Days Sales Outstanding
Trade accounts receivable days sales outstanding (“DSO”) was 64 days at July 2, 2021 and 66 days at October 2, 2020. 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.
Contractual Obligations
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. In January 2021, the total fixed cost commitment was $11.6 million for calendar year 2021. As of July 2, 2021,1, 2022, we estimate that we have fixed cost commitments of $5.8$6.6 million related to this amended agreement through the remainder of calendar year 2021.2022. 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 pay the noncontrolling shareholders of MeVis an annual recurring net compensation of €0.95 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 July 2, 2021,1, 2022, noncontrolling shareholders together held approximately 0.5 million shares of MeVis, representing 26.3% of the outstanding shares.
During the third quarter of fiscal year 2020, we entered into a purchase agreement with a supplier to acquire certain equipment and intellectual property from the supplier that is utilized to manufacture X-ray cables utilized in our products. As of July 2, 2021,1, 2022, there has been no transfer of control of the underlying equipment. This acquisition is expected to be completed during the 20212022 fiscal year and the total consideration to be paid by us for the acquired assets is expected to be ¥1,084.7 million or approximately $9.7$8.0 million, subject to potential decreases for costs incurred by the Company. On April 14, 2022, we entered into a foreign currency hedge related to this Japanese Yen payment, which is expected to fix the purchase price of these assets at approximately $7.9 million.
Contingencies
From time to time, the Company iswe are a party to or otherwise involved in legal proceedings, claims and government inspections, or investigations, customs and duty audits, and other claims and contingency matters, both inside and outside the United States, arising in the ordinary course of its business or otherwise. The Company accruesWe accrue amounts for probable losses, to the extent they can be reasonably estimated, that it believeswe believe are adequate to address any liabilities related to legal proceedings and other loss contingencies that the Company believeswe 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. The CompanyWe did not have any material contingent liabilities as of July 2, 20211, 2022 and October 2, 2020.1, 2021. Legal expenses are expensed as incurred.
Off-Balance Sheet ArrangementsDays Sales Outstanding
In conjunction withTrade accounts receivable days sales outstanding (“DSO”) was 67 days at July 1, 2022 and 62 days at October 1, 2021. Our accounts receivable and DSO are impacted by a number of factors, including the saletiming of our products inproduct shipments, collections performance, payment terms, the ordinary coursemix of business,revenues from different regions and consistent with industry practice, we provide standard indemnificationthe effects of business partners and customers for losses suffered or incurred for property damages, death and injury and for patent, copyright or any other intellectual property infringement claims by any third parties with respect to our products. The terms of these indemnification arrangements are generally perpetual. Except for losses related to property damages, the maximum potential amount of future payments we could be required to make under these arrangements is unlimited. As of July 2, 2021, we have not incurred any material costs to defend lawsuits or settle claims related to these indemnification arrangements. As a result, we believe the estimated fair value of these arrangements is minimal.economic instability.
We also have indemnification obligations to our directors and officers and certain of our employees that serve as officers or directors of our foreign subsidiaries that may require us to indemnify our directors and officers and those certain employees against liabilities that may arise by reason of their status or service as directors or officers, and to advance their expenses incurred as a result of any legal proceeding against them as to which they could be indemnified.
Recent Accounting Standards or Updates Not Yet Effective
See Note 1, “SummarySummary of Significant Accounting Policies”Policies, of the notes to the accompanying condensed consolidated financial statements for a description of recent accounting standards, including the expected dates of adoption and the estimated effects on our condensed 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 July 2, 20211, 2022 was approximately $259$456 million. The Company expects to recognize this backlog as revenue over the next 12 months; however, orders
Orders may be revised or canceled, either according to their terms or as customers’customers' needs change. In addition, our ability to convert backlog into revenue may be impacted by on-going supply chain related interruptions and uncertainties. Consequently, it is difficult to predict with certainty the amount of backlog that will result in revenues. We perform a quarterly review to verify that outstanding orders in the backlog remain valid. Aged orders that are not expected to be converted to revenues are deemed dormant and are reflected as a reduction in the backlog amounts in the period identified.
In addition to orders for which revenues have not been recognized and are still considered valid, we have pricing agreements with many of our established customers that span multi-year periods. These pricing agreements include volume ranges under which orders are placed.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
We are exposed to four primary types of market risks: foreign currency exchange rate risk, credit and counterparty risk, interest rate risk, and commodity price risk.
Foreign Currency Exchange Rate Risk
A significant portion of our customers are outside the United States, while our financial statements are denominated, and our products are generally priced in U.S. Dollars. A strong U.S. Dollar may result in pricing pressure for our customers that are located outside the United States and that conduct their businesses in currencies other than the U.S. Dollar. Such pricing pressure has caused, and could continue to cause, some of our customers to ask for discounted prices, delay purchasing decisions, consider moving to in-sourcing supply of components or migrating to lower cost alternatives. A weak U.S. Dollar may result in our products becoming more attractively priced on a U.S. Dollar basis compared to our competitors. In addition, because our business is global and some payments may be made in local currency, fluctuations in foreign currency exchange rates can impact our revenues and expenses and/or the profitability in U.S. Dollars of products and services that we provide in foreign markets.
We may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities, and net investments in foreign subsidiaries.subsidiaries, and forecast purchases denominated in foreign currencies. We generallymay hedge portions of forecasted foreign currency exposure, typically for one to three months. In addition, we hold a cross-currency swap between the Euro and U.S. Dollar as a Net Investment Hedge of our acquisition of Direct Conversion. Depending on the spot rate between the Euro and U.S. Dollar at the time of settlement and whether we have sufficient Euros available, we may have to borrow incrementally in U.S. Dollars to settle this obligation. However,Additionally, we may choose not to hedge certain foreign exchange exposures for a variety of reasons including, but not limited to, accounting considerations, or the prohibitive economic cost of hedging particular exposures, or due to natural offsets among the different exposures. See Note 6, Financial Derivatives and Hedging Activities,of the notes to our condensed consolidated financial statements for further information.
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 and requiring certain industrialIndustrial customers to provide a down payment.
Interest Rate Risk
Borrowings under our ABL Facility bear interest at floating interest rates. At July 2, 2021,1, 2022, we had no borrowings subject to floating interest rates. See Note 10.10, Borrowings, of the notes to our condensed consolidated financial statements for further information.
Our exposure to interest rate risk also is related 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 three and nine months ended July 2, 2021,1, 2022, we did not have any commodity derivative instruments in place to manage our exposure to price changes.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934)1934, as amended (the "Exchange Act")) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that such information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.
The Chief Executive Officer ("CEO") and the Chief Financial Officer, ("CFO"), with assistance from other members of management, have evaluatedreviewed the effectiveness of our disclosure controls and procedures as of July 2, 2021,1, 2022, and based on their evaluation, the CEO and CFO have concluded that the disclosure controls and procedures were not effective as of such date due to the material weaknesses in internal control over financial reporting that were disclosed in our Annual Report on Form 10-K for the fiscal year ended October 2, 2020 and continue to exist as of July 2, 2021.
Changes in Internal Control Over Financial Reporting
During the quarter ended July 2, 2021, we continue to devote substantial effort to remediating the identified material weaknesses. Other than the implementation of the remediation measures described below,1, 2022, there were no other changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Remediation of Previously Identified Material Weaknesses
As previously describedreporting (as defined in Part II, Item 9A of our Annual Report on Form 10-K forExchange Act Rules 13a-15(f) and 15d-15(f) under the fiscal year ended October 2, 2020, we took further actions as part of our remediation plan to address the material weaknesses disclosed therein. We are continuing to enhance our overall control environment through the following:
•Control Environment: We continue to invest significantly in the quality of our accounting talent including management, technical, process improvement and financial system roles. Specifically, during the third quarter of fiscal year 2021, we continued addressing deficiencies identified in our Control Environment by developing a comprehensive internal finance training program to ensure that the team has the requisite knowledge to create and maintain the proper environment for effective internal control over financial reporting. While significant progress has been made in response to the material weakness, additional time is needed to demonstrate sustainability as it relates to our internal control over financial reporting and improvements made to our complement of resources.
•Risk Assessment: We continue to enhance our comprehensive risk assessment process to identify, design, implement, and re-evaluate our control activities, including monitoring controls related to the design and operating effectiveness of certain control activities pertaining to our business process environment. Specifically, we have undertaken and continue to evaluate our global risk environment to ensure that all risks have been mapped to key controls.
•Inventory and cost of revenues: We have implemented or enhanced existing controls to validate existence of inventory at third party vendor locations as well as our controls over presentation and disclosure of inventory classification.
•Financial Reporting: We continue to enhance controls related to the monitoring of journal entry posting rights and responsibilities and have implemented system workflow functionality to restrict roles and responsibilities related to the preparation and review of journal entries. We have also continued to enhance the design of controls over the completeness, accuracy and elimination of intercompany balances.
Because the reliability of the internal control process requires repeatable execution, the successful remediation of these material weaknesses will require review and evidence of operating effectiveness prior to concluding that the controls are effective, and there is no assurance that additional remediation steps will not be necessary. As such, as we continue to evaluate and work to improve our internal control over financial reporting, our management may decide to take additional measures to address the material weaknesses or modify the remediation steps already underway. Although significant progress has been made, the previously identified material weaknesses continue to exist as of July 2, 2021, and will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
We are subject to various claims, complaints and legal actions in the normal course of business from time to time. We are not aware of any currently pending litigation for which the outcome could have a material adverse effect on our operations or financial position.
Item 1A. Risk Factors
Summary of Principal Risk Factors
Investing in our common stock involves risks. See below and Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures about Market Risks for a discussion of the following principal risks and other risks that make an investment in Varex speculative or risky:
•Our operations, cash flow,business and financial position,results may be adversely affected by the effects of inflation.
•It has become more difficult to attract and the demand for certain of our products,have been adverselyretain employees, which has impacted, and in the future couldis likely to continue to be adversely impacted by the coronavirus (COVID-19) pandemic and associated economic disruptions.impact, our ability to manufacture products.
•We sell products and services to a limited number of OEMoriginal equipment manufacturer (“OEM”) customers, many of which are also competitors, and a reduction in or loss of business of one or more of these customers may materially reduce our sales.
•We may not be able to accurately predict customer demand for our products, which is subject to matters beyond our controlcontrol.
•We compete in highly competitive markets, and we may lose business to our customers or other companies with greater resources or the ability to develop more effective technologies, or we could be forced to reduce our prices.
•Our success depends on the successful development, introduction, and commercialization of new generations of products and enhancements to or simplifications of existing product lines.
•Changes in import/export regulatory regimes and tariffs could continue to negatively impact our business.
•A disruption at our manufacturing facilities, as well as fluctuating manufacturing costs, could materially and adversely affect itsour business.
•Supply chain disruptions, includingOur operations, cash flow, and financial position, and the loss of a supplier,demand for our security, industrial and any inability to obtain supplies of important components hasinspection products, have been adversely impacted, our ability to manufacture products and caused product delivery delays and mayin the future could continue to do so.be adversely impacted by the COVID-19 pandemic and associated economic disruptions.
•Our international manufacturing operations subject us to volatility and other risks, including high security risks, which could result in harm to our employees and contractors or substantial costs.
•Warranty claims may materially and adversely affect our business.
•Product defects or misuse may result in material product liability or professional errors and omissions claims, litigation, investigation by regulatory authorities, or product recalls that could harm our future revenues and require us to pay material uninsured claims.
•Our competitive position would be harmed if we are not able to maintain our intellectual property rights and protecting our intellectual property can be costly.
•Disruption of critical information systems or material breaches in the security of our systems may materially and adversely affect our business and customer relations.
•Compliance with laws and regulations across the globe applicable to the marketing, manufacture, and distribution of our products may be costly, and failure to comply may result in significant penalties and other harm to our business.
•We identified material weaknesses in our internal control over financial reporting which, if not remediated appropriately or timely, could result in loss of investor confidence and adversely impact our stock price.
•Conversion of our Convertible Notes may dilute the ownership interest of Varex’sour stockholders or may otherwise depress the market price of Varex’sour common stock.
•We have significant debt obligations that could adversely affect our business, profitability and ability to meet our obligations.
•Our ABL Credit FacilityAsset-Based Loan credit facility and our indentures impose significant operating and financial restrictions that may limit current and future operating flexibility, and make it difficult to respond to economic or industry changes or to take certain actions, which could harm our long-term interest.
•Potential indemnification liabilities to Varian, a Siemens Healthineers Company ("Varian"), could materially and adversely affect our business, financial condition, results of operations, and cash flows.
The following risk factors and other information included in this quarterly report on Form 10-Q 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 we presently deem less significant may also adversely affect our business operations. If any of the following risks or additional risks and uncertainties actually occur, our business, operating results, and financial condition could be adversely affected.
Risks Relating to Our Business
Current economic conditions, including supply chain disruptions and logistical challenges, as well as the military conflict between Russia and Ukraine, have increased our costs, and have impacted and may in the future impact our ability to obtain materials needed to manufacture our products, to deliver those products to our customers, and otherwise adversely impact our financial condition and results of operations.
Current economic conditions have had, and we believe will continue to have, an adverse impact on our manufacturing capacity, supply chain and distribution systems. We have experienced, and continue to experience, difficulties in obtaining materials used to build our products and these difficulties have impacted our ability to deliver finished products to our customers. We believe that it will continue to be difficult to obtain certain materials throughout fiscal year 2022. We have used more of our inventory on hand than we have used historically and are purchasing materials that are critical to our processes, often at higher costs. Shortages of materials, particularly micro-controller chips and associated electronic components, 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 are communicated to us with very little advanced warning, which has caused operational and customer order fulfillment challenges. During fiscal year 2021, inventory levels decreased due to our strong growth and, despite a concerted effort, it has continued to be difficult to replenish that inventory. While we are dedicating significant resources to manage, mitigate, and resolve these issues, we currently expect supply chain challenges to continue to impact our ability to deliver products to our customers over the next several quarters. If our actions to mitigate such challenges are not successful, material shortages could cause us to temporarily stop production of certain products. Production delays have had and could continue to have a material adverse effect on our business and results of operations. For example, if we are unable to deliver products to our customers without unreasonable delay, those customers may seek alternative suppliers or decide to in-source certain products.
In addition to material shortages, supply chain logistics have become more challenging, could remain challenging, and result in higher costs and efforts. Our ability to move unfinished goods and finished products around the world has been impacted by the decreased availability of global transportation networks. We have been subject to price increases on both the components used to make our products, and for moving unfinished goods and finished products across the globe. Increased freight charges and shipping delays have also become more common during the pandemic and are expected to continue into the foreseeable future. If we are not able to mitigate these price increases and/or raise prices for our products, our operations, cash flow, and financial position could be adversely impacted. In addition, regulatory approvals for certain of our products may continue to be delayed due to COVID-19 related closures. See Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information regarding the risks related to supply chain disruptions and logistical challenges on our business.
The escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine have beenintroduced further uncertainty into the economic environment, which could impact our business.Although the length and impact of the ongoing military conflict is highly unpredictable, the conflict in Ukraine could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions.Poor relations between the United States and Russia; sanctions by the United States, European Union, and other countries against Russia; the response by Russia and other countries to these sanctions; and any escalation of political tensions or economic instability in the area could have an adverse impact on our business, our customers, and our suppliers. Further, our customers, suppliers, and other third parties with whom we do business may have staff, operations, materials or equipment located in Ukraine or Russia, which could impact our supply chain, the services being provided to us, or our financial condition or results of operations.
COVID-19 has adversely affected,impacted our operations, cash flow, and financial position, and in the future we could continue to be adversely impacted, by the COVID-19 pandemic and associated economic disruptions.
The pandemic caused by the spread of COVID-19 adversely impacted our operations, cash flow, and financial position. For example, increases in COVID-19 related employee absences have made it more difficult from time to time, and may in the future make it more difficult from time to time to manufacture our products. The pandemic has also created significant volatility, uncertainty and economic disruption. Emerging variants and uneven vaccination rates across the globe could lead to additionallyadditional volatility, uncertainty, and economic disruption.
Decreased demand for certain products. As an initial response to the pandemic, governments around the world imposed measures designed to reduce the transmission of COVID-19 and individuals responded to the fears of contracting COVID-19 by modifying their behavior. In particular, restrictions on the movement of people and goods were put into place, overall economic activity decreased, elective procedures and exams were delayed or cancelled, there was a significant reduction in physician office visits, and hospitals were postponing or cancelling capital purchases as well as limiting or eliminating services. Those factors, among others, caused customers to delay or cancel orders for certain Varex products. While healthcare systems and economies around the world have begun to reopen, customer demand has not returned to pre-pandemic levels, and the adverse effects of COVID-19 on our financial statements and results of operations are expected to be more persistent, and have been more severe, than previously assumed. Reduced demand for certain of our products could continue to depress our results of operations. In addition, new New or continuing outbreaks of COVID-19 could lead to future decreases in demand.demand for our products. The actions taken to combat COVID-19 have had, and could continue to have a negative impact on ourfuture operating results, cash flows and financial condition. Local government lockdowns or prohibitions on travel could adversely affect our ability to manufacture or sell our
products. For example, the Chinese government has closed, and may in the future close, our factory in China for extended periods of time to combat COVID-19 infection rates in the region.This could impact our ability to manufacture our products and provide service to our customers in the region. We believe that COVID-19’s adverse impact on our operating results, cash flows and financial condition will be primarily driven by: the severity and duration of the COVID-19 pandemic; the COVID-19 pandemic’s impact on the U.S.United States and international healthcare systems, the U.S. economy and worldwide economy; and the timing, scope and effectiveness of U.S. and international governmental responses to the COVID-19 pandemic and associated economic disruptions.
Disruption in manufacturing, distribution, supply chain and other operations. In addition, government action related to adversely affecting demand for our products,the COVID-19 and associated economic disruptions have had and we believe will continue topandemic, such as potential vaccine mandates or testing requirements, could have an adverse impact on our manufacturing capacity,business and operating results by, among other things, increasing costs to verify compliance and making it more difficult to retain existing employees or hire new workers. See Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information regarding the risks related to COVID-19 on our business.
Our business and financial results may be adversely affected by the effects of inflation
Inflation has the potential to adversely affect our liquidity, business, financial condition and results of operations by increasing our overall cost structure, particularly if we are unable to achieve commensurate increases in the prices we charge our customers. The existence of inflation in the economy has resulted in, and may continue to result in, higher interest rates and capital costs, shipping costs, supply chainsshortages, increased costs of labor, weakening exchange rates and distribution systems, including asother similar effects. As a result of impacts associated with shortages in obtaining materials used to make our products and preventive and precautionary measures thatinflation, we other businesses, and governments are taking. For example, at our manufacturing facility in the Philippines, many employees had significant difficulty getting to work, which caused the facility to operate at a decreased capacity and caused us to shift some manufacturing to another location. A reduction or interruption in any of our manufacturing processes could have a material adverse effect on our business. Due to global economic conditions, supply chain logistics have become more challenging and could remain challenging and result in higher costs and efforts. We have experienced difficulties in obtaining materials used to build our products and these difficulties have impacted our ability to deliver finished products to our customers. We believe that supply chain challenges will continue in the future, and if our actions to mitigate such challenges are not successful, material shortages could cause us to temporarily stop production of certain products. Production delays could have a material adverse effect on our business and results of operations. In addition, our ability to move unfinished goods and finished products around the world have been impacted by the decreased availability of global transportation networks and increased costs. In addition, regulatory approvals for certain of our products may continue to experience, cost increases. Although we may take measures to mitigate the impact of this inflation, if these measures are not effective, our business, financial condition, results of operations and liquidity could be delayed due to COVID-19 related closures.materially adversely affected. Even if such measures are effective, the benefits of such measures may not be realized until after the costs of inflation have been incurred.
Varex sells itsWe sell our products and services to a limited number of OEM customers, many of which are also its competitors, and a reduction in or loss of business of one or more of these customers may materially reduce itsour sales.
VarexWe had one customer during the three months ended July 2, 20211, 2022 that accounted for 17% of itsour revenue. Varex’s ten largest customers as a group accounted for approximately 52% and 56% of its revenue for the three months ended July 2, 2021 and July 3, 2020, respectively. Varex’sOur ten largest customers as a group accounted for approximately 51% and 53%52% of itsour revenue for the three months ended July 1, 2022 and July 2, 2021, respectively. Our ten largest customers as a group accounted for approximately 50% and 51% of our revenue for the nine months ended July 1, 2022 and July 2, 2021, and July 3, 2020, respectively.
Varex sells itsWe sell our products to a limited number of OEM customers, many of which are also itsour competitors with in-house X-ray component manufacturing operations. Although Varex seekswe seek to broaden itsour customer base, itwe will continue to depend on sales to a relatively small number of major customers. Because itwe often takestake significant time to replace lost business, it is likely that Varex’sour operating results would be materially and adversely affected if one or more of itsour major OEM customers were to cancel, delay, or reduce orders in the future.
Furthermore, Varex generateswe generate significant accounts receivables from the sale of itsour products and the provision of services directly to itsour major customers. If one or more of these customers were to cancel a product order or service contract (whether in accordance with its terms or otherwise), become insolvent or otherwise be unable or fail to pay for Varexour products and services, Varex’sour operating results and financial condition could be materially and adversely affected.
VarexWe may not be able to accurately predict the demand for itsour products by itsour customers.
End-user product demand, economic uncertainties, the COVID-19 pandemic, natural disasters, and other matters beyond Varex’sour control make it difficult for itsour customers to accurately forecast and plan future business activities; which makes it difficult for Varexus to accurately predict the demand for itsour products. Because the manufacture of our products requires some lead-time, changes in customer purchasing forecasts have previously impacted Varex’sour business, resulting in excess inventory and slowdowns in sales. Similar inventory adjustments and slowdowns in sales are likely to occur in the future. Changes to customer forecasts can occur on short notice. Varex’sOur customers also face inherent competitive issues and new product introduction delays which can result in changes in forecasts. The market and regulatory risks faced by Varex’sour customers also ultimately impact Varex’sour ability to forecast future business. Varex’sOur agreements for imaging components, such as itsour three-year pricing agreement with Canon Medical Systems, may contain purchasing estimates that are based on itsour customers’ historical purchasing patterns rather than firm commitments, and actual purchasing volumes under the agreements may vary significantly from these estimates. The variation from forecasted purchasing volume may be due, in part, to the increasing life of X-ray tubes, which can result in reduced demand for replacement X-ray tubes in ways Varexwe may not be able to accurately forecast. Reductions in purchasing patterns have in the past and may in the future materially and adversely affect Varex’sour operating results. DecreasedIn the past, decreased economic activity associated with the COVID-19 pandemic has had a significant negative impact on the demand for our industrial products and thata similar impact could continue or return.occur again.
Varex competesWe compete in highly competitive markets, and itwe may lose business to itsour customers or other companies with greater resources or the ability to develop more effective technologies, or itwe could be forced to reduce itsour prices.
Rapidly-evolvingWe compete in a market characterized by rapidly-evolving technology, intense competition and pricing pressure characterize the market in which Varex competes. Varexpressure. We often competescompete with companies that have greater financial, marketing and other resources than Varex.us. Some of the major diagnostic imaging systems companies, which are the primary OEM customers for Varex’sour X-ray components, also manufacture X-ray components, including X-ray tubes, for use in their own imaging systems products. VarexWe must compete with these in-house manufacturing operations for business. If these customers manufacture a greater percentage of their components in-house or otherwise decrease purchases from external sources, which may occur for a number of reasons, including a strong U.S. Dollar, or a general economic slowdown, Varexwe could experience reductions in purchasing volume by, or loss of, one or more of these customers. Such a reduction or loss may have a material and adverse effect on itsour business. In addition, Varex competeswe 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 Varex faceswe face intense competition from over a dozen smaller competitors. As a result of these competitive dynamics, to effectively retain the business of itsour customers and compete with itsour competitors Varexwe must have an advantage in one or more significant areas, such as lower product cost, better product quality and/or superior technology and/or performance. Varex hasWe have made price concessions to maintain existing customers and attract new customers, and may have to make additional price concessions in the future.
In itsour Industrial segment, Varex competeswe compete with other OEM suppliers primarily outside of the United States. The market for itsour X-ray tube and flat panel products used for nondestructive testing in industrial applications is small and highly fragmented. Some of Varex’sour competitors outside of the United States may have resources and support from their governments that Varex doeswe do not, such as preferences for local manufacturers, and may not be subject to the same trade compliance regulations as Varex.us. Therefore, Varex’sour ability to compete in certain high-growth markets may be limited compared to itsour competitors.
Varex’sOur competitors could develop technologies and products that are more effective than those Varexwe currently usesuse or producesproduce or that could render itsour products obsolete or noncompetitive. In addition, the timing of Varex’sour competitors’ introduction of products into the market could affect the market acceptance and sales of Varex’sour products. Some competitors offer specialized products that provide, or may be perceived by customers to provide, an advantage over Varex’sour products. Also, some of Varex’sour non-U.S. competitors may not be subject to the same standards, regulatory and/or other legal requirements to which Varex iswe 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 Varex’sour competitors could limit market acceptance of Varex’sour products and reduce itsour sales. Any of these competitive factors could negatively and materially affect Varex’sour pricing, sales, revenues, market share and gross margins and itsour ability to maintain or increase itsour operating margins.
Varex’sOur success depends on the successful development, introduction, and commercialization of new generations of products and enhancements to or simplifications of existing product lines.
RapidWe operate in a market characterized by rapid change and technological innovation, characterize the markets in which Varex operates, particularly with respect to flat panel technology. Varex’sOur customers use itsour products in their medical diagnostic, security, and industrial imaging systems, and Varexwe must continually introduce new products at competitive costs while also improving existing products with higher quality, lower costs, and increased features. To be successful, Varexwe must anticipate itsour customers’ needs and demands, as well as potential shifts in market preferences. Varex’sOur failure to do so has in the past resulted, and may in the future result, in the loss of customers and an adverse impact to itsour financial performance. With a relatively strong U.S. Dollar, Varex’sour ability to meet itsour customers’ pricing expectations is particularly challenging and may result in erosion of product margin and market share.
Varex hasWe have in the past spent, and in the future may need to spend, more time and money than it expectswe expect to develop, market and introduce new products or enhancements, and, even if Varex succeeds, Varexwe succeed, we may not be able to recover all or a meaningful part of itsour investment. Once introduced, new products may materially and adversely impact sales of Varex’sour existing products or make them less desirable or even obsolete, which could materially and adversely impact Varex’sour revenues and operating results. In addition, certain costs, including installation and warranty costs, associated with new products may be proportionately greater than the costs associated with other products and may therefore disproportionately, materially, and adversely affect Varex’sour gross and operating margins. If Varex iswe are unable to lower these costs over time, Varex’sour operating results could be materially and adversely affected. Some of the electronic components and integrated circuits used in Varex’sour flat panel detectors are susceptible to discontinuance and obsolescence risks, which may force Varexus to incorporate newer generations of these components, resulting in unplanned additional R&D expenses, delays in the launch of new products, supply disruption, or inventory write downs.
Our ability to successfully develop and introduce new products and product enhancements and simplifications, and the revenues and costs associated with these efforts, are affected by Varex’sour ability to, among other things:
•properly identify customer needs or long-term customer demands;
•prove the feasibility of new products;
•properly manage and control research and development costs;
•limit the time required from proof of feasibility to routine production;
•timely and efficiently comply with internal quality assurance systems and processes;
•limit the timing and cost of regulatory approvals;
•accurately predict and control costs associated with inventory overruns caused by the phase-in of new products and the phase-out of old products;
•price itsour products competitively and profitably, which can be particularly difficult with a strong U.S. Dollar;
•manufacture, deliver, and install itsour products in sufficient volumes on time and accurately predict and control costs associated with manufacturing installation, warranty, and maintenance of the products;
•appropriately manage itsour supply chain;
•manage customer acceptance and payment for products; and
•anticipate, respond to, and compete successfully with competitors.
Furthermore, as discussed in greater detail elsewhere in this “Risk Factors” section, Varexwe cannot be sure that itwe will be able to successfully develop, manufacture, or introduce new products or enhancements, the roll-out of which involves compliance with complex quality assurance processes, including the Quality System Regulation of the U.S. Food and Drug Administration (“FDA”). Failure to complete these processes timely and efficiently could result in delays that could affect Varex’sour ability to attract and retain customers or cause customers to delay or cancel orders, which would materially and adversely affect Varex’sour revenues and operating results.
More than half of Varex’sour revenues are generated from customers located outside the United States, and economic, political, and other risks associated with international sales and operations could materially and adversely affect Varex’sour sales or make them less predictable.
Varex conductsWe conduct business globally. Revenues generated from customers located outside the United States accounted for approximately 71% and 70% of our total revenues for the three months ended July 1, 2022 and July 2, 2021, respectively. Revenues generated from customers located outside the United States accounted for approximately 70% and 67% of Varex’s total revenues for the three months ended July 2, 2021 and July 3, 2020, respectively. Revenues generated from customers located outside the United States accounted for approximately 67% and 67% of Varex’sour total revenues for the nine months ended July 2, 20211, 2022 and July 3, 2020,2, 2021, respectively. As a result, Varexwe must provide significant service and support globally. Varex intendsWe intend to continue to expand itsour presence in international markets and expectsexpect to expend significant resources in doing so. VarexWe cannot be sure that itwe will be able to meet itsour sales, service, and support objectives or obligations in these international markets or recover itsour investment in these international markets. Varex’sOur future results could be harmed by a variety of factors, including:
•currency fluctuations, and in particular the strength of the U.S. Dollar (which is our functional and reporting currency) relative to many currencies, which have and may in the future adversely affect Varex’sour financial results and cause some customers to delay purchasing decisions or move to in-sourcing supply or migrate to lower cost alternatives or ask for additional discounts;
•the longer payment cycles associated with many customers located outside the United States;
•difficulties in interpreting or enforcing agreements and collecting receivables through many foreign countries’ legal systems;
•changes in restrictions on trade between the United States and other countries or unstable regional political and economic conditions;
•changes in the political, regulatory, safety or economic conditions in a country or regionregion;
•the imposition by governments of additional taxes, tariffs, global economic sanctions programs, or other restrictions on foreign trade such as the tariffs recently put into place by both China and the United States;
•conflicts between countries, including the current military conflict between Russia and Ukraine, and related sanctions;
•any inability to obtain required export or import licenses or approvals, including the inability to obtain required export licenses during a U.S. government shutdown;
•natural disasters and pandemics;
•failure to comply with export laws and requirements, which may result in civil or criminal penalties and restrictions on Varex’sour ability to export itsour products, particularly itsour industrial linear accelerator products;
•risks unique to the Chinese market, including import barriers and preferences for local manufacturers;
•failure to obtain proper business licenses or other documentation or to otherwise comply with local laws and requirements regarding marketing, sales, service, or any other business Varex conductswe conduct in a foreign jurisdiction, which may result in civil or criminal penalties and restrictions on itsour ability to conduct business in that jurisdiction; and
•difficulties in protecting Varex’sour intellectual property in foreign countries.
Although Varex’sour sales fluctuate from period to period, in recent years Varex’sour international operations have represented a larger share of itsour business. The more Varex dependswe depend on international sales, the more vulnerable Varex becomeswe become to these factors.
Our business may suffer if we are not able to hire and retain qualified personnel.
Our future success depends, to a great degree, on our ability to retain, attract, expand, integrate, and train our management team and other key personnel, such as qualified engineering, service, sales, marketing, 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. Competition for qualified personnel has increased over the past year. Because this competition is intense, particularly in Utah, where unemployment rates are relatively low, compensation-related costs could increase significantly if the supply of qualified personnel decreases or demand increases. If we are unable to hire and train qualified personnel, we may not be able to maintain or expand our business. Additionally, if we are unable to retain key personnel, we may not be able to replace them readily or on terms that are reasonable, which also could hurt our business.
A change in the percentage of Varex’sour total earnings from international sales or additional changes in tax laws could increase Varex’sour effective tax rate.
Varex’sOur effective tax rate is impacted by tax laws in both the United States and in foreign countries. Earnings from Varex’sour international subsidiaries are generally taxed at rates that differ from U.S. rates. A change in the percentage of Varex’sour total earnings from the international subsidiaries, a change in the mix of particular tax jurisdictions between the international subsidiaries, or a change in currency exchange rates could cause Varex’sour effective tax rate to increase. The Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform”) was signed into law on December 22, 2017. Prior to the enactment of U.S. Tax Reform, Varex was not taxed in the United States on certain undistributed earnings of certain foreign subsidiaries. WhileFurthermore, while U.S. Tax Reform imposed a current tax on cumulative undistributed earnings, these earnings could also become subject to incremental foreign withholding or U.S. state taxes should they be actually remitted to the United States, in which case Varex’sour financial results could be materially and adversely affected.
The Statutory changes included in U.S. Tax Reform are broad, complex, and subject to change and interpretation. Additional statutory changes orproposed US legislation, if passed, including interpretive guidance, issued by Federal or local authorities could have a material impact on income tax expense, the effective rate, or the value of deferred tax assets and liabilities. In addition, significant judgments and estimates are required to evaluate our tax position and the impact of the new tax law. If these judgments and estimates are incorrect, or if the underlying assumptions are modified by subsequent guidance or are different from what we expect, our tax liability could differ significantly from our current estimates. Changes in the valuation of Varex’sour deferred tax assets or liabilities, additional changes in tax laws or rates, changes in the interpretation of tax laws in other jurisdictions, or other changes beyond Varex’sour control could materially and adversely affect itsour financial position and results of operations.
Varex hasWe 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 Varex'sour effective tax rate.
VarexWe may face additional risks from the acquisition or development of new lines of business.
From time to time, Varexwe may acquire or develop new lines of business. There are substantial risks and uncertainties associated with new lines of business, particularly in instances where the markets are not fully developed. Risks include developing knowledge of and experience in the new business, recruiting market professionals, increasing research and development expenditures, and developing and capitalizing on new relationships with experienced market participants. This may mean significant investment and involvement of Varex’sour senior management to acquire or develop, then integrate, the business into itsour operations. Timelines for integration of new businesses may not be achieved, and price and profitability targets may not prove feasible, as new products can carry lower gross margins than existing products. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences may also impact whether implementation of a new business will be successful. Failure to manage these risks could have a material and adverse effect on Varex’sour business, results of operations, and/or financial condition.
VarexWe may be unable to complete future acquisitions or realize expected benefits from acquisitions of or investments in new businesses, products, or technologies, which could harm Varex’sour business.
Varex’sOur ability to identify and take advantage of attractive acquisitions or other business development opportunities is an important component in implementing itsour overall business strategy. VarexWe must grow its businessesour business in response to changing technologies, customer demands, and competitive pressures. In some circumstances, Varexwe may decide to grow itsour business through the acquisition of complementary businesses, products, or technologies, rather than through internal development; however, there is no guarantee that these acquisitions will be successful or that Varexwe will realize a return on itsour investment.
Identifying suitable acquisition candidates can be difficult, time consuming, and costly, and Varexwe may not be able to identify suitable candidates or successfully complete or finance identified acquisitions, including as a result of failing to obtain regulatory or competition clearances, which could impair Varex’sour growth and ability to compete. In addition, completing an acquisition can divert Varex’sour management and key personnel from itsour current business operations, which could harm itsour business and affect itsour financial results. Even if Varex completeswe complete an acquisition, Varexwe may not be able to successfully integrate newly-acquired organizations, products, technologies, or employees into itsour operations or may not fully realize some of the expected synergies.
Integrating an acquisition can also be expensive and time consuming and may strain Varex’sour resources. It may cost Varexus more to commercialize new products than originally anticipated or cause Varexus to increase itsour expenses related to research and development, either of which could materially and adversely impact itsour results of operations. In many instances, integrating a new business will also involve implementing or improving internal controls appropriate for a public company into a business that lacks them. It is also possible that an acquisition could increase Varex’sour risk of litigation, as a third party may be more likely to assert a legal claim following an acquisition because of perceived deeper pockets or a perceived greater value of a claim. In addition, Varexwe may be unable to retain the employees of acquired companies or the acquired company’s customers, suppliers, distributors, or other partners for a variety of reasons, including the fact that these entities may be Varex’sour competitors or may have close relationships with itsour competitors.
Further, Varexwe may find that it needswe need to restructure or divest acquired businesses or assets of those businesses. Even if it does so, an acquisitionCompleted acquisitions may not produce the full efficiencies, growth, or benefits that were expected. If Varex decideswe decide to sell assets or a business, it may be difficult to identify buyers or alternative exit strategies on acceptable terms, in a timely manner, or at all, which could delay the accomplishment of itsour strategic objectives. VarexWe may be required to dispose of a business at a lower price or on less advantageous terms, or to recognize greater losses than itwe had anticipated.
If Varex acquireswe acquire a business, it allocateswe allocate the total purchase price to the acquired business’ tangible assets and liabilities, identifiable intangible assets, and liabilities based on their fair values as of the date of the acquisition and records the excess of the purchase price over those values as goodwill. If it failswe fail to achieve the anticipated growth from an acquisition, or if it decideswe decide to sell assets or a business, itwe may be required to recognize an impairment loss on the write down of itsour assets and goodwill, which could materially and adversely affect itsour financial results. In addition, acquisitions can result in potentially dilutive issuances of equity securities or the incurrence of debt, contingent liabilities or expenses, or other charges, any of which could harm Varex’sour business and affect itsour financial results.
Additionally, Varex participateswe participate in joint ventures and hashave investments in privately-held companies, (forfor example, itsour 40% ownership in dpiX LLC, itsour major supplier of itsour amorphous silicon-based thin film transistor arrays (flat panels used in itsour digital detectors) thatand VEC Imaging GmbH & Co. KG, a joint venture to develop nanotube based x-ray sources. These investments and joint ventures are subject to risk of loss of investment capital.capital as well as other risks. These investments are inherently risky, in some instances because the markets for the technologies or products these companies have under development may never materialize. If these companies do not succeed, Varexwe could lose some or all of itsour investment in these companies. There is no guarantee that the time and money invested by us in these projects will yield the expected returns.
Warranty claims may materially and adversely affect Varex’sour business.
VarexWe could experience an increase in warranty claims as a result of issues with product quality or product failures as a direct result of Varex’sour design, manufacturing, or issues in itsour supply chain. Such an occurrence may damage Varex’sour market reputation, cause sales to decline, or require repairs or voluntary remedial measures to enhance customer satisfaction, which could materially and adversely impact Varex’sour financial results. Increased warranty claims on any given product could cause Varexus to halt production on that product and significantly impair Varex’sour liquidity and profitability, and cause reputational harm to Varex.us. Because some categories of products tend to experience higher numbers of warranty claims than others, a shift in the types of products that Varex’sour customers purchase could lead to an increase in warranty claims. If actual levels of warranty claims are greater than the level of claims Varex estimates,we estimate, cost of sales could increase, and Varex’sour financial condition could be materially and adversely affected. In addition, product quality issues could result in significant follow-on effects for Varex,us, including, among other things, reputational harm to Varexus and itsour customers, loss of customers, and liability as a result of product quality issues. These outcomes would materially and adversely affect Varex’sour business and financial condition.
Product defects or misuse may result in material product liability or professional errors and omissions claims, litigation, investigation by regulatory authorities, or product recalls that could harm Varex’sour future revenues and require itus to pay material uninsured claims.
Varex’s Our business exposes itus to potential product liability claims that are inherent in the manufacture, sale, installation, servicing, and support of components that are used in medical devices and other devices that deliver radiation. Because Varex’sour products, through incorporation in OEMs’ systems, are involved in the intentional delivery of radiation to the human body and other situations where people may come into contact with radiation (for example, when Varex’sour security and inspection products are being used to scan cargo or in the diagnosis of medical problems), the possibility for significant personal injury or loss of life exists. Although Varex’sour products are incorporated into OEMs’ systems, and thus only perform pursuant to the design and operating systems of OEMs, Varexwe may also be subject to claims for property damage, personal injury, or economic loss related to or resulting from any errors or defects in itsour products or the installation, servicing, or support of itsour products. Any accident or mistreatment could subject Varexus to legal costs, litigation, adverse publicity, and damage to itsour reputation, whether or not itsour products or services were a factor.
If Varex’sour X-ray inspection systems fail to detect the presence of bombs, explosives, weapons, contraband, or other threats to personal safety, Varexwe could be subject to product and other liability claims or negative publicity, which could result in increased costs, reduced sales, and a decline in the market price of Varex’sour common stock. There are many factors beyond Varex’sour control that could result in the failure of itsour products to detect the presence of bombs, explosives, weapons, contraband, or other threats to personal safety, including operator error and misuse of or malfunction of Varexour equipment. The failure of Varex’sour systems to detect the presence of these dangerous materials may lead to personal injury, loss of life, and extensive property damage and may result in potential claims against Varex.
Product liability actions are subject to uncertainty and may be expensive, time consuming, and disruptive to Varex’sour operations. For these and other reasons, Varexwe may choose to settle product liability claims against itus regardless of their actual merit. A product liability action determined against Varexus could result in adverse publicity or significant damages, including the possibility of punitive damages, and Varex’sour combined financial position, results of operations, or cash flows could be materially and adversely affected.
If a product Varex designswe design or manufacturesmanufacture were defective (whether due to design, labeling or manufacturing defects, improper use of the product, or other reasons), Varexwe may be required to correct or recall the product and notify regulatory authorities. The adverse publicity resulting from a correction or recall could damage Varex’sour reputation and cause customers to review and potentially terminate their relationships with Varex.us. A product correction or recall could consume management time and have an adverse financial impact on itsour business, including incurring substantial costs, losing revenues, and accruing losses.
Varex maintains We maintain limited product liability insurance coverage. Varex’sOur product liability insurance policies are expensive and have high deductible amounts and self-insured retentions. Varex’sOur insurance coverage may prove to be inadequate, and future policies may not be available on acceptable terms or in sufficient amounts, if at all. If a material claim is not insured or is in excess of Varex’sour insurance coverage, Varexwe could have to pay substantial damages, which could have a material and adverse effect on itsour financial position and/or results of operations.
Varex’s business may suffer if it is not able to hire and retain qualified personnel.
Varex’s future success depends, to a great degree, on its ability to retain, attract, expand, integrate, and train its management team and other key personnel, such as qualified engineering, service, sales, marketing, and other staff. Varex competes for key personnel with other medical equipment and software manufacturers and technology companies, as well as universities and research institutions. Because this competition is intense, particularly in Utah, where unemployment rates are relatively low, compensation-related costs could increase significantly if the supply of qualified personnel decreases or demand increases. If Varex is unable to hire and train qualified personnel, Varex may not be able to maintain or expand its business. Additionally, if Varex is unable to retain key personnel, Varex may not be able to replace them readily or on terms that are reasonable, which also could hurt its business.
Risks Relating to the Manufacture of our Products
Supply chain disruptions, including the loss of a supplier, and any inability to obtain supplies of important components 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.
As discussed under the heading "Risks Related to our Business" above, supply chain disruptions have had, and will likely continue to have, an impact on our ability to manufacture our products. We have experienced delays in receiving materials used to make our products due both to material shortages and shipping delays. These delays are likely to continue. In addition, poor relations between the United States and Russia; sanctions by the United States, European Union, and other countries against Russia; the response by Russia and other countries to these sanctions; and any escalation of political tensions or economic instability in the area could have an adverse impact on our business, our customers, and our suppliers. Further, our customers, suppliers, and other third parties with whom we do business may have staff, operations, materials or equipment located in Ukraine or Russia, which could impact our supply chain, the services being provided to us, or our financial condition or results of operations. During fiscal year 2022, material shortages have increased and have caused, and if not timely remedied could continue to cause, us to temporarily stop production of certain products. If we are unable to obtain the materials necessary to make our products or must pay more for those materials, it could have a material adverse effect on our business and financial results.
We obtain some of the components included in our products from a limited group of suppliers or from sole-source suppliers, such as wave guides for industrial linear accelerators, transistor arrays, cesium iodide coatings and specialized integrated circuits for flat panel detectors, X-ray tube targets, housings, glass frames, high-voltage cable, bearings and various other components. For example, our major supplier of our amorphous silicon-based thin film transistor arrays (flat panels) used in our digital image detectors is dpiX LLC. Although we hold a 40% ownership interest in dpiX, we do not have majority voting rights and do not have the power to direct the activities of dpiX. In addition, Varian is our sole source supplier for a key component in linear accelerators used in our security and inspection products subsystems, which are specially made for us. If current suppliers cease producing these or other components, there can be no assurance that the components will be available from other suppliers on reasonable terms or at all.
If we lose any of these limited- or sole-source suppliers, if their operations are substantially interrupted, or if any of them fail to meet performance or quality specifications or delivery deadlines, 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, or (2) could significantly increase costs for the affected products and cause material delays in delivery of those and other related products. In addition, manufacturing capacity limitations of any of our suppliers or other inability of these suppliers to meet increasing demand or delivery deadlines could limit growth opportunities for the affected product lines and damage customer relationships. Shortage of, and greater demand for, components and
subassemblies could also increase manufacturing costs if the supply/demand imbalance increases the price of the components and subassemblies. Any of these events could materially and adversely affect our business and financial results. If we decide to manufacturer a component that was previously purchased from an external supplier, we may not be able to manufacture the component as efficiently as the external supplier and may experience delays or problems in successfully manufacturing the component, which could materially and adversely affect our ability to manufacture and supply products to customers.
Shortages, changes in source of, and increased in prices for, raw materials have negatively impacted our ability to manufacture products, have caused delays, and have increased our cost of goods.
We rely on the supplies of certain raw materials such as tungsten, lead, iridium, and copper for security and inspection products and copper, lead, tungsten, rhenium, molybdenum zirconium, and various high grades of steel alloy for X-ray tubes. Worldwide demand, availability, and pricing of these raw materials have been volatile. We expect that availability and pricing will continue to fluctuate in the future. If supplies are restricted or become unavailable or if prices increase further, this could constrain our manufacturing of affected products, reduce our profit margins, or otherwise materially and adversely affect our business.
We are required to disclose (1) the presence in a company’s products of certain metals known as “conflict minerals,” which are metals mined from the Democratic Republic of the Congo and adjoining countries, and (2) procedures regarding a manufacturer’s efforts to identify the sourcing of those minerals from this region. Our complex supply chain may inhibit our ability to sufficiently verify the origins of the relevant minerals used in our products through the due diligence procedures that we implement, which may harm our reputation. In addition, we may encounter challenges in satisfying customers who require that all of the components of our products are certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so. Moreover, complying with these rules requires investigative efforts, which has and will continue to cause us to incur associated costs and could materially and adversely affect the sourcing, supply, and pricing of materials used in our products or result in process or manufacturing modifications, all of which could materially and adversely affect our results of operations.
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.
A disruption at Varex’sour manufacturing facilities, as well as fluctuating manufacturing costs, could materially and adversely affect itsour business.
The majority of Varex’sour products are manufactured at itsour facility in Salt Lake City, Utah. Varex’sOur manufacturing operations are subject to potential power failures, the breakdown, failure, or substandard performance of equipment, the improper installation or operation of equipment, pandemics, and natural or other disasters. Loss or damage to itsour manufacturing facility due to any of these factors or otherwise could materially and adversely affect Varex’sour ability to manufacture sufficient quantities of itsour products or otherwise deliver products to meet customer demand or contractual requirements, which may result in a loss of revenue and other adverse business consequences. Because of the time required to obtain regulatory approval and licensing of a manufacturing facility, Varexwe may not be available on a timely basis to replace any lost manufacturing capacity. The occurrence of these or any other operational issues at Varex’sour manufacturing facilities could have a material and adverse effect on Varex’sour business, financial condition, and results of operations.
Some of Varex’sour products are manufactured in Wuxi, China; Walluf, Germany; Heerlen and Doetinchem, the Netherlands; and Calamba City, Philippines, which are subject to similar risks but may also face additional regulatory and political risks, which could impact Varex’sour ability to manufacture and ship products in a timely manner or at all. VarexWe also manufacturesmanufacture security products in Las Vegas, Nevada, and these operations are also subject to potential power failures, the breakdown, failure, or substandard performance of equipment, the improper installation or operation of equipment, earthquakes, and other disasters, all of which could materially and adversely affect Varex’sour ability to deliver products to meet customer demand. In addition, Varex’sour costs associated with manufacturing itsour products can vary significantly from quarter to quarter, and fluctuations thereof may adversely affect itsour business, operating results, and/or financial condition.
Varex’sOur results have been and may continue to be affected by continuing worldwide economic instability, including changes in foreign currency exchange rates and fluctuations in the price of crude oil and other commodities.
The global economy has been impacted by a number of economic and political factors.factors, including the political conflict between Russia and Ukraine and the growing concern over inflation. In many markets, these conditions have shrunk capital equipment budgets, slowed decision-making and made it difficult for Varex’sour customers and vendors to accurately forecast and plan future business activities. This, in turn, has caused Varex’sour customers to be more cautious with, and sometimes freeze, delay, or dramatically reduce purchases and capital project expenditures. Some countries have adopted and may in the future adopt austerity or stimulus programs that could negatively affect Varex’sour results from period to period. In addition, actions taken by the current U.S. administration may also create global economic uncertainty, which may cause our customers to reduce their spending, which, in turn, could adversely affect our business, financial condition, operating results, and cash flows. An uncertain economic environment may also disrupt supply or affect our service business, as customers’ constrained budgets may result in pricing pressure,
extended warranty provisions, and even cancellation of service contracts. In addition, concerns over continued economic instability could make it more difficult for Varexus to collect outstanding receivables. A weak or deteriorating healthcare market would inevitably materially and adversely affect Varex’sour business, financial conditions, and results of operations.
Because Varex’sour products are generally priced in U.S. Dollars, the strengthening of the U.S. Dollar in the last several years has caused, and could continue to cause, some customers to ask for discounts, delay purchasing decisions, or consider moving to in-sourcing such components or migrating to lower cost alternatives. Further, because Varex’sour business is global and some payments may be made in local currency, fluctuations in foreign currency exchange rates can impact itsour results by affecting product demand, revenues and expenses, and/or the profitability in U.S. Dollars of products and services that Varex provideswe provide in foreign markets.
Changes in monetary or other policies here and abroad, including as a result ofefforts to combat inflation, economic and/or political instability, or in reaction thereto, would also likely affect foreign currency exchange rates. Furthermore, if one or more European countries were to replace the Euro with another currency, Varex’sour sales in these countries, or in Europe generally, would likely be materially and adversely affected until stable exchange rates are established.
Additionally, fluctuations in commodities prices could materially and adversely affect Varex’sour performance. Rising commodities prices will increase Varex’shave increased our costs and those of Varex’sour medical OEM customers, which could in turn result in reduced demand for Varex’s products.our products or impact our financial results. Further, Varex’sour security product revenues from oil-producing countries, in which Varex haswe have a significant customer base, have in the past suffered as a result of volatility in oil prices and remain sensitive to fluctuations in the future.
Supply chain disruptions, including the loss of a supplier, and any inability to obtain supplies of important components could restrict Varex’s ability to manufacture products, cause delays in its ability to deliver products, or significantly increase its costs.
Supply chain disruptions have had, and will likely continue to have, an impact on Varex’s ability to manufacture its products. Varex has experienced delays in receiving materials used to make its products due both to material shortages and shipping delays. These delays are likely to continue. In recent months, material shortages have increased and if not timely remedied, these material shortages could cause us to temporarily stop production of certain products. If Varex is unable to obtain the materials necessary to make its products or must pay more for those materials, it could have a material adverse effect on Varex’s business and financial results.
Varex obtains from a limited group of suppliers or from sole-source suppliers some of the components included in its products, such as wave guides for industrial linear accelerators, transistor arrays, cesium iodide coatings and specialized integrated circuits for flat panel detectors, X-ray tube targets, housings, glass frames, high-voltage cable, bearings and various other components. For example, Varex’s major supplier of its amorphous silicon-based thin film transistor arrays (flat panels) used in its digital image detectors is dpiX LLC. Although Varex holds a 40% ownership interest in dpiX, Varex does not have majority voting rights and does not have the power to direct the activities of dpiX. In addition, Varian is Varex’s sole source supplier for a key component in linear accelerators used in Varex’s security and inspection products subsystems, which are specially made for Varex. If current suppliers cease producing these components, there can be no assurance that the components will be available from other suppliers on reasonable terms or at all.
If Varex loses any of these limited- or sole-source suppliers, if their operations are substantially interrupted, or if any of them fail to meet performance or quality specifications or delivery deadlines, Varex may be required to obtain and qualify one or more replacement suppliers or to manufacture the components internally. Such an event (1) may then also require Varex to redesign or modify its products to incorporate new parts and/or further require Varex to obtain clearance, qualification, or certification of these products, including by the FDA, or obtain other applicable regulatory approvals in other countries, or (2) could significantly increase costs for the affected products and cause material delays in delivery of those and other related products. In addition, manufacturing capacity limitations of any of Varex’s suppliers or other inability of these suppliers to meet increasing demand or delivery deadlines could limit growth opportunities for the affected product lines and damage customer relationships. Shortage of, and greater demand for, components and subassemblies could also increase manufacturing costs if the supply/demand imbalance increases the price of the components and subassemblies. Any of these events could materially and adversely affect Varex’s business and financial results. If Varex decides to manufacturer a component that was previously purchased from an external supplier, Varex may not be able to manufacture the component as efficiently as the external supplier and may experience delays or problems in successfully manufacturing the component, which could materially and adversely affect Varex’s ability to manufacture and supply products to customers.
A shortage or change in source of, or increase in price of, raw materials could restrict Varex’s ability to manufacture products, cause delays, or significantly increase its cost of goods.
Varex relies on the supplies of certain raw materials such as tungsten, lead, iridium, and copper for security and inspection products and copper, lead, tungsten, rhenium, molybdenum zirconium, and various high grades of steel alloy for X-ray tubes. Worldwide demand, availability, and pricing of these raw materials have been volatile, and Varex expects that availability and pricing will continue to fluctuate in the future. If supplies are restricted or become unavailable or if prices increase, this could constrain Varex’s manufacturing of affected products, reduce its profit margins, or otherwise materially and adversely affect its business.
Varex is required to disclose (1) the presence in a company’s products of certain metals known as “conflict minerals,” which are metals mined from the Democratic Republic of the Congo and adjoining countries, and (2) procedures regarding a manufacturer’s efforts to identify the sourcing of those minerals from this region. Varex’s complex supply chain may inhibit Varex’s ability to sufficiently verify the origins of the relevant minerals used in its products through the due diligence procedures that it implements, which may harm Varex’s reputation. In addition, Varex may encounter challenges in satisfying customers who require that all of the components of Varex products are certified as conflict-free, which could place Varex at a competitive disadvantage if it is unable to do so. Moreover, complying with these rules requires investigative efforts, which has and will continue to cause Varex to incur associated costs and could materially and adversely affect the sourcing, supply, and pricing of materials used in Varex’s products or result in process or manufacturing modifications, all of which could materially and adversely affect its results of operations.
If Varex is not able to match its manufacturing capacity with demand for its products, its financial results may suffer.
Many of Varex’s products have a long production cycle, and Varex must anticipate demand for its products to ensure adequate manufacturing or testing capacity. If Varex is unable to anticipate demand, and its manufacturing or testing capacity does not keep pace with product demand, Varex will not be able to fulfill orders in a timely manner, which may negatively impact its financial results and overall business. Conversely, if demand for Varex’s products decreases, the fixed costs associated with excess manufacturing capacity may harm its financial results, including by decreasing gross margins and increasing research and development costs as a percentage of revenue.
Delivery schedules for Varex’sour security, industrial, and inspection products tend to be unpredictable.
Varex designs, manufactures, sells, We design, manufacture, sell, and servicesservice Linatron® X-ray accelerators, image-processing software, and image detection products for security and inspection, such as cargo screening at ports and borders and nondestructive examination for a variety of applications, as well as industrial applications. VarexWe generally sellssell security and inspection products to OEMs who incorporate itsour products into their inspection systems, which are then sold to customs and other government agencies, as well as to commercial organizations in the casting, power, aerospace, chemical, petro-chemical, and automotive industries. Varex believesWe believe growth in itsour security and inspection products will be driven by security cargo screening and border protection needs, as well as by the needs of customs agencies to verify shipments for assessing duties and taxes. This business is heavily influenced by domestic and international government policies on border and port security, political change, and government budgets. In addition, Varex believeswe believe growth in this product line may be driven in part by industrial customers engaged in 3-D printing, which, as a developing market, may be difficult to predict. Orders for Varex’sour security and inspection products have been and may continue to be unpredictable, as governmental agencies may place large orders with Varexus or itsour OEM customers in a short time period and then may not place any orders for a long time period thereafter. Because it is difficult to predict Varex’sour OEM customer delivery, the actual timing of sales and revenue recognition varies significantly. The market for border protection systems has slowed significantly, and end customers, particularly in oil-based economies and war zones in which Varex haswe have a significant customer base, are delaying system deployments or tenders and considering moving to alternative sources, resulting in a decline in the demand for security and inspection products.
The demand for Varex’sour security and inspection products is heavily influenced by U.S. and foreign governmental policies on national and homeland security, border protection, and customs activities, which depend upon government budgets and appropriations that are subject to economic conditions, as well as political changes and oil prices. Varex hasWe have seen customers freeze or dramatically reduce purchases and capital project expenditures, delay projects, or act cautiously as governments around the world wrestle with spending priorities. As economic growth remains sluggish in various jurisdictions and appears to be deteriorating in others, and as concerns about levels of government employment and government debt continue, Varex expectswe expect that these effects will also continue. Bid awards in this business may be subject to challenge by third parties, as Varex haswe have previously encountered with a large government project. These factors make this business more unpredictable and could cause volatility in Varex’sour revenues and earnings.
Varex’sOur international manufacturing operations subject it to volatility and other risks, including high security risks, which could result in harm to itsour employees and contractors or substantial costs.
Varex conducts We conduct certain manufacturing operations internationally to reduce costs and streamline itsour manufacturing operations. There are administrative, legal, and governmental risks to operating internationally that could increase operating expenses or hamper the development of these operations. The risks from operating internationally that could increase Varex’sour operating expenses and materially and adversely affect itsour operating results, financial condition, and ability to deliver itsour products and grow itsour business include, among others:
•difficulties in staffing and managing employee relations and foreign operations, particularly in attracting and retaining personnel qualified to design, sell, test, and support itsour products;
•fluctuations in currency exchange rates;
•difficulties in coordinating itsour operations globally and in maintaining uniform standards, controls, procedures, and policies across itsour operations;
•difficulties in enforcing contracts and protecting intellectual property;
•diversion of management attention;
•imposition of burdensome governmental regulations, including changing laws and regulations with respect to collection and maintenance of personally identifiable data;
•regional and country-specific political and economic instability, as discussed in greater detail below; and
•inadequacy of the local infrastructure to support itsour operations.
Varex’s Our international locations expose itus to higher security risks compared to its United Statesour U.S. locations, which could result in both harm to itsour employees and contractors or substantial costs. Some of itsour services are performed in or adjacent to high-risk locations where the country or location and surrounding area is suffering from political, social, or economic turmoil, war or civil unrest, or has a high level of criminal or terrorist activity. In those locations where Varex haswe have employees or operations, Varexwe may incur substantial costs to maintain the safety of itsour personnel. Despite these precautions, the safety of itsour personnel in these locations may continue to be at risk, and Varexwe may in the future suffer the loss of employees and contractors, which could harm itsour business reputation and operating results.
Varex’sOur operations are vulnerable to interruption or loss due to natural or other disasters, power loss, strikes, and other events beyond itsour control.
Varex conducts We conduct some of itsour activities, including manufacturing, research and development, administration, and data processing at facilities located in areas that have in the past experienced or may in the future experience natural disasters. Varex’sOur insurance coverage for such disasters may not be adequate or continue to be available at commercially-reasonable terms, or at all. A major disaster (such as a major fire, hurricane, earthquake, flood, tsunami, volcanic eruption or terrorist attack) affecting Varex’sour facilities, or those of itsour suppliers, could significantly disrupt itsour operations and delay or prevent product manufacture and shipment during the time required to repair, rebuild, or replace itsour or itsour suppliers’ damaged manufacturing facilities. These delays could be lengthy and costly. If any of Varex’sour customers’ facilities are adversely affected by a disaster, shipments of itsour products could be delayed. Additionally, customers may delay purchases of Varex’sour products until itsour operations return to normal. For example, following the earthquake and tsunami disasters in Japan in 2011, the operations of Canon Medical Systems, our largest customer, were impacted, and, as a consequence, orders to and product shipment from our business were delayed for several months. Even if Varex'sour suppliers or customers are able to quickly respond to a disaster, the ongoing effects of the disaster could create some uncertainty in the operations of itsour business. In addition, Varex’sour facilities may be subject to a shortage of available electrical power and other energy supplies. Any shortages may increase itsour costs for power and energy supplies or could result in blackouts, which could disrupt the operations of itsour affected facilities and harm itsour business. Further, Varex’sour products are typically shipped from a limited number of ports, and any disaster, strike, or other event blocking shipment from these ports could delay or prevent shipments and harm itsour business. In addition, concerns about terrorism, the effects of a terrorist attack, political turmoil, or an outbreak of epidemic diseases could have a negative effect on Varex’sour business operations, those of itsour suppliers and customers, and the ability to travel, resulting in adverse consequences on itsour revenues and financial performance.
Risks Relating to our Intellectual Property and Information Systems
Varex’sOur competitive position would be harmed if it iswe are not able to maintain itsour intellectual property rights and protecting Varex’sour intellectual property can be costly.
Varex filesWe file applications as appropriate for patents covering new products and manufacturing processes. VarexWe cannot be sure, however, that patents will be issued from any of Varex’sour pending or future patent applications. VarexWe also cannot be sure that itsour current patents, the claims allowed under itsour current patents, or patents for technologies licensed to Varexus will be sufficiently broad to protect itsour technology position against competitors. Issued patents owned by, or licensed to, Varexus may be challenged, invalidated, or circumvented, or the rights granted under the patents may not provide Varexus with competitive advantages. Asserting Varex’sour patent rights against others in litigation or other legal proceedings is costly and diverts managerial resources. For example, during fiscal year 2019, Varex initiated litigation asserting claims of patent infringement against a third party. Varex intends to prosecute its claims vigorously, and Varex has experienced, and will continue to experience, increased legal expenses related to this litigation that could adversely affect its financial results. An adverse finding in this or similar patent infringement litigation could adversely impact Varex’sour competitive position. In addition, Varexwe may not be able to detect patent infringement by others or may lose itsour competitive position in the market before Varex iswe are able to do so.
Varex We also reliesrely 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 itsour proprietary, and other confidential rights. These protections may prove to be inadequate, since agreements may still be breached, and Varexwe may not have adequate remedies for a breach. Varex’sOur trade secrets may become known to or be independently developed by others, including as a result of misappropriation by unauthorized access to Varex’sour technology systems. If Varex’sour proprietary or confidential information is misappropriated, itsour business and financial results could be materially and adversely impacted. Varex hasWe have trademarks, both registered and unregistered, that are maintained and enforced to provide customer recognition for itsour products in the marketplace, but unauthorized parties may still use them. VarexWe also licenseslicense certain patented or proprietary technologies from others. In some cases, products with substantial revenues may depend on these license rights. If Varexwe were to lose the rights to license these technologies, or itsour costs to license these technologies were to materially increase, itsour business would suffer. As Varex expands itswe expand our manufacturing capabilities outside of the United States, more of Varex’sour intellectual property may be held in jurisdictions that do not have robust intellectual property protections, which may make it harder for Varexus to adequately protect itsour Intellectual Property.
Third parties may claim that Varex iswe are infringing upon their intellectual property, and Varexwe could suffer significant litigation or licensing expenses or be prevented from selling itsour products.
There is a substantial amount of litigation over patent and other intellectual property rights in the industries in which Varex competes. Varex’swe 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 Varex’sour activities for conflicts with their patent rights. Determining whether a product infringes on a party’s intellectual property rights involves complex legal and factual issues, and the outcome of this type of litigation is often uncertain. Parties may claim that Varex iswe are infringing upon their intellectual property rights. VarexWe may not be aware of intellectual property rights of others that relate to itsour products, services, or technologies. From time to time, Varex haswe have received notices from parties asserting infringement, and Varex haswe have been subject to lawsuits alleging infringement of patent or other intellectual property rights. Any dispute regarding patents or other intellectual property could be costly and time consuming and could divert Varex’sour management and key personnel from itsour business operations. VarexWe may not prevail in a dispute. Varex doesWe do not maintain insurance for intellectual property infringement, so costs of defense, whether or not Varex iswe are successful in defending an infringement claim, will be borne by Varexus and could be significant. If Varex iswe are unsuccessful in defending or appealing an infringement claim, VarexWe may be subject to significant damages, and itsour combined financial position, results of operations, or cash flows could be materially and adversely affected. VarexWe may also be subject to injunctions against development and sale of itsour products, the effect of which could be to materially reduce itsour revenues. Furthermore, a third party claiming infringement may not be willing to license itsour rights to Varex,us, and even if a third-party rights holder is willing to do so, the amounts Varexwe might be required to pay under the associated royalty or license agreement could be significant. VarexWe could decide to alter itsour business strategy or voluntarily cease the allegedly infringing actions rather than face litigation or pay a royalty, which could materially and adversely impact itsour business and results of operations.
Disruption of critical information systems or material breaches in the security of Varex’sour systems may materially and adversely affect itsour business and customer relations.
Information technology (including technology from third party providers) helps Varexus operate efficiently, interface with and support itsour customers, maintain financial accuracy and efficiency, and produce itsour financial statements. In the ordinary course of itsour business, Varex collects, processeswe collect, process and storesstore sensitive data, including intellectual property, proprietary business information and that of customers, suppliers and business partners, third parties accessing itsour website, patient data and personally identifiable information of customers and employees, in Varex’sour data centers, and on itsour networks, as well as third party off-site infrastructure. Despite security measures, there is an increasing threat of information security attacks, including from computer viruses or other malicious codes, unauthorized access attempts, and cyber-attacks that pose risks to companies, including Varex.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, Varexwe may be unable to anticipate these techniques or to implement adequate preventative measures, which could result in data leaks or otherwise compromise our confidential or proprietary information and disrupt our operations. If Varex doeswe do not allocate and effectively manage the resources necessary to build and sustain the proper technology infrastructure, Varexwe could be subject to, among other things, transaction errors, processing inefficiencies, the loss of customers, business disruptions, or the loss of or damage to intellectual property through a security breach or misappropriation of intellectual property. Such security breaches could expose Varexus to a risk of loss of information, litigation, and possible liability to employees, customers, and/or regulatory authorities. If Varex’sour data management systems do not effectively collect, secure, store, process, and report relevant data for the operation of itsour business, whether due to equipment malfunction or constraints, software deficiencies, or human error, Varex’sour ability to effectively plan, forecast, and execute itsour business plan and comply with applicable laws and regulations will be impaired, perhaps materially. Any such impairment could materially and adversely affect Varex’sour financial condition, results of operations, cash flows, and the timeliness with which Varex reports itswe report our operating results internally and externally.
Varex uses We use certain cloud-based software. A security breach, whether of Varex’sour products, of Varex’sour customers’ network security and systems, or of third-party hosting services could disrupt access to Varex’sour customers’ stored information and could lead to the loss of, damage to or public disclosure of Varex’sour customers’ stored information, including patient health information. Such an event could have serious negative consequences, including possible patient injury, regulatory action, fines, penalties and damages, reduced demand for Varex’sour solutions, an unwillingness of itsour customers to use itsour solutions, harm to itsour reputation and brand, and time-consuming and expensive litigation, any of which could have a material and adverse effect on Varex’sour financial results.
Risks Relating to Our Legal and Regulatory Environment
Changes in import/export regulatory regimes and tariffs could continue to negatively impact our business.
Tariffs and changes in international trade agreements or trade-related laws and regulations may have an indirect adverse impact on our business. As a component manufacturer, our products are integrated into the systems and products of our OEM customers. If the United States, China or other countries levy tariffs, duties or other additional taxes or restrictions on our customer’s products, the demand for such products, and our components included in such products, could decrease, which could have a material adverse effect on our business. Uncertainty over tariffs and trade wars could also cause our customers to delay or cancel orders for our products.
In recent years, the United States has imposed tariffs on items imported from China that are incorporated into our products. Tariffs on items imported by us from China and other countries have increased our costs and has increased prices and lowered gross margins on some of our products. These tariffs have had a direct adverse impact on our business and results of operations, and future tariffs could have a more significant impact on our business. China has imposed retaliatory tariffs that impact a number of Varexour products, including U.S. origin X-ray tubes, heat exchange units, and certain flat panel detectors. The tariffs levied by China have increased our customers’ costs for products imported into China, which has caused us to make price concessions on some products and has caused some customers to stop purchasing products from us. We expect that tariffs will continue to have a negative effect on our business and results of operations, including the possibility of continued price concessions or loss of business. Tariffs could limit our ability to compete for increased market share in China, which could cause our long-term prospects in China to suffer. The imposition of additional tariffs by the United States could result in the adoption of additional tariffs by China and other countries, as well as further retaliatory actions by any affected country, which could negatively impact the global market for imaging equipment and could have a significant adverse effect on our business.
Compliance with foreign laws and regulations applicable to the marketing, manufacture, and distribution of Varex’sour products may be costly, and failure to comply may result in significant penalties and other harm to Varex’sour business.
Regulatory requirements affecting Varex’sour operations and sales outside the United States vary from country to country, often differing significantly from those in the United States. In general, outside the United States, some of Varex’sour products are regulated as medical devices by foreign governmental agencies similar to the FDA.
For Varexus to market itsour products internationally, Varexwe must obtain clearances or approvals for products and product modifications. These processes (including, for example, the processes in the EU, the European Economic Area (“EEA”), Switzerland, Brazil, Australia, China, Japan and Canada) can be time consuming, expensive and uncertain, which can delay Varex’sour ability to market products in those countries. Delays in the receipt of or failure to receive regulatory approvals, the inclusion of significant limitations on the indicated uses of a product, the loss of previously obtained approvals or failure to comply with existing or future regulatory requirements could restrict or prevent Varexus from doing business in a country or subject Varexus to a variety of enforcement actions and civil or criminal penalties, which would materially and materially and adversely affect itsour business. In addition, compliance with changing regulatory schemes may add additional complexity, cost and delays in marketing or selling Varex’sour products.
Within the EU/EEA, Varexwe must obtain, and in turn affix, a CE mark certification, which is a European marking of conformity that indicates that a product meets the essential requirements of the European Union's Medical Device Directive. Compliance with the Medical Device Directive is done through a self-certification process that is then verified by an independent certification body called a “Notified Body,” which is an organization empowered by the legislature to conduct this verification. Once the CE mark is affixed, the Notified Body will regularly audit Varexus to ensure that it remainswe remain in compliance with the applicable European laws and Medical Device Directive. By affixing the CE mark to itsour product, Varex iswe are certifying that itsour products comply with the laws and regulations required by the EU/EEA countries, thereby allowing the free movement of itsour products within these countries and others that accept CE mark standards. If Varexwe cannot support itsour performance claims and demonstrate compliance with the applicable European laws and the Medical Device Directive, Varexwe would lose itsour right to affix the CE mark to itsour products, which would prevent Varexus from selling itsour products within the EU/EEA/Switzerland territory and in other countries that recognize the CE mark. In April 2017, the European Commission adopted two new regulations on medical devices. These new regulationsdevices that impose stricter requirements for placing medical devices in the EU market, as well as for Notified Bodies. These new regulations have resulted in the limited availability of recognized Notified Bodies, which could delay our ability to obtaining CE marks. VarexWe may be subject to risks associated with additional testing, modification, certification, or amendment of itsour existing market authorizations, or Varexwe may be required to modify products already installed at itsour customers’ facilities to comply with the official interpretations of these revised regulations.
Varex isWe 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, Varex iswe are required to timely file various reports with international regulatory authorities similar to the reports it iswe are required to timely file with U.S. regulatory authorities, including reports required by international adverse event reporting regulations. If these reports are not timely filed, regulators may impose sanctions, including temporarily suspending Varex’sour market authorizations or CE mark, and sales of itsour products may suffer.
Further, as Varex enterswe enter new businesses or pursuespursue new business opportunities internationally, or as regulatory schemes change, Varexwe may become subject to additional laws, rules, and regulations. Becoming familiar with and implementing the infrastructure necessary to comply with these laws, rules, and regulations is costly. Additionally, in some countries, Varex relieswe rely or may rely in the future on foreign distributors and agents to assist in complying with foreign regulatory requirements, and Varexwe cannot be sure that they will always do so. The failure of Varexus or itsour agents to comply with these laws, rules, and regulations could delay the introduction of new products, cause reputational harm, or result in investigations, fines, injunctions, civil penalties, criminal prosecution, or an inability to sell Varex’sour products in or to import itsour products into certain countries, which could materially and adversely affect Varex’sour business.
Compliance with U.S. laws and regulations applicable to the marketing, manufacture, and distribution of Varex’sour products may be costly, and failure or delays in obtaining regulatory clearances or approvals or failure to comply with applicable laws and regulations could prevent Varexus from distributing itsour products, require Varexus to recall itsour products, or result in significant penalties or other harm to Varex’sour business.
Some of Varex’sour products and those of OEMs that incorporate Varex’sour products are subject to extensive and rigorous government regulation in the United States. Compliance with these laws and regulations is expensive and time-consuming, and failure to comply with these laws and regulations could materially and adversely affect Varex’sour business.
Generally, Varex’sour manufacturing operations for medical devices, and those of itsour third-party manufacturers, are required to comply with the Quality System Regulations (“QSR”) of the FDA, as well as other federal and state regulations for medical devices
and radiation-emitting products. The FDA, through authorized auditing organizations, makes announced and unannounced periodic and on-going inspections of medical device manufacturers to determine compliance with QSR and, in connection with these inspections, issues reports known as Form FDA 483 reports when the FDA believes the manufacturer has failed to comply with applicable regulations and/or procedures. If Form FDA 483 reports are not addressed and/or corrective action is not taken in a timely manner and to the FDA’s satisfaction, the FDA may issue a warning letter and/or proceed directly to an enforcement action. Failure to respond in a timely manner to a warning letter, or any other notice of noncompliance and to promptly come into compliance could result in the FDA bringing an enforcement action, which could include the total shutdown of Varex’sour 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 Varexwe may take, which may include product recalls, correction and removal of products from customer sites, and/or changes to itsour product manufacturing and quality systems, could materially and adversely impact Varex’sour 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 Varexwe could face increased pressure from itsour competitors, who could use the warning letter against Varexus in competitive sales situations, either of which could materially and adversely affect Varex’sour reputation, business, and stock price.
In addition, Varex iswe are required to timely file various reports with the FDA, including reports required by the medical device reporting regulations (“MDRs”), that require Varexwe report to regulatory authorities if itsour devices may have caused or contributed to a death or serious injury, or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur. If Varex initiateswe initiate a correction or removal of a device to reduce a risk to health posed by the device, Varexwe would be required to submit a publicly-available correction and removal report to the FDA and, in many cases, similar reports to other regulatory agencies. This report could be classified by the FDA as a device recall, which could lead to increased scrutiny by the FDA, other international regulatory agencies, and Varex’sour customers regarding the quality and safety of Varex’sour devices. If these MDRs or correction and removal reports are not filed on a timely basis, regulators may impose sanctions, sales of Varex’sour products may suffer, and Varexwe may be subject to product liability or regulatory enforcement actions, all of which could harm itsour business.
Government regulation may also cause significant delays or even prevent the marketing and full commercialization of future products or services that Varexwe may develop and/or may impose costly requirements on Varex’sour business. Further, as Varex enterswe enter new businesses or pursuespursue new business opportunities, Varexwe will become subject to additional laws, rules, and regulations, including FDA and foreign rules and regulations. Becoming familiar with and implementing the infrastructure necessary to comply with these laws, rules, and regulations is costly and time consuming. In addition, failure to comply with these laws, rules and regulations could delay the introduction of new products and could materially and adversely affect Varex’sour business.
If Varexwe or any of itsour suppliers, distributors, agents, or customers fail to comply with FDA, Federal Trade Commission, or other applicable U.S. regulatory requirements or are perceived to have failed to comply with regulations, Varexwe may face:
•adverse publicity affecting both Varexus and itsour 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 Varexour products or those of itsour customers;
•delays in purchasing decisions by customers or cancellation of existing orders;
•the inability to sell Varexour products; and
•difficulty in obtaining product liability or operating insurance at a reasonable cost, or at all.
Varex isWe 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 Varexwe may incur as the consequence of regulatory violations. Consequently, Varex doeswe 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 Varexwe may be unable to receive registration approval or renewal of existing registrations if it failswe fail to meet regulatory approval requirements or if the approval process becomes commercially infeasible or impractical.
Varex markets We market and distributesdistribute certain X-ray tubes through distributors and third-party/multi-vendor service organizations that are used as equivalent replacements for specific OEM tubes. Varex isWe 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. For example, to sell X-ray tubes for replacement applications in China, product registrations must be approved by the new National Medical Products Administration (“NMPA”). VarexWe must comply with the requirements of the NMPA, and Varexwe may not be able to receive registration approval or renewal of existing registrations if it failswe fail to meet regulatory approval requirements or if the process of gaining approval becomes commercially infeasible or impractical. Certain of these local laws and regulations have the effect of serving as a barrier to trade and can be difficult to navigate predictably.
In addition, certain countries in which Varexour products are sold require products to undergo re-registration if the product is altered in any significant way, and it may be determined that the separation of Varex from Varian, including Varex’s new name, will require these products to be re-registered as Varex products, even if they are physically unchanged.way.
These registration processes can be costly and time consuming, and customers may decide to purchase products from Varex’sour competitors that do not have to be involved in a re-registration process. In addition, Varex’sour inability to receive or renew product registrations may prevent Varexus from marketing and/or distributing those particular products for replacement applications in the specific country.
Existing and future healthcare reforms, including the Affordable Care Act and changes to reimbursement rates, may indirectly have a material adverse effect on Varex’sour business and results of operations.
Sales of Varex’sour products to OEMs in the medical sector indirectly depend on whether adequate reimbursement is available for itsour customers’ products from a variety of sources, such as government healthcare insurance programs, including U.S. Medicare and Medicaid programs, foreign government programs, private insurance plans, health maintenance organizations, and preferred provider organizations. Without adequate reimbursement, the demand for Varex’sour customers’ products, and therefore indirectly Varex’sour products, may be limited.
Healthcare reform proposals and medical cost containment measures in the United States and in many foreign countries could limit the use of both Varex’sours and itsour customers’ products, reduce reimbursement available for such use, further tax the sale or use of Varex’sour products, and further increase the administrative and financial burden of compliance. These reforms and measures, including the uncertainty in the medical community regarding their nature and effect, could have a material and adverse effect on Varex’sus and itsour customers’ purchasing decisions regarding itsour products and treatments and could harm Varex’sour business, results of operations, financial condition, and prospects. VarexWe cannot predict the specific healthcare programs and regulations that will be ultimately implemented by local, regional, and national governments globally. However, any changes that lower reimbursements for Varex’sus or itsour 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 Varexus or others in the healthcare sector could materially and adversely affect Varex’sour business and results of operations.
Varex isWe are subject to federal, state, and foreign laws governing itsour business practices which, if violated, could result in substantial penalties. Additionally, challenges to or investigations into Varex’sour practices could cause adverse publicity and be costly to respond to and thus could harm itsour business.
Anti-corruption laws and regulations. Varex isWe 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 and the Law On the Fundamentals of Health Protection in the Russian Federation. In general, there is a worldwide trend to strengthen anti-corruption laws and their enforcement, and the healthcare industry and medical equipment manufacturers have been particular targets of these investigation and enforcement efforts. Any violation of these laws by Varexus or itsour agents or distributors could create substantial liability for Varex,us, subject itsour officers and directors to personal liability, and cause a loss of reputation in the market. Varex operatesWe operate in many countries, including India and China, where the public sector is perceived as being corrupt. Varex’sOur strategic business plans include expanding itsour business in regions and countries that are rated as higher risk for corruption activity by Transparency International e.V., an international non-profit that publishes an annual corruption perception index. Becoming familiar with and implementing the infrastructure necessary to comply with laws, rules, and regulations applicable to new business activities and mitigating and protecting against corruption risks could be costly. Failure by Varexus or itsour agents or distributors to comply with these laws, rules, and regulations could delay itsour expansion into high-growth markets and could materially and adversely affect itsour business. VarexWe will likely do more business, directly and potentially indirectly, in countries where the public sector is perceived to be corrupt. Increased business in higher-risk countries could subject Varexus and itsour officers and directors to increased scrutiny and increased liability from itsour business operations.
Competition and trade compliance laws. Varex isWe are subject to various competition and trade compliance laws in the jurisdictions where it operates.we operate. Regulatory authorities in those jurisdictions may have the power to subject Varexus to sanctions and impose changes or conditions in the way Varex conducts itswe 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 Varex’sour actions or enforcement or private rights of action could materially and adversely affect itsour business or damage itsour reputation. VarexWe 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 itsour management and key personnel from itsour business operations. An adverse outcome under any such investigation or audit could subject Varexus to fines and/or orand criminal or other penalties, which could materially and adversely affect Varex’sour business and financial results. Furthermore, competition laws may prohibit or increase the cost of future acquisitions that Varexwe may desire to undertake.
Laws and ethical rules governing interactions with healthcare providers. Varex doesWe do not generally sell itsour products directly to healthcare providers, but may occasionally sell itsour products to healthcare providers through distributors.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 Varex’sour sales, marketing, and other promotional activities by limiting the kinds of financial arrangements Varexwe may have with hospitals, physicians, or other potential purchasers of itsour products. They particularly impact how Varex structures itswe 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 Varex doeswe 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 Varex’sour practices could cause adverse publicity and be costly to defend and thus could harm itsour 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 Varexus to implement the necessary and costly infrastructure to track and report certain payments to healthcare providers. Failure to comply with these new tracking and reporting laws could subject Varexus to significant civil monetary penalties.
Varex isOther Laws. From time to time, new laws or regulations may be adopted and compliance with these laws or regulations could be costly or time consuming. For example, in July 2021, the U.S. government passed the Uyghur Forced Labor Prevention Act (the “UFLPA”), which imposes importation limits on goods produced using forced labor in China, especially the Xinjiang Uyghur Autonomous Region, and imposes related sanctions. Guidance related to compliance with the UFLPA has not yet been issued, and we cannot yet evaluate the impact that compliance with the UFLPA will have on our business or financial condition.
We are subject to similar laws in foreign countries where it conductswe 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. VarexWe could face civil, criminal, and administrative sanctions if any member state determines that Varex haswe have breached itsour obligations under such state’s national laws. Industry associations also closely monitor the activities of member companies. If these organizations or authorities name Varexus as having breached itsour obligations under their regulations, rules, or standards, itsour reputation would suffer, and itsour business and financial condition could be materially and adversely affected.
Certain of Varex’sour products are subject to regulations relating to use of radioactive material, compliance with which may be costly, and a failure to comply therewithwith these regulations may materially and adversely affect Varex’sour business.
As a manufacturer and seller of medical devices and devices emitting radiation or utilizing radioactive by-product material, Varexwe and some of itsour suppliers and distributors are subject to extensive regulation by United States governmental authorities, such as the FDA, the Nuclear Regulatory Commission (“NRC”), and state and local regulatory agencies, which is intended to ensure the devices are safe and effective and comply with laws governing products which emit, produce, or control radiation. These regulations govern, among other things, the design, development, testing, manufacturing, packaging, labeling, distribution, import/export, sale, and marketing and disposal of Varex’sour products. Varex isWe 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.
Varex’s 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. Varex’sOur manufacture, distribution, installation, service, and removal of industrial devices utilizing radioactive material or emitting radiation also requires Varexus to obtain a number of licenses and certifications for these devices and materials. Service of these products must also be in accordance with a specific radioactive materials licenses. Obtaining licenses and certifications may be time consuming, expensive, and uncertain.
The handling and disposal of radioactive materials resulting from the manufacture, use, or disposal of Varex’sour products may impose significant costs and requirements. Disposal sites for the lawful disposal of materials generated by the manufacture, use, or decommissioning of Varex’sour products may no longer accept these substances in the future or may accept them on unfavorable terms.
If Varex iswe are unable to obtain required FDA clearances or approvals for a product or isare unduly delayed in doing so, or the uses of that product wereare limited, Varex’sour business could suffer.
Typically, Varex’sour OEM customers are responsible for obtaining 510(k) pre-market notification clearance on their systems that integrate Varexour products. A substantial majority of Varex’sour products are “Class I” devices that do not require 510(k) clearance, but Varex doeswe do produce software that is classified as a Class II device subject to 510(k) clearance. Unless an exception applies, VarexWe 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 itwe can market or sell those products in the United States. Modifications or enhancements to a product that could significantly affect its safety or effectiveness, or that would constitute a major change in the intended use of the device, technology, materials, labeling, packaging, or manufacturing process also require a new 510(k) clearance. Although manufacturers make the initial determination whether a change to a cleared device requires a new 510(k) clearance, Varexwe cannot ensure that the FDA will agree with itsour decisions not to seek additional approvals or clearances for particular modifications to itsour products or that Varexwe will be successful in obtaining new 510(k) clearances for modifications. Obtaining clearances or approvals is time consuming, expensive, and uncertain. VarexWe may not be able to obtain the necessary clearances or approvals or may be unduly delayed in doing so, which could harm itsour business. Furthermore, even if Varex iswe 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 Varex iswe are unable to obtain required FDA clearance or approval for a product or is unduly delayed in doing so, or the uses of that product were limited, Varex’sour business could suffer.
Unfavorable results of legal proceedings could materially and adversely affect Varex’sour financial results.
From time to time, Varex iswe 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 itsour business or otherwise. Legal proceedings are often lengthy, taking place over a period of years with interim motions or judgments subject to multiple levels of review (such as appeals or rehearings) before the outcome is final. Litigation and other legal proceedings, claims, government inspections, audits and investigations are subject to significant uncertainty and may be expensive, time consuming, and disruptive to Varex’sour operations. For these and other reasons, Varexwe may choose to settle legal proceedings and claims, regardless of their actual merit.
If a legal proceeding were ultimately resolved against Varex,us, it could result in significant compensatory damages, and, in certain circumstances, punitive damages, disgorgement of revenue or profits, remedial corporate measures, or injunctive relief imposed on Varex.us. If Varex’sour existing insurance does not cover the amount or types of damages awarded, or if other resolution or actions taken as a result of such legal proceeding were to restrain itsour ability to market one or more of itsour material products or services, itsour combined financial position, results of operations, or cash flows could be materially and adversely affected. In addition, legal proceedings, and any adverse resolution thereof, can result in adverse publicity and damage to Varex’sour reputation, which could materially and adversely impact itsour business.
New accounting pronouncements or changes in interpretation or application of generally accepted accounting principles may materially and adversely affect Varex’s operating results.
Varex prepares its financial statements in accordance with GAAP. These principles are subject to interpretation by the FASB, American Institute of Certified Public Accountants, the SEC, and various other regulatory and/or accounting bodies. New accounting pronouncements, or a change in interpretations of, or its application of, existing principles can have a significant effect on Varex’s reported results and may even affect its reporting of transactions completed before a change is announced. In addition, when Varex is required to adopt new accounting standards, Varex’s methods of accounting for certain items may change, which could cause its
results of operations to fluctuate from period to period, make it more difficult to compare its financial results to prior periods, and could cause Varex to delay required filings under the Exchange Act.
As its operations evolve over time, Varex may introduce new products and/or new technologies that require Varex to apply different accounting principles, including ones regarding revenue recognition, than Varex has applied in past periods. The application of different types of accounting principles and related potential changes may make it more difficult to compare its financial results from quarter to quarter, and the trading price of Varex common stock could suffer or become more volatile as a result.
Environmental laws impose compliance costs on Varex’sour business and may also result in liability.
Varex isWe are subject to environmental laws around the world. These laws regulate many aspects of itsour operations, including itsour handling, storage, transport, and disposal of hazardous substances, such as the chemicals and materials that Varex useswe use in the course of itsour manufacturing operations. They can also impose cleanup liabilities, including with respect to discontinued operations. As a consequence, Varexwe can incur significant environmental costs and liabilities, some recurring and others not recurring. Although it followswe follow procedures intended to comply with existing environmental laws, Varex,we, like other businesses, may mishandle or inadequately manage hazardous substances used in itsour manufacturing operations and can never completely eliminate the risk of contamination or injury from certain materials that it useswe use in itsour business and, therefore, itwe cannot completely eliminate the prospect of resulting claims and damage payments. VarexWe may also be assessed fines and/or other penalties for failure to comply with environmental laws and regulations. Insurance has provided coverage for portions of cleanup costs resulting from historical occurrences, but Varex doeswe do not expect to maintain insurance coverage for costs or claims that might result from any future contamination.
Future changes in environmental laws could also increase itsour costs of doing business, perhaps significantly. Several countries, including some in the EU, now require medical equipment manufacturers to bear certain disposal costs of products at the end of the product’s useful life, increasing its costs. The EU has also adopted directives that may lead to restrictions on the use of certain hazardous substances or other regulated substances in some of itsour products sold there. These directives, along with another that requires substance information to be provided upon request, could increase Varex’sour operating costs in order to maintain itsour 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 itsour business.
Fulfilling obligations incidentalFailure to being a public company place significant demands on Varex’s management, administrative,maintain effective internal controls and operational resources, including accounting and information technology resources.
As a public company, Varex is subject to the reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”), and is required to prepare its financial statements according to the rules and regulations required by the SEC. The Exchange Act requires that Varex file annual, quarterly, and current reports. Varex’s failure to prepare and disclose this information in a timely manner or to otherwise comply with applicable law could subject it to penalties under federal securities laws, cause it to be out of compliance with applicable stock exchange listing requirements, and expose it to lawsuits and restrict its ability to access financing. For example, as a result of the delayed filing of our 2019 Annual Report on Form 10-K, we received a notification letter from Nasdaq advising us that we were not in compliance with Nasdaq listing requirements. While we promptly regained compliance with the Nasdaq listing requirements, if we had failed to regain compliance in a timely manner, it would have negatively impacted Varex.
VarexWe must, among other things, establish and maintain effective internal controls and procedures for financial reporting and disclosure purposes. 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 Varex’sour business or changes in applicable accounting rules. As described in the following risk factor, Varex has identified material weaknesses in its internal control over financial reporting. VarexWe cannot assure that itsour internal control over financial reporting will be effective in the future or that additional material weaknesses will not be discovered with respect to a prior period for which it had previously believed that internal controls were effective.
Matters impacting Varex’s If our internal controls and procedures are not effective, our financial statements may cause Varex to be unable to report its financial information on a timely basis or may cause Varex to restate previously-issued financial information, thereby subjecting Varex to adverse regulatory consequences, including sanctions or investigations bynot accurately reflect the SEC or in respectresults of violations of applicable stock exchange listing rules. Thereour business and operations. In addition, there could also be a negative reaction in the financial markets due to a loss of investor confidence in Varexus and the reliability of itsour financial statements, which could affect Varex’s stock price.
Varex identified material weaknesses in its internal control over financial reporting which, if not remediated appropriately or timely, could result in loss of investor confidence and adversely impact our stock price.
As further described in Item 4 of this Quarterly Report on Form 10-Q and Item 9A in our Annual Report on Form 10-K for the fiscal year ended October 2, 2020, management determined that Varex’s internal control over financial reporting and its disclosure controls and procedures were not effective and that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified material weaknesses within our risk assessment process and control environment, which in turn, contributed to additional material weaknesses related to (1) inventory and cost of sales, and (2) financial reporting. Until remediated, these material weaknesses could result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected on a timely basis. There can be no assurance that the remedial measures being implemented by Varex's management will be successful. In addition, because of the COVID-19 pandemic, a larger number of Varex’s employees are working remotely, which may make it harder to remediate existing material weaknesses and might make it harder to maintain proper internal controls over financial reporting. If Varex is unable to remediate the material weaknesses, or is otherwise unable to maintain effective internal control over financial reporting or disclosure controls and procedures, Varex's ability to record, process and report financial information accurately, and to prepare financial statements within required time periods, could be adversely affected, which could subject Varex to litigation or investigations requiring management resources and payment of legal and other expenses, including civil penalties, negatively affect investor confidence in our financial statements and adversely impact our stock price.
Risks Relating to Our Indebtedness
Varex hasWe have significant debt obligations that could adversely affect itsour business, profitability and ability to meet itsour obligations.
As of July 2, 2021, Varex’s1, 2022, our total combined indebtedness was approximately $511.7$450.6 million. The borrowings under Varex’sour unsecured convertible senior notes due 2025 (the “Convertible Notes”) bear interest at a fixed rate of 4.00% and borrowings under Varex’sour senior secured notes due 2027 (the “Senior Secured Notes”) bear interest at a fixed rate of 7.875%.
Varex's Our debt could potentially have important consequences to Varexus and itsour investors, including:
•limiting Varex’sour flexibility in planning for, or reacting to, changes in itsour business and the industry; and
•limiting Varex’sour ability to borrow additional funds as needed or increasing the costs of any such borrowing.borrowing;
•make it more difficult for us to satisfy our obligations, including our debt obligations;
•increase our vulnerability to adverse economic and general industry conditions, including interest rate fluctuations, because a portion of our borrowings are and will continue to be at variable rates of interest;
•require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, which would reduce the availability of our cash flow from operations to fund working capital, capital expenditures or other general corporate purposes;
•place us at a disadvantage compared to competitors that may have proportionately less debt; and
•limit our ability to obtain additional debt or equity financing due to applicable financial and restrictive covenants in our debt agreements.
If Varex’sour cash requirements in the future are greater than expected, itsour cash flow from operations may not be sufficient to repay all of the outstanding debt as it becomes due, and Varexwe may not be able to borrow money, sell assets, or otherwise raise funds on acceptable terms, or at all, to refinance Varex’sour debt. For example, holders of the Convertible Notes will have the right to require Varexus to repurchase all or a portion of the Convertible Notes on the occurrence of a fundamental change at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. Further, if a make-whole fundamental change as defined in the Indenture governing the Convertible Notes occurs prior to the maturity date of the Convertible Notes, Varexwe will in some cases be required to increase the conversion rate for a holder that elects to convert its Convertible Notes in connection with such make-whole fundamental change. On the conversion of the Convertible Notes, unless Varex electswe elect to deliver solely shares of common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), Varexwe will be required to make cash payments for the Convertible Notes being converted. However, Varexwe may not have enough available cash or be able to obtain financing at the time Varex iswe are required to make such repurchases of the Convertible Notes surrendered or pay cash with respect to the Convertible Notes being converted.
Despite our substantial indebtedness, we may still be able to incur significantly more debt. This could intensify the risks described above.
We and our subsidiaries may be able to incur substantial indebtedness in the future. As of July 2, 2021,1, 2022, we had approximately $100 million of additional available borrowing capacity (subject to borrowing base availability) under the new revolving credit agreement that we entered into on September 30, 2020 (the “Asset-Based Loan”,Loan,” or "ABL Facility"). There is no guarantee that our borrowing base availability under the ABL Facility will be sufficient to allow us to borrow the maximum amount permitted under the ABL Facility. In addition to any amounts that might be available to us for borrowing under the ABL Facility, subject to certain
conditions, we will have the right to request an increase of aggregate commitments under the ABL Facility by an aggregate amount of up to $75 million by obtaining additional commitments either from one or more of the lenders under the ABL Facility or other lending institutions.
Although the ABL Facility and the indenture governing our Senior Secured Notes contain restrictions on our and our subsidiaries’ ability to incur additional indebtedness, these restrictions are subject to a number of important qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. Furthermore, the covenants in the indenture governing our Convertible Notes do not restrict the incurrence of indebtedness by the company or any of its subsidiaries, and the covenants that may be contained in any future debt instruments could allow us to incur a significant amount of additional indebtedness.
The more leveraged we become, the more we, and in turn holders of our notes, will be exposed to certain risks described above under “— Varex haswe have significant debt obligations that could adversely affect itsour business, profitability and ability to meet itsour obligations.”
The ABL Facility and the indenture governing our Senior Secured Notes impose significant operating and financial restrictions that may limit our current and future operating flexibility, particularly our ability to respond to changes in the economy or our industry or to take certain actions, which could harm our long termlong-term interests and may limit our ability to make payments on the notes.
Our ABL Facility and the indenture governing our Senior Secured Notes impose significant operating and financial restrictions on us.
These restrictionsus limit our ability, among other things, to:
•incur, assume or permit to exist additional indebtedness (including guarantees thereof);
•pay dividends or certain other distributions on our capital stock or repurchase our capital stock or prepay subordinated indebtedness;
•prepay, redeem or repurchase certain debt;
•issue certain preferred stock or similar equity securities;
•incur liens on assets;
•make certain loans, investments or other restricted payments;
•allow to exist certain restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to us;
•engage in transactions with affiliates;
•alter the business that we conduct; and
•sell certain assets or merge or consolidate with or into other companies.
As a result of these restrictions, we may be:
•limited in how we conduct our business;
•unable to raise additional debt or equity financing to operate during general economic or business downturns; or
•unable to compete effectively or to take advantage of new business opportunities.
A breach of the covenants under the indenture governing our Senior Secured Notes or the ABL Facility could result in an event of default under the applicable indebtedness. Such a default, if not cured or waived, may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt that is subject to an applicable cross-acceleration or cross-default provision. In addition, an event of default under the ABL Facility would permit the lenders under the ABL Facility to terminate all commitments to extend further credit under the ABL Facility. Furthermore, if we were unable to repay the amounts due and payable under the ABL Facility, those lenders could proceed against the collateral securing such indebtedness. In the event our lenders or holders of the notes offered hereby accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness.
Our ability to continue to have the necessary liquidity to operate our business may be adversely impacted by a number of factors, including uncertain conditions in the credit and financial markets, which could limit the availability and increase the cost of financing. A deterioration of our results of operations and cash flow resulting from decreases in consumer spending, could, among other things, impact our ability to comply with the fixed charge coverage ratio contained in our ABL Facility.
Our historical sources of liquidity to fund ongoing cash requirements include cash flows from operations, cash and cash equivalents, borrowings through our previous credit facility and convertible debt offerings. The sufficiency and availability of credit may be adversely affected by a variety of factors, including, without limitation, the tightening of the credit markets, including lending by financial institutions who are sources of credit for our borrowing and liquidity; an increase in the cost of capital; the reduced availability of credit; our ability to execute our strategy; the level of our cash flows, which will be impacted by customer demand for our products; compliance with a fixed charge coverage ratio that is included in our ABL Facility, interest rate fluctuations and the adverse impact of the COVID-19 outbreak on the U.S. and world-wide economies and on our business. Interest rates in the U.S. generally increased in fiscal 2018 and 2019, but decreased in fiscal 2020. We cannot predict the future level of interest rates or the effect of any increase in interest rates on the availability or aggregate cost of our borrowings. We cannot be certain that any additional required financing, whether debt or equity, will be available in amounts needed or on terms acceptable to us, if at all.
The ABL Facility contains a minimum Fixed Charge Coverage Ratio of 1.00 to 1.00 that is tested when excess availability under the ABL is less than the greater of (i) 10.0% of the LineLoan Cap (the lesser of (a) the aggregate commitments under the ABL Facility and (b) the aggregate borrowing base) and (ii) $7.5 million. If we have to borrow in excess of 10.0% of the LineLoan Cap and $7.5 million, and we do not increase our earnings, we also would be at risk of not being in compliance with the ABL Facility’s fixed charge coverage ratio. Compliance with the fixed charge coverage ratio is dependent on the results of our operations, which are subject to a number of factors including current economic conditions. Adverse developments in the economy, including as a result of the COVID-19 outbreak, could lead to reduced spending by our customers and end-users which could adversely impact our net sales and cash flow, which could affect our ability to comply with the fixed charge coverage ratio. In addition, the ABL Facility contains other affirmative and negative covenants that restrict Varex’sour operating and financing activities. These provisions may limit our ability to, among other things, incur future indebtedness, contingent obligations or liens, guarantee indebtedness, make certain investments and capital expenditures, sell stock or assets, pay dividends and consummate certain mergers or acquisitions. Failure to comply with the fixed charge coverage ratio and other covenants, including the requirement to timely deliver financial statements within applicable grace periods, could result in an event of default. Upon an event of default, if the ABL Facility is not amended or the event of default is not waived, the lender could declare all amounts then outstanding, together with accrued interest, to be immediately due and payable. If this happens, Varexwe may not be able to make those payments or borrow sufficient funds from alternative sources to make those payments. Even if Varexwe were to obtain additional financing, that financing may be on unfavorable terms.
We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness, including the notes. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. If our operating results and available cash are insufficient to meet our debt service obligations, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them, and these proceeds may not be adequate to meet any debt service obligations then due. Any future refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants which could further restrict our business operations. Additionally, the Indentureindenture relating to our notes will limit the use of the proceeds from any disposition of our assets. As a result, the Indentureindenture may prevent us from using the proceeds from such dispositions to satisfy our debt service obligations.
Our credit rating and ability to access well-functioning capital markets are important to our ability to secure future debt financing on acceptable terms. Our credit ratings may not reflect all risks associated with an investment in our secured notes.
Our access to the debt markets and the terms of such access depend on multiple factors including the condition of the debt capital markets, our operating performance and our credit ratings. These ratings are based on a number of factors including an assessment of our financial strength and financial policies. Our borrowing costs will be dependent to some extent on the rating assigned to our debt. However, there can be no assurance that any particular rating assigned to us will remain in effect for any given period of time or that a rating will not be changed or withdrawn by a rating agency if, in that rating agency’s judgment, future circumstances relating to the basis of the rating so warrant. Incurrence of additional debt by us could adversely affect our credit rating. Any disruptions or turmoil in the capital markets or any downgrade of our credit rating could adversely affect our cost of funds, liquidity, competitive position and access to capital markets, which could materially and adversely affect our business operations, financial condition and results of operations. In addition, downgrading the credit rating of our debt securities or placing us on a watch list for possible future downgrading would likely have an adverse effect on the market price of our securities.
VarexWe entered into certain hedging positions that may affect the value of the Convertible Notes and the volatility and value of Varex’sour common stock.
In connection with the issuance of the Convertible Notes, Varexwe entered into certain convertible note hedge transactions. These hedge transactions are expected generally to reduce potential dilution of our common stock on any conversion of the Convertible Notes or offset any cash payments we are required to make in excess of the principal amount of such converted Convertible Notes, as the case may be, with such reduction or offset subject to a cap. The counterparties to these hedging positions or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to Varex’sour common stock or purchasing or selling Varex’sour 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 Varexus on any fundamental change repurchase date or otherwise). This activity could cause or avoid an increase or a decrease in the market price of Varexour common stock or the Convertible Notes. In addition, if any such hedging positions fail to become effective, the counterparties to these hedging positions or their respective affiliates may unwind their hedge positions, which could adversely affect the value of Varexour common stock.
Risks Relating to Our Common Stock
The trading price of Varex’sour common stock may decline or fluctuate significantly and fluctuations in Varex’sour operating results, including quarterly revenues, and margins, may cause itsour stock price to be volatile, which could cause losses for itsour stockholders.
In the past year, Varex'sour stock price has ranged from a low of $10.37$18.90 to a high of $28.25. Varex$32.65. We cannot guarantee that an active trading market will be sustained for itsour common stock. Nor can Varexwe predict the prices at which shares of itsour common stock may trade. Varex hasWe have experienced and expectsexpect in the future to experience fluctuations in itsour operating results, including revenues and margins, from period to period. These fluctuations may cause Varex’sour stock price to be volatile, which could cause losses for itsour stockholders.
Varex’s Our quarterly and annual operating results, including itsour revenues and margins, may be affected by a number of other factors, including:
•the introduction and timing of announcement of new products or product enhancements by Varexus and itsour competitors;
•changechanges in itsour or itsour competitors’ pricing or discount levels;
•changes in foreign currency exchange rates and other economic uncertainty;
•changes in import/export regulatory regimes including the imposition of tariffs on our products or those of our customers;
•changes in the relative portion of itsour revenues represented by itsour various products, including the relative mix between higher margin and lower-margin products;
•the ability to identify and remediate significant deficiencies and material weaknesses in internal controls;
•changes in the relative portion of itsour revenues represented by itsour international region as a whole and by regions within the overall region, as well as by individual countries (notably, those in emerging markets);
•fluctuation in itsour effective tax rate, which may or may not be known to Varexus in advance;
•the availability of economic stimulus packages or other government funding, or reductions thereof;
•disruptions in the supply or changes in the costs of raw materials, labor, product components or transportation services;
•changes to itsour organizational structure, which may result in restructuring or other charges;
•disruptions in itsour operations, including itsour ability to manufacture products, caused by events such as earthquakes, fires, floods, terrorist attacks or the outbreak of epidemic diseases;
•the unfavorable outcome of any litigation or administrative proceeding or inquiry, including governmental audits, as well as ongoing costs associated with legal proceedings and governmental audits; and
•accounting changes and adoption of new accounting pronouncements.
Because many of Varex’sour operating expenses are based on anticipated capacity levels, and a high percentage of these expenses are fixed for the short term, a small variation in the timing of revenue recognition can cause significant variations in operating results from quarter to quarter. If Varex’sour gross margins fall below the expectation of securities analysts and investors, the trading price of Varexour common stock may decline.
Conversion of the Convertible Notes may dilute the ownership interest of Varex’sour stockholders or may otherwise depress the market price of Varex’sour common stock.
The conversion of the Convertible Notes may dilute the ownership interests of Varex’sour stockholders. On conversion of the Convertible Notes, Varex haswe have the option to pay or deliver, as the case may be, cash, shares of common stock, or a combination of cash and shares of common stock. If Varex electswe elect to settle our conversion obligation in shares of common stock or a combination of cash and shares of common stock, any sales of Varexour common stock issuable on such conversion could adversely affect prevailing market prices of Varex’sour common stock. In addition, the existence of the Convertible Notes may encourage short selling by market participants because the conversion of the Convertible Notes could be used to satisfy short positions, or anticipated conversion of the Convertible Notes into shares of Varex’sour common stock, any of which could depress the market price of Varex’sour common stock.
The conditional conversion feature of the Convertible Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditions for optional conversion of the Convertible Notes by holders are met before the close of business on the business day immediately preceding June 1, 2025, holders of the Convertible Notes will be entitled to convert the Convertible Notes at any time during specified periods at their option. If Varex electswe elect to satisfy our conversion obligation by settling all or a portion of itsour conversion obligation in cash, it could adversely affect Varex’sour liquidity. In addition, even if holders do not elect to convert their Convertible Notes, Varexwe 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 Varexour net working capital and may seriously harm Varex’sour business.
Certain provisions in Varex’sour Amended and Restated Certificate of Incorporation, itsour Amended and Restated Bylaws, itsour Indenture, and of Delaware law, may prevent or delay an acquisition of Varex,our, which could decrease the trading price of Varex’sour common stock.
Varex’sOur Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws contain, and Delaware law contains, provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the bidder and to encourage prospective acquirers to negotiate with Varex’sour board of directors rather than to attempt a hostile takeover. These provisions include, among others:
•the inability of Varex’sour stockholders to call a special meeting;
•the inability of Varex’sour stockholders to act without a meeting of stockholders;
•rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings;
•the right of Varex’sour board of directors to issue preferred stock without stockholder approval;
•the division of Varex’s board of directors into three classes of directors, with each class serving a staggered three-year term, and, this classified board provision could have the effect of making the replacement of incumbent directors more time-consuming and difficult, until the 2022 annual meeting of stockholders, after which directors will be elected annually;
•a provision that stockholders may only remove directors with cause while the board is classified;
•the ability of Varex’sour directors, and not stockholders, to fill vacancies on Varex’sour board of directors; and,
•the requirement that the affirmative vote of stockholders holding at least 66 2/3% of Varex’s voting stock is required to amend certain provisions in Varex’s Amended and Restated Certificate of Incorporation (relating to the term and removal of its directors, the filling of its board vacancies, the calling of special meetings of stockholders, stockholder action by written consent, the elimination of liability of directors to the extent permitted by Delaware law and indemnification of directors and officers), although this requirement will expire on the completion of the 2021 annual meeting of stockholders, after which Varex's Amended and Restated Certificate of Incorporation may be amended by the affirmative vote of the holders of at least a majority of the outstanding voting stock.directors.
In addition, because Varexwe did not elect to be exempt from Section 203 of the Delaware General Corporation Law (the “DGCL”), this provision could also delay or prevent a change of control that stockholders may favor. Section 203 provides that, subject to limited exceptions, persons that acquire, or who are affiliated with a person that acquires, more than 15% of the outstanding voting stock of a Delaware corporation (an “interested stockholder”) shall not engage in any business combination with that corporation, including by merger, consolidation, or acquisitions of additional shares, for a three-year period following the date on which the person became an interested stockholder, unless: (1) prior to such time, the board of directors of such corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (2) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of such corporation at the time the transaction commenced; or (3) on or subsequent to such time the business combination is approved by the board of directors of such corporation and authorized at a meeting of stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock of such corporation not owned by the interested stockholder.
These provisions are not intended to make Varexus immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that Varex’sour board of directors determines is not in the best interests of Varexus and Varex’sour stockholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors.
Furthermore, certain provisions in Varex’s Indentureour indenture governing the Convertible Notes may make it more difficult or expensive for a third party to acquire Varex.us. For example, the Indentureour indenture requires Varex,us, at the holders’ election, to repurchase the Convertible Notes for cash on the occurrence of a fundamental change and, in certain circumstances, to increase the conversion rate for a holder that converts itsour Convertible Notes in connection with a make-whole fundamental change. A takeover of Varexus may trigger the requirement that we repurchase the Convertible Notes or increase the conversion rate, which could make it costlier for a third party to acquire Varex. Varex’sus. Our Indenture also prohibits Varexus from engaging in a merger or acquisition unless, among other things, the surviving entity assumes the obligations under the Convertible Notes and Varex’sour Indenture. These and other provisions in Varex’s Indentureour indenture could deter or prevent a third party from acquiring Varexus even when the acquisition may be favorable to holders of the Convertible Notes or Varex’sour stockholders.
Liabilities related to Varex’sour operations when it was part of Varian, or liabilities associated with itsour spin-off from Varian, could materially and adversely affect Varex’sour business, financial condition, results of operations, and cash flows.
Varex We entered into a Separation and Distribution Agreement when itwe spun off from Varian. The agreement provides for, among other things, indemnification obligations designed to make Varian financially responsible for liabilities allocable to Varian before the spin-off, and to make Varexus financially responsible for liabilities allocable to Varexus before the spin-off and for information contained in the Varexour registration statement that describes the separation, Varex,we, and the transactions contemplated by the Separation and Distribution Agreement. VarexWe may be subject to substantial liabilities if it is required to indemnify Varian or if Varian is required, but unable, to indemnify Varex.us. Either of these could negatively affect Varex’sour business, financial position, results of operations, and/or cash flows.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits required to be filed by Item 601 of Regulation S-K: | | | | | | | | |
Exhibit
No. | | Description |
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| 3.1 | | |
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| 31.1* | | |
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| 32.1* | | |
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| 101.INS* | | Inline 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 |
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| 101.SCH* | | Inline XBRL Taxonomy Extension Schema Document |
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| 101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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| 104* | | Cover Page Interactive Data File - (formatted as Inline XBRL and contained in Exhibit 101) |
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| * | | Filed herewith. |
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SIGNATURES
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.
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| | | VAREX IMAGING CORPORATION |
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| Date: | August 4, 20213, 2022 | By: | /s/ SHUBHAM MAHESHWARI |
| | | Shubham Maheshwari |
| | | Chief Financial Officer |
| | | (Duly Authorized Officer and Principal Financial Officer) |
