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 fiscal year ended September 29, 2023
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 No.)
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. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in
the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those corrections are restatements that required a recovery analysis of incentive-based compensation received
by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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 March 31, 2023, 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 March 31, 2023) was approximately $728.7 million.
As of November 8, 2023, there were 40.5 million shares of the registrant’s common stock outstanding.
Portions of registrant’s proxy statement relating to registrant’s 2024 annual meeting of stockholders are 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.
Item 9C.
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
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
[Reserved]
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
Disclosures Regarding Foreign Jurisdictions that Prevent Inspections
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
Exhibit 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,” or “Varex,”). 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, include the following:
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reduction in or loss of business of one or more of our limited original equipment manufacturing (“OEM”) customers;
loss of business to, and an inability to effectively compete with, competitors;
pricing pressures and other factors that could result in margin erosion;
failure to meet customers’ needs and demands;
global, regional, and country-specific economic instability, shifting political environments, changing tax treatment,
reactionary import/export regulatory regimes, and other risks associated with international manufacturing, operations, and
sales;
supply chain disruptions resulting in delayed product delivery, and increased costs as a result of reliance on a limited number
of suppliers for certain key components;
inability to maintain or defend our intellectual property rights, and high cost of protecting our intellectual property and
defending against infringement claims;
disruption of critical information systems or material breaches in the security of our systems;
noncompliance with regulations applicable to marketing, manufacturing, labeling, and distributing our products and delays in
obtaining regulatory clearances or approvals;
and other factors cited in Risk Factors listed under Item 1A of this Annual Report, Business and MD&A and other factors
describe from time to time in our other filing with the U.S. Securities and Exchange Commission (“SEC”), or other reasons.
Statements concerning supply chain and logistics challenges; cost increases and expense management; changes in U.S. and
worldwide economic conditions, such as the impact of inflation, and fluctuations in foreign currency exchange rates; geopolitical
tensions; 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,” “intend,”
“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.
Item 1. Business
Overview
PART I
Varex Imaging Corporation is a leading innovator, designer and manufacturer of X-ray imaging components including X-ray
tubes, flat panel and photon counting detectors and accessories, linear accelerators, image software processing solutions and stand-
alone X-ray based systems in select application areas. Our components are used in medical diagnostic imaging, security inspection
systems, and industrial quality inspection systems, as well as for analysis and measurement applications in industrial manufacturing
applications. Global OEMs incorporate our X-ray imaging components into their systems to detect, diagnose, protect, irradiate and
inspect. Varex has approximately 2,400 full-time equivalent employees, located at engineering, 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, the Middle East, India and Africa. APAC includes Asia
(other than India) and Australia. Revenues by region are based on the known final destination of products sold.
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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 400 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.
Operating Segments and Products
We have two reportable operating segments: Medical and Industrial. The segments align our products and service offerings
with customer use in medical and industrial markets.
Medical
In our Medical segment, we design, manufacture, sell and service X-ray imaging components, including X-ray tubes, flat
panel and photon counting detectors and accessories, high voltage connectors, image-processing software and workstations, 3D
reconstruction software, computer-aided diagnostic software, collimators, automatic exposure control devices, generators, and coolers.
These components are used in a range of medical imaging applications including CT, mammography, oncology, cardiac, surgery,
dental, fluoroscopy, and other diagnostic radiography uses.
Our X-ray imaging components are primarily sold to OEM customers. These OEM customers then design-in our products to
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 35 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 buy from us for 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 as well as directly to end-users for replacement purposes.
We are one of the largest independent global manufacturers of X-ray imaging 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
160,000 X-ray tubes, 170,000 X-ray detectors, 600,000 connect and control components and 16,500 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 depending upon usage and other factors. For example, CT X-ray tubes generally need to be replaced every 2 to 6 years, in
comparison to a general radiography tube which can last up to 10 years, depending on utilization. In China, the replacement cycle for
CT X-ray tubes currently can be as frequent as every 10 to 20 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 or more, 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.
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. 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.
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In recent years our business in China has been impacted by the trade war with the United States in three principal ways: (1)
importing raw materials from China to the United States has become more expensive, (2) importing raw materials and sub-assemblies
from the United States to China has become more expensive, and (3) importing finished United States manufactured products into
China has become more difficult and expensive. While the governments of both the United States and China have granted tariff
exclusions that temporarily eliminate the additional duties payable for specific commodities, providing partial relief, these exclusions
are temporary and/or must be solicited and approved on a shipment-by-shipment basis. There is no guarantee that such exclusions will
be granted or extended by either government, and the U.S. tariff exclusions are set to expire on December 31, 2023 unless extended. 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. To help mitigate the impact of tariffs on materials imported to
China, and to be closer to our global customer base, we continue to expand manufacturing capabilities at our facilities in China,
Germany, the Netherlands and the Philippines. We have also implemented local sourcing strategies to 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. Our mitigation efforts could prove less effective than anticipated if rising tensions
between China and Taiwan lead to worsening trade relations between China and the United States.
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, baggage screening at airports, and nondestructive
testing, irradiation, and inspection applications used in a number of other vertical markets. Our industrial products include Linatron®
X-ray linear accelerators, X-ray tubes, flat panel and photon counting detectors, computed radiography scanners, high voltage
connectors, and coolers. 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 and 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 cargo security for the screening of trucks, trains, and cargo containers at ports and
borders as well as airport security for checked baggage and palletized cargo. The end customers for border protection systems are
typically government agencies, many of which are in oil-based economies and war zones where there can be significant 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 aerospace, automotive, electronics, oil and gas, food packaging, metal
castings and additive manufacturing. 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.
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Customers
Our customers are primarily large OEMs. Our top five customers, measured by revenue, are Canon Medical Systems
Corporation (“Canon”), United Imaging Healthcare, General Electric Company, Siemens Healthineers AG, and Elekta AB, which
collectively accounted for approximately 39% of total revenue in fiscal year 2023. Our largest customer, Canon, accounted for
approximately 17%, 17% and 18% of our total revenue for fiscal years 2023, 2022, and 2021, respectively, while our ten largest
customers as a group accounted for approximately 51%, 52% and 51% of our revenue for fiscal years 2023, 2022 and 2021,
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 to manufacture imaging
components. 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, better product availability, 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 tube business.
The market for digital detectors is 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
compete 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 iRay, Teledyne, 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 non-destructive testing. In the
high-energy market, we compete against technologies from Nuctech Company Limited, Siemens AG, ETM Electromatic Inc., and
PMB Alcen, 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 warrant 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, New York, Texas, and Illinois; and internationally in the Philippines, China, the Netherlands, Germany, France, Sweden,
Switzerland, Finland, the United Kingdom, Italy, and Japan. Our application specialists and engineers make recommendations to meet
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.
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Manufacturing and Supplies
We manufacture our products at facilities in Salt Lake City, Utah; Las Vegas, Nevada; Liverpool, New York; Franklin Park,
Illinois; Houston, Texas; Borden, United Kingdom; Doetinchem, 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 the International Standards Organization (“ISO”) under ISO 9001 (for industrial products) or
ISO 13485 (for medical devices). In addition, we have a regional service center in 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 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, nickel, silver, gold, lead, tungsten, iridium, rhenium, molybdenum, rhodium, niobium, zirconium, beryllium,
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.
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, UK, Sweden, Finland 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. 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, Utah; San Jose, California; Doetinchem, Netherlands;
Danderyd, Sweden; Espoo, Finland; and Walluf, Germany. 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 of medical devices. 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”), the Nuclear
Regulatory Commission (“NRC”), and state and local regulatory agencies, to ensure the devices are safe and effective and comply
with laws governing products that 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, an 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
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
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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
our 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”), new state privacy laws, “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 Health Information Technology for Economic and Clinical Health
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, may impact our business.
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
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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 European Economic Area ("EEA"). The
CE mark is also recognized in many countries outside the EU and can assist in the clearance process. To receive permission to affix
the CE mark to our medical device products, we must obtain approvals and 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,
which was superseded by the EU MDR-Medical Device Regulations in May 2021. 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 the Japanese
Pharmaceutical and Medical Device Act 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 from Health 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, 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, and 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 or stricter 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 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
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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 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 2022 Corruption Perceptions Index measured the degree to which public sector corruption is
perceived to exist in 180 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 governments 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. 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 improved in
fiscal year 2023 with increased sales during fiscal year 2023 and additional tenders for fiscal year 2024.
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.
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
September 29, 2023, we own approximately 250 patents issued in the United States, approximately 380 patents issued throughout the
rest of the world and have approximately 150 patent applications pending with various patent agencies worldwide. The patents issued
expire between 2023 and 2042. 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.”
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In conjunction with the January 2017 separation from Varian Medical Systems, Inc. ("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. Varian was subsequently acquired by Siemens in April of 2021.
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). As of September 29, 2023, we had an existing environmental liability of approximately $2.8 million, net of
expected insurance proceeds, 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, wage inflation, and
availability of qualified individuals.
As of September 29, 2023, we had approximately 2,400 full-time equivalent 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 solicit feedback from our employees through employee satisfaction and other surveys. The results of these surveys
are analyzed, and we hold meetings with employees to share and discuss areas of improvement. We believe this is a useful process to
inform how future decisions are made in order 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 a total rewards
package that is responsive to local markets. In the United States, where our largest employee base resides, our benefits for eligible
employees have included:
Health insurance coverage available to full-time employees;
Tuition reimbursement up to a specified dollar amount on an annual basis;
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• Matching contributions to a tax-qualified defined contribution savings ("401(k)") plan, on a dollar-for-dollar basis up to four
percent of the employee’s base compensation;
An employee assistance program; and
Training and development programs designed to help employees improve workplace performance.
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Approximately 91% of our eligible employees participate in our 401(k) plan. In addition, in an effort to further align the
interests of eligible 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.
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.
Diversity and Inclusion
As one of our values states, “we embrace equality,” and we are committed to a diverse and inclusive workplace that is
respectful to all. Some of our initiatives include providing educational scholarships to traditionally underrepresented classes and for
science, technology, engineering, and mathematics ("STEM") programs, regularly analyzing pay equity, and engaging in on-campus
events that increase our exposure to diverse populations to promote diversity in our hiring. We do not tolerate discrimination and
harassment, and we expect our teams to conduct themselves ethically at all times in accordance with Varex’s Code of Conduct.
Information Available to Investors
The 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:
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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);
proxy statements; and
Section 16 ownership reports.
Additionally, our Code of Conduct, Corporate Governance Guidelines, Human Rights Policy, and the charters of the Audit
Committee, Compensation and Human Capital Management Committee, and Nominating and Corporate Governance Committee are
also available 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 (https://www.vareximaging.com/investor-relations/),
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”).
Information about our Executive Officers
The biographical summaries of our executive officers are as follows:
Sunny S. Sanyal, 59, 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, 52, has served as Chief Financial Officer ("CFO") since July 2020. Shubham (Sam) joined 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
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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, 52, has served as Chief Legal Officer since February 2022 and 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.
Andrew Hartmann, 61, has served as Senior Vice President and General Manager - Detectors since April 2023 and previously
as Senior Vice President, Medical Sales & Marketing since July 2018. Prior to joining Varex he worked for a number of leading
OEMs in various leadership roles, most recently as General Manager of the X-ray and Ultrasound Business for Carestream Health,
Inc., a worldwide provider of X-ray imaging systems, from April 2012 to June 2018. Prior to Carestream, Andrew worked for Siemens
Medical Solutions USA, Inc. (Siemens Healthineers), a leading medical technology company, in sales and marketing roles both
domestically in the United States and internationally for Siemens’ ultrasound business. Prior to Siemens, he held leadership roles at
Acuson Corp. (subsequently acquired by Siemens), including General Manager for Acuson’s Australia and New Zealand business.
Andrew received a Master of Business Administration (“EMBA”) from Ashridge Business School in London, United Kingdom, and
received a diploma in electronics from Sydney Technical College in Australia.
Mark S. Jonaitis, 62, has served as Senior Vice President and General Manager - X-Ray Sources since January 2017. Prior to
the separation of Varex from Varian, Mark served in various management positions at Varian, including most recently as 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
Investing in Varex Imaging Corporation common stock involves risks and the following risk factors and other information
included in this Annual Report on Form 10-K under Item 1 "Business", Item 7 "Management’s Discussion and Analysis of Financial
Condition and Results of Operations" and Item 7A "Quantitative and Qualitative Disclosures about Market Risk" should be carefully
considered. Although the risk factors described below are the ones management deems significant, additional risks and uncertainties
not presently known to us or that are presently known to us that we presently deem not material may also adversely affect our business
operations.
Risks Relating to Our Business
We sell our products and services to a limited number of original equipment manufacturer ("OEM") customers, many of which
are also our competitors, and a reduction in or loss of business of one or more of these customers may materially reduce our sales.
We had one customer during fiscal year 2023 that accounted for 17% of our revenue. Our ten largest customers as a group
accounted for approximately 51%, 52% and 51% of our revenue for fiscal years 2023, 2022 and 2021, respectively. Because we often
take significant time to replace lost business, it is likely that our operating results would be materially and adversely affected if one or
more of our major OEM customers were to cancel, delay, or reduce orders in the future.
Furthermore, we generate significant accounts receivables from the sale of our products and the provision of services directly
to our major customers. We had one customer that accounted for 13.8% of our accounts receivables as of September 29, 2023. If one
or more of these customers were to cancel a product order or service contract, become insolvent, or otherwise be unable or fail to pay
for our products and/or services in a timely manner, our operating results and financial condition could be materially and adversely
affected.
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We may not be able to accurately predict the demand or delivery schedules for our products.
End-user product demand, economic uncertainties, the impact of pandemic diseases, natural disasters, armed conflict,
geopolitical tensions, government actions (for example, the Chinese government initiated anti-corruption investigation related to its
healthcare industry), and other matters beyond our control, make it difficult for our customers to accurately forecast and plan future
business activities, which makes it difficult for us to accurately predict demand for our products. Because the manufacture of our
products requires some lead-time, changes in customer purchasing forecasts have previously resulted in excess inventory and
slowdowns in sales, which are likely to occur again in the future. Changes to customer forecasts can occur on short notice, as our
customers face inherent competitive issues, new product introduction delays, and market and regulatory risks. Our agreements for
imaging components contain purchasing estimates that are typically based on our customers’ forward-looking forecasts 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 we may not be able to accurately forecast. Reductions in purchasing patterns have in the past, and
may in the future, materially and adversely affect our operating results.
We compete in highly competitive markets, and we are subject to pricing pressures and other factors that could result in margin
erosion.
We compete in markets characterized by rapidly-evolving technology, intense competition and pricing pressure. We often
compete with companies that have greater financial, marketing and other resources than us. Some of the major diagnostic imaging
systems companies, which are the primary OEM customers for our X-ray imaging components, also manufacture X-ray imaging
components, including X-ray tubes, for use in their own imaging systems products. If these customers manufacture a greater
percentage of their components in-house or otherwise decrease purchases from external sources, we could experience reductions in
purchasing volume by, or loss of, one or more of these customers, which may have a material and adverse effect on our business. In
addition, we compete 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 we face intense competition from over a dozen smaller
competitors. We have in the past made price and other concessions to maintain existing customers and attract new customers, and may
have to make additional price concessions in the future.
In our Industrial segment, we compete with other OEM suppliers primarily outside of the United States. Some of our
competitors outside of the United States may have resources and support from their governments that we do not, such as preferences
for local manufacturers, and may not be subject to the same trade compliance regulations as us.
Our competitors are not all subject to the same standards, regulatory and/or other legal requirements to which we are 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 our competitors could limit market acceptance of our products and negatively and materially
affect our pricing, sales, revenues, market share, and gross margins and our ability to maintain or increase our operating margins.
Our success depends on meeting our customers' needs and demands.
To be successful, we must anticipate our customers’ needs and demands, as well as potential shifts in market preferences. If
we are unable to anticipate these needs and demands, or the mix of products requested by our customers changes from what we expect,
our revenue, margins, and financial results could be adversely affected. When the U.S. Dollar is strong compared to the operating
currencies of our international customers, our ability to meet such customers’ pricing expectations is particularly challenging and may
result in erosion of revenues, product margin, and/or market share or other concessions on business terms.
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 our gross
and operating margins. We may also experience lower margins due to increased commodities prices, and inadequate transfer pricing
favoring sales to third parties over internal sales. If we are unable to lower these costs over time, our operating results could be
materially and adversely affected. Some of the electronic components and integrated circuits used in our flat panel detectors are
susceptible to discontinuance and obsolescence risks, which may force us to incorporate newer generations of these components,
resulting in unplanned additional R&D expenses, delays in the launch of new products, supply disruptions, or inventory write-downs.
Further, using aging production equipment might hamper our capacity to innovate to meet customers’ needs and demands and stay
competitive. Failure to develop and adopt artificial intelligence ("AI") technology could also hinder competitiveness and growth
potential in a rapidly evolving market. We may also experience challenges in developing and implementing effective market
strategies, leading to missed opportunities and customer dissatisfaction.
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We may not be able to successfully develop, manufacture, or introduce new products or enhancements to existing products,
the roll-out of which involves compliance with complex quality assurance processes, including the Quality System Regulation
(“QSR”) of the U.S. Food and Drug Administration (“FDA”). Failure to complete these processes timely and efficiently could result in
delays that could affect our ability to attract and retain customers or cause customers to delay or cancel orders, which would materially
and adversely affect our revenues and operating results.
More than half of our revenue is generated from customers located outside the United States, and is subject to global, regional,
and country-specific economic instability, shifting political environments, changing tax treatment, and other risks associated with
international manufacturing, operations and sales.
Revenues generated from customers located outside the United States accounted for approximately 69%, 69%, and 68% of
our total revenues during fiscal years 2023, 2022, and 2021, respectively. We intend to continue to expand our presence in
international markets and expect to expend significant resources in doing so. Our future results could be impacted by a variety of
factors, including:
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currency fluctuations, and in particular the strength of the U.S. Dollar (which is our functional and reporting currency);
political and economic instability, including the possibility of civil unrest, terrorism, mass violence or armed conflict, which
may among other things, impact our operations and business access;
difficulties in staffing and managing employee relations in foreign operations, particularly in attracting and retaining
personnel qualified to design, test, sell and support our products;
difficulties in coordinating our operations globally and in maintaining uniform standards, controls, procedures, and policies
across our operations;
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;
imposition of burdensome governmental regulations, including changing laws and regulations with respect to collection and
maintenance of personally identifiable data;
the imposition by governments of additional taxes, tariffs, global economic sanctions programs, or other restrictions on
foreign trade; and
compliance with export laws and requirements.
Our international locations expose us to higher security risks compared to our United States locations, which could result in
both harm to our employees and contractors or substantial costs. Some of our 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 we have employees or operations, we may incur
substantial costs to maintain the safety of our personnel, and we may suffer the loss of employees and contractors, which could harm
our business reputation and operating results.
We 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 our business.
Our ability to identify and take advantage of attractive acquisitions or other business development opportunities is an
important component in implementing our overall business strategy. Such transactions involve a number of risks, including the
following:
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we may incur substantial costs, including advisory fees and diversion of management attention, in evaluating a potential
transaction;
we may be unable to achieve the anticipated benefits from the transaction, including a return on our investment;
we may have difficulty integrating organizations, products, technologies, or employees of an acquired business into our
operations and may have difficulty retaining the key personnel of the acquired business;
we may find that we need to restructure or divest acquired businesses or assets of the acquired business; and
if we fail to achieve the anticipated growth from an acquisition, or if we decide to sell assets or a business, we may be
required to recognize an impairment loss on the write-down of our assets and goodwill.
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Legal proceedings may materially and adversely affect our business, results of operations, or cash flows.
From time to time, we are 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 our business or
otherwise. Such proceedings are often lengthy, subject to significant uncertainty and may be expensive, time consuming, and
disruptive to our operations. For these and other reasons, we may choose to settle legal proceedings and claims, regardless of their
actual merit. If a legal proceeding were ultimately resolved against us, we may be required to pay damages or fines, some of which
may be in excess of our insurance coverage, or may require us to change our business practices, which could materially and adversely
impact our business, results of operations, or cash flows.
Our subsidiary Varex Imaging Deutschland AG holds a 50% interest in VEC Imaging GmbH & Co. KG, (“VEC”) a joint
venture formed to develop technology for use in X-ray imaging components. In August 2023, the partners to the VEC joint venture
filed judicial proceedings in Germany against one another disputing the validity of shareholder resolutions passed in January 2023.
Each party is seeking to have the other party’s managing director(s) removed and to exclude the other party from the joint venture. If
either party is successful, the prevailing party would be required to purchase the non-prevailing party’s interest in the joint venture for
an amount equal to 75% of the fair market value thereof, which amount is in dispute.
Product defects or misuse may result in material product or other liability or professional errors and omissions claims, litigation,
investigation by regulatory authorities, or product recalls.
Our business exposes us to potential product and other 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 our products,
through incorporation into 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, the possibility for significant personal injury or loss of life exists. Furthermore, if
our x-ray inspection systems fail to detect the presence of bombs, explosives, weapons, contraband, or other threats to personal safety,
this may lead to personal injury, loss of life, and extensive property damage. We may also be subject to warranty and damage claims
for property damage, personal injury, or economic loss related to or resulting from any errors or defects in our products or the
installation, servicing, or 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. We are currently a party to certain
products liability litigation which, if adversely determined, could have an adverse material impact on our financial results. If a product
we design or manufacture were defective, we may be required to correct or recall the product and notify regulatory authorities.
We may choose to settle product liability claims against us regardless of their actual merit. A product liability action
determined against us could result in adverse publicity or significant damages, including the possibility of punitive damages, and our
combined financial position, results of operations, or cash flows could be materially and adversely affected.
We maintain limited product liability insurance coverage. Our product liability insurance policies are expensive and have
high deductible amounts and self-insured retentions. Our 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 our insurance
coverage, we could have to pay substantial damages, which could have a material and adverse effect on our financial position and/or
results of operations.
Risks Relating to the Manufacture of our Products
Supply chain disruptions, including the loss of a supplier, and any inability to obtain raw materials or supplies of important
components due to inflation have impacted our ability to manufacture products, have caused delays in our ability to deliver
products, and have increased our costs and may continue to do so.
Inflation and supply chain disruptions have had, are currently having, and could continue to have, an impact on our ability to
manufacture certain products. Inflation has the potential to increase our overall cost structure, and sustained inflation has resulted in,
and may continue to result in, higher interest rates and capital costs, increased shipping costs, supply shortages, increased costs of
labor, weakening exchange rates, and other similar effects.
Material shortages and delays due to inflation and other market constraints have caused, and could in the future cause, us to
temporarily stop production of certain products or miss opportunities to pursue additional sales of some products. We require certain
raw materials, such as copper, nickel, silver, gold, lead, tungsten, iridium, rhenium, molybdenum, rhodium, niobium, zirconium,
beryllium, 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. If we are unable to obtain the materials necessary to make certain products without
unreasonable delay, those customers may seek alternative suppliers or decide to in-source certain products or if we must pay more for
certain materials, it could reduce our profit margin or otherwise have a material adverse effect on our business and financial results.
Further, our competitors with greater financial resources may be better able to restructure their manufacturing and supply chains in
response to geopolitical and economic trends and thereby have a competitive advantage over us.
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We obtain some of the components included in our products from a limited group of suppliers or from sole-source suppliers,
such as 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. If current suppliers cease producing these or other
components, fail to provide products on our delivery timelines, or become insufficiently solvent to continue operations, there can be
no assurance that the components will be available from other suppliers on reasonable terms or at all, and this could materially and
adversely affect our business and financial results.
Furthermore, we may be required to obtain and qualify one or more replacement suppliers or to manufacture the components
internally. Such an event (1) may then also require us to redesign or modify our products to incorporate new parts and/or further
require us to obtain clearance, qualification, or certification of these products, including by the FDA, or obtain other applicable
regulatory approvals in other countries, (2) could significantly increase costs for the affected products, (3) cause material delays in
delivery of affected and other related products, or (4) could prevent us from meeting our delivery obligations to our customers.
If we are not able to match our manufacturing capacity with demand for our products, our financial results may suffer.
Many of our products have a long production cycle, and we must anticipate demand for our products to ensure adequate
manufacturing and testing capacity. If we are unable to anticipate demand, and our manufacturing or testing capacity does not keep
pace with product demand, we will not be able to fulfill orders in a timely manner, which may negatively impact our financial results
and overall business. Conversely, if demand for our products decreases, the fixed costs associated with excess manufacturing capacity
may harm our financial results, including by decreasing gross margins and increasing research and development costs as a percentage
of revenue.
Delivery schedules for our security, industrial, and inspection products tend to be unpredictable.
The demand for our security and inspection products is heavily influenced by United States 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. 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, this could cause volatility in our revenues and earnings.
Our operations are vulnerable to interruption or loss due to natural or other disasters, the effects of climate change, power loss,
strikes, and other events beyond our control.
We conduct some of our 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. A major disaster (such
as a major fire, hurricane, earthquake, flood, tsunami, volcanic eruption, or terrorist attack) or a climate change-related event affecting
our facilities, or those of our suppliers, could significantly disrupt our operations and delay or prevent product manufacture and
shipment during the time required to repair, rebuild, or replace our or our suppliers’ damaged manufacturing facilities. These delays
could be lengthy and costly. If any of our customers’ facilities are adversely affected by such a disaster or event, shipments of our
products could be delayed. Additionally, customers may delay purchases of our products until our or their operations return to normal.
Even if our suppliers or customers are able to quickly respond to such a disaster or event, the ongoing effects could create some
uncertainty in the operations of our business. In addition, concerns about terrorism, the effects of a terrorist attack, political turmoil, or
an outbreak of epidemic diseases have in the past had, and could in the future have, a negative effect on our business operations, those
of our suppliers and customers, and the ability to travel, resulting in adverse consequences on our revenues and financial performance.
Risks Relating to our Intellectual Property and Information Systems
Our competitive position would be harmed if we are not able to maintain or defend our intellectual property rights, and protecting
our intellectual property and defending against infringement claims can be costly.
We file applications as appropriate for patents covering new products and manufacturing processes. We cannot be sure,
however, that patents will be issued from any of our pending or future patent applications or that our current patents, the claims
allowed under our current patents, or patents for technologies licensed to us will be sufficiently broad to protect our technology
position against competitors. We also jointly develop intellectual property with third parties and seek to protect our rights to such
intellectual property through licenses and other contractual arrangements.
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We also rely 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 our proprietary, and other confidential rights. Our trade secrets may become known to or be
independently developed by others, including as a result of misappropriation by unauthorized access to our technology systems, and
our business and financial results could be materially and adversely impacted. We have trademarks, both registered and unregistered,
that are maintained and enforced to provide customer recognition for our products in the marketplace, but unauthorized parties may
still use them. We also license certain patented or proprietary technologies from others. In some cases, products with substantial
revenues may depend on these license rights. If we were to lose the rights to license these technologies, or our costs to license these
technologies were to materially increase, our business would suffer.
There is a substantial amount of litigation over patent and other intellectual property rights in the industries in which we
compete. Our 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 our activities for conflicts
with their patent rights. From time to time, we have received notices from parties asserting infringement, and we have been subject to
lawsuits alleging infringement of patent or other intellectual property rights. In addition, from time to time we have, and in the future
may, enter into agreements that require us to indemnify our customers for intellectual property infringement, which agreements could
subject us to liability. One of our subsidiary's customers has been named as a defendant in a lawsuit alleging that the customer’s
system (which incorporates our subsidiary’s products) infringes upon the plaintiff’s patent. Under the contract with the customer, our
subsidiary has an obligation to indemnify the customer for damages resulting from that lawsuit, which if determined adversely could
have a negative impact of our results of operations. Legal disputes relating to intellectual property have occurred, are occurring, and
may occur in the future. Any dispute regarding patents or other intellectual property, including with respect to breaches of licensing
agreements or other contractual arrangements, could be costly and time consuming and could divert our management and key
personnel from our business operations. We may not prevail in a dispute. We do not maintain insurance for intellectual property
infringement, so costs of defense, whether or not we are successful in defending an infringement claim, will be borne by us and could
be significant. If we are unsuccessful in defending or appealing an infringement claim or claims alleging other contractual breaches,
we may be subject to significant damages, and our combined financial position, results of operations, or cash flows could be materially
and adversely affected. We may also be subject to injunctions against development and sale of our products, the effect of which could
be to materially reduce our revenues.
As we expand our manufacturing capabilities outside of the United States, more of our intellectual property may be held in
jurisdictions that do not have robust intellectual property protections, which may make it harder for us to adequately protect our
intellectual property.
Disruption of critical information systems or material breaches in the security of our systems may materially and adversely affect
our business and customer relations.
Information technology (including technology from third-party providers) helps us operate efficiently, interface with and
support our customers, maintain financial accuracy and efficiency, and produce our financial statements. In the ordinary course of our
business, we collect, process, and store sensitive data, including intellectual property, proprietary business information, and
information of customers, suppliers, and business partners, third parties accessing our website, patient data, and personally identifiable
information of customers and employees, in our data centers and on our networks, as well as in third-party off-site data centers.
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 us. 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, we 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
materially disrupt our operations. Such security breaches could expose us to a risk of loss of information and intellectual property,
litigation, and possible liability to employees, customers, shareholders, and/or regulatory authorities. If our data management systems
do not effectively collect, secure, store, process, and report relevant data for the operation of our business, whether due to equipment
malfunction or constraints, software deficiencies, or human error, our ability to effectively plan, forecast, and execute our business
plan and comply with applicable laws and regulations will be impaired, perhaps materially. Any such impairment could materially and
adversely affect our financial condition, results of operations, cash flows, and the timeliness with which we report our operating results
internally and externally.
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We use certain cloud-based software. A security breach, whether of our products, of our customers’ network security and
systems, or of third-party hosting services could disrupt access to our customers’ stored information and could lead to the loss of,
damage to, or public disclosure of our 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
our solutions, an unwillingness of our customers to use our solutions, harm to our reputation and brand, and time-consuming and
expensive litigation, any of which could have a material and adverse effect on our financial results.
Risks Relating to Our Legal and Regulatory Environment
Changes in import/export regulatory regimes, tariffs, and national policies could continue to negatively impact 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, import restrictions, 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 the past, the United States has imposed tariffs on items imported from China and other countries that are incorporated into
our products. Tariffs on these items have increased our costs and prices and lowered gross margins on some of our products, thereby
having a direct adverse impact on our business and results of operations. China has also imposed retaliatory tariffs that impact a
number of our products, including United States origin X-ray tubes, heat exchange units, and certain flat panel detectors. These tariffs
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 our products.
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.
Both the governments of the United States and China have granted tariff exclusions that temporarily eliminate duties payable
for specific commodities, providing partial relief from such tariffs, but they must be solicited and approved on a shipment-by-shipment
basis. There is no guarantee that such exclusions will be granted or extended by either government, and the United States tariff
exclusions are set to expire on December 31, 2023, unless extended.
In addition to tariffs, China’s stated policy of reducing its dependence on foreign manufacturers and technology companies
may result in reduced demand for our products in China, which could have a material adverse impact on our business, results of
operations and financial position. There are risks that the Chinese government may, among other things, require the use of local
suppliers, compel companies that do business in China to partner with local companies to conduct business, or provide incentives to
government-backed local customers to buy from local suppliers rather than companies like ours, all of which could adversely impact
our business, results of operations and financial position.
The Chinese government recently initiated investigations into corruption in its healthcare industry. This has had a broad-
based impact on the healthcare industry in China and slowed sales of healthcare products there. As a result, our sales in China have
also slowed. We expect the investigations to continue into fiscal year 2024, and this could continue to adversely impact revenues in
our China business.
Increasing tensions between China and Taiwan may cause the United States and/or China to impose higher tariffs, commence
trade wars, move more quickly to reduce their dependence on each other’s goods, or enact boycotts against each other’s goods, and
this could cause significant disruptions in the markets and industries we serve, and in our supply chain, decrease demand from
customers for the ultimate products using our solutions, and materially harm our business, financial condition and results of
operations.
In response to Russia's ongoing aggression against Ukraine, as substantially enabled by Belarus, the United States
Department of Commerce strengthened its existing sanctions under the Export Administration Regulations against Russia and Belarus.
The enhanced sanctions would require Bureau of Industry and Security export licenses in order to export our products, including for
medical, health and safety, or humanitarian purposes, to Russia and Belarus. Applications for the export of products to Russia or
Belarus will be reviewed under a policy of denial and reviewed on a case-by-case basis. If licenses for the export of our product are
denied, it could adversely affect our business and results of operations.
A change in the percentage of our total earnings from international sales or additional changes in tax laws could increase our
effective tax rate.
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Earnings from our international subsidiaries are generally taxed at rates that differ from United States rates. A change in the
percentage of our total earnings from our international subsidiaries, a change in the mix of particular tax jurisdictions between our
international subsidiaries, or a change in currency exchange rates could cause our effective tax rate to increase. Furthermore, while
United States tax reform imposed a current tax on cumulative undistributed earnings, these earnings could also become subject to
incremental foreign withholding or United States state taxes should they actually be remitted to the United States, in which case our
financial results could be materially and adversely affected.
Statutory changes included in proposed United States legislation, if passed, including interpretive guidance, could have a
material impact on income tax expense, the effective tax rate, or the value of deferred tax assets and liabilities. Changes in the
valuation of our 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 our control could materially and adversely affect our financial position and results of
operations.
We have 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 our effective tax rate.
Compliance with foreign laws and regulations applicable to the marketing, manufacturing, and distribution of our products may
be costly, and failure to comply may result in unfavorable legal proceedings, in significant penalties and other harm to our
business.
Outside the United States, some of our products are regulated as medical devices by foreign governmental agencies similar to
the FDA.
For us to market our products internationally, we must obtain clearances or approvals for products and product modifications,
which can be time consuming, expensive, uncertain, and which can delay our ability to market products. 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 us from doing
business in a country or subject us to a variety of enforcement actions and civil or criminal penalties, which would materially and
adversely affect our business. In addition, compliance with changing regulatory schemes may add additional complexity, cost, and
delays in marketing, or selling our products.
Within the European Union ("EU") and the European Economic Area ("EEA"), we must obtain, and in turn affix, a CE mark
certification, that indicates that a product meets the essential requirements of the EU’s Medical Device Directive (“MDD”) and the EU
Medical Device Regulations. By affixing the CE mark to our product, we are certifying that our products comply with the laws and
regulations required by the EU/EEA countries, thereby allowing the free movement of our products within these countries and others
that accept CE mark standards. If we cannot support our performance claims and demonstrate compliance with the applicable
European laws and the MDD, we would lose our right to affix the CE mark to our products, which would prevent us from selling our
products within the EU/EEA/Switzerland territory and in other countries that recognize the CE mark.
We are 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, we are required to timely file various reports with international regulatory authorities similar to the reports we are
required to timely file with United States 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 our market
authorizations or CE mark, and sales of our products may suffer.
As we enter new businesses or pursue new business opportunities internationally, or as regulatory schemes change, we may
become subject to additional laws, rules, and regulations, and compliance can be costly. The failure by us or our 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 our products in or to import our products into certain
countries, which could materially and adversely affect our business.
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Compliance with United States laws and regulations applicable to the marketing, manufacturing, and distribution of our products
may be costly, and failure or delays in obtaining regulatory clearances or approvals, or failure to comply with applicable laws and
regulations could harm our business.
If we or any of our suppliers, distributors, agents, or customers fail to comply with FDA, Federal Trade Commission, or other
applicable United States regulatory requirements or are perceived to have failed to comply with regulations, we may face:
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adverse publicity affecting both us and our 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;
increased difficulty in obtaining required clearances or approvals or losses of clearances or approvals already granted;
seizures or recalls of our products or those of our customers;
delays in purchasing decisions by customers or cancellation of existing orders;
the inability to sell our products; and
difficulty in obtaining product liability or operating insurance at a reasonable cost, or at all.
Generally, our manufacturing operations for medical devices, and those of our third-party manufacturers, are required to
comply with the QSR of the FDA, as well as other federal and state regulations for medical devices and radiation-emitting products.
Failure to respond in a timely manner to a warning letter or any other notice of noncompliance with applicable regulations and/or
procedures and to promptly come into compliance could result in the FDA bringing an enforcement action, which could include the
total shutdown of our 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 we may take, which may
include product recalls, correction and removal of products from customer sites, or changes to our product manufacturing and quality
systems, could materially and adversely impact our 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 we could face
increased pressure from our competitors, who could use the warning letter against us in competitive sales situations, either of which
could materially and adversely affect our reputation, business, and stock price.
Our OEM customers are responsible for obtaining 510(k) pre-market notification clearance on their systems that integrate our
products. A substantial majority of our products are “Class I” devices that do not require 510(k) clearance, but we do produce software
that is classified as a Class II device subject to 510(k) clearance. Unless an exception applies, we 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 we can market or sell those products in
the United States or in connection with 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. We cannot ensure that the FDA will agree with our decisions not to seek additional approvals or clearances for
particular modifications to our products or that we will be successful in obtaining new 510(k) clearances for modifications. Obtaining
clearances or approvals is time consuming, expensive, and uncertain. Furthermore, even if we are 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
we are unable to obtain required FDA clearance or approval for a product or are unduly delayed in doing so, or the uses of that product
were limited, our business could suffer.
We are required to timely file various reports with the FDA, including reports required by the medical device reporting
regulations (“MDRs”), that require we report to regulatory authorities if our 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 we initiate a correction or removal of a device to reduce a risk to health posed by the device, we 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 our customers regarding the quality and safety of our devices. If these MDRs or correction and removal
reports are not filed on a timely basis, regulators may impose sanctions, sales of our products may suffer, and we may be subject to
product liability or regulatory enforcement actions, all of which could harm our business.
Government regulation may also cause significant delays or prevent the marketing and full commercialization of future
products or services that we may develop and/or may impose costly requirements on our business. As we enter new businesses or
pursue new business opportunities, we will become subject to additional laws, rules, and regulations, including FDA and foreign rules
and regulations and compliance can be costly. Failure to comply with these laws, rules and regulations could delay the introduction of
new products and could materially and adversely affect our business.
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We are 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 we may incur as the consequence of regulatory violations.
Consequently, we do not have insurance that would cover this type of liability.
We sell 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 we may be unable to receive registration approval or
renewal of existing registrations.
We market and distribute certain X-ray tubes through distributors and third-party/multi-vendor service organizations that are
used as equivalent replacements for specific OEM tubes. We are 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. 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 our products are sold require products to undergo re-registration if the product is
altered in any significant way.
These registration processes can be costly and time consuming, and customers may decide to purchase products from our
competitors that do not have to be involved in a re-registration process. In addition, our inability to receive or renew product
registrations may prevent us from marketing and/or distributing those particular products for replacement applications in the specific
country.
Existing and future healthcare reforms and changes to reimbursement rates, may indirectly have a material adverse effect on our
business and results of operations.
Sales of our products to OEMs in the medical sector indirectly depend on whether adequate reimbursement is available for
our 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 our customers’ products, and therefore indirectly our products, may
be limited, which could harm our business, results of operations, financial condition, and prospects.
Healthcare reform proposals and medical cost containment measures in the United States and in many foreign countries could
limit the use of both ours and our customers’ products, reduce reimbursement available for such use, further tax the sale or use of our
products, and further increase the administrative and financial burden of compliance. Any changes that lower reimbursements for us or
our 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 us
or others in the healthcare sector could materially and adversely affect our business and results of operations.
We are subject to federal, state, and foreign laws governing our business practices which, if violated, could result in substantial
penalties. Additionally, challenges to or investigations into our practices could cause adverse publicity and be costly to respond to
and thus could harm our business.
Anti-corruption laws and regulations. We are 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. Any violation of these laws by us or our agents or distributors
could create substantial liability for us, subject our officers and directors to personal liability, and cause a loss of reputation in the
market. We operate in many countries, including India and China, where the public sector is perceived as being corrupt. Our strategic
business plans include expanding our 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, which could subject
us and our officers and directors to increased scrutiny and increased liability from our business operations. 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 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.
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Competition and trade compliance laws. We are subject to various competition and trade compliance laws in the jurisdictions
where we operate throughout the world. Regulatory authorities in those jurisdictions may have the power to subject us to sanctions and
impose changes or conditions in the way we conduct our 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
our actions or enforcement or private rights of action could materially and adversely affect our business or damage our reputation. We
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 our management and key personnel from our business
operations. An adverse outcome under any such investigation or audit could subject us to fines and 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.
Laws and ethical rules governing interactions with healthcare providers. We may occasionally sell our products to healthcare
providers through distributors or otherwise engage healthcare providers to provide services. 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 our sales, marketing, and other promotional activities by limiting the kinds of financial arrangements we may have
with hospitals, physicians, or other potential purchasers of our products. They particularly impact how we structure our 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 we do 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 our practices could cause adverse publicity and be costly to defend and thus could harm
our 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 us to implement the necessary and costly infrastructure to track and report certain payments to healthcare
providers. Failure to comply with these tracking and reporting laws could subject us to significant civil monetary penalties.
Other Laws. We are subject to other laws in foreign countries where we conduct 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. We could face civil, criminal, and administrative sanctions if any
member state determines that we have breached our obligations under such state’s national laws. Industry associations also closely
monitor the activities of member companies. If these organizations or authorities name us as having breached our obligations under
their regulations, rules, or standards, our reputation would suffer, and our business and financial condition could be materially and
adversely affected.
Certain of our products are subject to regulations relating to use of radioactive material, compliance with which may be costly, and
a failure to comply with these regulations may materially and adversely affect our business.
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 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,
marketing, and disposal of our products. We are 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.
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Our 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. Our manufacture, distribution, installation, service, and removal of industrial devices utilizing radioactive material or
emitting radiation also requires us to obtain a number of licenses and certifications for these devices and materials. Service of these
products must also be performed in accordance with 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 our products may
impose significant costs and requirements. Disposal sites for the lawful disposal of materials generated by the manufacture, use, or
decommissioning of our products may no longer accept these substances in the future or may accept them on unfavorable terms.
Environmental laws impose compliance costs on our business and may also result in liability.
Environmental laws regulate many aspects of our operations, including our handling, storage, transport, and disposal of
hazardous substances, such as the chemicals and materials that we use in the course of our manufacturing operations. They can also
impose cleanup liabilities, including with respect to discontinued operations. Like other businesses, we may mishandle or inadequately
manage hazardous substances used in our manufacturing operations and can never completely eliminate the risk of contamination or
injury from certain materials that we use in our business and, therefore, we cannot completely eliminate the prospect of resulting
claims and damage payments. We 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 we do not expect
to maintain insurance coverage for costs or claims that might result from any future contamination.
Pursuant to the Separation and Distribution Agreement we entered into with Varian when we spun off from Varian, we are
obligated to indemnify Varian for 20% of the cleanup liabilities related to prior corporate restructuring activities undertaken while we
were a division of Varian. This includes 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). We assess this indemnification
obligation quarterly with Varian and make accruals accordingly. These accruals have historically been small, but can sometimes
fluctuate significantly from period to period. For example, during the second quarter of fiscal year 2023, Varian informed us of an
adjustment to their estimate of their liability, which resulted in an increase in our liability of approximately $2.9 million, net of
expected insurance proceeds.
Future changes in environmental laws could also increase our 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, thereby 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 our products sold there. These directives, along with another
that requires substance information to be provided upon request, could increase our operating costs in order to maintain our 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 our business.
Environmental, Social, Governance Risks
Our business is subject to evolving Environmental, Social, and Governance (“ESG”) requirements and stakeholder expectations
that could expose us to numerous risks.
Regulators, customers, investors, and other stakeholders are increasingly focusing on ESG issues and related disclosures.
Changing ESG requirements and stakeholder expectations have resulted in, and are likely to continue to result in, increased general
and administrative expenses and increased management time and attention spent complying with or meeting such regulations and
expectations. We may also communicate certain ESG initiatives and goals in our SEC filings or in other public disclosures. If our
ESG-related data, processes, and reporting are incomplete or inaccurate, or if we fail to achieve progress with respect to our ESG goals
on a timely basis, or at all, our reputation, business, financial performance, and growth could be adversely affected.
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In addition, our customers have adopted, and may continue to adopt, procurement policies that require us to comply with
social and environmental provisions. An increasing number of investors have adopted, and may continue to adopt, ESG policies for
their portfolio companies, and various voluntary sustainability initiatives and organizations have promulgated different social and
environmental and sustainability guidelines. These practices, policies, provisions, and initiatives are under active development, subject
to change, can be unpredictable and conflicting, and may prove difficult and expensive for us to comply with and could negatively
affect our reputation, business, or financial condition.
If we are unable to retain, attract, expand, integrate, and train our management team and other key personnel, we may not be able
to maintain or expand our business.
Our future success depends on our ability to retain, attract, expand, integrate, and train our management team and other key
personnel, such as qualified engineering, service, sales, marketing, manufacturing, and other staff. We compete for key personnel with
other medical equipment and software manufacturers and technology companies, as well as universities and research institutions. We
have observed an overall tightening and increasingly competitive labor market over the past years, which has resulted in increased
wages offered by other employers and voluntary attrition of employees in the industry, making it more difficult to recruit, hire, and
retain talent. Because competition is intense, particularly in Utah, where unemployment rates are relatively low, compensation-related
costs have increased and could continue to increase, significantly. Additionally, our United States-based employees, including our
senior management team, work for us on an at-will basis, and there is no assurance that any such employees will remain with us.
Replacing key employees may take an extended period of time, and to the extent we hire employees from competitors, we also may be
subject to allegations that they have been improperly solicited or divulged proprietary or other confidential information. Freezing new
positions or terminating existing ones could hinder our ability to execute our strategic plan and achieve growth targets, resulting in
long-term sacrifices for short-term gains. Further, potential employee turnover resulting from work from home policy changes, limited
growth opportunities and competitive market conditions could lead to knowledge loss and decreased productivity. If we are unable to
retain or hire and train qualified personnel, we may not be able to maintain or expand our business. Similarly, if we fail to adequately
invest in leadership training and career development resources this could limit employee growth, lead to shortages of skilled
personnel, hinder effective management and decision making, and hamper overall organizational success.
Risks Relating to Our Indebtedness
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.
As of September 29, 2023, our total combined indebtedness was approximately $448.0 million of principal, including our
4.00% Convertible Senior Unsecured Notes due 2025 (the "Convertible Notes") and our 7.875% Senior Secured Notes due 2027 (the
“Senior Secured Notes”). For more information regarding our borrowings, see Note 9, Borrowings of the Notes to Consolidated
Financial Statements of this report.
Our $100 million revolving credit facility (the “Asset-Based Loan,” or "ABL Facility") and the indenture governing our
Senior Secured Notes impose significant operational and financial restrictions on us that include, but are not limited to our ability 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.
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;
limited in our ability to borrow additional funds as needed or increasing the cost of such borrowing;
challenged in satisfying our obligations, including our debt obligations;
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•
•
•
•
vulnerable 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;
required 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;
at a disadvantage compared to competitors that may have proportionately less debt; 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, may result in the acceleration of any other debt that is subject to an applicable cross-acceleration or cross-default
provision, and 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 accelerate the repayment of our
borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness.
If our cash requirements in the future are greater than expected, our cash flow from operations may not be sufficient to repay
all of the outstanding debt as it becomes due, and we may not be able to borrow money, sell assets, or otherwise raise funds on
acceptable terms, or at all, to refinance our debt. Any future refinancing of our indebtedness could be at higher interest rates and may
require us to comply with more onerous covenants which could further restrict our business operations. Additionally, the indentures
relating to our notes limit the use of the proceeds from any disposition of our assets. As a result, the indentures may prevent us from
using the proceeds from such dispositions to satisfy our debt service obligations.
Our ability to continue to have the necessary liquidity to operate our business may be adversely impacted by a number of factors,
and 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 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; and interest rate fluctuations. 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 Loan Cap (the lesser of (a) the aggregate commitments under the ABL
Facility and (b) the aggregate borrowing base) and (ii) $7.5 million. Adverse developments in the economy in the past have led and in
the future 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.
We entered into certain hedging positions that may affect the value of the Convertible Notes and the volatility and value of our
common stock.
In connection with the issuance of the Convertible Notes, we 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 our common stock or
purchasing or selling our 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 us on any fundamental change repurchase date or otherwise) which could cause or avoid an increase or a decrease in the market
price of our common stock or the Convertible Notes and could adversely affect the value of our common stock.
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Risks Relating to Our 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 we elect to satisfy our conversion obligation by settling all or a portion of
our conversion obligation in cash, it could adversely affect our liquidity. In addition, even if holders do not elect to convert their
Convertible Notes, we 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 our net working capital
and may seriously harm our business. If we elect to settle our conversion obligation in shares of common stock or a combination of
cash and shares of common stock, any sales of our common stock issuable on such conversion could adversely affect prevailing
market prices of our 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 our common stock, any of which could depress the market price of our common stock.
Risks Relating to Our Spin-Off
Liabilities related to our operations when we were part of Varian, or liabilities associated with the spin-off from Varian, could
materially and adversely affect our business, financial condition, results of operations, and cash flows.
We entered into a Separation and Distribution Agreement when we spun off from Varian. This agreement provides for,
among other things, indemnification obligations designed to make Varex financially responsible for information contained in our
registration statement that describes Varex, our separation from Varian, the transactions contemplated by the Separation and
Distribution Agreement, and liabilities that were allocable to Varex before the spin-off. We may be subject to substantial liabilities if
we were required to indemnify Varian or if Varian were required, but unable, to indemnify us. Either of these could negatively affect
our business, financial position, results of operations, and/or cash flows.
General Risks
Failure to maintain effective internal controls and procedures could negatively impact us.
In the past, we have not always been successful in maintaining effective internal controls and procedures. Internal control
over financial reporting is complex and may be revised over time to adapt to changes in our business or changes in applicable
accounting rules. We cannot assure that our internal control over financial reporting will be effective in the future or that material
weaknesses will not be discovered with respect to a prior period for which we had previously believed that internal controls were
effective. If our internal controls and procedures are not effective, our financial statements may not accurately reflect the results of our
business and operations. In addition, there could also be a negative reaction in the financial markets due to a loss of investor
confidence in us and the reliability of our financial statements, which could affect our stock price.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters is 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 29 other facilities throughout North America, Europe, and Asia that
comprise over 800,000 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.
In addition to our location in Salt Lake City, Utah, our other primary owned facilities are located in Las Vegas, Nevada;
Franklin Park, Illinois; and Doetinchem, the Netherlands. 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
segment. 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. Our
27
Doetinchem, Netherlands facility is approximately 4 acres and approximately 100,000 square feet of space used for manufacturing,
engineering, administrative functions, and research and development for our Medical and Industrial segments.
Primary leased facilities include approximately 288,000 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, research and development, or
administrative functions for our Medical and Industrial segments.
We believe our current facilities are well-maintained and adequate to meet our current and reasonably anticipated future
needs. We believe we will be able to renew leases, as needed, on acceptable terms or that we will be able to find suitable alternatives.
Item 3. Legal Proceedings
We are subject to various claims, complaints and legal actions in the normal course of business from time to time. The
resolution of such claims, complaints and legal actions is subject to significant uncertainty and may be expensive, time consuming,
and disruptive to our operations. At the present time, we do not believe we have any current or pending litigation for which the
outcome could have a material adverse effect on our operations or financial position.
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 8, 2023, there were approximately 1,310 holders of record of Varex common stock. This number does not
include beneficial owners holding shares in "nominee" or "street" name.
This graph shows the total return on VREX common stock for the five years ended September 29, 2023, 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 September 29, 2018 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.
Item 6. [Reserved]
29
Period EndingIndex ValueSeptember 2018 - September 2023VREX USRUTDJUSAM09/1803/1909/1904/2010/2003/2110/2104/2209/2203/2309/230.250.50.7511.251.51.75
Table of Contents
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 imaging components including X-ray
tubes, flat panel and photon counting detectors and accessories, linear accelerators, and other image software processing solutions,
which are critical components of a variety of X-ray based imaging equipment. 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.
For additional information on our business, see Item 1 "Business".
Impact of General Economic Environment
While there was some improvement in the general economic environment during the year, we remain cautious as many
factors remain dynamic and unpredictable. The uncertain economic environment, supply chain and logistic challenges, and
geopolitical tensions have contributed to, and may continue to contribute to, inflation, higher interest rates and capital costs, increased
shipping costs, supply shortages, increased costs of labor and materials, exchange rate volatility, and other similar effects.
During 2023, we experienced some supply chain, manufacturing, and logistics challenges. Currently, we anticipate such
challenges to have less of an impact in fiscal year 2024. Shortages of certain materials have caused, and may continue to cause, delays
in manufacturing products for our customers. In some cases, raw material shortages and delivery delays from our suppliers have
caused operational and customer order fulfillment challenges. In addition, in late 2023 our Medical business was negatively impacted
by the China government initiated anti-corruption measures related to the healthcare industry. We expect these actions to continue into
fiscal year 2024, which could impact revenues in our China business.
For additional information on risks related to supply chain and logistics challenges, cost increases, changes in U.S. and
worldwide economic conditions, geopolitical tensions and other risks that could impact our results, see Item 1A "Risk Factors".
Fiscal Year
Our fiscal year is the 52- or 53-week period ending on the Friday nearest September 30. Fiscal year 2023 was the 52-week
period that ended September 29, 2023, fiscal year 2022 was the 52-week period that ended September 30, 2022, and fiscal year 2021
was the 52-week period that ended October 1, 2021.
Results of Operations
For a discussion and analysis of our year-over-year changes, financial condition, and results of operations for the fiscal years
ended September 30, 2022 and October 1, 2021 refer to Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of our annual report on Form 10-K for the fiscal year ended September 30, 2022, filed with the SEC on
November 18, 2022. Our year-over-year changes, financial condition, and results of operations for the fiscal years ended
September 29, 2023 and September 30, 2022 are set forth below.
Comparison of Results of Operations for Fiscal Years 2023 and 2022
Revenues, net
(In millions)
Medical
Industrial
Total revenues, net
Medical as a percentage of total revenues
Industrial as a percentage of total revenues
2023
% Change
2022
% Change
2021
$
$
673.3
220.1
893.4
75.4 %
24.6 %
—%
19%
4%
$
$
674.7
184.7
859.4
78.5 %
21.5 %
5%
6%
5%
$
$
643.8
174.3
818.1
78.7 %
21.3 %
Medical revenues decreased $1.4 million in fiscal year 2023 compared to 2022 primarily due to lower sales in our China
business, as well as decreased sales of digital detectors for oncology and dental applications partially offset by increased sales in X-ray
tubes for CT and mammography applications.
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Industrial revenues increased $35.4 million due to increased sales of security inspection products and digital detectors for
inspection applications.
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
2023
% Change
2022
% Change
2021
$
$
281.8
290.7
320.9
893.4
31.5 %
32.5 %
35.9 %
3%
4%
5%
4%
$
$
273.3
280.8
305.3
859.4
31.8 %
32.7 %
35.5 %
2%
2%
12%
5%
$
$
268.5
276.3
273.3
818.1
32.8 %
33.8 %
33.4 %
The Americas revenues increased $8.5 million in fiscal year 2023 compared to 2022 primarily due to increased sales of
security inspection products, digital detectors and X-ray tubes. EMEA revenues increased $9.9 million primarily due to increased sales
of security inspection products and X-ray tubes, partially offset by decreased sales in digital detectors for oncology and dental
applications. APAC revenues increased $15.6 million primarily due to increased sales of X-ray tubes partially offset by a decrease in
sales of digital detectors.
Gross Profit
(In millions)
Medical
Industrial
Total gross profit
Medical gross margin
Industrial gross margin
Total gross margin
2023
% Change
2022
% Change
2021
$
$
205.5
84.8
290.3
30.5 %
38.5 %
32.5 %
(2)%
16%
2%
$
$
210.5
73.0
283.5
31.2 %
39.5 %
33.0 %
4%
7%
4%
$
$
203.2
68.3
271.5
31.6 %
39.2 %
33.2 %
The Medical segment gross profit decreased $5.0 million in fiscal year 2023 compared to 2022 primarily due to an increase in
material costs associated with digital detectors.
The Industrial segment gross profit increased $11.8 million in fiscal year 2023 compared to 2022 primarily as a result of
increased sales of security inspection products and X-ray tubes.
Operating Expenses
(In millions)
Research and development
As a percentage of total revenues
Selling, general and administrative
As a percentage of total revenues
Operating expenses
As a percentage of total revenues
Research and Development
2023
% Change
2022
% Change
2021
$
$
$
84.8
9.5 %
128.4
14.4 %
213.2
23.9 %
10%
9%
9%
$
$
$
77.0
9.0 %
118.3
13.8 %
195.3
22.7 %
7%
(6)%
(1)%
$
$
$
71.9
8.8 %
125.5
15.3 %
197.4
24.1 %
Research and development costs for fiscal year 2023 increased to 9.5% of revenues primarily due to increased spending on
material costs supporting research and development initiatives and includes $2 million in costs related to a development agreement
entered into during fiscal year 2022 with a third-party company. See Note 12, Commitments and Contingencies, included in the
accompanying Notes to Consolidated Financial Statements. 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.
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Selling, General and Administrative
Selling, general and administrative expenses as a percentage of total revenues increased to 14.4% for fiscal year 2023 from
13.8% for fiscal year 2022 primarily due to increased compensation costs, with additional increases in external service and
environmental remediation costs.
Interest and Other Expense, Net
The following table summarizes our interest and other expense, net:
(In millions)
Interest income
Interest expense
Other expense, net
Interest and other expenses, net
2023
% Change
2022
% Change
2021
$
$
3.7
(29.3)
(20.2)
(45.8)
825%
(26)%
370%
5%
$
$
0.4
(39.8)
(4.3)
(43.7)
300%
(5)%
23%
(4)%
$
$
0.1
(42.1)
(3.5)
(45.5)
Interest income increased in fiscal year 2023 compared to fiscal year 2022 primarily due to an increase in investments in
marketable debt securities and other bank deposits.
Interest expense decreased in fiscal year 2023 compared to fiscal year 2022 primarily due to the redemption of $27 million of
our Senior Secured Notes in March 2022, reduced fees on the ABL Facility, and reduced interest expense due to the adoption of ASU
2020-06. See Note 1, Summary of Significant Accounting Policies, "Recently Adopted Accounting Pronouncements" for further details
concerning the adoption of ASU 2020-06.
Other expense, net increased in fiscal year 2023 compared to fiscal year 2022 primarily due to the impairment of an equity
method investment, partially offset by decreased foreign exchange expense.
Taxes on Income
Effective tax rate
Fiscal Years
2023
2022
(55.6) %
30.8 %
We had an income tax benefit of $17.4 million and an income tax expense of $13.7 million, for effective rates of (55.6)% and
30.8%, for fiscal years 2023 and 2022, respectively.
During fiscal year 2023, our effective tax rate varied from the U.S. federal statutory rate of 21% primarily due to the
favorable impact of the release of the U.S. valuation allowance, U.S. tax reform regarding international provisions, R&D credits, and
return to provision adjustments. These favorable items were partially offset by the unfavorable impact of profit in foreign jurisdictions
with statutory tax rates greater than 21%.
During fiscal year 2022, our effective tax rate varied from the U.S. federal statutory rate of 21% primarily due to the
unfavorable impact of profit in foreign jurisdictions with statutory tax rates greater than 21% and also U.S. deferred tax attributes and
losses in certain foreign jurisdictions for which a valuation allowance is provided. These unfavorable items were partially offset by the
favorable impact of U.S. tax reform regarding international provisions, return to provision adjustments, and R&D tax credits.
We estimated the fiscal year 2023 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 of U.S. tax reform, and have
included these amounts in the calculation of the fiscal year 2023 tax provision. We made an accounting policy election, as allowed by
the SEC and FASB, to recognize the impact of GILTI as a period cost if and when incurred.
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 believe that our operating cash flow, cash on our balance sheet and availability under our ABL Facility are
sufficient to meet our anticipated operating cash needs for at least the next 12 months and 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.
We are currently not aware of any trends or demands, commitments, events, or uncertainties that will result in or that are reasonably
likely to result in a material change to our liquidity needs during or beyond the next 12 months. See Item 1A. “Risk Factors” for a
further discussion. The maximum availability under our ABL Facility was $100.0 million as of September 29, 2023; however, the
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borrowing base under the ABL Facility fluctuates from month-to-month depending primarily on the amount of eligible accounts
receivable, inventory, and real estate. As of September 29, 2023 the amount available under our ABL Facility was $88.7 million, and
the ABL Facility remains undrawn. At September 29, 2023 we had total debt of $442.6 million, net of discounts and deferred issuance
costs of $5.4 million.
Cash and Cash Equivalents, Certificates of Deposit, and Marketable Debt Securities
The following table summarizes our cash and cash equivalents, certificates of deposit, and marketable debt securities:
(In millions)
September 29, 2023
September 30, 2022
$ Change
% Change
Cash and cash equivalents
Certificates of deposit not included in cash and
cash equivalents
Marketable debt securities not included in cash
and cash equivalents
Total
Borrowings
$
$
152.6 $
89.4 $
1.0
41.3
7.2
16.7
194.9 $
113.3 $
63.2
(6.2)
24.6
81.6
70.7 %
(86.1) %
147.3 %
72.0 %
The following table summarizes the changes in our debt outstanding:
(In millions, except for percentages)
September 29, 2023
September 30, 2022
$ Change
% Change
Current maturities of long-term debt
Current portion of other debt
Non-current maturities of long-term debt:
Convertible Senior Unsecured Notes
Senior Secured Notes
Other debt
Total non-current maturities of long-term
debt:
Unamortized issuance costs and debt discounts
Unamortized discount - Convertible Notes(1)
Unamortized issuance costs - Convertible
Notes(1)
Debt issuance costs - Senior Secured Notes
Total
Total debt outstanding, net
$
$
$
$
$
$
1.5 $
2.1 $
(0.6)
(28.6) %
200.0 $
200.0 $
243.0
3.5
243.0
4.6
446.5 $
447.6 $
— $
(28.7) $
(2.5)
(2.9)
(5.4) $
442.6 $
(3.1)
(3.5)
(35.3) $
414.4 $
—
—
(1.1)
(1.1)
28.7
0.6
0.6
29.9
28.2
— %
— %
(23.9) %
(0.2) %
(100.0) %
(19.4) %
(17.1) %
(84.7) %
6.8 %
(1) In connection with the adoption of ASU 2020-06, the unamortized discount and equity component related to the Convertible Notes were derecognized and the
carrying value of the issuance costs was adjusted in the first quarter of fiscal year 2023. Refer to Note 1, Summary of Significant Accounting Policies for further details.
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 and restricted cash
2023
Fiscal Years
2022
2021
$
108.4 $
16.9 $
(44.9)
(0.2)
0.1
(48.4)
(23.8)
(0.2)
Net increase (decrease) in cash and cash equivalents and restricted cash
$
63.4 $
(55.5) $
92.6
(16.2)
(32.3)
(0.1)
44.0
Net cash provided by operating activities. Net cash provided by operating activities was $108.4 million and $16.9 million for
the fiscal years 2023 and 2022, respectively. The increase in cash provided by operating activities was primarily due to a reduction in
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cash outflows for inventory and an increased collections from accounts receivable, partially offset by increased payments for accounts
payable during fiscal year 2023.
Net cash used in investing activities. Cash used in investing activities was $44.9 million and $48.4 million for the fiscal years
2023 and 2022, respectively. The decrease in cash used in investing activities was primarily due to cash receipts related to the
settlement of net investment hedges and decreased purchases of property, plant, and equipment, partially offset by increased
purchasing of marketable equity and debt securities.
Net cash used in financing activities. Net cash used in financing activities was $0.2 million and $23.8 million for the fiscal
years 2023 and 2022, respectively. The decrease in cash used in financing activities was primarily due to the partial redemption of our
Senior Secured Notes during the fiscal year 2022.
Days Sales Outstanding
Trade accounts receivable days sales outstanding (“DSO”) was 65 days and 68 days at September 29, 2023 and
September 30, 2022, respectively. Our accounts receivable and DSO are impacted by a number of factors, including the timing of
product shipments, collections performance, payment terms, the mix of revenues from different regions, and the effects of economic
instability.
Material Contractual Obligations
The following table summarizes, as of September 29, 2023, the total amount of future payments due in various future periods:
(In millions)
Lease obligations
Principal payments on borrowings
dpiX fixed cost commitment
Dividends to MeVis noncontrolling interest
Development and share purchase commitments
Non-cancellable supplier purchase obligations
Payments Due by Period
Total
Fiscal Year
2024
Fiscal Years
2025-2026
Fiscal Years
2027-2028
Beyond
$
38.0 $
5.7 $
10.1 $
7.5 $
14.7
448.0
3.3
2.5
2.0
7.3
1.5
3.3
0.5
2.0
4.3
202.8
243.7
—
1.0
—
3.0
—
1.0
—
—
—
—
—
—
—
Total
$
501.1 $
17.3 $
216.9 $
252.2 $
14.7
We lease office space under non-cancelable operating leases. For further information on our operating leases, see Note 3,
Leases, included in the accompanying Notes to Consolidated Financial Statements.
For further discussion regarding our borrowings, see Note 9, Borrowings, included in the accompanying Notes to
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 2023, we estimate that we have fixed cost commitments of $3.3 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. As of September 29,
2023, noncontrolling shareholders together held approximately 0.5 million shares of MeVis, representing 26.3% of the outstanding
shares.
In the fourth quarter of fiscal year 2022, we entered into a development agreement and a share purchase agreement with a
third-party company. For more information about these agreements, see Note 12, Commitments and Contingencies, included in the
accompanying Notes to Consolidated Financial Statements.
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The Company enters into purchase agreements with its suppliers in the ordinary course of its business for the purchase of
goods and services. Some of these purchase agreements are non-cancellable and thus contractually obligate us to future cash
payments.
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
the cleanup liabilities related to prior corporate restructuring activities. As of September 29, 2023, our estimated environmental
liability for these sites is $2.8 million, net of expected insurance proceeds. For further discussion regarding our environmental
obligation, see Note 1, Summary of Significant Accounting Policies, included in the accompanying Notes to Consolidated Financial
Statements.
Contingencies
From time to time, we are a party to or otherwise involved in legal proceedings, government inspections, investigations,
customs and duty audits, and other claims and contingency matters, both inside and outside the United States, arising in the ordinary
course of our business or otherwise. We accrue amounts for probable losses, to the extent they can be reasonably estimated, that we
believe are adequate to address any liabilities related to legal proceedings as well as other loss contingencies that we believe 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. We did not have any material contingent liabilities as of September 29, 2023
and September 30, 2022. Legal expenses are expensed as incurred.
See Item 3 "Legal Proceedings" of this Annual Report for additional information regarding legal proceedings and Note 12,
Commitments and Contingencies, in the Notes to Consolidated Financial Statements for further information regarding certain of our
contractual obligations and contingencies, which discussion is incorporated herein by reference.
Critical Accounting 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.
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. Our critical
accounting policies that are affected by accounting estimates include valuation of inventories, assessment of recoverability of goodwill
and intangible assets, and income taxes. Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial
Statements, Item 8 "Financial Statements and Supplementary Data" describes the significant accounting policies and methods used in
the preparation of the Company’s consolidated financial statements. For a discussion of how these estimates and other factors may
affect our business, see Item 1A. “Risk Factors.”
Inventories, net
Inventory is valued at the lower of cost or net realizable value. Costs include materials, labor, external service and
manufacturing overhead and is computed using standard cost, which approximates actual cost, on a first-in-first-out basis. We review
inventory quantities on hand and record provisions for estimated excess, slow moving, and obsolete inventory. The evaluation of the
carrying value of our inventories takes 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. See Note 1,
Summary of Significant Accounting Policies, "Inventories, net" for further details.
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
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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 that consists of a
comparison of the fair value of a reporting unit against its carrying amount, including the goodwill allocated to each reporting unit.
In fiscal years 2023, 2022 and 2021, we performed the annual goodwill qualitative impairment test for our two reporting units
and determined that, at those times, it was not more likely than not that the fair values of the reporting units were less than their
carrying amounts and accordingly recorded 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). Significant changes in our projections
of our operating results or other factors could cause us to make interim assessments of impairment in any quarter that could result in
some or all of the goodwill being impaired. A future impairment charge for goodwill could have a material effect on the Company's
consolidated financial position and results of operations.
Taxes on Income
We calculate income taxes based on the tax statutes, regulations, and case law of the various jurisdictions in which we
operate. Significant judgment is required in determining the timing and amounts of deductible and creditable items. The benefits of
uncertain tax positions are recorded in our financial statements only after determining it is more likely than not that the uncertain tax
positions would withstand challenge by taxing authorities. We periodically reassess our positions and record any changes in the
financial statements as appropriate. Gross uncertain tax positions, exclusive of interest and penalties, were $1.4 million and $1.2
million as of September 29, 2023, and September 30, 2022, respectively. We believe the resolution of these matters will not materially
affect our consolidated financial statements. Income taxes are described further in Note 15, Taxes on Income, of our consolidated
financial statements.
The assessment regarding whether a valuation allowance is required or should be adjusted is based on an evaluation of
possible sources of taxable income and also considers all available positive and negative evidence factors. Our accounting for the
valuation of deferred tax assets represents our best estimate of future events. Changes in our current estimates, due to unanticipated
market conditions, governmental legislative actions or events, could have a material effect on our ability to utilize deferred tax assets.
Refer to Note 15, Taxes on Income, of our consolidated financial statements for additional information on the composition of valuation
allowances.
Recent Accounting Standards or Updates Not Yet Effective
See Note 1, Summary of Significant Accounting Policies, of the Notes to 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.
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 estimated total backlog at
September 29, 2023 was approximately $335 million.
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.
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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.
Risks
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, or 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 or purchase 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, net investments in foreign subsidiaries, and forecast purchases
denominated in foreign currencies. We may hedge portions of forecasted foreign currency exposure, typically for one to three months.
In addition, we hold cross-currency swaps 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. Additionally, we may choose not to
hedge certain foreign exchange exposures for a variety of reasons including, but not limited to, accounting considerations, the
prohibitive economic cost of hedging particular exposures, or due to natural offsets among the different 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 and marketable securities 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 or requiring certain customers to provide a down payment.
Interest Rate Risk
Borrowings under our ABL Facility bear interest at floating interest rates. At September 29, 2023, we had no borrowings
subject to floating interest rates. See Note 9, Borrowings, of the Notes to Consolidated Financial Statements for further information.
Our exposure to interest rate risk also relates to our interest-bearing assets, primarily our cash and cash equivalents and
marketable securities. Fixed rate securities may have their market value adversely affected due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income
may fluctuate due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in
market value due to changes in interest rates.
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
strategies. During the fiscal year ended September 29, 2023, we did not have any commodity derivative instruments in place to
manage our exposure to price changes.
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Sensitivity Analysis
The following table sets forth the potential loss in future earnings, fair value, or cash flows resulting from hypothetical changes in
relevant market rates or prices as of September 29, 2023.
Market Risk Category
Hypothetical Change
Estimated Impact
(In millions)
Impact
Category
Foreign Currency - Revenue
10% decrease in foreign exchange rates
$
Interest Rate - Marketable Securities
100 basis point decrease in interest rate of underlying investments
Commodity Price
10% increase in commodity prices
$
18.2
Earnings
1.6
3.6
Earnings
Earnings
Item 8. Financial Statements and Supplementary Data.
The Consolidated Financial Statements and Schedules listed in the Index to Consolidated 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 Exchange Act are designed to
provide reasonable assurance that information required to be disclosed in our periodic reports that we file or submit under the
Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC
and that such information is accumulated and communicated to our management, including our principal executive and financial
officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and
procedures, no matter how well designed, and operated, can provide only reasonable assurance of achieving their objectives and
management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on
this evaluation, the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") have concluded that our disclosure controls
and procedures were effective as of September 29, 2023.
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 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. Our management evaluated the
design and operating effectiveness of our internal control over financial reporting based on the criteria established in the Internal
Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the
"COSO framework" (2013)). All internal control systems, no matter how well designed, have inherent limitations. Accordingly, even
effective internal controls and procedures can provide only reasonable assurance with respect to financial statement preparation and
presentation.
Under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of our
internal control over financial reporting as of September 29, 2023. Based on this evaluation, our management concluded that we
maintained effective internal control over financial reporting as of September 29, 2023.
The effectiveness of our internal control over financial reporting as of September 29, 2023 has been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as stated in their attestation report, which appears below in this Item
9A.
Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting during the quarter ended September 29, 2023, that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f) under the Exchange Act).
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Varex Imaging Corporation
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Varex Imaging Corporation and subsidiaries (the “Company”) as of
September 29, 2023, 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 Company maintained, in all material respects,
effective internal control over financial reporting as of September 29, 2023, based on criteria established in Internal Control —
Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
("PCAOB"), the consolidated financial statements as of and for the year ended September 29, 2023, of the Company and our report
dated November 16, 2023, expressed an unqualified opinion on those financial statements and included an explanatory paragraph
regarding the Company’s adoption of a new accounting standard.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
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 (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) 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 (3) 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.
/s/ Deloitte & Touche LLP
Salt Lake City, Utah
November 16, 2023
39
Table of Contents
Item 9B. Other Information
During the three months ended September 29, 2023, none of our directors or officers informed us of the adoption or
termination of a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as those terms are defined in
Regulation S-K, Item 408.
Item 9C. Disclosures Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
Except as otherwise disclosed below, the information required by Items 10, 11, 12, 13 and 14 is incorporated by reference
from our definitive proxy statement for the 2024 Annual Meeting of Stockholders. Our definitive proxy statement for the 2024 Annual
Meeting of Stockholders ("Proxy Statement") will be filed with the SEC no later than 120 days after September 29, 2023.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Directors and Executive Officers
The information required by this Item 10 with respect to our executive officers is set forth in Item 1 "Business" 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.
Code of Conduct
We have adopted a Code of Conduct that applies to all our executive officers and directors. The Code of Conduct is available
on our website at http://www.vareximaging.com.
We intend to comply with the disclosure requirements of 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 persons performing similar functions by posting such information on our website, specified above.
We will provide disclosure of delinquent Section 16(a) reports, if any, in our Proxy Statement, and such disclosure, if any, is
incorporated herein by reference.
Item 11. Executive Compensation
The information required by this Item 11 is incorporated by reference from our Proxy Statement 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 September 29, 2023 with respect to the shares of our common stock that may
be issued under our existing equity compensation plans.
40
Table of Contents
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 (1)
(a)
Weighted average
exercise price of
outstanding options,
warrants, and rights (2)
(b)
Number of securities
remaining available for
future issuance under
equity compensation
plans (3) (excluding
securities reflected in
columns (a) and (b))
4,140 $
—
4,140 $
28.08
—
28.08
2,778
—
2,778
(1) Consists of stock options, restricted stock units ("RSUs"), and deferred stock units ("DSUs") granted under the Varex Imaging Corporation 2017 Omnibus Stock
Plan and the 2020 Stock Plan. Excludes purchase rights under the ESPP.
(2) 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.
(3) Includes 2,211 thousand shares available for future issuance under the 2020 Stock Plan, and also includes 567 thousand shares available for future issuance under
the ESPP. Shares available for issuance under the ESPP, including shares subject to purchase during the current purchase period, which commenced on August 28, 2023
(the exact number of which will not be known until the purchase date on February 23, 2024). 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 12 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 Proxy Statement under the caption “Stock
Ownership—Beneficial Ownership of Certain Stockholders, Directors and Executive Officers.”
Item 13. Certain Relationships and Related Transactions and Director Independence.
The information required by this Item 13 with respect to certain relationships and related transactions is incorporated by
reference from our Proxy Statement 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 Proxy Statement under
the caption “Proposal - Election of Directors.”
Item 14. Principal Accountant Fees and Services.
The information required by this Item 14 is incorporated by reference from our Proxy Statement under the caption “Proposal
- Ratification of the Appointment of Our Independent Registered Public Accounting Firm.”
41
Table of Contents
Item 15. Exhibit and Financial Statement Schedules.
Documents filed as part of this annual report include:
PART IV
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 10-K.
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
2.1*
3.1*
3.2*
4.1
4.2*
4.3*
10.1*
10.2*
10.3*
10.4*†
10.5*†
10.6*†
10.7*†
10.8*†
Description
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).
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 the Company, as amended February 11, 2021 (incorporated by reference to
Exhibit 3.1 to the Company’s Current Report on Form 8-K filed February 16, 2021).
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 (incorporated by reference to Exhibit 4.3 to the
Company’s Current Report on Form 10-K filed November 30, 2021).
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).
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).
42
Table of Contents
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*
Form of Change in Control Agreement (incorporated by reference to Exhibit 10.11 to the Company’s Annual
Report on Form 10-K filed November 19, 2021).
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 (incorporated by reference to Exhibit 10.18 to
the Company’s Current Report on Form 10-K filed November 30, 2021).
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).
LIBOR Transition Amendment, dated as of March 9, 2022, among Varex Imaging Corporation, Varex Imaging
West, LLC, Varex Imaging Deutschland AG, the other Loan Parties, the Lenders, Issuing Banks and Swing
Line Lender, and BANK OF AMERICA, N.A., as administrative agent and collateral agent.
10.22*†
Transition and Release Agreement, dated January 10, 2023, by and between Brian Giambattista and Varex
Imaging Corporation (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed January 10, 2023).
21.1
23.1
31.1
31.2
32.1
32.2
List of Subsidiaries as of September 29, 2023
Consent of Deloitte & Touche LLP, 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.
101.INS
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.
43
Table of Contents
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
*
†
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
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibits 101).
Incorporated herein by reference
Management contract or compensatory agreement.
Item 16. Form 10-K Summary
None
44
Table of Contents
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 16, 2023
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
President and Chief Executive Officer and Director
(Principal Executive Officer)
November 16, 2023
Chief Financial Officer
(Principal Financial and Accounting Officer)
November 16, 2023
/s/ WALTER M ROSEBROUGH, JR.
Chairman of the Board
November 16, 2023
Walter M Rosebrough, Jr.
/s/ KATHLEEN L. BARDWELL
Director
November 16, 2023
Kathleen L. Bardwell
/s/ JOCELYN D. CHERTOFF
Director
November 16, 2023
Jocelyn D. Chertoff
/s/ TIMOTHY E. GUERTIN
Timothy E. Guertin
/s/ JAY K. KUNKEL
Jay K. Kunkel
/s/ CHRISTINE A. TSINGOS
Christine A. Tsingos
Director
Director
Director
November 16, 2023
November 16, 2023
November 16, 2023
45
Table of Contents
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34)
Consolidated Statements of Operations for the fiscal years ended 2023, 2022 and 2021
Consolidated Statements of Comprehensive Income for the fiscal years ended 2023, 2022 and 2021
Consolidated Balance Sheets as of the end of fiscal years 2023 and 2022
Consolidated Statements of Stockholders' Equity for the fiscal years 2023, 2022 and 2021
Consolidated Statements of Cash Flows for the fiscal years ended 2023, 2022 and 2021
Notes to Consolidated Financial Statements
F-1
F-3
F-4
F-5
F-6
F-7
F-8
46
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Varex Imaging Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Varex Imaging Corporation and subsidiaries (the "Company") as of
September 29, 2023 and September 30, 2022, the related consolidated statements of operations, comprehensive income, stockholders’
equity, and cash flows for each of the three years in the period ended September 29, 2023, and the related notes (collectively referred
to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of
the Company as of September 29, 2023 and September 30, 2022, and the results of its operations and its cash flows for each of the
three years in the period ended September 29, 2023, in conformity with accounting principles generally accepted in the United States
of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of September 29, 2023, based on criteria established in Internal
Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated November 16, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for Convertible Notes effective
October 1, 2022, due to the adoption of Accounting Standards Update, 2020-06, Debt — Debt With Conversion and Other Options
(Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible
Instruments and Contracts in an Entity’s Own Equity, using the modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public accounting firm registered with the 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 audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the 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 financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were
communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to
the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical
audit matters does not alter in any way our opinion on the 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.
Inventories – Valuation of Excess and Obsolete Inventories — Refer to Note 1 to the financial statements
Critical Audit Matter Description
Inventories are valued at the lower of cost or net realizable value. The Company evaluates the carrying value of its inventories taking
into consideration such factors as historical sales 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. As of September 29, 2023,
the Company’s inventories, net, were $277.5 million. For the year ended September 29, 2023, inventory write-downs were
$5.6 million. Estimating the amount of excess and obsolete inventories involves significant judgment and estimates.
We identified the valuation of excess and obsolete inventories as a critical audit matter because of management’s significant judgment
related to its estimates of anticipated future sales in determining the valuation of excess and obsolete inventories. This required a high
degree of auditor judgment and an increased extent of effort.
How the Critical Audit Matter Was Addressed in the Audit
F-1
Table of Contents
Our audit procedures related to management’s estimates of the valuation of excess and obsolete inventories included the following,
among others:
• We tested the effectiveness of controls over the valuation of excess and obsolete inventories. The controls we tested included
those over the calculation, accuracy and completeness of underlying data used in the calculation, including historical sales
and anticipated future sales by product, product quantities on hand, and applicable prices.
• We evaluated management’s ability to accurately estimate the valuation of excess and obsolete inventories by comparing
actual inventory write-downs to management’s historical estimates.
• We performed procedures to evaluate the reasonableness of management’s methods, assumptions, and judgments used in
developing their estimate of the valuation of excess and obsolete inventories, which included consideration of historical sales,
anticipated future sales, and information obtained from production planning and supply chain employees.
• We tested the accuracy and completeness of the underlying data used in the Company’s calculations of the valuation of
excess and obsolete inventories, including historical usage, anticipated future sales, quantities on hand, and pricing.
• We assessed the reasonableness of the assumptions used in estimating the valuation of excess and obsolete inventories, which
included consideration of anticipated future sales and information obtained from production planning and supply chain
employees, and developing an independent expectation and comparing our independent expectation to the results of the
Company’s calculations.
• We tested the mathematical accuracy of the Company’s calculations of excess and obsolete inventories.
Investments in Privately-Held Companies – Impairment of Equity Method Investment — Refer to Notes 1, 4, 6, and 10 to the
financial statements
Critical Audit Matter Description
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, but not control, these investments. The Company records impairment losses on its
equity method investments if an impairment exists and is deemed to be other-than-temporary. To determine the fair value of the equity
method investment, the Company equally weights an income approach based on discounted cash flows and a market approach based
on comparable publicly traded companies in similar lines of business. During the year ended September 29, 2023, the Company
assessed its equity method investment in dpiX Holding LLC (“dpiX Holding”) for impairment and concluded that the carrying value
of the investment was greater than its fair value and that the loss in value was other than temporary. The Company recorded an
impairment charge totaling $16.4 million. The Company’s estimate of the fair value of the equity method investment included a
discounted cash flow technique which included estimates of a discount rate and future revenues of dpiX Holding.
We identified the valuation of dpiX Holding as a critical audit matter because of the significant judgments and estimates management
makes to determine the fair value of the equity method investment to record the impairment charge. This required a high degree of
auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s
estimates and assumptions related to selection of the discount rate and forecasts of future revenues used in determining the impairment
charge, including the need to involve our valuation specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s estimates and assumptions related to selection of the discount rate and forecasts of
future revenues in determining the impairment of dpiX Holding included the following, among others:
• We tested the effectiveness of controls over management’s impairment charge calculation, including those over the
determination of the fair value of the equity method investment, such as controls related to management’s estimates and
assumptions related to selection of the discount rate and forecasts of future revenues.
• We evaluated the reasonableness of management’s revenue forecast estimates by comparing key assumptions to historical
results, communications and contractual agreements between the Company and dpiX Holding, and information obtained from
sales and marketing personnel of the Company.
• With the assistance of fair value specialists, we evaluated the reasonableness of the discount rate by:
◦
◦
Testing the source information underlying the determination of the discount rate and mathematical accuracy of the
calculation.
Developing a range of independent estimates and comparing those to the discount rate selected by management.
• We evaluated whether the revenue forecast estimates were consistent with evidence obtained in other areas of the audit.
/s/ Deloitte & Touche LLP
Salt Lake City, Utah
November 16, 2023
We have served as the Company’s auditor since 2021.
F-2
Table of Contents
VAREX IMAGING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
Revenues, net
Cost of revenues
Gross profit
Operating expenses:
Research and development
Selling, general and administrative
Total operating expenses
Operating income
Interest income
Interest expense
Other expense, net
Interest and other expense, net
Income before taxes
Income tax (benefit) expense
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to Varex
Net income per common share attributable to Varex
Basic
Diluted
Weighted average common shares outstanding
Basic
Diluted
2023
Fiscal Years
2022
2021
$
893.4 $
859.4 $
603.1
290.3
84.8
128.4
213.2
77.1
3.7
(29.3)
(20.2)
(45.8)
31.3
(17.4)
48.7
0.5
575.9
283.5
77.0
118.3
195.3
88.2
0.4
(39.8)
(4.3)
(43.7)
44.5
13.7
30.8
0.5
$
$
$
48.2 $
30.3 $
1.20 $
1.08 $
40.3
50.3
0.76 $
0.73 $
39.8
41.6
818.1
546.6
271.5
71.9
125.5
197.4
74.1
0.1
(42.1)
(3.5)
(45.5)
28.6
10.7
17.9
0.5
17.4
0.44
0.43
39.3
40.3
See accompanying Notes to Consolidated Financial Statements.
F-3
VAREX IMAGING CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Net income
Other comprehensive (loss) income, net of tax
Unrealized (loss) gain on defined benefit obligations
Income (loss) on forward contracts
Unrealized income (loss) on available-for-sale securities
Foreign currency translation adjustments
Total comprehensive income
Less: Comprehensive income attributable to noncontrolling interests
2023
Fiscal Years
2022
2021
$
48.7 $
30.8 $
(1.0)
0.1
0.1
(0.5)
47.4
0.5
1.4
(0.6)
(0.1)
(0.6)
30.9
0.5
Comprehensive income attributable to Varex
$
46.9 $
30.4 $
See accompanying Notes to Consolidated Financial Statements.
17.9
(0.1)
—
—
(0.7)
17.1
0.5
16.6
F-4
Table of Contents
(In millions, except share amounts)
Assets
Current assets:
Cash and cash equivalents
VAREX IMAGING CORPORATION
CONSOLIDATED BALANCE SHEETS
September 29, 2023
September 30, 2022
Accounts receivable, net of allowance for credit losses of $0.6 million and $0.6 million at
September 29, 2023 and September 30, 2022, respectively
Inventories, net
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 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 12)
Stockholders' equity:
$
152.6 $
163.6
277.5
64.6
658.3
143.6
288.5
22.4
29.0
41.3
29.0
37.5
89.4
173.3
303.2
44.0
609.9
141.3
284.5
33.6
46.4
2.3
23.2
43.2
$
$
1,249.6 $
1,184.4
64.7 $
82.6
3.8
1.5
10.2
162.8
441.1
—
23.1
41.6
668.6
78.2
81.4
4.0
2.1
7.4
173.1
412.3
0.5
18.0
33.8
637.7
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: 40,529,573 and 40,085,126 at September 29, 2023 and
September 30, 2022, respectively
Additional paid-in capital
Accumulated other comprehensive (loss) income
Retained earnings
Total Varex stockholders' equity
Noncontrolling interests
Total stockholders' equity
0.4
450.4
(1.2)
118.1
567.7
13.3
581.0
0.4
469.1
0.1
63.8
533.4
13.3
546.7
Total liabilities and stockholders' equity
$
1,249.6 $
1,184.4
See accompanying Notes to Consolidated Financial Statements.
F-5
Table of Contents
VAREX IMAGING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions)
October 2, 2020
Net income
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 loss on defined benefit obligations,
net of tax
Foreign currency translation adjustments
Other
October 1, 2021
Net income
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 loss on forward contracts
Unrealized loss on change in fair value of
available-for-sale securities
Unrealized gain on defined benefit obligations,
net of tax
Foreign currency translation adjustments
Other
September 30, 2022
Net income
Cumulative effect of accounting change
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
Realized gain on forward contracts
Unrealized gain on change in fair value of
available-for-sale securities
Unrealized loss on defined benefit obligations,
net of tax
Foreign currency translation adjustments
Other
September 29, 2023
Common Stock
Shares Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income
Retained
Earnings
Total
Varex
Equity
Noncontrolling
Interests
Total
Stockholders'
Equity
39.1 $
0.4 $
434.4 $
0.8 $
16.1 $ 451.7 $
14.1 $
—
0.2
(0.1)
0.2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1.5)
2.8
13.9
—
—
(0.2)
—
—
—
—
—
(0.1)
(0.7)
—
17.4
17.4
—
—
—
—
—
—
—
—
(1.5)
2.8
13.9
(0.1)
(0.7)
(0.2)
39.4 $
0.4 $
449.4 $
— $
33.5 $ 483.3 $
—
0.1
0.4
(0.1)
0.3
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3.8
—
(2.8)
4.9
14.0
—
—
—
—
(0.2)
—
—
—
—
—
—
(0.6)
(0.1)
1.4
(0.6)
—
30.3
—
—
—
—
—
—
—
—
—
—
30.3
3.8
—
(2.8)
4.9
14.0
(0.6)
(0.1)
1.4
(0.6)
(0.2)
40.1 $
0.4 $
469.1 $
0.1 $
63.8 $ 533.4 $
—
—
—
0.2
(0.1)
0.3
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(34.6)
0.2
—
(1.4)
3.9
13.5
—
—
—
—
(0.3)
—
—
—
—
—
—
—
0.1
0.1
(1.0)
(0.5)
—
48.2
6.1
—
—
—
—
—
—
—
—
—
—
48.2
(28.5)
0.2
—
(1.4)
3.9
13.5
0.1
0.1
(1.0)
(0.5)
(0.3)
0.5
—
—
—
—
—
—
(1.4)
13.2 $
0.5
—
—
—
—
—
—
—
—
—
(0.4)
13.3 $
0.5
—
—
—
—
—
—
—
—
—
—
(0.5)
465.8
17.9
—
(1.5)
2.8
13.9
(0.1)
(0.7)
(1.6)
496.5
30.8
3.8
—
(2.8)
4.9
14.0
(0.6)
(0.1)
1.4
(0.6)
(0.6)
546.7
48.7
(28.5)
0.2
—
(1.4)
3.9
13.5
0.1
0.1
(1.0)
(0.5)
(0.8)
40.5 $
0.4 $
450.4 $
(1.2) $
118.1 $ 567.7 $
13.3 $
581.0
See accompanying Notes to Consolidated Financial Statements.
F-6
Table of Contents
VAREX IMAGING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Cash flows from operating activities:
2023
Fiscal Years
2022
2021
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
48.7
$
30.8
$
Share-based compensation expense
Depreciation
Amortization of intangible assets
Deferred taxes
Loss from equity method investments
Impairment of equity method investment
Amortization of deferred loan costs
Other assets impairment charges
Inventory write-down
Loss on operating lease abandonment
Other, net
Changes in assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued liabilities and other current and long-term liabilities
Deferred revenues
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property, plant and equipment
Loss on settlement of cash flow hedge
Proceeds from maturities of marketable debt securities
Purchase of marketable debt securities
Purchase of marketable equity securities
Purchase of certificates of deposit
Acquisitions of businesses and assets
Settlement of net investment hedge
Proceeds from sales of business and assets
Investments in and loans to privately-held companies
Other
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of debt
Repayments of borrowings
Proceeds from shares issued under employee stock purchase plan
Proceeds from exercise of stock options
Taxes related to net share settlement of equity awards
Other financing activities
Net cash 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
$
$
$
13.5
19.5
13.7
(39.5)
1.6
16.4
2.6
—
5.6
—
3.0
9.8
20.2
7.0
(15.0)
(1.0)
2.3
108.4
(20.7)
(0.2)
28.3
(52.2)
(2.7)
(1.0)
(1.0)
7.0
—
—
(2.4)
(44.9)
—
(2.4)
3.9
0.2
(1.4)
(0.5)
(0.2)
0.1
63.4
90.6
154.0
27.4
16.7
$
$
14.0
19.0
14.6
0.6
2.6
—
10.9
—
6.4
1.9
4.1
(18.1)
(85.0)
10.3
19.7
(14.9)
—
16.9
(21.3)
(0.5)
2.0
(18.7)
(2.4)
(7.2)
—
—
1.7
(0.6)
(1.4)
(48.4)
—
(29.4)
4.9
3.8
(2.8)
(0.3)
(23.8)
(0.2)
(55.5)
146.1
90.6
29.5
2.2
$
$
2.7
$
1.5
$
See accompanying Notes to Consolidated Financial Statements.
F-7
17.9
13.9
20.5
16.8
(3.0)
3.0
—
10.0
0.5
3.5
—
1.3
(32.9)
42.8
(0.9)
(13.6)
12.2
0.6
92.6
(15.1)
—
—
—
—
—
—
—
—
(1.4)
0.3
(16.2)
1.5
(33.1)
2.8
—
(1.5)
(2.0)
(32.3)
(0.1)
44.0
102.1
146.1
21.6
14.1
1.5
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” or “Varex”) designs, manufactures, sells, and services a broad range of medical
products, which include X-ray imaging components including X-ray tubes, flat panel and photon counting detectors and accessories,
ionization chambers, high voltage connectors, image processing software and workstations, 3D reconstruction software, computer-
aided diagnostic software, collimators, automatic exposure control devices, generators, and heat exchangers. The Company sells its
products to imaging system original equipment manufacturer (“OEM”) customers for incorporation into new medical diagnostic,
radiation therapy, dental, and veterinary equipment, as well as to independent service companies and distributors, and directly to end-
users for replacement purposes.
The Company also designs, manufactures, sells and services industrial products, which include Linatron® X-ray linear
accelerators, X-ray tubes, digital detectors, high voltage connectors, coolers, 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 or irradiation systems and processes. 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
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 in accordance with accounting principles generally accepted in
the United States ("GAAP"). The Company has consolidated all its majority owned subsidiaries and entities over which it has control.
All intercompany balances and transactions have been eliminated in consolidation.
Reclassification of Prior Period Presentation
Certain prior period amounts in the Notes to the Consolidated Financial Statements have had a change in presentation to
conform to current period presentation. This change does not affect previously reported results.
Segment Reporting
The Company has two reportable operating segments; (i) Medical and (ii) Industrial. See Note 16, 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 2023 was the 52-week period that ended September 29, 2023, fiscal year 2022 was the 52-week period that ended September 30,
2022, and fiscal year 2021 was the 52-week period that ended October 1, 2021.
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 entity has the
obligation to absorb losses or the right to receive residual returns 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 September 29, 2023, the Company had variable interests in two entities,
neither of which were consolidated by the Company.
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, valuation of goodwill and intangible assets, receivables, warranties, refund liabilities, long-lived
F-8
Table of Contents
asset valuations, impairment of investments, valuation of financial instruments, and taxes on income. Actual results could differ from
these estimates.
Cash and Cash Equivalents
The Company considers unrestricted 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 Company's Consolidated Balance Sheets. 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
Total as presented in the Consolidated Statements of Cash Flows
Fair Value
Twelve Months Ended
September 29, 2023
Twelve Months Ended
September 30, 2022
Beginning of
Period
End of Period
Beginning of
Period
End of Period
$
$
89.4 $
1.2
90.6 $
152.6
$
1.4
154.0
$
144.6 $
1.5
146.1 $
89.4
1.2
90.6
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) income ("OCI") 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). 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, marketable securities, certificates of deposit, and trade accounts receivable. Cash held with financial institutions may
exceed the Federal Deposit Insurance Corporation insurance limits or similar limits in foreign jurisdictions. To date, the Company has
not realized 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 credit losses 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. When these suppliers are unable to meet the Company's supply needs, the Company's production is negatively impacted.
F-9
Table of Contents
Credit is extended to customers based on an evaluation of the customer’s financial condition, and collateral is not required. In
certain circumstances, a customer may be required to prepay all or a portion of the contract price prior to transfer of control. During
the periods presented, one of the Company's customers accounted for a significant portion of revenues, as set forth below:
Canon Medical Systems Corporation
2023
Fiscal Year
2022
2021
16.5 %
17.2 %
17.9 %
Canon Medical Systems Corporation accounted for 13.8% and 10.3% of the Company’s accounts receivable as of
September 29, 2023 and September 30, 2022, respectively.
Inventories, net
Inventory is valued at the lower of cost or net realizable value. Costs include materials, labor, external service, 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.
The following table summarizes the Company’s inventories, net:
(In millions)
Raw materials and parts
Work-in-process
Finished goods
Total inventories
September 29, 2023
September 30, 2022
$
$
217.5 $
20.0
40.0
277.5 $
240.3
23.2
39.7
303.2
The Company recorded inventory write-downs of $5.6 million, $6.4 million and $3.5 million for the twelve months ended
September 29, 2023, September 30, 2022, and October 1, 2021, respectively.
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 up to thirty 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
Gross property, plant and equipment
Accumulated depreciation and amortization
Total property, plant and equipment, net
September 29, 2023
September 30, 2022
$
$
8.3 $
159.1
194.9
20.8
383.1
(239.5)
143.6 $
8.3
149.2
182.9
29.1
369.5
(228.2)
141.3
The Company recorded depreciation expense of $19.5 million, $19.0 million, and $20.5 million in fiscal years 2023, 2022
and 2021, respectively.
F-10
Table of Contents
Equity Method 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, but not control, these investments. The Company records impairment
losses on its equity method investments if an impairment exists and is deemed to be other-than-temporary, which is based on various
factors, including but not limited to, the length of time the fair value of the investment is below the carrying value, the absence of an
ability to recover the carrying amount of the investment, and the inability of the investee to sustain an earnings capacity that would
justify the carrying amount of the investment. In the fourth quarter of fiscal year 2023, the Company assessed its equity method
investment in dpiX Holding LLC (“dpiX Holding”) for impairment and engaged an external service firm to perform a valuation of its
ownership interest in dpiX Holding as of July 1, 2023. The fair value of the Company's equity interest in dpiX Holding as of the
valuation date was determined to be $27.6 million. The Company's carrying value of its investment as of July 1, 2023 was
$44.0 million. The Company concluded the loss in value of the investment was other than temporary and was primarily due to
reductions in forecasted glass purchases by Varex, as the Company is one of dpiX LLC's (“dpiX”) largest customers. See Note 4,
Related-Party Transactions, for details on the Company's investment in dpiX Holding. As a result, the Company recorded a before-tax
impairment charge totaling $16.4 million, which is included in other expense, net in the Company's Consolidated Statements of
Operations. There were no impairments recorded during fiscal year 2022 or 2021.
Marketable Securities
The Company's marketable securities consist primarily of financial instruments such as United States treasury securities,
United States agency obligations, corporate bonds, commercial paper, money market funds, and equity securities.
Marketable Debt Securities
The Company's marketable debt securities are classified as available-for-sale. Classification of marketable debt securities is
determined at the time of purchase, and the Company reevaluates such classification as of each balance sheet date. Marketable debt
securities are recorded at estimated fair value and included in cash and cash equivalents, prepaid expenses and other current assets, and
other assets within the Consolidated Balance Sheets. Any unrealized gains or losses are included in accumulated other comprehensive
(loss) income within the Consolidated Balance Sheets. When the fair value of a marketable debt security declines below its amortized
cost basis, any portion of that decline attributable to credit losses, to the extent expected to be nonrecoverable before the sale of the
security, is recognized in the Consolidated Statements of Operations. When the fair value of a marketable debt security declines below
its amortized cost basis due to changes in interest rates, such amounts are recorded in accumulated other comprehensive (loss) income,
and are recognized in the Consolidated Statements of Operations only if the Company sells or intends to sell the security before
recovery of its cost basis. There were no impairments related to marketable debt securities recorded during the twelve months ended
September 29, 2023.
Marketable Equity Securities
Marketable equity securities are stated at fair value as determined by the most recently traded price of each security at the
balance sheet date and included in other assets within the Consolidated Balance Sheets. All unrealized gains and losses on marketable
equity securities are recorded as part of other expense, net in the Company's Consolidated Statements of Operations. See Note 10, Fair
Value, for further details.
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, net 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 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
F-11
Table of Contents
financial performance, and other relevant events and factors affecting the reporting unit. If the Company determines 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. In fiscal years 2023, 2022, and 2021, the Company
performed the annual goodwill qualitative impairment test for our two reporting units and determined that, at those dates, it was not
more likely than not that the fair values of the reporting units were less than their carrying amount and accordingly recorded no
impairment.
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 12, Commitments and Contingencies, for further
information regarding certain of our contractual obligations and contingencies.
Environmental Obligations
The Company's 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, the Company is obligated to
indemnify Varian for the cleanup liabilities related to prior corporate restructuring activities. The Company anticipates that it will be
obligated to reimburse Varian for 20% of the liabilities of Varian related to these sites (after adjusting for any insurance proceeds or
tax benefits received by Varian). As of September 29, 2023 and September 30, 2022, the Company's estimated liability for these sites
was $2.8 million and $1.1 million, net of expected insurance proceeds, respectively.
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
New accruals charged to cost of revenues
Product warranty expenditures
Accrued product warranty, at end of period
Leases
Fiscal Years Ended
September 29,
2023
September 30,
2022
$
$
7.9 $
12.7
(12.9)
7.7 $
8.5
11.3
(11.9)
7.9
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. The Company recognizes
operating leases with lease terms of more than twelve months in operating lease assets, current operating lease liabilities, and
F-12
Table of Contents
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
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 imaging
components including 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 linear accelerators together with its image
processing software and image detection products to OEM customers that incorporate them into their inspection or irradiation systems
and processes. 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
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.
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. For sales with a right of return, revenue is reduced and 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 refund liability and right of return 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 could be sold separately.
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.
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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 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 16, 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 liabilities are included within the deferred revenues, and other long-term liabilities balances in the Consolidated
Balance Sheets. The Company does not have any material contract assets.
Deferred revenue represents the Company's obligation to transfer goods or services to its customers for which it has already
received consideration (or the amount is due) from the customer. The Company's deferred revenue balance primarily relates to
contract advances and billings for warranty contracts.
Deferred revenue that is estimated to be recognized during the following twelve-month period is recorded as deferred
revenues and the remaining portion is recorded as other long-term liabilities in the Consolidated Balance Sheets.
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.
Allowance for Credit Losses
The Company evaluates the creditworthiness of customers prior to authorizing shipment for all major sale transactions. On a
quarterly basis, the Company considers historical trends, current information and any reasonable and supportable forecasts to
determine if an amount should be included in the allowance for credit losses. The Company had an allowance for credit losses of $0.6
million and $0.6 million as of September 29, 2023 and September 30, 2022, 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 Operations 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 14, Employee Stock Plans, included in this report.
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Table of Contents
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.
Taxes on Income
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. Future changes in tax regulation can have a material impact, including tax
rate changes or the realization of deferred tax assets. 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. Also, net operating loss carryforwards in jurisdictions with current losses provide
uncertainty for realization. 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. A portion
of the U.S. general business tax credits for research outside of the financial statement line for research and development ("R&D") have
a small degree of uncertainty. A reasonable reserve is maintained on the uncertain portion until either the Internal Revenue Service
chooses to audit or the statute of limitation expires. A reserve for R&D is typical for companies that calculate and utilize this general
business credit. 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.
We regularly evaluate the realizability of our deferred tax assets based on the weight of all available evidence, both positive
and negative, including the history of recent earnings and expected future taxable income on a jurisdictional basis and our ability to
generate sufficient taxable income in the future to realize the net deferred tax assets. As of September 29, 2023, based on our
assessment of the realizability of our net deferred tax assets, we reached the conclusion that it was more likely than not that the U.S.
federal deferred tax assets are realizable due to cumulative income in recent years and the expectation of sustained profitability in
future periods. As a result, we released the valuation allowance against all of the U.S. federal deferred tax assets. We continue to
maintain a valuation allowance against U.S. state R&D credit carryforwards and a partial valuation allowance against state net
operating losses that are not expected to be realizable. We also maintain full valuation allowances against the net deferred tax assets in
Sweden, Finland, and Saudi Arabia, due to their recent historical losses and the uncertainty of their future taxable income to realize
their net operating losses.
The 2017 Tax Cuts and Jobs Act ("TCJA") included a provision requiring research and development expenditures to be
capitalized for tax years beginning after December 31, 2021, which was effective for the Company starting in fiscal year 2023.
Because the Company has a significant amount of research and development expenditures, U.S. taxable income and cash taxes are
expected to be significantly higher over the next several years.
Foreign Currency Remeasurement and 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 Operations in other
expense, net. 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)
income.
Recently Adopted Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board issued Accounting Standard Update ("ASU") 2020-06,
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The standard removed certain separation models in
ASC 470-20 for convertible instruments, and, as a result, embedded conversion features are no longer separated from the host contract
for convertible instruments with conversion features that are not required to be accounted for as derivatives under ASC 815. These
convertible debt instruments are accounted for as a single liability measured at amortized cost. This results in the interest expense
recognized for convertible debt instruments to be typically closer to the coupon interest rate. Further, the ASU made amendments to
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the earnings per share (“EPS”) guidance in Topic 260 for convertible instruments, the most significant impact of which was requiring
the use of the if-converted method for diluted EPS calculation, and no longer allowing the net share settlement method. The Company
adopted this ASU on October 1, 2022, using the modified retrospective method. On the date of adoption, the Company recorded an
entry to reduce additional paid-in capital by $34.6 million, increase long-term debt, net by $28.0 million, decrease deferred tax assets
by $0.5 million, and increase retained earnings by $6.1 million for the after-tax impact of previously recognized amortization of the
debt discount associated with the Company’s Convertible Notes (as defined herein). The unamortized discount on the Company's
Convertible Notes (see Note 9, Borrowings) was derecognized in the first quarter of fiscal year 2023, which removed the amortization
of the debt discount, and brought the effective interest rate closer to the coupon rate of 4.00%. The impact that the adoption of ASU
2020-06 has on the Company's net income per diluted share will depend on the amount of earnings in each period and could result in
additional dilution.
2. REVENUE RECOGNITION
Right of Return Assets and Refund Liabilities
Right of return assets are included within the prepaid expenses and other current assets, and other assets in the Consolidated
Balance Sheets. Refund liabilities are included within the accrued liabilities and other current liabilities and other long-term liabilities
in the Consolidated Balance Sheets. The following tables summarize the changes in the right of return assets and refund liabilities for
the twelve months ended September 29, 2023 and September 30, 2022:
(In millions)
Balance at October 1, 2021
Costs recovered from product returns during the period
Right of return assets from shipments of products, subject to return during the period
Adjustment for actual vs. reserved product returns
Balance at September 30, 2022
Costs recovered from product returns during the period
Right of return assets from shipments of products, subject to return during the period
Adjustment for actual vs. reserved product returns
Balance at September 29, 2023
(In millions)
Balance at October 1, 2021
Release of refund liability included in beginning of year refund liability
Additions to refund liabilities
Adjustment for actual vs. reserved product returns
Balance at September 30, 2022
Release of refund liability included in beginning of year refund liability
Additions to refund liabilities
Adjustment for actual vs. reserved product returns
Balance at September 29, 2023
Right of Return Assets
$
$
$
$
$
$
24.3
(5.4)
7.1
(0.6)
25.4
(5.1)
6.8
(1.1)
26.0
Refund Liabilities
27.0
(6.1)
7.9
(0.6)
28.2
(5.6)
7.5
(1.2)
28.9
During fiscal year 2023, the Company recognized revenue of $6.7 million related to deferred revenue which existed at
September 30, 2022. During fiscal year 2022, the Company recognized revenue of $6.7 million related to deferred revenue which
existed at October 1, 2021.
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.
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3. LEASES
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 less than one year to approximately
ninety-five years, some of which may include options to extend the leases for up to five 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.
During the twelve months ended September 30, 2022, the Company recorded a loss due to abandonment of $1.9 million,
which is included in selling, general and administrative on the Consolidated Statements of Operations.
The following table presents supplemental balance sheet information related to the Company's operating and finance leases:
(In millions)
Assets
Balance Sheet Location
September 29, 2023
September 30, 2022
Operating lease right-of-use assets
Operating lease assets
$
29.0 $
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
0.3
3.8
0.1
23.1
Finance lease liabilities (non-current)
Other long-term liabilities
$
0.2 $
The following table presents the weighted average remaining lease term and discount rate information related to the
Company's operating and finance leases:
23.2
0.3
4.0
0.2
18.0
0.1
Operating lease weighted average remaining lease term (in years)
Operating lease weighted average discount rate
Finance lease weighted average remaining lease term (in years)
Finance lease weighted average discount rate
September 29, 2023
September 30, 2022
7.8
7.9 %
3.6
4.7 %
6.4
5.6 %
2.0
3.6 %
The following table provides information related to the Company’s operating and finance leases:
F-17
Table of Contents
(In millions)
Total operating lease costs(1)
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
Noncash finance right-of-use assets obtained in exchange for new lease
liabilities
Total right-of-use assets obtained in exchange for new lease
liabilities
$
$
2023
2022
2021
5.8 $
0.2 $
7.8 $
0.3
8.1 $
10.6 $
0.2
10.8 $
6.4 $
0.2 $
7.3 $
0.2
7.5 $
5.4 $
0.1
5.5 $
8.1
0.3
7.9
0.2
8.1
5.6
0.2
5.8
(1) Includes variable and short-term lease expense, which were immaterial for fiscal years 2023, 2022, and 2021.
As of September 29, 2023, 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:
2024
2025
2026
2027
2028
Thereafter
Total future lease payments
Less: imputed interest
Present value of lease liabilities
Operating Leases
Finance Leases
$
$
$
5.6 $
5.5
4.4
4.2
3.3
14.7
37.7 $
(10.8)
26.9 $
0.1
0.1
0.1
—
—
—
0.3
—
0.3
As of September 29, 2023, the Company had not entered into any material leases that have not yet commenced.
4. RELATED-PARTY TRANSACTIONS
Investment in Privately-Held Companies
The Company has a 40% ownership interest in dpiX Holding, a holding company that has a 100% ownership interest in dpiX,
a supplier of amorphous silicon-based thin film transistor arrays for flat panels used in the Company's digital image detectors. In
accordance with the dpiX Holding operating agreement, net profits or losses are allocated to the members in accordance with their
ownership interests.
The 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. In fiscal years 2023,
2022, and 2021, the Company recorded loss on the equity investment in dpiX Holding of $0.2 million, $2.6 million, and $2.3 million,
respectively. The loss on the equity investment in dpiX Holding is included in other expense, net in the Consolidated Statements of
Operations. The carrying value of the equity investment in dpiX Holding was $25.8 million and $42.4 million at September 29, 2023
and September 30, 2022, respectively.
The Company recorded an impairment of its investment in dpiX Holding of $16.4 million in the fourth quarter of 2023. See
Note 1, Summary of Significant Accounting Policies, for details on the nature of the impairment. There were no impairments recorded
during fiscal year 2022 or 2021.
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Table of Contents
In fiscal years 2023, 2022 and 2021, the Company purchased glass transistor arrays from dpiX totaling $18.7 million,
$21.0 million and $18.5 million, respectively. These purchases of glass transistor arrays are included as a component of inventories,
net on the Consolidated Balance Sheets or cost of revenues in the Consolidated Statements of Operations.
As of September 29, 2023 and September 30, 2022, the Company had accounts payable to dpiX totaling $2.7 million and
$3.1 million, respectively.
In October 2013, the Company entered into an amended agreement with dpiX and other parties that, among other things,
provides it with the right to 50% of dpiX’s total manufacturing capacity. In addition, the Company is required to pay for 50% of
dpiX's fixed costs, as determined at the beginning of each calendar year. In January 2023, the fixed cost commitment was determined
and approved by the dpiX board of directors to be $13.1 million for calendar year 2023. As of September 29, 2023, the Company
estimated it has fixed cost commitments of $3.3 million related to the amended agreement through the remainder of calendar year
2023. The amended agreement will continue unless the ownership structure of dpiX changes (as defined in the amended agreement).
The Company has determined that dpiX Holding is a variable interest entity because the 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 unilaterally direct the activities of dpiX Holding, and therefore, is not the primary beneficiary of dpiX
Holding. The Company’s exposure to loss as a result of its involvement with dpiX Holding is limited to the carrying value of the
Company’s investment of $25.8 million and fixed cost commitments.
In November 2018, the Company (through one of its wholly-owned subsidiaries) and CETTEEN GmbH (“CETTEEN”),
formed a German limited liability company that governs the affairs and conduct of the business of VEC Imaging GmbH & Co. KG
(“VEC”), a joint venture formed 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 of accounting. The Company has determined that VEC is a variable interest entity.
In fiscal years 2023, 2022, and 2021, the Company recorded a loss on the equity investment in VEC of $0.4 million,
$0.8 million, and $1.1 million respectively. The Company's investment in VEC was $2.1 million and $2.5 million as of September 29,
2023 and September 30, 2022, respectively. In fiscal years 2023 and 2022, the Company had loans and other receivables from VEC of
$0.7 million and $0.9 million, respectively, which are recorded in prepaid expenses and other current assets in the Consolidated
Balance Sheets.
5. 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 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 were completed by the end of December 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 2023, 2022 and 2021 fiscal years, which
predominately relate to the Company's Medical segment:
(In millions)
Location of Restructuring Charges in
Consolidated Statements of Operations
Other assets impairment charges
Selling, general and administrative
Accelerated depreciation
Severance costs
Facility closure costs
Total restructuring charges
Cost of revenues
Selling, general and administrative
Selling, general and administrative
2023
2022
2021
— $
1.8 $
—
—
—
—
—
—
— $
1.8 $
—
0.2
0.6
0.2
1.0
$
$
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Table of Contents
6. OTHER FINANCIAL INFORMATION
The following table summarizes the Company’s accrued liabilities and other current liabilities:
(In millions)
Accrued compensation and benefits
Product warranty
Taxes payable
Refund liability
Accrued interest
Other
(In millions)
Long-term income tax payable
Environmental liabilities
Defined benefit obligation liability
Long-term refund liability
Derivative liability
Long-term other
September 29, 2023
September 30, 2022
$
33.4 $
7.7
13.3
7.2
11.6
9.4
$
4.6 $
1.9
5.2
21.7
4.9
3.3
36.7
7.9
11.3
6.8
11.7
7.0
81.4
4.3
1.3
3.3
21.4
—
3.5
33.8
(3.4)
—
(0.2)
0.1
(3.5)
Total accrued liabilities and other current liabilities
$
82.6 $
The following table summarizes the Company’s other long-term liabilities:
September 29, 2023
September 30, 2022
Total other long-term liabilities
$
41.6 $
The following table summarizes the Company’s other expense, net:
(In millions)
Loss from equity method investments
Impairment of equity method investment
Realized losses on foreign currencies, net
Other
Total other expense, net
2023
Fiscal Years
2022
2021
(1.4) $
(3.0) $
(16.4)
(1.0)
(1.4)
—
(1.5)
0.2
(20.2) $
(4.3) $
$
$
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Table of Contents
7. NET INCOME PER SHARE
Basic net income per common share is computed by dividing the net income for the period by the weighted average number
of shares of common stock outstanding during the reporting period. Diluted net income per common share reflects the effects of
potentially dilutive securities, which is computed by dividing the sum of net income and any adjustments to net income by the sum of
the weighted average number of common shares outstanding and dilutive common shares.
A reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per common share
is as follows:
(In millions, except per share amounts)
Net income per share - basic
Net income attributable to Varex
Basic weighted average shares outstanding
Basic net income per share attributable to Varex
Net income per share - diluted
Net income attributable to Varex
Interest expense on Convertible Notes, net of tax
Diluted net income
Basic weighted average shares outstanding
Dilutive effect of Convertible Senior Notes
Dilutive effect of share-based awards and other
Diluted weighted average shares outstanding
2023
Fiscal Year
2022
2021
$
$
$
48.2 $
40.3
1.20 $
30.3 $
39.8
0.76 $
48.2 $
30.3 $
6.2
54.4
40.3
9.6
0.4
50.3
—
30.3
39.8
1.3
0.5
41.6
Diluted net income per share attributable to Varex
$
1.08 $
0.73 $
Anti-dilutive share summary
Share-based awards and other
Warrants
Total anti-dilutive shares
2.7
9.6
12.3
3.0
—
3.0
17.4
39.3
0.44
17.4
—
17.4
39.3
0.6
0.4
40.3
0.43
2.8
—
2.8
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 per share
attributable to Varex when their effect is dilutive. As of October 1, 2022, the Company adopted ASU 2020-06 using the modified
retrospective method. The standard requires the Company to apply the if-converted method in relation to the Convertible Notes, which
requires the Company to assume that the Convertible Notes would have been converted using only share settlement at the beginning of
the period, resulting in an additional 9.6 shares outstanding. Using this method, the numerator is affected by adding back the after-tax
interest expense and the denominator is affected by including the effect of potential share settlement, if the effect is dilutive. Prior to
the adoption of ASU 2020-06, the Convertible Notes were accounted for using the treasury stock method for purposes of net income
per share. See Note 1, Summary of Significant Accounting Policies, "Recently Adopted Accounting Pronouncements" for further
details concerning the adoption of ASU 2020-06. Furthermore, in connection with the offering of the Convertible Notes, the Company
entered into convertible note hedges and warrants (see Note 9, Borrowings). However, the Company's convertible note hedges are not
included when calculating potentially dilutive shares since their effect is always anti-dilutive.
8. 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.
F-21
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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, in which case the Company would test for effectiveness on a more frequent
basis. The changes in fair value for all trades that are not designated for hedge accounting are recognized in current period income.
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 that meet certain minimum credit ratings to help mitigate
counterparty credit risk.
Derivatives Designated as Hedging Instruments - Net Investment Hedges
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. During the first quarter of fiscal year 2023, the Company terminated all three of its
previously outstanding cross currency swap contracts which resulted in cash received upon settlement of $7.3 million. The gain on the
cross currency swap contracts was recorded in accumulated other comprehensive (loss) income where it will remain until such time
that substantial liquidation of the international operations should occur. Concurrent with the termination of the previous cross currency
swap contracts, the Company entered into two new cross currency swap contracts which have been designated as net investment
hedges.
As of September 29, 2023, 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
2
$
58.7
The following table summarizes the amount of pre-tax gain (loss) recognized from derivative instruments for the periods
indicated and the line items in the accompanying statements of operations where the results are recorded for net investment hedges:
Amount of (Loss) or Gain Recognized in OCI
on Derivatives
Fiscal Year Ended
(In millions)
2023
2022
2021
Location of Gain or
(Loss) Recognized in
Income on Derivative
(Amount Excluded from
Effectiveness Testing)
Amount of Gain Recognized in Income on
Derivative (Amount Excluded from
Effectiveness Testing)
2023
2022
2021
Cross currency swap
contracts
$
(4.4) $
8.7 $
(0.3)
Interest expense
$
0.9 $
1.2 $
1.3
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
Balance Sheet Location
Cross currency swap contracts
Cross currency swap contracts
Cross currency swap contracts
Prepaid expenses and other current assets
Other assets
Other long-term liabilities
Derivative Assets and Liabilities
2023
2022
$
$
0.7 $
—
4.9 $
1.2
6.3
—
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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, lease contracts, third-party accounts receivable and payable, and
intercompany accounts receivable and payables. These forward contracts are generally entered into at the end of one fiscal period and
expire by the end of the next fiscal period. 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 expense, net in the Consolidated Statements of Operations
and offsets the change in fair value of the foreign currency-denominated assets and liabilities, which are also recorded as a component
of other expense, net. The Company has 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 as of September 29, 2023:
(In millions of equivalent USD)
Australian Dollar
Chinese Renminbi
Euro
Indian Rupee
Total notional value
9. BORROWINGS
Notional Value of
Derivatives not
Designated as Hedging
Instruments:
Sell contracts
$
$
3.9
8.6
15.9
6.3
34.7
The following table summarizes the Company's short-term and long-term debt:
(In millions, except for percentages)
Amount
Weighted-Avg
Effective Interest
Rate
Amount
Weighted-Avg
Effective Interest
Rate
September 29, 2023
September 30, 2022
Current maturities of long-term debt
Other debt
Non-current maturities of long-term debt:
Convertible Senior Unsecured Notes
Senior Secured Notes
Other debt
$
$
1.5
200.0
243.0
3.5
$
$
2.1
200.0
243.0
4.6
4.8%
8.2%
10.9%
8.2%
Total non-current maturities of long-term debt:
$
446.5
$
447.6
$ Change
$
(0.6)
$
$
—
—
(1.1)
(1.1)
Unamortized issuance costs and debt discounts
Unamortized discount - Convertible Notes(1)
Unamortized issuance costs - Convertible Notes(1)
Debt issuance costs - Senior Secured Notes
Total
Total debt outstanding, net
Equity component of Convertible Senior Unsecured
Notes(1)(2)
$
$
$
$
—
(2.5)
(2.9)
(5.4)
442.6
—
$
(28.7)
$
28.7
(3.1)
(3.5)
(35.3)
414.4
49.7
$
$
$
0.6
0.6
29.9
28.2
$
$
$
(49.7)
(1) In connection with the adoption of ASU 2020-06, the unamortized discount and equity component related to the Convertible Notes were derecognized and the
carrying value of the issuance costs was adjusted in the first quarter of fiscal year 2023. Refer to Note 1, Summary of Significant Accounting Policies for further details.
(2) Included in additional paid-in capital on the Consolidated Balance Sheets.
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Future principal payments of long-term debt outstanding as of September 29, 2023 are as follows:
(In millions)
Fiscal years:
2024
2025
2026
2027
2028
Thereafter
Total debt outstanding
Less: current maturities of long-term debt
Non-current portion of long-term debt
The following table summarizes the Company's interest expense:
Contractual interest coupon and other
Amortization/extinguishment of debt issuance costs
Amortization of debt discounts
Total interest expense
Convertible Senior Unsecured Notes
$
$
$
1.5
201.5
1.3
243.7
—
—
448.0
(1.5)
446.5
Twelve Months Ended
September 29, 2023
September 30, 2022
October 1, 2021
$
$
26.7
$
27.6
$
2.6
—
3.4
8.8
29.3
$
39.8
$
30.7
3.5
7.9
42.1
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
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 1 and December 1 of each year, beginning on December 1, 2020, and will mature on June 1,
2025, unless earlier converted or repurchased by Varex.
The Convertible Notes are convertible into cash, shares of Varex common stock or a combination thereof, at Varex’s
election, at an initial conversion rate of 48.048 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 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 maximum number of
shares issuable upon conversion of the Convertible Notes is 9.6 million.
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
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
F-24
Table of Contents
warrants. The number of shares underlying the Warrant Transactions is 9.6 million. The number of warrants outstanding as of
September 29, 2023, was 9.6 million.
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 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.
On July 15, 2021, the Company redeemed $30 million of Senior Secured Notes, in accordance with the terms and conditions
of the governing indenture, by paying cash of $31.5 million, inclusive of the redemption premium and accrued interest, and recognized
a $1.4 million loss related to the redemption premium and the write-off of previously recorded debt issuance costs. The redemption
price of the redeemed notes was 103% of the principal amount, plus accrued and unpaid interest from, and including, April 15, 2021
to, but excluding, the redemption date of July 15, 2021.
On March 18, 2022, the Company redeemed $27 million of Senior Secured Notes, in accordance with the terms and
conditions of the governing indenture, by paying cash of $28.7 million, inclusive of the redemption premium and accrued interest, and
recognized a $1.2 million loss related to the redemption premium and the write-off of previously recorded debt issuance costs. The
redemption price of the redeemed notes was 103% of the principal amount, plus accrued and unpaid interest from, and including,
October 15, 2021 to, but excluding, the redemption date of March 18, 2022. As of September 29, 2023, the aggregate principal amount
of the outstanding Senior Secured Notes was $243.0 million.
Asset-Based Loan
On September 30, 2020, the Company entered into a revolving credit agreement consisting of a $100.0 million asset-based
loan revolving credit facility (the “Asset-Based Loan”, or "ABL Facility").
From September 30, 2020 through March 9, 2022, borrowings under the Asset-Based Loan bore interest at floating rates
based on the London Interbank Offered Rate ("LIBOR"), or a 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 was required to pay a
quarterly commitment fee of 0.375% to 0.5% annualized, based on the aggregate unused commitments under the Asset-Based Loan.
On March 9, 2022, the ABL Facility was amended to transition the reference rate for certain dollar denominated advances to
the Secured Overnight Financing Rate ("SOFR") from LIBOR and the quarterly commitment fee was amended to 0.25% annualized,
based on the aggregate unused commitments under the Asset-Based Loan. Additionally, the applicable margin rates were reduced by
75 basis points and the interest rate floor was reduced from 50 basis points to 0 basis points.
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. The maximum availability under our ABL
Facility is $100.0 million; however, the borrowing base under the ABL fluctuates from month-to-month depending on the amount of
eligible accounts receivable, inventory, and real estate. As of September 29, 2023, the amount available under our ABL Facility was
$88.7 million, and the ABL Facility remains undrawn.
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 Loan Cap (the lesser of (a) the aggregate commitments under the ABL
Facility and (b) the aggregate borrowing base) and (ii) $7.5 million. As of September 29, 2023, the Company is compliant with the
ABL Facility covenants.
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Table of Contents
The ABL Facility has 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.
10. FAIR VALUE
Assets/Liabilities Measured at Fair Value on a Recurring Basis
The fair values of certain of the Company’s financial instruments, including bank deposits included in cash and cash
equivalents, accounts receivable, net and accounts payable, approximate their fair values due to their short maturities. As of
September 29, 2023, the fair value of the Company's Convertible Notes and Senior Secured Notes, as defined in Note 9, Borrowings
and measured using Level 1 inputs, were $228.4 million and $243.6 million, respectively. As of September 30, 2022, the fair values of
the Company's Convertible Notes and Senior Secured Notes, measured using Level 1 inputs, were $250.2 million and $241.3 million,
respectively. 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.
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)
Assets:
Money market funds
Commercial paper
Corporate notes/bonds
Government agencies
US Treasury bills
Derivative assets
Deferred compensation plan(1)
Marketable equity securities
Total assets measured at fair value
Liabilities:
Derivative liabilities
Total liabilities measured at fair value
$
$
$
Fair Value Measurements at September 29, 2023
Quoted Prices in
Active Markets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Total
$
— $
45.4 $
— $
—
—
—
—
—
6.3
4.1
6.0
8.3
6.6
28.6
0.7
—
—
—
—
—
—
—
—
—
10.4 $
95.6 $
— $
106.0
— $
— $
4.9 $
4.9 $
— $
— $
4.9
4.9
45.4
6.0
8.3
6.6
28.6
0.7
6.3
4.1
(1) The assets held under the Company’s deferred compensation plan are classified in Level 1 as they relate primarily to publicly traded mutual funds
for which there are observable market prices in active markets.
F-26
Table of Contents
(In millions)
Assets:
Money market funds
Commercial paper
Corporate notes/bonds
Government agencies
US Treasury bills
Derivative assets
Deferred compensation plan(1)
Marketable equity securities
Total assets measured at fair value
Liabilities:
Derivative liabilities
Total liabilities measured at fair value
Fair Value Measurements at September 30, 2022
Quoted Prices in Active
Markets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Total
$
$
$
$
— $
—
—
—
—
—
5.4
2.5
36.6 $
5.9
3.6
0.3
10.2
7.5
—
—
— $
—
—
—
—
—
—
—
7.9 $
64.1 $
— $
— $
— $
0.3 $
0.3 $
— $
— $
36.6
5.9
3.6
0.3
10.2
7.5
5.4
2.5
72.0
0.3
0.3
(1) The assets held under the Company’s deferred compensation plan are classified in Level 1 as they relate primarily to publicly traded mutual funds
for which there are observable market prices in active markets.
Nonrecurring Fair Value Measurements
In the fourth quarter of fiscal year 2023, the Company assessed its equity method investment in dpiX Holding for impairment
and concluded that the carrying value of the investment was greater than its fair value. The nonrecurring fair value measurements used
by the Company to impair its equity method investment in dpiX Holding was calculated by equal weighting of the income approach
based on estimated discounted future cash flows and the market approach based on comparable publicly traded companies in similar
lines of businesses. Under the income approach, fair value is determined based on a discounted cash flow technique that uses estimates
of cash flows discounted to present value using rates commensurate with the risks associated with those cash flows. Under the market
approach, a market-based value is derived by relating multiples for earnings and cash flow measures for a group of comparable public
companies to the same measure for each reporting unit to estimate fair value. This valuation resulted in a Level 3 nonrecurring fair
value measurement. See Note 1, Summary of Significant Accounting Policies, for details on the nature of the impairment.
Marketable Debt Securities
The following is a summary of marketable debt securities, which are included within the cash and cash equivalents, prepaid
expenses and other current assets, and other assets balances on the Consolidated Balance Sheets.
(In millions)
Commercial paper
Corporate notes/bonds
US Treasury bills
Government agencies
Total marketable debt securities
September 29, 2023
Amortized Costs
Unrealized Losses
Fair Value
6.0 $
— $
8.3
28.6
6.6
—
—
—
49.5 $
— $
$
$
6.0
8.3
28.6
6.6
49.5
The following table summarizes the marketable debt securities on the Consolidated Balance Sheets as of September 30, 2022.
F-27
Table of Contents
(In millions)
Commercial paper
Corporate notes/bonds
US Treasury bills
Government agencies
Total marketable debt securities
September 30, 2022
Amortized Costs
Unrealized Losses
Fair Value
5.9 $
— $
3.7
10.2
0.3
(0.1)
—
—
20.1 $
(0.1) $
$
$
The contractual maturities of marketable debt securities as of September 29, 2023, are shown in the table below. Actual
maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.
(In millions)
Contractual maturities:
Due within one year
Due after one year through five years
Total marketable debt securities
September 29, 2023
Amortized Costs
Fair Value
$
$
49.5 $
—
49.5 $
5.9
3.6
10.2
0.3
20.0
49.5
—
49.5
During the twelve months ended September 29, 2023, there were no gross realized gains or losses from the sale of certain
marketable debt securities that were reclassified out of accumulated other comprehensive (loss) income.
The following tables summarizes the balance sheet locations for marketable debt securities:
(In millions)
Commercial paper
Corporate notes/
bonds
Government
agencies
Treasury Bills
Total
Cash and cash equivalents
Prepaid expenses and other current
assets
Total marketable debt securities
$
$
6.0 $
—
6.0 $
— $
8.3
8.3 $
— $
6.6
6.6 $
2.2 $
26.4
28.6 $
September 29, 2023
(In millions)
Commercial paper
Corporate notes/
bonds
September 30, 2022
Government
agencies
Treasury Bills
Total
Cash and cash equivalents
Prepaid expenses and other current
assets
Other assets
$
— $
— $
— $
3.3 $
5.9
—
1.9
1.7
0.3
—
6.4
0.5
Total marketable debt securities
$
5.9 $
3.6 $
0.3 $
10.2 $
8.2
41.3
49.5
3.3
14.5
2.2
20.0
11. GOODWILL AND INTANGIBLE ASSETS
The following table reflects goodwill by reportable segment:
(In millions)
Balance at September 30, 2022
Business combination
Foreign currency translation adjustments
Balance at September 29, 2023
Medical
Industrial
Total
$
$
169.4 $
—
2.1
115.1 $
0.5
1.4
171.5 $
117.0 $
284.5
0.5
3.5
288.5
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Table of Contents
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:
September 29, 2023
September 30, 2022
(In millions)
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Acquired existing technology
$
72.3 $
(57.8) $
14.5 $
70.0 $
(49.9) $
Patents, licenses and other
Customer contracts and supplier
relationship
12.5
50.3
(12.2)
(42.7)
0.3
7.6
12.3
49.6
(11.6)
(36.8)
Total intangible assets
$
135.1 $
(112.7) $
22.4 $
131.9 $
(98.3) $
20.1
0.7
12.8
33.6
Amortization expense for intangible assets was $13.7 million, $14.6 million and $16.8 million in fiscal years 2023, 2022 and
2021, respectively.
As of September 29, 2023, the estimated future amortization expense of intangible assets with finite lives is as follows:
(In millions)
Fiscal years:
2024
2025
2026
2027
2028
Thereafter
Total
$
$
9.1
3.1
3.0
2.8
2.7
1.7
22.4
12. COMMITMENTS AND CONTINGENCIES
Lease Commitments
See Note 3, Leases, included in this report, for additional information about the Company's lease commitments.
Other Commitments
See Note 4, Related-Party Transactions, included in this report, for additional information about the Company’s
commitments to dpiX.
See Note 13, 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 $2.8 million as of September 29, 2023. See Note 1, Summary
of Significant Accounting Policies, included in the accompanying Notes to Consolidated Financial Statements for additional
information.
In fiscal year 2022, the Company entered into several agreements with a third-party company, whose stock is publicly traded
on a foreign exchange. Under these agreements, the Company will make certain milestone payments of up to $5 million upon
achievement of specified milestones. During fiscal years 2022 and 2023, the Company paid $1 million and $2 million, respectively, to
the third-party company, which was recorded in research and development in the Consolidated Statements of Operations. The
remaining milestones are expected to be achieved in fiscal year 2024.
The Company enters into purchase agreements with its suppliers in the ordinary course of its business for the purchase of
goods and services. Some of these purchase agreements are non-cancellable and thus contractually obligate the Company to future
cash payments. The Company has non-cancellable supplier purchase obligations of approximately $7.3 million as of September 29,
2023.
F-29
Table of Contents
Contingencies
The Company did not have any material contingent liabilities as of September 29, 2023 and September 30, 2022. Legal
expenses are expensed as incurred.
13. NONCONTROLLING INTERESTS
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 interests in the equity section of the Company’s Consolidated
Balance Sheets. Income representing the noncontrolling partner's share of income from operations is included in the Company's
Consolidated Statements of Operations.
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. In fiscal years 2017 and 2018, the Company purchased an immaterial number of MeVis' shares for an
additional 0.2% of outstanding shares under the put right such that the Company now owns 73.7% of the outstanding shares of
common stock of MeVis. 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 Sheets. As of September 29, 2023, noncontrolling
shareholders together held approximately 0.5 million shares of MeVis, representing 26.3% of the outstanding shares.
Changes in noncontrolling interests were as follows:
(In millions)
Balance at beginning of period
Net income attributable to noncontrolling interests
Other, including foreign currency remeasurement
Balance at end of period
14. EMPLOYEE STOCK PLANS
Employee Stock Plans
Fiscal Years
2023
2022
Noncontrolling
Interests
Noncontrolling
Interest
$
$
13.3
$
0.5
(0.5)
13.3
$
13.2
0.5
(0.4)
13.3
Certain of the Company's employees participate in the Varex Imaging Corporation 2020 Omnibus Stock Plan (the “2020
Stock Plan”), the 2017 Omnibus Stock Plan (the “2017 Stock Plan”), and the Varex Imaging Corporation 2017 Employee Stock
Purchase Plan (the “2017 ESPP”) which allow the grants of stock options, restricted stock units and performance shares among other
types of awards to eligible employees.
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. During the fiscal year 2022, the Company's Board of Directors approved an increase in the number of shares available for
issuance under the 2017 ESPP of 0.8 million shares. As of September 29, 2023 the 2017 ESPP provides for the purchase of up
to 1.8 million shares of Varex common stock.
Share-Based Compensation Expense
Share-based compensation expense recognized in the Consolidated Statements of Operations is based on awards ultimately
expected to vest. Share-based compensation expense includes expenses related to the Company’s direct employees.
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The table below summarizes the effect of recording share-based compensation expense and the option value of the employee
stock purchase plan shares:
(In millions)
Cost of revenues
Research and development
Selling, general and administrative
Total share-based compensation expense
2023
Fiscal Year
2022
2021
$
$
1.7 $
3.3
8.5
1.6 $
3.1
9.3
13.5 $
14.0 $
1.4
3.0
9.5
13.9
The unrecognized share-based compensation cost as of September 29, 2023 was $23.1 million, and is expected to be
recognized over a weighted average period of 2.5 fiscal years. As of September 29, 2023, there were approximately 2.2 million and
0.6 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
2023
2022
2021
2023
2022
2021
6.9
3.6 %
43.9 %
— %
$9.75
7.0
1.4 %
42.7 %
— %
$12.07
7.0
1.0 %
41.5 %
— %
$9.37
0.5
4.8 %
34.8 %
— %
$4.96
0.4
1.6 %
33.6 %
— %
$5.41
0.5
0.1 %
68.4 %
— %
$5.90
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 typically 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 or 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
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.
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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 30, 2022
Granted
Canceled, expired or forfeited
Exercised
Outstanding at September 29, 2023
Exercisable at September 29, 2023
2,902
415
(442)
(13)
2,862
2,080
$13.61 - $37.60
$
$22.13 - $24.55
$22.13 - $37.10
$13.61 - $13.61
$13.61 - $37.60
$13.61 - $37.60
$
$
28.97
22.31
28.92
13.61
28.08
29.44
4.5
$
1,361.4
4.8
3.4
$
$
871.4
642.6
(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 $18.79 as of September 29, 2023, 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 2023, 2022 and 2021 was $4.0 million, $3.9 million and
$3.7 million, respectively. The total intrinsic value of the options exercised during the years ended September 29, 2023, September 30,
2022 and October 1, 2021 was $0.1 million, $0.5 million and $0.0 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
the 2020 Stock Plan:
(In thousands, except per share amounts)
Balance at September 30, 2022
Granted
Vested
Canceled, expired or forfeited
Balance at September 29, 2023
Number of Shares
Weighted Average
Grant-Date Fair
Value
1,045 $
566
(255)
(79)
1,277 $
24.35
20.00
24.71
23.75
22.30
The total grant-date fair value of shares granted was $11.3 million, $10.8 million and $8.9 million for fiscal years 2023, 2022
and 2021, respectively. Shares outstanding at September 29, 2023, September 30, 2022 and October 1, 2021 had an estimated market
value of $24.0 million, $22.1 million and $30.9 million, respectively.
15. TAXES ON INCOME
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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Income tax (benefit) expense was as follows:
(In millions)
Current income tax expense
Federal
State and local
Foreign
Total current
Deferred income tax (benefit) expense:
Federal
State and local
Foreign
Total deferred
Income tax (benefit) expense
2023
Fiscal Years
2022
2021
$
$
$
$
9.8 $
3.7 $
0.3
12.6
0.2
10.3
22.7 $
14.2 $
(38.0) $
0.4 $
(0.2)
(1.9)
(40.1)
(0.9)
—
(0.5)
(17.4) $
13.7 $
Income before taxes are generated from the following geographic areas:
(In millions)
United States
Foreign
Income before taxes
2023
Fiscal Years
2022
2021
$
$
(6.2) $
37.5
31.3 $
16.4 $
28.1
44.5 $
The effective tax rate differs from the U.S. federal statutory tax rate as a result of the following:
5.4
1.4
6.8
13.6
1.8
(1.3)
(3.4)
(2.9)
10.7
(4.1)
32.7
28.6
Federal statutory income tax rate
State and local taxes, net of federal tax benefit
Statutory rate change impact on prior year deferreds
Return to provision
Research and development credit
Prior year research and development credit
Foreign rate difference
Foreign research innovation box
Change in valuation allowance
U.S. tax reform - international provisions
U.S. net operating loss carryback
Other
Effective tax rate
2023
Fiscal Years
2022
2021
21.0 %
21.0 %
21.0 %
0.3
—
(4.7)
(8.4)
—
6.3
—
(65.7)
(9.2)
—
4.8
(55.6) %
(1.4)
1.1
(2.1)
(0.9)
—
6.5
—
6.3
(4.6)
—
4.9
30.8 %
0.3
—
4.2
(4.2)
(0.3)
1.7
(3.8)
8.4
(0.7)
5.2
5.6
37.4 %
During fiscal year 2023, the Company's effective tax rate varied from the U.S. federal statutory rate of 21% primarily due to
the favorable impact of the release of the U.S. valuation allowance, U.S. tax reform regarding international provisions, R&D credits,
and return to provision adjustments. These favorable items were partially offset by the unfavorable impact of profit in foreign
jurisdictions with statutory tax rates greater than 21%.
During fiscal year 2022, the Company’s effective tax rate varied from the U.S. federal statutory rate of 21% primarily due to
the unfavorable impact of profit in foreign jurisdictions with statutory tax rates greater than 21% and also U.S. deferred tax attributes
and losses in certain foreign jurisdictions for which a valuation allowance is provided. These unfavorable items are partially offset by
the favorable impact of U.S. tax reform international provisions, return to provision adjustments, and R&D tax credits.
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During fiscal year 2021, the Company’s effective tax rate varied from the U.S. federal statutory rate of 21% primarily
because of the unfavorable impact of U.S. deferred tax attributes and losses in certain foreign jurisdictions for which a valuation
allowance is provided and a reduction in benefit for U.S. net operating losses carried back to prior years. These unfavorable items are
partially offset by the favorable impact of R&D tax credits and U.S. tax reform international provisions.
The Company has estimated its fiscal year 2023 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 of U.S. tax reform,
and have included these amounts in the calculation of the fiscal year 2023 tax provision. The Company has made an accounting policy
election, as allowed by the SEC and FASB, to recognize the impact of GILTI as a period cost if and when incurred.
Significant components of deferred tax assets and liabilities are as follows:
(In millions)
Deferred tax assets:
Inventory adjustments
Share-based compensation
Product warranty
Unrealized exchange gain
Deferred compensation
Net operating loss carryforwards
Accrued vacation
Accrued incentives
Credit carryforwards
Deferred financing fees
Interest expense limitation
Capitalized interest
Lease liabilities
Investments in privately held companies
Research and experimentation capitalization
Other
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Acquired intangibles
Property, plant and equipment
Investments in privately held companies
Operating lease assets
Other
Total deferred tax liabilities
Net deferred tax assets
Reported As:
Deferred tax assets
Deferred tax liabilities
Net deferred tax assets
September 29, 2023
September 30, 2022
$
5.9 $
6.7
1.5
2.5
1.4
19.4
0.3
2.0
2.7
5.7
—
1.1
6.1
3.2
17.6
4.1
80.2 $
(18.7)
61.5 $
(5.3) $
(8.0)
—
(6.0)
(0.9)
(20.2)
41.3 $
61.5 $
(20.2)
41.3 $
$
$
$
$
$
$
6.4
6.3
1.4
2.6
1.3
19.7
0.9
2.8
2.5
2.4
3.9
0.9
5.4
—
—
2.5
59.0
(32.2)
26.8
(7.9)
(8.8)
(1.4)
(5.6)
(1.3)
(25.0)
1.8
26.8
(25.0)
1.8
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The Company is maintaining its reinvestment assertion with respect to foreign earnings for the year ended September 29,
2023, which is that all earnings prior to fiscal year 2018 are permanently reinvested for all countries, and that all earnings for Direct
Conversion, located primarily in Sweden and Finland, are also indefinitely reinvested in those countries, but post fiscal year 2017
earnings in all other countries are not permanently reinvested. 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
repatriated in the form of a dividend.
As of September 29, 2023, the Company had foreign net operating loss carryforwards ("NOL") of approximately $19.3
million with $0.8 million expiring between 2023 and 2034 and $18.5 million carried forward indefinitely.
The valuation allowance relates primarily to net operating losses in certain foreign jurisdictions and other deferred tax
attributes where, based on the weight of available evidence, it is more likely than not that the tax benefit will not be realized. The
valuation allowance decreased by $13.5 million during fiscal year 2023 and increased by $2.0 million during fiscal year 2022. The
decrease during the current year was primarily related to the release of the valuation allowance against U.S. deferred tax attributes.
Changes in the Company's valuation allowance for deferred tax assets were as follows:
(In millions)
Valuation allowance balance–beginning of fiscal year
Other increases
Other decreases
Valuation allowance balance—end of fiscal year
2023
Fiscal Years
2022
2021
$
$
32.2 $
30.2 $
—
(13.5)
6.9
(4.9)
18.7 $
32.2 $
28.7
5.4
(3.9)
30.2
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 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
2023
2022
$
$
1.2 $
—
0.2
1.4 $
1.1
0.1
—
1.2
As of September 29, 2023 and September 30, 2022, the total amount of gross unrecognized tax benefits was $1.4 million and
$1.2 million, respectively, all of which would affect the effective tax rate if recognized.
The Company includes interest and penalties related to income taxes within income tax expense (benefit) on the Consolidated
Statements of Operations. For the year ended September 29, 2023, $0.2 million interest and penalties have been included for this
period. For the year ended September 30, 2022, $0.2 million interest and penalties have been included for this period. For the year
ended October 1, 2021, $0.2 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. Other periods for entities acquired are still open and subject to examination. Generally, periods prior to 2012 are
no longer subject to examination.
During fiscal year 2021, the New York Department of Finance and Taxation and the Utah State Tax Commission commenced
examinations of Varex’s tax returns for the years 2017, 2018, and 2019, which were closed as of September 29, 2023 with no
significant adjustments.
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16. SEGMENT INFORMATION
The Company has two reportable operating segments: Medical and Industrial, which aligns with how its CEO, who is the
Company's Chief Operating Decision Maker (“CODM”), reviews the Company’s performance. 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 CEO
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.
Description of Segments
The Medical segment designs, manufactures, sells and services X-ray imaging components, including X-ray tubes, digital
detectors and accessories, ionization chambers, high voltage connectors, image-processing software and workstations, 3D
reconstruction software, computer-aided diagnostic software, collimators, automatic exposure control devices, generators, and heat
exchangers. 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, irradiation, and inspection applications used in a number of other vertical markets. The Company's industrial products include
Linatron® X-ray linear accelerators, X-ray tubes, digital detectors, high voltage connectors, and coolers. 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
Income before taxes
Income tax (benefit) expense
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to Varex
2023
$
Fiscal Year
2022
2021
673.3 $
220.1
893.4
205.5
84.8
290.3
213.2
(45.8)
31.3
(17.4)
48.7
0.5
674.7 $
184.7
859.4
210.5
73.0
283.5
195.3
(43.7)
44.5
13.7
30.8
0.5
$
48.2 $
30.3 $
643.8
174.3
818.1
203.2
68.3
271.5
197.4
(45.5)
28.6
10.7
17.9
0.5
17.4
The Company does not disclose total assets by segment as this information is not provided to the CODM.
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Table of Contents
Geographic Information
(In millions)
Americas
EMEA
APAC
Total company
Revenues
Fiscal Years
2022
2023
Long-Lived Assets
Fiscal Years
2021
2023
2022
$
$
281.8 $
273.3 $
268.5 $
101.8 $
290.7
320.9
280.8
305.3
276.3
273.3
22.8
19.0
893.4 $
859.4 $
818.1 $
143.6 $
99.8
23.2
18.3
141.3
Revenue in the United States of America was $275.1 million, $263.7 million and $262.3 million in fiscal years 2023, 2022
and 2021, respectively.
The Company operates various manufacturing and marketing operations outside the United States. Americas includes North
and South 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.
17. 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 $4.9 million, $4.4 million and $2.8 million in fiscal years
2023, 2022 and 2021, respectively.
The Company also maintains defined benefit plans for certain employees located outside the United States. The net pension
liability is included in other long-term liabilities on the Company's Consolidated Balance Sheets and totaled $5.2 million and $3.3
million as of September 29, 2023 and September 30, 2022, respectively. The Company’s net periodic benefit costs for the Company’s
defined benefit plans were not material for fiscal years 2023, 2022, and 2021.
18. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
The following tables present the changes in the accumulated balances for each component of other comprehensive (loss)
income:
(In millions)
(Loss) Income
on Forward
Contracts
Unrealized
(Loss) Gain on
Defined Benefit
Obligations
CTA, Including
Impact of Net
Investment
Hedge
Unrealized
(Loss) Income
on Available-
For-Sale
Securities
Accumulated
Other
Comprehensive
Income (Loss)
Balance at October 01, 2021
$
— $
(0.8) $
0.8 $
— $
Other comprehensive (loss) income before
reclassifications
Income tax impact
Foreign currency translation adjustment
(0.8)
0.2
—
2.0
(0.6)
—
8.7
(0.4)
(8.9)
(0.1)
—
—
Balance at September 30, 2022
$
(0.6) $
0.6 $
0.2 $
(0.1) $
Other comprehensive (loss) income before
reclassifications
Income tax impact
Foreign currency translation adjustment
0.1
—
—
(1.2)
0.2
—
(4.4)
—
3.9
0.1
—
—
Balance at September 29, 2023
$
(0.5) $
(0.4) $
(0.3) $
— $
—
9.8
(0.8)
(8.9)
0.1
(5.4)
0.2
3.9
(1.2)
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