What changed in this filing

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Item 1A. Risk Factors

2020-11-30 compared with 2019-12-20 · 355 added, 264 removed, 363 unchanged (63% of the section changed)

The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered.

Although the risk factors described below are the ones management deems significant, additional risks and uncertainties not presently known to us or that we presently deem less significant may also adversely affect our business operations.

Although the risk factors described below are the ones management deems material, additional risks and uncertainties not presently known to us or that we presently deem not material may also adversely affect our business operations.

If any of the following risks or additional risks and uncertainties actually occur, our business, operating results, and financial condition could be adversely affected.

Risks Relating to Our Business

Our operations, cash flow, and financial position have been adversely affected, and in the future could continue to be adversely impacted, by the coronavirus ("COVID-19") pandemic and associated economic disruptions.

The pandemic caused by the spread of COVID-19 has created significant volatility, uncertainty and economic disruption.

Decreased demand for certain products .

As an initial response to the pandemic, governments around the world imposed measures designed to reduce the transmission of COVID-19 and individuals responded to the fears of contracting COVID-19 by modifying their behavior.

In particular, restrictions on the movement of people and goods were put into place, overall economic activity decreased, elective procedures and exams were delayed or cancelled, there was a significant reduction in physician office visits, and hospitals were postponing or cancelling capital purchases as well as limiting or eliminating services.

Those factors, among others, caused customers to delay or cancel orders for certain Varex products.

While healthcare systems and economies around the world have begun to reopen, customer demand has not returned to pre-pandemic levels, and the adverse effects of COVID-19 on our financial statements and results of operations are expected to be more persistent, and have been more severe, than previously assumed.

Specifically, we now believe that reduced demand in our industrial segment and for certain higher end medical products will continue to depress our results of operations.

In addition, new or continuing outbreaks of COVID-19 could lead to further decreases in demand for certain of our products.

The actions taken to combat COVID-19 have had, and we believe will continue to have, a negative impact on our operating results, cash flows and financial condition.

We believe that COVID-19’s adverse impact on our operating results, cash flows and financial condition will be primarily driven by:

the severity and duration of the COVID-19 pandemic;

the COVID-19 pandemic’s impact on the U.S.

and international healthcare systems, the U.S.

economy and worldwide economy;

and the timing, scope and effectiveness of U.S.

and international governmental responses to the COVID-19 pandemic and associated economic disruptions.

Disruption in manufacturing, distribution, supply chain and other operations.

In addition to adversely affecting demand for our products, COVID-19 and associated economic disruptions have had and could continue to have an adverse impact on our manufacturing capacity, supply chains and distribution systems, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments are taking.

For example, at our manufacturing facility in the Philippines, many employees have had significant difficulty getting to work, which caused the facility to operate at a decreased capacity and caused us to shift some manufacturing to another location.

A reduction or interruption in any of our manufacturing processes could have a material adverse effect on our business.

Supply chain logistics have also become more challenging and could remain challenging and result in higher costs.

Our ability to move unfinished goods and finished products around the world have been impacted by the decreased availability of global transportation networks.

In addition, regulatory approvals for certain of our products may continue to be delayed due to COVID-19 related closures.

Varex sells its products and services to a limited number of OEM customers, many of which are also its competitors, and a reduction in or loss of business of one or more of these customers may materially reduce its sales.

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Varex may not be able to accurately predict the demand for its products by its customers.

End-user product demand, economic uncertainties, natural disasters, and other matters beyond Varex’s control make it difficult for its customers to accurately forecast and plan future business activities;

End-user product demand, economic uncertainties, the COVID-19 pandemic, natural disasters, and other matters beyond Varex’s control make it difficult for its customers to accurately forecast and plan future business activities;

which makes it difficult for Varex to accurately predict the demand for its products.

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Reductions in purchasing patterns have in the past and may in the future materially and adversely affect Varex’s operating results.

Decreased economic activity associated with the COVID-19 pandemic has had a significant negative impact on the demand for our industrial products and that impact is likely to continue.

Varex competes in highly competitive markets, and it may lose business to its customers or other companies with greater resources or the ability to develop more effective technologies, or it could be forced to reduce its prices.

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Any of these competitive factors could negatively and materially affect Varex’s pricing, sales, revenues, market share and gross margins and its ability to maintain or increase its operating margins.

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 2018 and 2019, the United States has imposed tariffs on items imported from China that are incorporated into our products.

Tariffs on items imported by us from China and other countries have increased our costs and has increased prices and lowered gross margins on some of our products.

These tariffs have had a direct adverse impact on our business and results of operations, and future tariffs could have a more significant impact on our business.

China has imposed retaliatory tariffs that impact a number of Varex 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.

Varex’s success depends on the successful development, introduction, and commercialization of new generations of products and enhancements to or simplifications of existing product lines.

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To be successful, Varex must anticipate its customers’ needs and demands, as well as potential shifts in market preferences.

Varex’s failure to do so has in the past resulted, and may in the future result, in the loss of customers and an adverse impact to its financial performance.

Varex’s failure to do so has in the past resulted, and may in the future result, in the loss of customers and an adverse

impact to its financial performance.

With a relatively strong U.S.

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Revenues generated from customers located outside the United States accounted for approximately 66%, 65% and 65% of Varex’s total revenues during fiscal years 2020, 2019, and 2018, respectively.

Varex must provide significant service and support globally.

As a result, Varex must provide significant service and support globally.

Varex intends to continue to expand its presence in international markets and expects to expend significant resources in doing so.

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government shutdown;

• natural disasters and pandemics;

• failure to comply with export laws and requirements, which may result in civil or criminal penalties and restrictions on Varex’s ability to export its products, particularly its industrial linear accelerator products;

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There could be additional future losses in these and other jurisdictions that would negatively impact Varex's effective tax rate.

Our secured revolving credit facility and secured term loan credit facility (collectively the “Credit Facility”) restrict certain activities, and failure to comply with the terms of this facility may have an adverse effect on our business, liquidity and financial position.

Varex is party to a secured revolving credit facility and a secured term loan credit facility, each of which contains restrictive financial covenants, including financial covenants that require Varex to comply with specified financial ratios.

If we do not increase our earnings, we are at risk of not being in compliance with certain of our financial covenants, including our consolidated total leverage ratio and our consolidated senior secured leverage ratio.

Varex may have to curtail some of its operations to comply with these covenants.

In addition, its credit facilities contain other affirmative and negative covenants that could restrict its operating and financing activities.

These provisions limit its 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 credit facility requirements, including the requirement to timely deliver financial statements within applicable grace periods, could result in an event of default under our credit facility.

Upon an event of default, if the credit facility documents are not amended or the event of default is not waived, the lender could declare all amounts then outstanding, together with accrued interest, to be immediately due and payable.

If this happens, Varex may not be able to make those payments or borrow sufficient funds from alternative sources to make those payments.

Even if Varex were to obtain additional financing, that financing may be on unfavorable terms.

Varex has significant debt obligations that could adversely affect its business, profitability and ability to meet its obligations.

As of September 27, 2019 , Varex’s total combined indebtedness, net of deferred loan costs, was approximately $395.1 million .

The borrowings under Varex’s credit facilities bear interest at floating interest rates.

As part of its overall risk management practices, Varex entered into financial derivatives, particularly interest rate swaps designed as cash flow hedges, to hedge the floating LIBOR interest rate on $264.4 million of its debt.

As a result, Varex will be exposed to fluctuations in interest rates to the extent of the balance of its borrowings under the LIBOR-based portion of its credit facilities.

Varex's debt could potentially have important consequences to Varex and its investors, including:

requiring that a portion of Varex’s cash flow from operations be used to make principal and interest payments on this debt, which would reduce cash flow available for other corporate purposes;

increasing Varex’s vulnerability to shifts in interest rates and to general adverse economic and industry conditions;

limiting Varex’s flexibility in planning for, or reacting to, changes in its business and the industry;

limiting Varex’s ability to borrow additional funds as needed or increasing the costs of any such borrowing.

In addition, Varex’s actual cash requirements in the future may be greater than expected.

Varex’s cash flow from operations may not be sufficient to repay all of the outstanding debt as it becomes due, and Varex may not be able to borrow money, sell assets, or otherwise raise funds on acceptable terms, or at all, to refinance Varex’s debt.

Fulfilling obligations incidental to being a public company place significant demands on Varex’s management, administrative, and operational resources, including accounting and information technology resources.

As a public company, Varex is subject to the reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”), and is required to prepare its financial statements according to the rules and regulations required by the SEC.

The Exchange Act requires that Varex file annual, quarterly, and current reports.

Varex’s failure to prepare and disclose this information in a timely manner or to otherwise comply with applicable law could subject it to penalties under federal securities laws, cause it to be out of compliance with applicable stock exchange listing requirements, and expose it to lawsuits and restrict its ability to access financing.

For example, as a result of the delayed filing of this 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 with the filing of our Form 10-K we will regain compliance with the Nasdaq listing requirements, if we had failed to regain compliance in a timely manner, it would have negatively impacted Varex.

Varex must, among other things, establish and maintain effective internal controls and procedures for financial reporting and disclosure purposes.

Internal control over financial reporting is complex and may be revised over time to adapt to changes in Varex’s business or changes in applicable accounting rules.

As described in the following risk factor, Varex has identified material weaknesses in its internal control over financial reporting.

Varex cannot assure that its internal control over financial reporting will be effective in the future or that additional material weaknesses will not be discovered with respect to a prior period for which it had previously believed that internal controls were effective.

Matters impacting Varex’s internal controls may cause Varex to be unable to report its financial information on a timely basis or may cause Varex to restate previously-issued financial information, thereby subjecting Varex to adverse regulatory consequences, including sanctions or investigations by the SEC or in respect of violations of applicable stock exchange listing rules.

There could also be a negative reaction in the financial markets due to a loss of investor confidence in Varex and the reliability of its financial statements, which could affect Varex’s stock price.

The delayed filing of some of this Annual Report has made Varex currently ineligible to use a registration statement on Form S-3 to register the offer and sale of securities, which could adversely affect its ability to raise future capital or complete acquisitions.

As a result of the delayed filing of this Annual Report on Form 10-k, Varex will not be eligible to register the offer and sale of our securities using a registration statement on Form S-3 until one year from the date it regained and maintains its status as a current filer.

Should Varex wish to register the offer and sale of its securities to the public prior to the time it is eligible to use Form S-3, both the transaction costs and the amount of time required to complete the transaction could increase, making it more difficult to execute any such transaction successfully and potentially harming our financial condition.

Varex identified material weaknesses in its internal control over financial reporting which, if not remediated appropriately or timely, could result in loss of investor confidence and adversely impact our stock price.

As further described in Item 9A of this report, at the end of each of fiscal year 2019 and 2018, 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.

Management also identified business process control deficiencies which resulted in material weaknesses in the business processes for revenue, inventory and financial close.

These material weaknesses resulted in immaterial audit adjustments and out of period adjustments to the Company’s consolidated financial statements.

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.

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.

Varex may face additional risks from the acquisition or development of new lines of business.

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Identifying suitable acquisition candidates can be difficult, time consuming, and costly, and Varex may not be able to identify suitable candidates or successfully complete or finance identified acquisitions, including as a result of failing to obtain regulatory or competition clearances, which could impair Varex’s growth and ability to compete.

In addition, completing an acquisition can divert

Varex’s management and key personnel from its current business operations, which could harm its business and affect its financial results.

In addition, completing an acquisition can divert Varex’s management and key personnel from its current business operations, which could harm its business and affect its financial results.

Even if Varex completes an acquisition, Varex may not be able to successfully integrate newly-acquired organizations, products, technologies, or employees into its operations or may not fully realize some of the expected synergies.

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If these companies do not succeed, Varex could lose some or all of its investment in these companies.

Warranty claims may materially and adversely affect Varex’s business.

Varex could experience an increase in warranty claims as a result of issues with product quality or product failures as a direct result of Varex’s design, manufacturing, or issues in its supply chain.

Such an occurrence may damage Varex’s market reputation, cause sales to decline, or require repairs or voluntary remedial measures to enhance customer satisfaction, which could materially and adversely impact Varex’s financial results.

Increased warranty claims on any given product could cause Varex to halt production on that product and significantly impair Varex’s liquidity and profitability, and cause reputational harm to Varex.

Because some categories of products tend to experience higher numbers of warranty claims than others, a shift in the types of products that Varex’s customers purchase could lead to an increase in warranty claims.

If actual levels of warranty claims are greater than the level of claims Varex estimates, cost of sales could increase, and Varex’s financial condition could be materially and adversely affected.

In addition, product quality issues could result in significant follow-on effects for Varex, including, among other things, reputational harm to

Varex and its customers, loss of customers, and liability as a result of product quality issues.

These outcomes would materially and adversely affect Varex’s business and financial condition.

Product defects or misuse may result in material product liability or professional errors and omissions claims, litigation, investigation by regulatory authorities, or product recalls that could harm Varex’s future revenues and require it to pay material uninsured claims.

Varex’s business exposes it to potential product liability claims that are inherent in the manufacture, sale, installation, servicing, and support of components that are used in medical devices and other devices that deliver radiation.

Because Varex’s products, through incorporation in OEMs’ systems, are involved in the intentional delivery of radiation to the human body and other situations where people may come into contact with radiation (for example, when Varex’s security and inspection products are being used to scan cargo or in the diagnosis of medical problems), the possibility for significant personal injury or loss of life exists.

Although Varex’s products are incorporated into OEMs’ systems, and thus only perform pursuant to the design and operating systems of OEMs, Varex may also be subject to claims for property damage, personal injury, or economic loss related to or resulting from any errors or defects in its products or the installation, servicing, or support of its products.

Any accident or mistreatment could subject Varex to legal costs, litigation, adverse publicity, and damage to its reputation, whether or not its products or services were a factor.

If Varex’s X-ray inspection systems fail to detect the presence of bombs, explosives, weapons, contraband, or other threats to personal safety, Varex could be subject to product and other liability claims or negative publicity, which could result in increased costs, reduced sales, and a decline in the market price of Varex’s common stock.

There are many factors beyond Varex’s control that could result in the failure of its products to detect the presence of bombs, explosives, weapons, contraband, or other threats to personal safety, including operator error and misuse of or malfunction of Varex equipment.

The failure of Varex’s systems to detect the presence of these dangerous materials may lead to personal injury, loss of life, and extensive property damage and may result in potential claims against Varex.

Product liability actions are subject to uncertainty and may be expensive, time consuming, and disruptive to Varex’s operations.

For these and other reasons, Varex may choose to settle product liability claims against it regardless of their actual merit.

A product liability action determined against Varex could result in adverse publicity or significant damages, including the possibility of punitive damages, and Varex’s combined financial position, results of operations, or cash flows could be materially and adversely affected.

If a product Varex designs or manufactures were defective (whether due to design, labeling or manufacturing defects, improper use of the product, or other reasons), Varex may be required to correct or recall the product and notify regulatory authorities.

The adverse publicity resulting from a correction or recall could damage Varex’s reputation and cause customers to review and potentially terminate their relationships with Varex.

A product correction or recall could consume management time and have an adverse financial impact on its business, including incurring substantial costs, losing revenues, and accruing losses.

Varex maintains limited product liability insurance coverage.

Varex’s product liability insurance policies are expensive and have high deductible amounts and self-insured retentions.

Varex’s insurance coverage may prove to be inadequate, and future policies may not be available on acceptable terms or in sufficient amounts, if at all.

If a material claim is not insured or is in excess of Varex’s insurance coverage, Varex could have to pay substantial damages, which could have a material and adverse effect on its financial position and/or results of operations.

Varex’s business may suffer if it is not able to hire and retain qualified personnel.

Varex’s future success depends, to a great degree, on its ability to retain, attract, expand, integrate, and train its management team and other key personnel, such as qualified engineering, service, sales, marketing, and other staff.

Varex competes for key personnel with other medical equipment and software manufacturers and technology companies, as well as universities and research institutions.

Because this competition is intense, particularly in Utah, where unemployment rates are relatively low, compensation-related costs could increase significantly if the supply of qualified personnel decreases or demand increases.

If Varex is unable to hire and train qualified personnel, Varex may not be able to maintain or expand its business.

Additionally, if Varex is unable to retain key personnel, Varex may not be able to replace them readily or on terms that are reasonable, which also could hurt its business.

Risks Relating to the Manufacture of our Products

A disruption at Varex’s manufacturing facilities, as well as fluctuating manufacturing costs, could materially and adversely affect its business.

The majority of Varex’s products are manufactured at its facility in Salt Lake City, Utah.

Varex’s manufacturing operations are subject to potential power failures, the breakdown, failure, or substandard performance of equipment, the improper installation or operation of equipment, and natural or other disasters.

Loss or damage to its manufacturing facility due to any of these factors or otherwise could materially and adversely affect Varex’s ability to manufacture sufficient quantities of its products or otherwise deliver products to meet customer demand or contractual requirements, which may result in a loss of revenue and other adverse business consequences.

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Walluf, Germany;

Heerlen and Dinxperlo, the Netherlands;

Heerlen and Doetinchem, the Netherlands;

and Calamba City, Philippines, which are subject to similar risks but may also face additional regulatory and political risks, which could impact Varex’s ability to manufacture and ship products in a timely manner or at all.

Varex manufactures its security products in Las Vegas, Nevada, and certain flat panels in Santa Clara, California, and these operations are also subject to potential power failures, the breakdown, failure, or substandard performance of equipment, the improper installation or operation of equipment, earthquakes, and other disasters, all of which could materially and adversely affect Varex’s ability to deliver products to meet customer demand.

Varex also manufactures security products in Las Vegas, Nevada, and these operations are also subject to potential power failures, the breakdown, failure, or substandard performance of equipment, the improper installation or operation of equipment, earthquakes, and other disasters, all of which could materially and adversely affect Varex’s ability to deliver products to meet customer demand.

In addition, Varex’s costs associated with manufacturing its products can vary significantly from quarter to quarter, and fluctuations thereof may adversely affect its business, operating results, and/or financial condition.

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In addition, actions taken by the current U.S.

administration and the pending withdrawal of the United Kingdom from the European Union (“EU”) 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.

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.

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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.

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.

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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.

The trading price of Varex’s common stock may decline or fluctuate significantly and fluctuations in Varex’s operating results, including quarterly revenues, and margins, may cause its stock price to be volatile, which could cause losses for its stockholders.

In the past year, Varex's stock price has ranged from a low of $21.57 to a high of $35.00.

Varex cannot guarantee that an active trading market will be sustained for its common stock.

Nor can Varex predict the prices at which shares of its common stock may trade.

Varex has experienced and expects in the future to experience fluctuations in its operating results, including revenues and margins, from period to period.

These fluctuations may cause Varex’s stock price to be volatile, which could cause losses for its stockholders.

Varex’s quarterly and annual operating results, including its revenues and margins, may be affected by a number of other factors, including:

the introduction and timing of announcement of new products or product enhancements by Varex and its competitors;

change in its or its competitors’ pricing or discount levels;

changes in foreign currency exchange rates and other economic uncertainty;

changes in import/export regulatory regimes including the imposition of tariffs on our products or those of our customers;

changes in the relative portion of its revenues represented by its various products, including the relative mix between higher margin and lower-margin products;

the ability to identify and remediate significant deficiencies and material weaknesses in internal controls;

changes in the relative portion of its revenues represented by its international region as a whole and by regions within the overall region, as well as by individual countries (notably, those in emerging markets);

fluctuation in its effective tax rate, which may or may not be known to Varex in advance;

the availability of economic stimulus packages or other government funding, or reductions thereof;

disruptions in the supply or changes in the costs of raw materials, labor, product components or transportation services;

changes to its organizational structure, which may result in restructuring or other charges;

disruptions in its operations, including its ability to manufacture products, caused by events such as earthquakes, fires, floods, terrorist attacks or the outbreak of epidemic diseases;

the unfavorable outcome of any litigation or administrative proceeding or inquiry, including governmental audits, as well as ongoing costs associated with legal proceedings and governmental audits;

accounting changes and adoption of new accounting pronouncements.

Because many of Varex’s operating expenses are based on anticipated capacity levels, and a high percentage of these expenses are fixed for the short term, a small variation in the timing of revenue recognition can cause significant variations in operating results from quarter to quarter.

If Varex’s gross margins fall below the expectation of securities analysts and investors, the trading price of Varex common stock may decline.

If Varex is not able to match its manufacturing capacity with demand for its products, its financial results may suffer.

Many of Varex’s products have a long production cycle, and Varex must anticipate demand for its products to ensure adequate manufacturing or testing capacity.

If Varex is unable to anticipate demand, and its manufacturing or testing capacity does not keep pace with product demand, Varex will not be able to fulfill orders in a timely manner, which may negatively impact its financial results and overall business.

Conversely, if demand for Varex’s products decreases, the fixed costs associated with excess manufacturing capacity may harm its financial results, including by decreasing gross margins and increasing research and development costs as a percentage of revenue.

Delivery schedules for Varex’s security, industrial, and inspection products tend to be unpredictable.

Varex designs, manufactures, sells, and services Linatron® X-ray accelerators, image-processing software, and image detection products for security and inspection, such as cargo screening at ports and borders and nondestructive examination for a variety of applications, as well as industrial applications.

Varex generally sells security and inspection products to OEMs who

incorporate its products into their inspection systems, which are then sold to customs and other government agencies, as well as to commercial organizations in the casting, power, aerospace, chemical, petro-chemical, and automotive industries.

Varex believes growth in its security and inspection products will be driven by security cargo screening and border protection needs, as well as by the needs of customs agencies to verify shipments for assessing duties and taxes.

This business is heavily influenced by domestic and international government policies on border and port security, political change, and government budgets.

In addition, Varex believes growth in this product line may be driven in part by industrial customers engaged in 3-D printing, which, as a developing market, may be difficult to predict.

Orders for Varex’s security and inspection products have been and may continue to be unpredictable, as governmental agencies may place large orders with Varex or its OEM customers in a short time period and then may not place any orders for a long time period thereafter.

Because it is difficult to predict Varex’s OEM customer delivery, the actual timing of sales and revenue recognition varies significantly.

The market for border protection systems has slowed significantly, and end customers, particularly in oil-based economies and war zones in which Varex has a significant customer base, are delaying system deployments or tenders and considering moving to alternative sources, resulting in a decline in the demand for security and inspection products.

The demand for Varex’s security and inspection products is heavily influenced by U.S.

and foreign governmental policies on national and homeland security, border protection, and customs activities, which depend upon government budgets and appropriations that are subject to economic conditions, as well as political changes and oil prices.

Varex has seen customers freeze or dramatically reduce purchases and capital project expenditures, delay projects, or act cautiously as governments around the world wrestle with spending priorities.

As economic growth remains sluggish in various jurisdictions and appears to be deteriorating in others, and as concerns about levels of government employment and government debt continue, Varex expects that these effects will also continue.

Bid awards in this business may be subject to challenge by third parties, as Varex has previously encountered with a large government project.

These factors make this business more unpredictable and could cause volatility in Varex’s revenues and earnings.

Varex’s international manufacturing operations subject it to volatility and other risks, including high security risks, which could result in harm to its employees and contractors or substantial costs.

Varex conducts certain manufacturing operations internationally to reduce costs and streamline its manufacturing operations.

There are administrative, legal, and governmental risks to operating internationally that could increase operating expenses or hamper the development of these operations.

The risks from operating internationally that could increase Varex’s operating expenses and materially and adversely affect its operating results, financial condition, and ability to deliver its products and grow its business include, among others:

• difficulties in staffing and managing employee relations and foreign operations, particularly in attracting and retaining personnel qualified to design, sell, test, and support its products;

• fluctuations in currency exchange rates;

• difficulties in coordinating its operations globally and in maintaining uniform standards, controls, procedures, and policies across its operations;

• difficulties in enforcing contracts and protecting intellectual property;

• diversion of management attention;

• imposition of burdensome governmental regulations, including changing laws and regulations with respect to collection and maintenance of personally identifiable data;

• regional and country-specific political and economic instability, as discussed in greater detail below;

• inadequacy of the local infrastructure to support its operations.

Varex’s international locations expose it to higher security risks compared to its United States locations, which could result in both harm to its employees and contractors or substantial costs.

Some of its services are performed in or adjacent to high-risk locations where the country or location and surrounding area is suffering from political, social, or economic turmoil, war or civil unrest, or has a high level of criminal or terrorist activity.

In those locations where Varex has employees or operations, Varex may incur substantial costs to maintain the safety of its personnel.

Despite these precautions, the safety of its personnel in these locations may continue to be at risk, and Varex may in the future suffer the loss of employees and contractors, which could harm its business reputation and operating results.

Varex’s operations are vulnerable to interruption or loss due to natural or other disasters, power loss, strikes, and other events beyond its control.

Varex conducts some of its activities, including manufacturing, research and development, administration, and data processing at facilities located in areas that have in the past experienced or may in the future experience natural disasters.

Varex’s insurance coverage for such disasters may not be adequate or continue to be available at commercially-reasonable terms, or at all.

major disaster (such as a major fire, hurricane, earthquake, flood, tsunami, volcanic eruption or terrorist attack) affecting Varex’s facilities, or those of its suppliers, could significantly disrupt its operations and delay or prevent product manufacture and shipment during the time required to repair, rebuild, or replace its or its suppliers’ damaged manufacturing facilities.

These delays could be lengthy and costly.

If any of Varex’s customers’ facilities are adversely affected by a disaster, shipments of its products could be delayed.

Additionally, customers may delay purchases of Varex’s products until its operations return to normal.

For example, following the earthquake and tsunami disasters in Japan in 2011, the operations of Canon Medical Systems, our largest customer, were impacted, and, as a consequence, orders to and product shipment from our business were delayed for several months.

Even if Varex's suppliers or customers are able to quickly respond to a disaster, the ongoing effects of the disaster could create some uncertainty in the operations of its business.

In addition, Varex’s facilities may be subject to a shortage of available electrical power and other energy supplies.

Any shortages may increase its costs for power and energy supplies or could result in blackouts, which could disrupt the operations of its affected facilities and harm its business.

Further, Varex’s products are typically shipped from a limited number of ports, and any disaster, strike, or other event blocking shipment from these ports could delay or prevent shipments and harm its business.

In addition, concerns about terrorism, the effects of a terrorist attack, political turmoil, or an outbreak of epidemic diseases could have a negative effect on Varex’s business operations, those of its suppliers and customers, and the ability to travel, resulting in adverse consequences on its revenues and financial performance.

Risks Relating to our Intellectual Property and Information Systems

Varex’s competitive position would be harmed if it is not able to maintain its intellectual property rights and protecting Varex’s intellectual property can be costly.

Varex files applications as appropriate for patents covering new products and manufacturing processes.

Varex cannot be sure, however, that patents will be issued from any of Varex’s pending or future patent applications.

Varex also cannot be sure that its current patents, the claims allowed under its current patents, or patents for technologies licensed to Varex will be sufficiently broad to protect its technology position against competitors.

Issued patents owned by, or licensed to, Varex may be challenged, invalidated, or circumvented, or the rights granted under the patents may not provide Varex with competitive advantages.

Asserting Varex’s patent rights against others in litigation or other legal proceedings is costly and diverts managerial resources.

For example, during fiscal year 2019, Varex initiated litigation asserting claims of patent infringement against a third party.

Varex intends to prosecute its claims vigorously, and Varex has experienced, and will continue to experience, increased legal expenses related to this litigation that could adversely affect its financial results.

An adverse finding in this or similar patent infringement litigation could adversely impact Varex’s competitive position.

In addition, Varex may not be able to detect patent infringement by others or may lose its competitive position in the market before Varex is able to do so.

Varex also relies on a combination of copyright, trade secret, and other laws, and contractual restrictions on disclosure, copying and transferring title (including confidentiality agreements with vendors, strategic partners, co-developers, employees, consultants, and other third parties), to protect its proprietary, and other confidential rights.

These protections may prove to be inadequate, since agreements may still be breached, and Varex may not have adequate remedies for a breach.

Varex’s trade secrets may become known to or be independently developed by others, including as a result of misappropriation by unauthorized access to Varex’s technology systems.

If Varex’s proprietary or confidential information is misappropriated, its business and financial results could be materially and adversely impacted.

Varex has trademarks, both registered and unregistered, that are maintained and enforced to provide customer recognition for its products in the marketplace, but unauthorized parties may still use them.

Varex also licenses certain patented or proprietary technologies from others.

In some cases, products with substantial revenues may depend on these license rights.

If Varex were to lose the rights to license these technologies, or its costs to license these technologies were to materially increase, its business would suffer.

As Varex expands its manufacturing capabilities outside of the United States, more of Varex’s intellectual property may be held in jurisdictions that do not have robust intellectual property protections, which may make it harder for Varex to adequately protect its Intellectual Property.

Third parties may claim that Varex is infringing upon their intellectual property, and Varex could suffer significant litigation or licensing expenses or be prevented from selling its products.

There is a substantial amount of litigation over patent and other intellectual property rights in the industries in which Varex competes.

Varex’s competitors, like companies in many high technology businesses, continually review other companies’ activities for possible conflicts with their own intellectual property rights.

In addition, non-practicing entities may review Varex’s activities for conflicts with their patent rights.

Determining whether a product infringes on a party’s intellectual property rights involves complex legal and factual issues, and the outcome of this type of litigation is often uncertain.

Parties may claim that Varex is infringing upon their intellectual property rights.

Varex may not be aware of intellectual property rights of others that relate to its products, services, or technologies.

From time to time, Varex has received notices from parties asserting infringement, and Varex has been subject to

lawsuits alleging infringement of patent or other intellectual property rights.

Any dispute regarding patents or other intellectual property could be costly and time consuming and could divert Varex’s management and key personnel from its business operations.

Varex may not prevail in a dispute.

Varex does not maintain insurance for intellectual property infringement, so costs of defense, whether or not Varex is successful in defending an infringement claim, will be borne by Varex and could be significant.

If Varex is unsuccessful in defending or appealing an infringement claim, Varex may be subject to significant damages, and its combined financial position, results of operations, or cash flows could be materially and adversely affected.

Varex may also be subject to injunctions against development and sale of its products, the effect of which could be to materially reduce its revenues.

Furthermore, a third party claiming infringement may not be willing to license its rights to Varex, and even if a third-party rights holder is willing to do so, the amounts Varex might be required to pay under the associated royalty or license agreement could be significant.

Varex could decide to alter its business strategy or voluntarily cease the allegedly infringing actions rather than face litigation or pay a royalty, which could materially and adversely impact its business and results of operations.

Disruption of critical information systems or material breaches in the security of Varex’s systems may materially and adversely affect its business and customer relations.

Information technology (including technology from third party providers) helps Varex operate efficiently, interface with and support its customers, maintain financial accuracy and efficiency, and produce its financial statements.

In the ordinary course of its business, Varex collects, processes and stores sensitive data, including intellectual property, proprietary business information and that of customers, suppliers and business partners, third parties accessing its website, patient data and personally identifiable information of customers and employees, in Varex’s data centers, and on its networks, as well as third party off-site infrastructure.

Despite security measures, there is an increasing threat of information security attacks, including from computer viruses or other malicious codes, unauthorized access attempts, and cyber-attacks that pose risks to companies, including Varex.

Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently, have become increasingly sophisticated and generally are not recognized until launched against a target, Varex may be unable to anticipate these techniques or to implement adequate preventative measures, which could result in data leaks or otherwise compromise our confidential or proprietary information and disrupt our operations.

If Varex does not allocate and effectively manage the resources necessary to build and sustain the proper technology infrastructure, Varex could be subject to, among other things, transaction errors, processing inefficiencies, the loss of customers, business disruptions, or the loss of or damage to intellectual property through a security breach or misappropriation of intellectual property.

Such security breaches could expose Varex to a risk of loss of information, litigation, and possible liability to employees, customers, and/or regulatory authorities.

If Varex’s data management systems do not effectively collect, secure, store, process, and report relevant data for the operation of its business, whether due to equipment malfunction or constraints, software deficiencies, or human error, Varex’s ability to effectively plan, forecast, and execute its business plan and comply with applicable laws and regulations will be impaired, perhaps materially.

Any such impairment could materially and adversely affect Varex’s financial condition, results of operations, cash flows, and the timeliness with which Varex reports its operating results internally and externally.

Varex uses certain cloud-based software.

A security breach, whether of Varex’s products, of Varex’s customers’ network security and systems, or of third-party hosting services could disrupt access to Varex’s customers’ stored information and could lead to the loss of, damage to or public disclosure of Varex’s customers’ stored information, including patient health information.

Such an event could have serious negative consequences, including possible patient injury, regulatory action, fines, penalties and damages, reduced demand for Varex’s solutions, an unwillingness of its customers to use its solutions, harm to its reputation and brand, and time-consuming and expensive litigation, any of which could have a material and adverse effect on Varex’s financial results.

Risks Relating to Our Legal and Regulatory Environment

Changes in import/export regulatory regimes and tariffs could continue to negatively impact our business.

Tariffs and changes in international trade agreements or trade-related laws and regulations may have an indirect adverse impact on our business.

As a component manufacturer, our products are integrated into the systems and products of our OEM customers.

Uncertainty over tariffs and trade wars could also cause our customers to delay or cancel orders for our products.

In recent years, the United States has imposed tariffs on items imported from China that are incorporated into our products.

Tariffs on items imported by us from China and other countries have increased our costs and has increased prices and lowered gross margins on some of our products.

These tariffs have had a direct adverse impact on our business and results of operations, and future tariffs could have a more significant impact on our business.

China has imposed retaliatory tariffs that impact a number of Varex

products including U.S.

origin X-ray tubes, heat exchange units, and certain flat panel detectors.

We expect that tariffs will continue to have a negative effect on our business and results of operations, including the possibility of continued price concessions or loss of business.

Tariffs could limit our ability to compete for increased market share in China, which could cause our long-term prospects in China to suffer.

The imposition of additional tariffs by the United States could result in the adoption of additional tariffs by China and other countries, as well as further retaliatory actions by any affected country, which could negatively impact the global market for imaging equipment and could have a significant adverse effect on our business.

Compliance with foreign laws and regulations applicable to the marketing, manufacture, and distribution of Varex’s products may be costly, and failure to comply may result in significant penalties and other harm to Varex’s business.

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Delays in the receipt of or failure to receive regulatory approvals, the inclusion of significant limitations on the indicated uses of a product, the loss of previously obtained approvals or failure to comply with existing or future regulatory requirements could restrict or prevent Varex from doing business in a country or subject Varex to a variety of enforcement actions and civil or criminal penalties, which would materially and materially and adversely affect its business.

In addition, compliance with changing regulatory schemes, such as what may occur in connection with Brexit, may add additional complexity, cost and delays in marketing or selling Varex’s products.

The Brexit process has caused legal uncertainty and will likely lead to divergent national laws and regulations.

While the full financial, regulatory and legal effects of Brexit are unknown, if the United Kingdom’s regulatory scheme is materially different from the current EU regulatory process, Varex’s regulatory compliance burden will likely increase.

In addition, compliance with changing regulatory schemes may add additional complexity, cost and delays in marketing or selling Varex’s products.

Within the EU/EEA, Varex must obtain, and in turn affix, a CE mark certification, which is a European marking of conformity that indicates that a product meets the essential requirements of the Medical Device Directive.

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Becoming familiar with and implementing the infrastructure necessary to comply with these laws, rules, and regulations is costly.

Additionally, in some countries, Varex relies or may rely in the future on foreign distributors and agents to assist in complying with foreign regulatory requirements, and Varex cannot be sure that they will always do so.

Additionally, in some countries, Varex relies or may rely in the future on foreign distributors and agents to assist in complying with foreign regulatory requirements, and Varex cannot

be sure that they will always do so.

The failure of Varex or its agents to comply with these laws, rules, and regulations could delay the introduction of new products, cause reputational harm, or result in investigations, fines, injunctions, civil penalties, criminal prosecution, or an inability to sell Varex’s products in or to import its products into certain countries, which could materially and adversely affect Varex’s business.

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In general, there is a worldwide trend to strengthen anti-corruption laws and their enforcement, and the healthcare industry and medical equipment manufacturers have been particular targets of these investigation and enforcement efforts.

Any violation of these laws by Varex or its agents or distributors could create substantial liability for Varex, subject its officers and

directors to personal liability, and cause a loss of reputation in the market.

Any violation of these laws by Varex or its agents or distributors could create substantial liability for Varex, subject its officers and directors to personal liability, and cause a loss of reputation in the market.

Varex operates in many countries, including India and China, where the public sector is perceived as being corrupt.

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If these organizations or authorities name Varex as having breached its obligations under their regulations, rules, or standards, its reputation would suffer, and its business and financial condition could be materially and adversely affected.

Warranty claims may materially and adversely affect Varex’s business.

If actual levels of warranty claims are greater than the level of claims Varex estimates, cost of sales could increase, and Varex’s financial condition could be materially and adversely affected.

In addition, product quality issues could result in significant follow-on effects for Varex, including, among other things, reputational harm to Varex and its customers, loss of customers, and liability as a result of product quality issues.

These outcomes would materially and adversely affect Varex’s business and financial condition.

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.

Delivery schedules for Varex’s security, industrial, and inspection products tend to be unpredictable.

Varex designs, manufactures, sells, and services Linatron ® X-ray accelerators, image-processing software, and image detection products for security and inspection, such as cargo screening at ports and borders and nondestructive examination for a variety of applications, as well as industrial applications.

Varex generally sells security and inspection products to OEMs who incorporate its products into their inspection systems, which are then sold to customs and other government agencies, as well as to commercial organizations in the casting, power, aerospace, chemical, petro-chemical, and automotive industries.