and discount rate. The fair value assigned to goodwill is
primarily attributable to expected synergies. The goodwill related to the Direct Conversion acquisition is not tax deductible.
The following amounts represent the determination of the fair value and estimated weighted average useful lives of
identifiable intangible assets for the Direct Conversion, which are amortized using the straight-line method:
(In millions)
Backlog
Trade names
Developed technology
In-process research and development
Customer relationships
Total intangible assets acquired
Estimated
Weighted Average
Useful Life
(In Years)
Fair Value
$
$
0.2
2.5
18.4
2.8
9.0
32.9
1
5
10
indefinite
10
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During the third quarter of 2020, the in-process research and development assets from the Direct Conversion acquisition were
determined to be impaired. Refer to Note 12. Goodwill and Intangible Assets, for more information.
The following amounts represent revenues by reporting segment from Direct Conversion from the acquisition date of April
29, 2019, through September 27, 2019:
(In millions)
Medical
Industrial
Total Direct Conversion revenues
Direct Conversion Revenue
$
$
4.5
1.8
6.3
The acquisition of Direct Conversion did not have a significant impact on the Company's consolidated results of operations
on a pro forma basis for the current or prior years.
5. RELATED-PARTY TRANSACTIONS
Investment in Privately-Held Companies
The Company has a 40% ownership interest in dpiX Holding LLC (“dpiX Holding”), a four-member consortium that has a
100% ownership interest in dpiX LLC (“dpiX”), a supplier of amorphous silicon based thin film transistor arrays for digital flat panel
image detectors. In accordance with the dpiX Holding Agreement, net profits or losses are allocated to the members, in accordance
with their ownership interests.
The equity investment in dpiX Holding is accounted for under the equity method of accounting. When the Company
recognizes its share of net profits or losses of dpiX Holding, profits or losses in inventory purchased from dpiX are eliminated until
realized by the Company. In fiscal years 2020, 2019 and 2018, the Company recorded (loss) and income on the equity investment in
dpiX Holding of $(0.8) million, $(1.1) million and $3.4 million, respectively. Income and loss on the equity investment in dpiX
Holding is included in other (expense) income, net in the consolidated statements of (loss) earnings. The carrying value of the equity
investment in dpiX Holding, which was included in investments in privately-held companies on the consolidated balance sheets, was
$47.3 million and $48.1 million at October 2, 2020 and September 27, 2019, respectively.
In fiscal years 2020, 2019 and 2018, the Company purchased glass transistor arrays from dpiX totaling $20.4 million,
$23.5 million and $19.3 million, respectively. These purchases of glass transistor arrays are included as a component of inventories on
the consolidated balance sheets or cost of revenues in the consolidated statements of (loss) earnings for these fiscal years.
As of October 2, 2020 and September 27, 2019, the Company had accounts payable to dpiX totaling $4.6 million and $3.6
million, respectively.
In October 2013, the Company entered into an amended agreement with dpiX and other parties that, among other things,
provides the Company with the right to 50% of dpiX’s total manufacturing capacity produced after January 1, 2014. In addition, the
amended agreement requires the Company to pay for 50% of the fixed costs (as defined in the amended agreement), as determined at
the beginning of each calendar year. In January 2020, the fixed cost commitment was determined and approved by the dpiX board of
directors to be $12.7 million for calendar year 2020. As of October 2, 2020, the Company estimated it has fixed cost commitments of
$3.2 million related to this amended agreement through the remainder of calendar year 2020. The amended agreement will continue
unless the ownership structure of dpiX changes (as defined in the amended agreement).
The Company has determined that dpiX is a variable interest entity because at-risk equity holders, as a group, lack the
characteristics of a controlling financial interest. Majority votes are required to direct the manufacturing activities, legal operations and
other activities that most significantly affect dpiX’s economic performance. The Company does not have majority voting rights and no
power to direct the activities of dpiX and therefore is not the primary beneficiary of dpiX. The Company’s exposure to loss as a result
of its involvement with dpiX is limited to the carrying value of the Company’s investment of $47.3 million and fixed cost
commitments.
In November 2018, the Company and CETTEEN GmbH (“CETTEEN”), formed a German joint venture entity, VEC
Imaging Verwaltungsgesellschaft GmbH (“VEC”), to develop technology for use in X-ray imaging components. In accordance with
the VEC agreement, net profits or losses are allocated to the members in accordance with their ownership interest. The Company's
investment in VEC is accounted for under the equity method. As of October 2, 2020, the Company has made contributions totaling
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$4.0 million, and has committed to contribute an additional $1.2 million, as milestones are achieved, and to provide certain full-time
employees to support prototyping and manufacturing activities in exchange for a 50% interest in VEC. CETTEEN made contributions
of certain assets including intellectual property in exchange for a 50% interest in VEC. The Company's investment in VEC was
$2.5 million and $2.0 million as of October 2, 2020 and September 27, 2019, respectively.
6. RESTRUCTURING
In July 2018, the Company committed to relocate the production of amorphous silicon glass for digital detectors, from its
Santa Clara facility, to the jointly owned dpiX fabrication facility in Colorado. In July 2019, the Company committed to close its Santa
Clara facility and to relocate the remaining production to its other existing facilities. The Company ceased all operations at the Santa
Clara facility as of October 2, 2020 and all activities related to the closure of the facility are expected to be complete by the end of
December 2020. In connection with the relocation of the glass production and site closure, the Company recorded $9.1 million and
$18.9 million of restructuring charges during fiscal year 2020 and 2019, respectively.
On July 29, 2020, the Company commenced the implementation of a reduction in workforce to reduce the Company’s
operating costs and address the impact of the COVID-19 pandemic. This action is expected to result in the reduction of the Company’s
workforce by approximately 94 employees, of which nearly all are located within the United States. This reduction is in addition to the
previously disclosed reduction in workforce associated with the closure of the Company’s Santa Clara facility. The Company expects
to complete the reduction in workforce by December 31, 2020. In connection with this reduction in workforce and other restructuring
activities, excluding those related to the Santa Clara facility, the Company has recorded $4.4 million of expense during fiscal year
2020.
Cash outflows associated with these restructuring charges are limited to employee termination expenses, facility closure and
equipment sales and disposals. Below is a detail of restructuring charges incurred during the 2020 and 2019 fiscal years, which
predominately relate to the Company's Medical segment:
(In millions)
Inventory write downs
Intangible assets impairment
Accelerated depreciation
Severance costs
Facility closure costs
Total restructuring charges
Location of Restructuring Charges in Consolidated
Statements of (Loss) Earnings
October 2, 2020
September 27, 2019
Cost of revenues
Impairment of intangible assets
Cost of revenues
Selling, general and administrative
Selling, general and administrative
$
$
1.3 $
—
2.9
5.7
3.6
13.5 $
3.1
4.8
4.5
6.2
0.3
18.9
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Table of Contents
7. OTHER FINANCIAL INFORMATION
The following table summarizes the Company’s accrued liabilities and other current liabilities:
(In millions)
Accrued compensation and benefits
Product warranty
Income taxes payable
Right of return liability
Deferred consideration
Other
Total accrued liabilities and other current liabilities
The following table summarizes the Company’s other long-term liabilities:
(In millions)
Long-term income tax payable
Environment liabilities
Defined benefit obligation liability
Long-term right of return liability
Long-term other
Total other long-term liabilities
The following table summarizes the Company’s other (expense) income, net:
$
$
$
8.1
5.6
7.4
—
16.4
70.5 $
3.9 $
0.8
6.5
19.9
3.8
34.9 $
October 2, 2020
September 27, 2019
$
33.0 $
October 2, 2020
September 27, 2019
(In millions)
Income (loss) from equity method investments
Change in fair value of deferred consideration
Impairment of investment
Realized (loss) on foreign currencies
Total other income (expense), net
8. (LOSS) EARNINGS PER SHARE
2020
Fiscal Years
2019
2018
(2.1) $
(2.3) $
0.9
(2.7)
(3.7)
1.0
0.0
(1.9)
(7.6) $
(3.2) $
$
$
Basic (loss) earnings per common share is computed by dividing the net (loss) earnings for the period by the weighted
average number of shares of common stock outstanding during the reporting period. Diluted earnings per common share reflects the
effects of potentially dilutive securities, which is computed by dividing net (loss) earnings by the sum of the weighted average number
of common shares outstanding and dilutive common shares, which consists of stock options and unvested restricted stock.
F-25
32.1
8.1
10.7
6.9
8.9
9.0
75.7
3.9
0.9
5.5
19.5
2.7
32.5
3.9
—
—
(1.2)
2.7
A reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per common share is
as follows:
(In millions, except per share amounts)
Net (loss) earnings attributable to Varex
Weighted average shares outstanding - basic
Dilutive effect of potential common shares
Weighted average shares outstanding - diluted
(Loss) earnings per share attributable to Varex - basic
(Loss) earnings per share attributable to Varex - diluted
Anti-dilutive employee shared based awards, excluded
2020
Fiscal Year
2019
2018
$
(57.9) $
15.5 $
38.8
—
38.8
(1.49) $
(1.49) $
3.5
38.2
0.4
38.6
0.41 $
0.40 $
1.9
$
$
27.5
37.9
0.5
38.4
0.73
0.72
1.2
Potentially dilutive shares, which are based on the weighted-average shares of common stock underlying stock options,
unvested stock awards, purchase rights granted under the employee stock purchase plan, warrants and convertible notes using the
treasury stock method or the if-converted method, as applicable, are included when calculating diluted net income (loss) earnings per
share attributable to Varex when their effect is dilutive. Because the Company incurred a net loss for fiscal year 2020, none of the
potentially dilutive common shares were included in the diluted share calculations for those periods as they would have been anti-
dilutive.
9. FINANCIAL DERIVATIVES AND HEDGING ACTIVITIES
As part of the Company’s overall risk management practices, the Company enters into financial derivatives to manage its
financial exposures to foreign currency exchange rates and interest rates.
The Company records all derivatives on the consolidated balance sheets at fair value. The accounting for changes in the fair
value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a
hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply
hedge accounting. A qualitative assessment of hedge effectiveness is performed on a quarterly basis, unless facts and circumstances
indicate the hedge may no longer be highly effective. The changes in fair value for all trades that are not designated for hedge
accounting are recognized in current period earnings. The Company does not offset fair value amounts recognized for derivative
instruments in its consolidated balance sheets for presentation purposes.
Credit risk related to derivative transactions reflects the risk that a party to the transaction could fail to meet its obligation
under the derivative contracts. Therefore, the Company’s exposure to the counterparty’s credit risk is generally limited to the amounts,
if any, by which the counterparty’s obligations to the Company exceed the Company’s obligations to the counterparty. The
Company’s policy is to enter into contracts only with financial institutions which meet certain minimum credit ratings to help mitigate
counterparty credit risk.
Derivatives Designated as Hedging Instruments - Cash Flow Hedges
The Company previously used interest rate swap contracts as cash flow hedges to manage its exposure to fluctuations in
LIBOR interest rates. Interest rate swap contracts hedging variable rate debt effectively fixed the LIBOR component of its interest rate
for a specific period of time. These hedges were entered into in connection with the Company's prior Credit Agreement, as defined in
Note 10. Borrowings, as the interest rates under the Credit Agreement were at variable rates. In September 2020, the Company repaid
the debt under the Credit Agreement and terminated all of the interest rate swap contracts. The loss on the interest rate contracts that
was deferred in other comprehensive income (OCI) was immediately recognized in earnings from transactions that are remote.
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The following table summarizes the amount of pre-tax (loss) earnings recognized from derivative instruments for the periods
indicated and the line items in the accompanying financial statements where the results are recorded for cash flow hedges:
(In millions)
Interest Rate Swap
Contracts
Amount of Gain or (Loss) Recognized in OCI
on Derivatives
Fiscal Year Ended
2020
2019
2018
Location of Gain or (Loss)
Reclassified from
Accumulated OCI into
Income
Amount of Gain or (Loss) Reclassified from
Accumulated OCI into Income
Fiscal Year Ended
2020
2019
2018
$
(3.4) $
(6.3) $
6.9
Interest expense
$
(1.5) $
1.9 $
0.1
These derivative instruments are subject to master netting agreements giving effect to rights of offset with each counterparty.
None of the balances were eligible for netting. The following table summarizes the gross fair values of derivative instruments as of the
periods indicated and the line items in the accompanying consolidated balance sheets where the instruments are recorded.
(In millions)
Derivatives designated as cash flow hedges
Interest rate swap contracts
Derivatives Designated as Hedging Instruments - Net Investment Hedges
Derivative Liabilities
October 2, 2020
September 27,
2019
Balance sheet location
Other non-current liabilities
$
— $
(0.5)
The Company uses cross currency swap contracts as net investment hedges to manage its risk of variability in foreign
currency-denominated net investments in majority-owned international operations. All changes in fair value of the derivatives
designated as net investment hedges are reported in accumulated other comprehensive (loss) income along with the foreign currency
translation adjustments on those investments. In September 2020, the Company terminated one of the net investment swaps and the
loss on the swap was recorded in accumulated other comprehensive (loss) income where it will remain until substantial liquidation of
the international operations.
As of October 2, 2020, the Company had the following outstanding derivatives designated as net investment hedging
instruments:
(In millions, except for number of instruments)
Cross Currency Swap Contracts
Number of
Instruments
Notional Value
3
$
66.6
The following table summarizes the amount of pre-tax earnings recognized from derivative instruments for the periods
indicated and the line items in the accompanying statements of (loss) earnings where the results are recorded for net investment
hedges:
Amount of Gain or (Loss) Recognized in OCI
on Derivatives
Fiscal Year Ended
(In millions)
2020
2019
2018
Location of Gain or (Loss)
Recognized in Income on
Derivative (Amount
Excluded from
Effectiveness Testing)
Amount of Gain or (Loss) Recognized in
Income on Derivative (Amount Excluded from
Effectiveness Testing)
2020
2019
2018
Cross Currency Swap
Contracts
$
(1.3) $
(0.2) $
—
Interest expense
$
1.5 $
0.2 $
—
These derivative instruments are subject to master netting agreements giving effect to rights of offset with each counterparty.
None of the balances were eligible for netting. The following table summarizes the gross fair values of derivative instruments as of the
periods indicated and the line items in the accompanying consolidated balance sheets where the instruments are recorded:
(In millions)
Derivatives designated as net
investment hedges
Cross currency swap contracts
Cross currency swap contracts
Derivative Assets
Derivative Liabilities
October 2, 2020
September 27,
2019
October 2, 2020
September 27,
2019
Balance sheet
location
Other current
assets
Other non-current
assets
$
$
Balance sheet
location
Other current
liabilities
Other non-current
liabilities
1.3 $
—
1.3 $
—
—
—
$
$
— $
(2.1)
(2.1) $
(0.2)
—
(0.2)
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Table of Contents
Balance Sheet Hedges
The Company also enters into foreign currency forward contracts to hedge fluctuations associated with foreign currency denominated
monetary assets and liabilities, primarily cash, third-party accounts receivable, accounts payable, and intercompany receivables and
payables. These forward contracts expire within 30 days. These forward contracts are not designated for hedge accounting treatment,
therefore, the change in fair value of these derivatives is recorded as a component of other income (expense) and offsets the change in
fair value of the foreign currency denominated assets and liabilities, which are also recorded in other income (expense). The effect of
derivative instruments not designated as hedges for fiscal year 2020 was a loss of $0.2 million. The Company does not, and does not
intend to use derivative financial instruments for speculative or trading purposes.
The following table shows the notional amounts of outstanding foreign currency contracts entered into under its balance sheet
hedge program as of October 2, 2020:
(in millions)
Swiss franc
Chinese renminbi
Euro
Notional Value of Derivatives not
Designated as Hedging
Instruments:
Buy contracts
Sell contracts
$
$
—
$
3.4
—
3.4
$
1.1
—
29.3
30.4
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Table of Contents
10. BORROWINGS
The following table summarizes the Company's short-term and long-term debt:
October 2, 2020
September 27, 2019
(In millions, except for percentages)
Amount
Current maturities of long-term debt
Term Facility
Other debt
Total current maturities of long-term debt
Non-current maturities of long-term debt:
Revolving Credit Facility
Asset-Based Loan
Term Facility
Convertible Senior Unsecured Notes
Senior Secured Notes
Other debt
$
$
$
—
2.5
2.5
—
—
—
200.0
300.0
8.8
Weighted-Avg
Effective Interest
Rate
Amount
Weighted-Avg
Effective Interest
Rate
$ Change
$
$
$
29.4
1.3
30.7
59.0
—
308.6
—
—
2.5
5.6%
$
$
(29.4)
1.2
(28.2)
5.6%
$
(59.0)
5.6%
—
(308.6)
200.0
300.0
6.3
10.9%
8.2%
Total non-current maturities of long-term debt:
$
508.8
$
370.1
$
138.7
Unamortized issuance costs and debt discounts
Debt issuance costs - Credit Agreement
$
—
$
(5.7)
$
5.7
Unamortized discount and issuance costs -
Convertible Notes
Debt issuance costs - Senior Secured Notes
Total
Total debt outstanding, net
(50.4)
(5.6)
(56.0)
455.3
$
$
—
—
(5.7)
(50.4)
(5.6)
$
(50.3)
395.1
$
60.2
$
$
Future principal payments of long-term debt outstanding as of October 2, 2020 are as follows:
(In millions)
Fiscal years:
2021
2022
2023
2024
2025
Thereafter
Total debt outstanding
Less: current maturities of long-term debt
Non-current portion of long -term debt
Convertible Senior Unsecured Notes
$
$
2.5
2.6
2.4
1.5
201.4
300.9
511.3
(2.5)
508.8
On June 9, 2020, Varex issued $200.0 million in aggregate principal amount of 4.00% convertible senior unsecured notes due
2025 (“Convertible Notes”). The net proceeds from the issuance of the Convertible Notes, after deducting transaction fees and offering
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expense payable by the Company, were approximately $193.1 million. The Convertible Notes bear interest at the annual rate of
4.00%, payable semiannually on June 15 and December 15 of each year, beginning on December 15, 2020, and will mature on June
15, 2025, unless earlier converted or repurchased by us.
The Convertible Notes will be convertible into cash, shares of Varex common stock or a combination thereof, at the
Company's election, at an initial conversion rate of 48.05 shares of common stock per $1,000 principal amount of Convertible Notes,
which is equivalent to an initial conversion price of approximately $20.81 per share, subject to adjustment pursuant to the terms of the
Indenture governing the Convertible Notes (the "Indenture"). The Convertible Notes may be converted at any time after, and
including, December 15, 2024 until the close of business on the second scheduled trading day immediately before the maturity date.
The conversion rate of the Convertible Notes may be adjusted in certain circumstances, including in connection with a
conversion of the Convertible Notes made following certain fundamental changes and under other circumstances set forth in the
Indenture. It is the Company's current intent and policy to settle any conversions of notes through a combination of cash and shares.
Prior to the close of business on the business day immediately preceding December 15, 2024, the Convertible Notes at the
option of the holder can be convertible only under the following circumstances:
•
•
•
•
during any calendar quarter commencing after the calendar quarter ending on September 30, 2020, if the last reported sale
price per share of Varex common stock exceeds 130% of the conversion price for each of at least 20 trading days during the
30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;
during the five consecutive business days immediately after any five consecutive trading day period (such five consecutive
trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of notes for each
trading day of the measurement period was less than 98% of the product of the last reported sale price per share of Varex
common stock on such trading day and the conversion rate on such trading day;
upon the occurrence of certain corporate events or distributions on Varex common stock, as described in the Indenture; or
if the Company calls any notes for redemption (under the conditions specified below).
The Convertible Notes will be redeemable, in whole or in part, at the Company’s option at any time, and from time to time,
on or after June 1, 2023 and on or before the 60th scheduled trading day immediately before the maturity date, at a cash redemption
price equal to the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest, if any, but only if the
last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price on (i) each of at least 20
trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day
immediately before the date the Company sends the related redemption notice; and (ii) the trading day immediately before the date the
Company sends such notice. In addition, calling any Convertible Note for redemption will constitute a make-whole fundamental
change with respect to that Convertible Note, in which case the conversion rate applicable to the conversion of that Convertible Note
will be increased in certain circumstances if it is converted after it is called for redemption. No sinking fund is provided for the
Convertible Notes.
Total interest expense related to the Convertible Notes for the twelve months ended October 2, 2020 was $5.0 million and
was comprised of $2.5 million related to the contractual interest coupon and $2.5 million related to the amortization of the discount
and issuance costs on the liability component.
Call Spread
On June 4, 2020 and June 5, 2020, in connection with the offering of the Convertible Notes, Varex entered into privately
negotiated convertible note hedge transactions (collectively, the “Hedge Transactions”). The Hedge Transactions cover, subject to
customary anti-dilution adjustments, the number of shares of Varex common stock that initially underlie the Convertible Notes. The
Hedge Transactions are expected generally to reduce the potential dilution and/or offset any cash payments Varex is required to make
in excess of the principal amount due upon conversion of the Convertible Notes in the event that the market price of Varex common
stock is greater than the strike price of the Hedge Transactions, which was initially $20.81 per share (subject to adjustment under the
terms of the Hedge Transactions). The strike price of $20.81 corresponds to the initial conversion price of the Convertible Notes. The
number of shares underlying the Hedge Transactions is 9.6 million.
On June 4, 2020 and June 5, 2020, Varex also entered into privately negotiated warrant transactions (collectively, the
“Warrant Transactions” and, together with the Hedge Transactions, the “Call Spread Transactions”), whereby the Company sold
warrants at a higher strike price relating to the same number of shares of Varex common stock that initially underlie the Convertible
Notes, subject to customary anti-dilution adjustments. The initial strike price of the warrants is $24.975 per share (subject to
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adjustment under the terms of the Warrant Transactions), which is 50% above the last reported sale price of Varex common stock on
June 4, 2020. The Warrant Transactions could have a dilutive effect to the Company's stockholders to the extent that the market price
per share of Varex common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the
warrants. The number of shares underlying the Warrant Transactions is 9.6 million. The number of warrants outstanding as of
October 2, 2020, was 9.6 million.
The Company used $11.2 million of the net proceeds from the issuance of the Convertible Notes and $49.8 million from the
Warrant Transactions to pay the cost of the Hedge Transactions, which totaled $61.0 million.
The Hedge Transactions and the Warrant Transactions are separate transactions, in each case, and are not part of the terms of
the Convertible Notes and will not affect any holder’s rights under the Convertible Notes. Holders of the Convertible Notes will not
have any rights with respect to the Call Spread Transactions.
Accounting Treatment of the Convertible Notes and Related Hedge Transactions and Warrant Transactions
As the Call Spread Transactions meet certain accounting criteria, the Call Spread Transactions were classified as equity and
are not accounted for as derivatives. The proceeds from the offering of the Convertible Notes were separated into liability and equity
components. On the date of issuance, the liability and equity components of the Convertible Notes were calculated to be
approximately $152.3 million and $47.7 million, respectively. The initial $152.3 million liability component was determined based on
the fair value of similar debt instruments excluding the conversion feature assuming a hypothetical interest rate of 10.45%. The initial
$47.7 million equity component represents the difference between the fair value of the initial $152.3 million in debt and the
$200.0 million of gross proceeds. The equity component is included in additional paid-in capital in the consolidated balance sheets and
will not be subsequently remeasured as long as it continues to meet the conditions for equity classification. The related initial debt
discount of $47.7 million is being amortized over the life of the Convertible Notes as non-cash interest expense using the effective
interest method at an interest rate of 10.9%.
In connection with the above-noted transactions, the Company incurred approximately $6.9 million of offering-related costs.
These offering fees were allocated to the liability and equity components in proportion to the allocation of proceeds and accounted for
as debt and equity issuance costs, respectively. The Company allocated $5.3 million of debt issuance costs to the liability component,
which were capitalized as deferred financing costs within long-term debt. These costs are being amortized as interest expense over the
term of the debt using the effective interest method. The remaining $1.6 million of transaction costs allocated to the equity component
were recorded as a reduction of the equity component.
Senior Secured Notes
Varex issued $300.0 million aggregate principal amount of 7.875% Senior Secured Notes due 2027 (the "Senior Secured
Notes") pursuant to an indenture dated September 30, 2020, among Varex, certain of its direct or indirect wholly-owned subsidiaries
as guarantors, and Wells Fargo Bank, National Association as trustee and collateral agent. Interest payments are paid semiannually on
April 15 and October 15 of each year, beginning on April 15, 2021.
The net proceeds from the Senior Secured Notes after initial purchasers’ discount, commissions and estimated fees and
expenses of $5.6 million, were approximately $294.4 million. The Company used $267.5 million of the proceeds from the offering to
repay the Term Facility (defined below), including accrued interest.
As of October 2, 2020, the book value of the Senior Secured Notes was presented net of unamortized debt issuance costs of
$5.6 million. Debt issuance costs are amortized to interest expense over the agreement term using the effective interest method. The
effective interest rate was 8.2% as of October 2, 2020.
The Senior Secured Notes are secured by a first priority lien on substantially all of the assets of Varex and the assets and
capital stock of its subsidiary guarantors (subject to exceptions), except for assets for which a first priority security interest is pledged
for the ABL Facility (defined below), in which the Senior Secured Notes will have a second lien security interest. The Senior Secured
Notes include negative covenants, subject to certain exceptions, restricting or limiting Varex's ability and the ability of its restricted
subsidiaries to, among other things, incur liens on collateral; sell certain assets; incur additional indebtedness; pay dividends; issue
preferred shares; consolidate, merge, or sell all or substantially all of its assets; and enter into certain transactions with their affiliates.
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At any time prior to October 15, 2023, the Company has the ability to redeem the Senior Secured Notes under the following
optional redemptions:
•
up to 30% of the aggregate principal amount of the notes issued under the indenture with the proceeds of certain
equity offerings at a redemption price equal to 107.875% of the principal amount thereof, plus accrued and unpaid interest, if
any, to, but excluding, the redemption date.
•
some or all of the notes at a price equal to 100% of the principal amount of the notes, plus a “make-whole
premium,” together with accrued and unpaid interest, if any, to, but excluding, the redemption date.
•
up to 10% of the aggregate principal amount of the notes per year at a redemption price equal to 103% of the
aggregate principal amount of notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding the
redemption date.
At any time on or after October 15, 2023, Varex may redeem all or part of the notes at the redemption prices indicated in the
indenture, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, if the Company experiences
certain changes of control or receive proceeds from certain asset sales, holders of the notes will have the right to require the Company
to repurchase the notes under the terms set forth within the indenture.
Interest expense related to the Senior Secured Notes for the twelve months ended October 2, 2020 was $0.2 million.
Asset-Based Loan
Concurrent with the termination of the Credit Agreement (defined below) and closing of the Senior Secured Notes on
September 30, 2020, the Company entered into a new revolving credit agreement consisting of a $100.0 million asset-based loan
revolving credit facility (the “Asset-Based Loan”, or "ABL Facility"). Borrowings under the Asset-Based Loan will be expected to
bear interest at floating rates based on LIBOR, or comparable rate, or a base rate, and an applicable margin based on Average Daily
Excess Availability (as defined in the Asset-Based Loan Agreement). In addition, the Company is required to pay a quarterly
commitment fee of 0.375% to 0.5%, based on the aggregate unused commitments under the Asset-Based Loan. The ABL Facility
matures on the earlier of September 30, 2025 or 91 days prior to the maturity of the Convertible Notes, at which time all outstanding
amounts under the ABL Facility will be due and payable. As of October 2, 2020, the total undrawn amount under the ABL Facility
was $100.0 million, however, the borrowing base under the ABL fluctuates from month-to-month depending on the amount of eligible
accounts receivable and inventory.
Debt issuance costs, including unamortized deferred costs for continuing lenders under the previously existing revolving
credit facility, of $3.1 million were capitalized and are being amortized over the term of the new agreement. The amortization
associated with these costs is recorded within Interest expense in the consolidated statement of operations. The debt issuance costs are
included net of amortization within other assets in the accompanying consolidated balance sheets.
The ABL Facility includes various restrictive covenants that limit our ability to engage in certain transactions, including the
incurrence of debt, payment of dividends and other restrictive payments, existence of restrictions affecting subsidiaries, sales of stock
and assets, certain affiliate transactions, modifications of debt documents and organizational documents, changes to line of business
and fiscal year, incurrence of liens, making fundamental changes, prepayments of junior indebtedness, and certain other transactions.
The ABL Facility contains a minimum Fixed Charge Coverage Ratio of 1.00 to 1.00 that is tested when excess availability
under the ABL is less than the greater of (i) 10.0% of the Line Cap (the lesser of (a) the aggregate commitments under the ABL
Facility and (b) the aggregate borrowing base) and (ii) $7.5 million.
The ABL Facility will have a first lien security interest on accounts receivable, cash, and inventory as well as certain real
estate and holds second lien security interest on all other assets.
Credit Agreement
On May 1, 2017 Varex entered into a secured revolving credit facility (the “Revolving Credit Facility”) in an aggregate
principal amount of up to $200.0 million with a term of five years, and a secured term facility (the “Term Facility” and together with
the Revolving Credit Facility, the “Credit Agreement”) in an aggregate principal amount of $400.0 million, which was subsequently
amended.
On September 30, 2020, the Company terminated its previously existing Credit Agreement, consisting of both the Term
Facility and Revolving Credit Facility. The Company repaid the outstanding Term Facility balance of $265.5 million and accrued
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interest of $2.0 million with proceeds received from the issuance of the Senior Secured Notes (defined above) and wrote off
approximately $3.8 million of previously recorded debt issuance costs, which resulted in a $3.8 million loss on extinguishment of
debt, recorded as interest expense within the consolidated statements of operations and comprehensive (loss) earnings.
11. FAIR VALUE
Assets/Liabilities Measured at Fair Value on a Recurring Basis
In the tables below, the Company has segregated all assets and liabilities that are measured at fair value on a recurring basis
into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement
date.
(In millions)
Fair Value Measurements at October 2, 2020
Assets:
Cash equivalents - money market funds
Derivative assets
Total assets measured at fair value
Liabilities:
Derivative liabilities
Total liabilities measured at fair value
Quoted Prices in
Active Markets
for Identical
Assets and
Liabilities
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
$
$
— $
—
— $
— $
— $
72.9 $
1.1
74.0 $
2.1 $
2.1 $
— $
—
— $
— $
— $
72.9
1.1
74.0
2.1
2.1
The fair values of certain of the Company’s financial instruments, including bank deposits included in cash and cash
equivalents, accounts receivable and accounts payable, also approximate their fair values due to their short maturities. As of
October 2, 2020, the fair value of the Company's Convertible Notes and Senior Secured Notes, as defined in Note 10. Borrowings, was
$178.5 million and $312.8 million, respectively. As of September 27, 2019, the total outstanding borrowings of $395.1 million, net of
deferred loan costs, approximated its fair value as it was carried at a market observable interest rate that resets periodically and was
categorized as Level 2 in the fair value hierarchy. The Company has elected to use the income approach to value its derivative
instruments using standard valuation techniques and Level 2 inputs, such as currency spot rates, forward points and credit default swap
spreads. There were no financial assets or liabilities measured on a recurring basis using significant unobservable inputs (Level 3) and
there were no transfers in or out of Level 1, 2 or 3 during fiscal year 2020.
At September 27, 2019, the Company determined the following levels of inputs for the following assets or liabilities:
(In millions)
Fair Value Measurements at September 27, 2019
Assets:
Cash equivalents - Money market funds
Total assets measured at fair value
Liabilities:
Derivative liabilities
Deferred consideration
Total liabilities measured at fair value
Quoted Prices in
Active Markets for
Identical Assets and
Liabilities
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
$
$
— $
— $
— $
8.9
8.9 $
8.8 $
8.8 $
0.7 $
—
0.7 $
— $
— $
— $
—
— $
8.8
8.8
0.7
8.9
9.6
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Table of Contents
12. GOODWILL AND INTANGIBLE ASSETS
In the third quarter of 2020, changes in facts and circumstances and general market declines from COVID-19 resulted in
reduced expectations of future operating results. The Company considered these circumstances and the potential long-term impact on
cash flows associated with its reporting units and indefinite-lived intangible assets and determined that an indicator of possible
impairment existed within its Medical and Industrial reporting units and indefinite-lived intangible assets. Accordingly, the Company
performed a quantitative impairment analysis to determine the fair values of those reporting units and indefinite-lived intangible
assets. The Company used both an income approach utilizing the discounted cash flow method ("DCF") and a market approach
utilizing the public company market multiple method. The Company developed multiple forecasted future cash flow scenarios for the
reporting units and indefinite-lived intangible assets with varied recovery timing and sales impact assumptions. Based on the output of
the analysis, the Company determined that the fair values of both the Medical and Industrial reporting units exceeded their carrying
amounts. The Company's Industrial reporting unit's fair value exceeded its carrying value by more than 20% and the Company's
Medical reporting unit's fair value exceeded its carrying value by more than 30%. Accordingly, no impairment charges were required
as of July 3, 2020. However, an impairment charge was required for the Company's in-process R&D as discussed below.
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates,
and market factors. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding the
Company's future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated
future annual net cash flows, income tax rates, discount rates, revenue growth rates, forecasted gross margins, market multiples,
terminal value and other market factors. This fair value measurement was based on significant inputs not observable in the market and
thus represents a Level 3 fair value measurement. If current expectations of future revenue growth rates and forecasted gross margins,
both in size and timing, are not met, if market factors outside of the Company's control, such as discount rates, change, if market
multiples decline, or if management’s expectations or plans otherwise change, including as a result of the development of the
Company's global five-year operating plan, then one or more of the Company's reporting units might become impaired in the future.
The Company will continue to monitor the financial performance of and assumptions for its reporting units. A future impairment
charge for goodwill could have a material effect on the Company's consolidated financial position and results of operations.
The following table reflects goodwill by reportable operating segment:
(In millions)
Balance at September 27, 2019
Foreign currency translation adjustments
Balance at October 2, 2020
Medical
Industrial
Total
$
$
173.0 $
117.8 $
1.4
0.9
174.4 $
118.7 $
290.8
2.3
293.1
The following table reflects the gross carrying amount and accumulated amortization of the Company’s finite-lived intangible
assets included in other assets in the consolidated balance sheets:
October 2, 2020
September 27, 2019
(In millions)
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Acquired existing technology
$
74.9 $
(37.5) $
37.4 $
74.1 $
(28.4) $
Patents, licenses and other
Customer contracts and supplier
relationship
Total intangible assets with finite lives
In-process R&D with indefinite lives
12.8
51.2
138.9
—
(9.7)
(24.2)
(71.4)
—
3.1
27.0
67.5
—
12.7
50.7
137.5
2.8
(8.4)
(17.2)
(54.0)
—
Total intangible assets
$
138.9 $
(71.4) $
67.5 $
140.3 $
(54.0) $
45.7
4.3
33.5
83.5
2.8
86.3
Amortization expense for intangible assets was $17.2 million, $15.7 million and $16.2 million in fiscal years 2020, 2019 and
2018, respectively. The Company recognized intangible asset impairment charges of $2.8 million, $4.8 million, and $3.0 million in
fiscal years 2020, 2019, and 2018, respectively, which are included in the consolidated statements of (loss) earnings under impairment
of intangible assets. These impairment charges related primarily to the Company's Medical reporting segment. The fair value of the
asset impaired during the third quarter of 2020 was determined using an estimated weighted average cost of capital of 25.0%
(consistent with the rate used at the acquisition date), which reflects the risks inherent in future cash flow projections and represents a
rate of return that a market participant would expect for this asset. The Company believes its assumptions are consistent with the plans
and estimates that a market participant would use to manage the business. The estimated fair value of the in-process R&D intangible
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asset as of July 3, 2020 was zero. This fair value measurement was based on significant inputs not observable in the market and thus
represents a Level 3 fair value measurement.
In addition, as a result of the impact of COVID-19 as discussed above, the Company determined certain impairment triggers
had occurred related to the Company’s finite-lived tangible and intangible assets. Accordingly, the Company analyzed undiscounted
cash flows at the asset group level for certain finite-lived tangible and intangible assets as of July 3, 2020. Based on that undiscounted
cash flow analysis, the Company determined that estimated undiscounted future cash flows exceeded their net carrying values, and,
therefore, as of July 3, 2020, the Company's finite-lived tangible and intangible assets were not impaired.
As of October 2, 2020, the estimated future amortization expense of intangible assets with finite lives is as follows:
(In millions)
Fiscal years:
2021
2022
2023
2024
2025
Thereafter
Total
$
$
16.5
15.0
13.9
9.3
3.2
9.6
67.5
13. COMMITMENTS AND CONTINGENCIES
Lease Commitments
See Note 3. Leases, included in this report, for additional information about Varex's lease commitments.
Purchase Agreement With Supplier
During the third quarter of fiscal year 2020, Varex entered into a purchase agreement with a supplier to acquire certain
equipment and intellectual property from the supplier that is utilized to manufacture X-ray cables utilized in Varex's products. As of
October 2, 2020, there has been no transfer of control of the underlying equipment. This acquisition is expected to be completed
during the 2021 fiscal year and the total consideration to be paid by Varex for the acquired assets is expected to be ¥1,084.7 million or
approximately $10.3 million.
Other Commitments
See Note 5. Related Party Transactions, included in this report, for additional information about the Company’s
commitments to dpiX.
See Note 14. Redeemable Noncontrolling Interests & Noncontrolling Interests, included in this report, for additional
information about the Company’s commitment to the noncontrolling shareholders of MeVis.
The Company has an environmental liability of approximately $2.0 million as of October 2, 2020.
Contingencies
From time to time, the Company is a party to or otherwise involved in legal proceedings, claims and government inspections
or investigations, customs and duty audits, other contingency matters, both inside and outside the United States, arising in the ordinary
course of its business or otherwise. The Company accrues amounts for probable losses, to the extent they can be reasonably estimated,
that it believes are adequate to address any liabilities related to legal proceedings and other loss contingencies that the Company
believes will result in a probable loss (including, among other things, probable settlement value). A loss or a range of loss is disclosed
when it is reasonably possible that a material loss will be incurred and can be estimated or when it is reasonably possible that the
amount of a loss, when material, will exceed the recorded provision. The Company did not have any material contingent liabilities as
of October 2, 2020 and September 27, 2019. Legal expenses are expensed as incurred.
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14. REDEEMABLE NONCONTROLLING INTERESTS & NONCONTROLLING INTERESTS
In April 2019, a subsidiary of Varex completed the acquisition of 98.2% of the outstanding shares of common stock of Direct
Conversion. As the Company has majority voting rights it has consolidated Direct Conversion's operations in its consolidated financial
statements and recorded the noncontrolling interest. The noncontrolling interest related to Direct Conversion is included in
noncontrolling interest in the equity section of the Company's consolidated balance sheet. Earnings representing the noncontrolling
interest's portion of Direct Conversion's income from operations is included in the Company's consolidated statements of (loss)
earnings.
In September 2018, the Company entered into a partnership in Saudi Arabia. The Company has majority voting rights with an
approximate 75% interest. Accordingly, the Company has consolidated the operations of the Saudi Arabia partnership in the
Company's consolidated financial statements and recorded the noncontrolling interests. The noncontrolling interest related to the
partner’s 25% interest in the joint venture is included in noncontrolling interest in the equity section of the Company’s consolidated
balance sheet. Earnings representing the noncontrolling partner's share of income from operations is included in the Company's
consolidated statements of (loss) earnings.
In April 2015, the Company completed the acquisition of 73.5% of the then outstanding shares of MeVis Medical Solutions
AG (“MeVis”), a public company based in Bremen, Germany that provides image processing software and services for cancer
screening. In August 2015, the Company, through one of its German subsidiaries, entered into a domination and profit and loss
transfer agreement (the “DPLTA”) with MeVis. In October 2015, the DPLTA became effective upon its registration at the local court
of Bremen, Germany. Under the DPLTA, MeVis subordinates its management to the Company and undertakes to transfer all of its
annual profits and losses to the Company. In return, the DPLTA grants the noncontrolling shareholders of MeVis: (1) an annual
recurring net compensation of €0.95 per MeVis share starting from January 1, 2015 and (2) a put right for their MeVis shares at
€19.77 per MeVis share. During fiscal year 2018, an immaterial number of MeVis’ shares were purchased under the put right. During
the fourth quarter of fiscal year 2020, the put right granted to the noncontrolling shareholders of MeVis under the DPLTA expired
unexercised, which resulted in the redeemable noncontrolling interests being reclassified to permanent equity as noncontrolling
interest in the consolidated balance sheet. As of October 2, 2020, noncontrolling shareholders together held approximately 0.5 million
shares of MeVis, representing 26.3% of the outstanding shares.
Changes in redeemable noncontrolling interests and noncontrolling interests were as follows:
(In millions)
Fiscal Years
2020
2019
Redeemable
Noncontrolling
Interests
Noncontrolling
Interests
Redeemable
Noncontrolling
Interests
Noncontrolling
Interest
Balance at beginning of period
$
10.5 $
3.3 $
11.1 $
Net earnings attributable to noncontrolling interests
Contributions from noncontrolling interests
Reclassification of redeemable NCI in MeVis to noncontrolling
interests in permanent equity
Dividend distributions
Other
Balance at end of period
15. EMPLOYEE STOCK PLANS
Employee Stock Plans
0.5
—
(11.3)
(0.5)
0.8
—
—
11.3
—
(0.5)
0.5
—
—
(0.5)
(0.6)
$
— $
14.1 $
10.5 $
2.1
(0.2)
1.4
—
—
—
3.3
The Company's employees participate in Varex Imaging Corporation 2020 Omnibus Stock Plan (the “2020 Stock Plan”),
2017 Omnibus Stock Plan (the “2017 Stock Plan”), and Varex Imaging Corporation 2017 Employee Stock Purchase Plan (the “2017
ESPP”) which allows the grants of stock options, restricted stock units and performance shares among other types of awards.
In January 2017, Varex stockholders approved the 2017 ESPP, which provides eligible employees with an opportunity to
purchase shares of Varex common stock at 85% of the lower of its fair market value at the start and end of a six-month purchase
period. The 2017 ESPP provides for the purchase of up to one million shares of Varex common stock.
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Share-Based Compensation Expense
Share-based compensation expense recognized in the consolidated statements of (loss) earnings is based on awards ultimately
expected to vest. Share-based compensation expense includes expenses related to the Company’s direct employees.
The table below summarizes the effect of recording share-based compensation expense and for the option component of the
employee stock purchase plan shares:
(In millions)
Cost of revenues
Research and development
Selling, general and administrative
Total share-based compensation expense
2020
Fiscal Year
2019
2018
$
$
1.1 $
2.5
9.8
1.2 $
2.2
8.3
13.4 $
11.7 $
1.3
1.8
6.9
10.0
The unrecognized share-based compensation cost as of October 2, 2020 was $24.4 million, and is expected to be recognized
in the next 3 to 4 fiscal years. As of October 2, 2020, there were approximately 4.8 million and 0.5 million shares of common stock
available for future issuances under the 2020 Stock Plan and the 2017 ESPP, respectively.
The Company utilized the Black-Scholes valuation model for estimating the fair value of stock options granted and the option
component of ESPP grants. The Company calculated the fair value of option grants and option component of ESPP grants on the
respective dates of grant using the following weighted average assumptions:
Expected term (in years)
Risk-free interest rate
Expected volatility
Expected dividend
Weighted average fair value at grant date
Employee Stock Option Plan
Employee Stock Purchase Plans
Fiscal Year
Fiscal Year
2020
2019
2018
2020
2019
2018
6.1
1.1 %
36.9 %
— %
$7.53
4.6
2.5 %
33.9 %
— %
$10.19
4.8
2.6 %
31.8 %
— %
$11.57
0.5
0.9 %
50.0 %
— %
$7.94
0.5
2.5 %
43.9 %
— %
$7.81
0.5
2.0 %
34.1 %
— %
$8.92
Option valuation methods, including Black-Scholes, require the input of subjective assumptions, which are discussed below.
Risk-Free Interest Rate
The interest rates used are based on the implied yield currently available on U.S. Treasury zero-coupon issues with an
equivalent remaining term equal to the expected life of the award.
Expected Term
Options granted generally vest over a period of 36 to 48 months and expire 7 to 10 years from date of grant. Employee stock
purchase plan offering periods are 6 months and provides eligible employees with an opportunity to purchase shares of Varex common
stock at 85% of the lower of its fair market value at the start and end of a six-month purchase period. The Company has elected to use
the simplified method in calculating the expected term of its options due to a lack of sufficient historical information.
Expected Dividend Yield
The dividend rate used is zero as the Company has never paid any cash dividends on its common stock and does not
anticipate doing so in the foreseeable future. The Company is also restricted from paying dividends on common stock under its debt
facilities.
Expected Volatility
Authoritative accounting guidance on stock-based compensation indicates that companies should consider volatility over a
period generally commensurate with the expected or contractual term of the stock option. Adequate Company-specific data does not
exist for this time period as the Company began trading in January 2017. The volatility variable used is a blended approach by using
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the Company's historic data for the years it has been publicly traded and a benchmark of other comparable companies’ volatility rates
for the prior years.
Stock Option Activity
The following table summarizes the activity for stock options under Varex’s employee incentive plans for the Company’s
employees:
(In thousands, except per share amounts and the
remaining term)
Options
Price range
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Term (in
years)
Aggregate
Intrinsic
Value (1)
Outstanding at September 27, 2019
2,269
$22.63 - $37.60
$
Granted
Canceled, expired or forfeited
Exercised
Outstanding at October 2, 2020
Exercisable at October 2, 2020
591
(61)
(64)
2,735
1,794
$13.61 - $28.12
$22.63 - $37.10
$22.84 - $23.24
$13.61 - $37.60
$25.17 - $37.60
$
$
30.60
23.39
30.17
22.93
29.23
30.48
4.1
$
1,220.3
4.5
2.9
$
$
—
—
(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, which is computed based on the difference between the exercise price and the closing price
of Varex common stock of $12.37 as of October 2, 2020, the last trading date of the Company's respective fiscal years, and which represents the amount that would
have been received by the option holders had all option holders exercised their options and sold the shares received upon exercise as of that date.
The grant-date fair value of options granted during fiscal years 2020, 2019 and 2018 was $4.4 million, $3.0 million and $3.1
million, respectively. The total intrinsic value of the options exercised during the years ended October 2, 2020, September 27, 2019
and September 28, 2018 was $0.4 million, $0.2 million and $1.7 million, respectively
Restricted Stock Units, Restricted Stock Awards and Deferred Stock Units
The following table summarizes the activity for restricted stock units, restricted stock awards and deferred stock units under
Varex’s employee incentive plans for the Company’s employees:
(In thousands, except per share amounts)
Balance at September 27, 2019
Granted
Vested
Canceled, expired or forfeited
Balance at October 2, 2020
Number of Shares
Weighted Average
Grant-Date Fair
Value
678 $
587
(224)
(86)
955 $
33.18
20.30
32.77
31.27
25.54
The total grant-date fair value of shares granted was $11.9 million, $9.0 million and $10.1 million for fiscal years 2020, 2019
and 2018, respectively. Shares outstanding at October 2, 2020, September 27, 2019 and September 28, 2018 had an estimated market
value of $11.8 million, $19.2 million and $18.4 million, respectively.
16. TAXES ON EARNINGS
Income tax expense or benefit is based on reported income or loss before income taxes. Deferred income taxes reflect the
effect of temporary differences between asset and liability amounts that are recognized for financial reporting purposes and the
amounts that are recognized for income tax purposes. These deferred taxes are measured by applying currently enacted tax laws.
Valuation allowances are recognized to reduce deferred tax assets to the amount that is more likely than not to be realized.
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Taxes on earnings were as follows:
(In millions)
Current (benefit) provision:
Federal
State and local
Foreign
Total current
Deferred (benefit) provision:
Federal
State and local
Foreign
Total deferred
Taxes on (loss) earnings
2020
Fiscal Years
2019
2018
$
$
$
$
(16.3) $
9.2 $
(1.4)
5.7
1.3
6.8
(12.0) $
17.3 $
(1.7) $
(10.0) $
0.6
(2.1)
(3.2)
(1.6)
—
(11.6)
(15.2) $
5.7 $
(2.1)
(0.3)
7.5
5.1
(7.0)
0.7
(1.4)
(7.7)
(2.6)
(Loss) earnings before taxes are generated from the following geographic areas:
(In millions)
United States
Foreign
(Loss) earnings before taxes
2020
Fiscal Years
2019
2018
$
$
(74.1) $
1.5
(72.6) $
5.9 $
15.6
21.5 $
3.7
22.0
25.7
The effective tax rate differs from the U.S. federal statutory tax rate as a result of the following:
Federal statutory income tax rate
State and local taxes, net of federal tax benefit
Revaluation of deferred tax liabilities for US statutory change
Mandatory repatriation tax on foreign earnings
Domestic production activities deduction
Research and development credit
Prior year deferred tax adjustments
Foreign rate difference
Change in valuation allowance
US tax reform - international provisions
US NOL carryback
Other
Effective tax rate
2020
21.0 %
1.0
—
—
—
3.7
0.4
(0.4)
(11.0)
—
5.6
0.6
Fiscal Years
2019
21.0 %
(0.9)
—
1.9
—
(10.2)
4.7
6.0
11.2
(4.7)
—
(2.5)
2018
24.5 %
1.1
(41.8)
13.0
(0.8)
(11.1)
1.9
0.8
(1.9)
—
—
4.2
20.9 %
26.5 %
(10.1) %
During fiscal year 2020, the Company’s effective tax rate varied from the U.S. federal statutory rate of 21% primarily
because of the favorable impact of U.S. net operating losses to be carried back to tax years with greater U.S. federal statutory rates.
These favorable tax items were mostly offset by the unfavorable impact of additional losses in certain foreign jurisdictions, limitations
on interest expense, and R&D credits for which no benefit is recognized.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (U.S. Tax Reform) was enacted in the U.S. which significantly
revised the U.S. corporate income tax structure. Among the revisions impacting our effective tax rate are a lower U.S. corporate
statutory rate going from 35% to 21% effective January 1, 2018 and changes to the way foreign earnings are taxed. As a September
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fiscal year filer, the lower corporate income tax rate is phased in from a U.S. statutory federal rate of 24.5% in fiscal year ending
September 28, 2018 to a rate of 21% for the fiscal year ending September 27, 2019.
During fiscal year 2019, the Company’s effective tax rate varied from the U.S. federal statutory rate of 21% primarily
because of the favorable impact of changes to the U.S. corporate tax structure resulting from U.S. Tax Reform, and U.S. research and
development tax credits. These favorable U.S. tax items were offset by losses in certain foreign jurisdictions for which no benefit is
recognized and earnings in other foreign jurisdictions that are taxed at higher rates.
During fiscal year 2018, the Company’s effective tax rate varied from the U.S. federal statutory rate primarily because of the
favorable impact of changes to the U.S. corporate tax structure resulting from U.S. Tax Reform. During fiscal years 2018 and 2017,
the effective tax rate also differs from the U.S. federal statutory rate due to increases resulting from U.S. state income tax expense,
losses in certain foreign jurisdictions for which no benefit is recognized, earnings in other foreign jurisdictions that are taxed at higher
rates, and limitations on the deductibility of officers' compensation. These are offset by decreases due to U.S. research and
development credits, tax windfalls for share-based compensation, and the release of a valuation allowance against loss carryforwards
in certain foreign jurisdictions.
During fiscal year 2019, additional U.S. Tax Reform provisions, including GILTI (global intangible low-taxed income),
BEAT (base-erosion anti-abuse tax), FDII (foreign-derived intangible income), limitations on interest expense deductions (if certain
conditions apply), and other components became effective for the Company and, if applicable, have been included in the calculation of
the fiscal year 2019 tax provision. The determination of the tax effects of U.S. Tax Reform may change following future legislation or
further interpretation of U.S. Tax Reform from U.S. Federal and state tax authorities. The guidance for accounting for U.S. Tax
Reform requires taxpayers to make an election regarding the accounting for GILTI. This policy election is to either: (1) treat GILTI as
a period cost if and when incurred, or (2) recognize deferred taxes for basis differences that are expected to reverse as GILTI in future
years. During the first quarter of fiscal year 2019, the Company has made the accounting policy election to account for GILTI under
the period cost method.
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Significant components of deferred tax assets and liabilities are as follows:
(In millions)
Deferred Tax Assets:
Inventory adjustments
Share-based compensation
Product warranty
Deferred compensation
Net operating loss carryforwards
Accrued vacation
Credit carryforwards
Deferred financing fees
Interest expense limitation
Lease liabilities
Other
Valuation allowance
Total deferred tax assets
Deferred Tax Liabilities:
Acquired intangibles
Property, plant and equipment
Investments in privately held companies
Right of use assets
Other
Total deferred tax liabilities
Net deferred tax liabilities
Reported As:
Deferred tax assets
Deferred tax liabilities
Net deferred tax liabilities
October 2, 2020
September 27, 2019
$
4.4 $
4.2
1.7
1.3
27.0
1.0
5.9
3.3
4.7
7.2
6.0
66.7 $
(28.7)
38.0 $
(16.6) $
(12.4)
(2.8)
(6.7)
(1.3)
(39.8)
(1.8) $
38.0 $
(39.8)
(1.8) $
$
$
$
$
$
$
5.6
3.1
1.6
1.1
24.3
1.0
1.9
—
—
—
7.5
46.1
(18.8)
27.3
(19.3)
(10.6)
(3.3)
—
(2.3)
(35.5)
(8.2)
27.3
(35.5)
(8.2)
As a result of the changes to the U.S. taxation of foreign earnings included in U.S. Tax Reform, the Company reevaluated its
previous indefinite reinvestment assertion with respect to these earnings during fiscal year 2018, which resulted in the Company
revoking its assertion for current and future earnings for all countries, while maintaining the assertion that historic earnings are
indefinitely reinvested outside the U.S. The Company modified its prior assertion in fiscal year 2019 with respect to the acquisition of
Direct Conversion. The modification was to assert that all earnings for Direct Conversion, located primarily in Sweden and Finland,
are indefinitely reinvested in those countries. For the year ended October 2, 2020, the Company maintains these assertions. Due to the
level of earnings available for repatriation, the treaty benefits applicable to jurisdictions in which those earnings are located, and the
now favorable U.S. tax treatment of repatriated foreign earnings, the amount of deferred tax liability recorded related to the potential
repatriation is approximately $0.1 million. This estimated liability is for U.S. State income taxes and foreign withholding taxes that
would apply if the foreign earnings were actually repatriated in the form of a dividend.
As of October 2, 2020, the Company had foreign net operating loss carryforwards ("NOL") of approximately $27.0 million
with $4.3 million expiring between 2021 and 2030 and $22.7 million carried forward indefinitely. On March 27, 2020, the
Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES
Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before
2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding
taxable years to generate a refund of previously paid income taxes. On July 2, 2020, the US Treasury Department issued a regulation
providing an election to waive NOL carryback to a former consolidated group. The Company has evaluated the impact of the CARES
Act and concludes the NOL carryback provision of the CARES Act will result in a material cash tax benefit.
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The valuation allowance relates primarily to net operating losses in certain foreign jurisdictions where, based on the weight of
available evidence, it is more likely than not that the tax benefit of the net operating losses will not be realized. The valuation
allowance increased by $9.9 million during fiscal year 2020 and increased by $14.8 million during fiscal year 2019. The increase
during the current year was primarily related to net operating losses in certain foreign jurisdictions, limitations on interest expense, and
U.S. Federal and State research and development tax credits.
Changes in the Company's valuation allowance for deferred tax assets were as follows:
(In millions)
Valuation allowance balance–beginning of fiscal year
Increases resulting from business combinations
Other increases
Other decreases
Valuation allowance balance—end of fiscal year
2020
Fiscal Years
2019
2018
18.8 $
4.0 $
—
10.2
(0.3)
12.0
2.8
—
28.7 $
18.8 $
4.3
—
2.2
(2.5)
4.0
$
$
During fiscal year 2020, the Company paid U.S and foreign taxes of approximately $4.2 million. In fiscal year 2019, the
Company paid U.S. and foreign taxes of approximately $8.2 million.
The Company accounts for uncertainty in income taxes following a two-step approach for recognizing and measuring
uncertain tax positions. The first step is to evaluate the tax position for recognition by determining whether the weight of available
evidence indicates that it is more likely than not that, based on the technical merits, the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is
more than 50% likely of being realized upon settlement.
Changes in the Company’s unrecognized tax benefits were as follows:
(In millions)
Unrecognized tax benefits balance–beginning of fiscal year
Additions (subtractions) based on tax positions related to a prior year
Additions based on tax positions related to the current year
Unrecognized tax benefits balance—end of fiscal year
Fiscal Years
2020
2019
$
$
0.6 $
0.2
—
0.8 $
0.6
(0.2)
0.2
0.6
As of October 2, 2020 and September 27, 2019, the total amount of gross unrecognized tax benefits was $0.8 million and
$0.6 million, respectively, all of which would affect the effective tax rate if recognized.
The Company includes interest and penalties related to income taxes within taxes (benefit) on earnings on the consolidated
statements of (loss) earnings. For the year ended October 2, 2020, $0.1 million interest and penalties have been included for this
period. For the year ended September 27, 2019, $0.1 million interest and penalties have been included for this period.
The Company files U.S. federal and state income tax returns and non-U.S. income tax returns in various jurisdictions. All of
these returns are subject to examination by their respective taxing jurisdictions from the date of filing through each applicable statute
of limitation period. The Company’s significant operations up to the date of separation have historically been included in Varian’s
U.S. federal and state income tax returns and non-U.S. jurisdiction tax returns. Material liabilities arising related to the pre-spin
operations would be the responsibility of Varian. Other periods for entities acquired are still open and subject to examination.
Generally, periods prior to 2010 are no longer subject to examination.
17. SEGMENT INFORMATION
The Company has two reportable operating segments Medical and Industrial. The segments align the Company’s products
and service offerings with customer use in medical and industrial markets and are consistent with how the Company’s Chief Executive
Officer, who is also its CODM, evaluates the business for the allocation of resources. The CODM allocates resources to and evaluates
the financial performance of each operating segment primarily based on revenues and gross profit. The operating and reportable
segment structure provides alignment between business strategies and operating results.
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Table of Contents
Description of Segments
The Medical segment designs, manufactures, sells and services X-ray imaging components, including X-ray tubes, digital
detectors, high voltage connectors, image-processing software and workstations, 3D reconstruction software, computer-aided
diagnostic software, collimators, automatic exposure control devices, generators, heat exchangers, ionization chambers and buckys (a
component of X-ray units that holds X-ray film cassettes). These components are used in a range of medical imaging applications
including CT, mammography, oncology, cardiac, surgery, dental, and other diagnostic radiography uses.
The Industrial segment designs, develops, manufactures, sells and services X-ray imaging products for use in a number of
markets, including security applications for cargo screening at ports and borders and baggage screening at airports, and nondestructive
testing and inspection applications used in a number of other markets. The Company's Industrial products include Linatron® X-ray
linear accelerators, X-ray tubes, digital detectors and high voltage connectors. In addition, the Company licenses proprietary image-
processing and detection software designed to work with other Varex products to provide packaged sub-assembly solutions to
Industrial customers.
Accordingly, the following information is provided for purposes of achieving an understanding of operations, but it may not
be indicative of the financial results of the reported segments were they independent organizations. In addition, comparisons of the
Company’s operations to similar operations of other companies may not be meaningful.
Information related to the Company’s segments is as follows:
(In millions)
Revenues
Medical
Industrial
Total revenues
Gross profit
Medical
Industrial
Total gross profit
Total operating expenses
Interest and other expense, net
(Loss) earnings before taxes
Taxes (benefit) on earnings
Net (loss) earnings
Less: Net earnings attributable to noncontrolling interests
Net (loss) earnings attributable to Varex
2020
$
Fiscal Year
2019
2018
584.5 $
153.8
738.3
136.4
53.8
190.2
223.9
(38.9)
(72.6)
(15.2)
(57.4)
0.5
596.8 $
183.8
780.6
188.9
67.8
256.7
211.0
(24.2)
21.5
5.7
15.8
0.3
$
(57.9) $
15.5 $
602.0
171.4
773.4
190.5
63.4
253.9
209.4
(18.8)
25.7
(2.6)
28.3
0.8
27.5
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Table of Contents
The following table summarizes the Company’s total assets by its reportable segments:
(In millions)
Identifiable assets:
Medical
Industrial
Total reportable segments
Geographic Information
(In millions)
United States
Latin America
EMEA
APAC
Total company
October 2, 2020
September 27, 2019
$
$
900.2 $
239.3
1,139.5 $
794.3
244.6
1,038.9
Revenues
Fiscal Years
2019
2020
Property, plant and equipment, net
Fiscal Years
2018
2020
2019
$
$
249.8 $
275.3 $
268.8 $
115.9 $
5.2
231.5
251.8
7.3
269.0
229.0
7.0
254.5
243.1
—
21.5
7.8
738.3 $
780.6 $
773.4 $
145.2 $
122.6
—
11.4
8.3
142.3
The Company operates various manufacturing and marketing operations outside the United States. Latin America includes
Brazil and Mexico. EMEA includes Europe, Russia, the Middle East, India and Africa. APAC includes Asia and Australia. Revenues
by region are based on the known final destination of products sold.
18. EMPLOYEE BENEFIT PLANS
Varex’s 401(k) plan is intended to be qualified under Section 401(a) of the Code with the 401(k) plan’s related trust intended
to be tax exempt under Section 501(a) of the Code and intended for all full-time employees in the United States. This plan allows
employees to contribute a portion of their pretax salary up to the maximum dollar limitation prescribed by the Internal Revenue
Service. The Company made matching contributions to the plan totaling $4.4 million, $6.7 million and $6.5 million in fiscal years
2020, 2019 and 2018, respectively.
The Company also maintains defined benefit plans for employees located outside the US. The net pension liability is included
in other long-term liabilities on the Company's consolidated balance sheets and totaled $6.5 million and $5.5 million as of October 2,
2020 and September 27, 2019, respectively. The Company’s net periodic benefit costs for the Company’s defined benefit plans were
not material for fiscal years 2020, 2019 and 2018.
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19. OTHER COMPREHENSIVE (LOSS) INCOME
The following tables present the changes in the accumulated balances for each component of other comprehensive income
(loss):
(In millions)
Balance at September 28, 2018
Other comprehensive loss before reclassifications
Income tax benefit
Foreign currency translation adjustment
Balance at September 27, 2019
Other comprehensive (loss) income before reclassifications
Amount reclassified out of other comprehensive income
Amount reclassified out of other comprehensive earnings -
transaction remote
Income tax impact
Foreign currency translation adjustment
Balance at October 2, 2020
Unrealized Gain
(Loss) on
Derivative
Financial
Instruments
Unrealized Gain
(Loss) on Defined
Benefit
Obligations
Currency
Translation
Adjustment
Accumulated
Other
Comprehensive
(Loss) Income
$
$
5.8 $
— $
— $
(8.3)
2.1
—
(1.9)
0.6
—
—
—
—
(0.4) $
(1.3) $
— $
(3.4)
1.5
2.4
(0.1)
—
0.9
—
—
(0.3)
—
(1.3)
—
—
0.3
2.5
$
— $
(0.7) $
1.5 $
5.8
(10.2)
2.7
—
(1.7)
(3.8)
1.5
2.4
(0.1)
2.5
0.8
F-45
CORPORATE INFORMATION
BOARD OF DIRECTORS
EXECUTIVE MANAGEMENT TEAM
Ruediger Naumann-Etienne, PhD (a) (b)
Chairman of the Board
Varex Imaging Corporation
Owner and Managing Director Intertec Group
Dr. Jocelyn D. Chertoff, MD (a) (b)
Chair of the Department of Diagnostic
Radiology and Vice President of the Regional
Radiology Service Line
Dartmouth-Hitchcock Medical Center
Timothy E. Guertin (b) (c)
Former Chief Executive Officer
Varian Medical Systems, Inc.
Sunny S. Sanyal
President and Chief Executive Officer
Shubham “Sam” Maheshwari
Chief Financial Officer
Brian W. Giambattista, PhD
Senior Vice President and General
Manager,
X-ray Detectors
Andrew J. Hartmann
Senior Vice President,
Global Medical Sales & Marketing
Jay K. Kunkel (a) (b)
Former President Asia, Executive Vice President
Tenneco Inc.
Kimberley E. Honeysett
Senior Vice President,
General Counsel and Corporate Secretary
Walter M Rosebrough, Jr. (b) (c)
President and Chief Executive Officer
STERIS plc
Sunny S. Sanyal
President and Chief Executive Officer
Varex Imaging Corporation
Christine A. Tsingos (a) (c)
Former Executive Vice President and Chief
Financial Officer
Bio-Rad Laboratories, Inc.
(a)
(b)
Member of the Audit Committee
Member of the Compensation and Management Development
Committee
(c)
Member of the Nominating and Corporate Governance
Committee
Mark S. Jonaitis
Senior Vice President and General
Manager,
X-ray Sources
Carl E. LaCasce
Senior Vice President and General
Manager,
Industrial Imaging
CORPORATE HEADQUARTERS
Varex Imaging Corporation
1678 S. Pioneer Road
Salt Lake City, UT 84104
Phone: 801.972.5000
STOCK LISTING
TRANSFER AGENT AND REGISTRAR
Computershare Trust Company, N.A.
P.O. Box 30170
College Station, TX 77842
Phone: 800.756.8200
computershare.com
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
PricewaterhouseCoopers LLP
201 S. Main Street, Suite 900
Salt Lake City, UT 84111
Phone: 801.531.9666
STOCKHOLDER INQUIRES
Our news releases, Securities and
Exchange Commission (“SEC”) filings
(including annual reports), corporate
governance matters and additional
information about Varex are available on
our website at no cost. This Annual Report
on Form 10-K is available on our website or
by contacting:
Howard Goldman
Director of Investor & Public Relations
Phone: 801.972.5000
Email:
investor.relations@vareximaging.com
This Annual Report on Form 10-K is also
available on the SEC’s website at sec.gov.
Current and prospective investors can
register to automatically receive by email
our press releases, SEC filings and other
notices at vareximaging.com.
Please note that information on, or that can be accessed through, our website is not part of this annual report or our proxy soliciting materials,
is not deemed “filed” with the SEC, and is not to be incorporate by reference into any of our filings under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, and, except for information filed by Varex Imaging Corporation under the
cover of Schedule 14A, is not deemed to be proxy soliciting materials.
VAREX IMAGING CORPORATION
1678 S. Pioneer Road
Salt Lake City, UT 84104
801.972.5000
vareximaging.com