What changed in this filing

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Item 1A. Risk Factors

2022-02-08 compared with 2021-08-04 · 97 added, 126 removed, 622 unchanged (26% of the section changed)

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See below for a discussion of the following principal risks and other risks that make an investment in Varex speculative or risky:

• Our operations, cash flow, financial position, and the demand for certain of our products, have been adversely impacted, and in the future could continue to be adversely impacted by the coronavirus (COVID-19) pandemic and associated economic disruptions.

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

• Supply chain and logistic challenges and disruptions, including increased difficulty in obtaining supplies of important components, and increasing costs have impacted our ability to manufacture products, have caused product delivery delays, and have increased our manufacturing costs.

These challenges and disruptions are likely to continue throughout our 2022 fiscal year.

• It has become more difficult to attract and retain employees, which has impacted, and is likely to continue to impact, our ability to manufacture products.

• We sell products and services to a limited number of original equipment manufacturers (“OEMs”) customers, many of which are also competitors, and a reduction in or loss of business of one or more of these customers may materially reduce our sales.

• We may not be able to accurately predict customer demand for our products, which is subject to matters beyond our control.

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

• A disruption at our manufacturing facilities, as well as fluctuating manufacturing costs, could materially and adversely affect its business.

• Supply chain disruptions, including the loss of a supplier, and any inability to obtain supplies of important components has impacted our ability to manufacture products and caused product delivery delays and may continue to do so.

• A disruption at our manufacturing facilities, as well as fluctuating manufacturing costs, could materially and adversely affect our business.

• Our operations, cash flow, and financial position, and the demand for our security, industrial and inspection products, have been adversely impacted, and in the future could continue to be adversely impacted by the 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.

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• 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’s stockholders or may otherwise depress the market price of Varex’s common stock.

• We have significant debt obligations that could adversely affect our business, profitability and ability to meet our obligations.

• Our ABL Credit Facility and our indentures impose significant operating and financial restrictions that may limit current and future operating flexibility, and make it difficult to respond to economic or industry changes or to take certain actions, which could harm our long-term interest.

• Potential indemnification liabilities to Varian could materially and adversely affect our business, financial condition, results of operations, and cash flows.

• Our Asset-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.

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Risks Relating to Our Business

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

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

Emerging variants and uneven vaccination rates across the globe could lead to additionally 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 or continuing outbreaks of COVID-19 could lead to future decreases in demand.

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

Current economic conditions, including supply chain disruptions and logistical challenges, have increased our costs, and are impacting our ability to obtain materials needed to manufacture our products and to deliver those products to our customers.

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 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.

Over the past year, our ability to mitigate supply chain challenges was higher than it is currently.

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.

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.

COVID-19 has adversely 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, we have recently seen an increase in COVID-19 related employee absences that has made it more difficult 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 additional volatility, uncertainty, and economic disruption.

New or continuing outbreaks of COVID-19 could lead to future decreases in demand for our products.

The actions taken to combat COVID-19 could have a negative impact on future 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.

the COVID-19 pandemic’s impact on the Unites States and international healthcare systems, the U.S.

economy and worldwide economy;

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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 we believe will continue to have an adverse impact on our manufacturing capacity, supply chains and distribution systems, including as a result of impacts associated with shortages in obtaining materials used to make our products and preventive and precautionary measures that 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 be delayed due to COVID-19 related closures.

In addition, government action related to the COVID-19 pandemic, such as new regulations mandating vaccines for companies with over 100 employees and for government contractors could have an adverse impact on our 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.

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

Varex had one customer during the three months ended July 2, 2021 that accounted for 17% of its 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’s ten largest customers as a group accounted for approximately 51% and 53% of its revenue for the nine months ended July 2, 2021 and July 3, 2020, respectively.

Varex had one customer during the three months ended December 31, 2021 that accounted for 19% of its revenue.

Varex’s ten largest customers as a group accounted for approximately 50% and 51% of its revenue for the three months ended December 31, 2021 and January 1, 2021, respectively.

Varex sells its products to a limited number of OEM customers, many of which are also its competitors with in-house X-ray component manufacturing operations.

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Varex conducts business globally.

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’s total revenues for the nine months ended July 2, 2021 and July 3, 2020, respectively.

Revenues generated from customers located outside the United States accounted for approximately 70% and 65% of Varex’s total revenues for the three months ended December 31, 2021 and January 1, 2021, respectively.

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

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The more Varex depends on international sales, the more vulnerable Varex becomes to these factors.

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.

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 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.

A change in the percentage of Varex’s total earnings from international sales or additional changes in tax laws could increase Varex’s effective tax rate.

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state taxes should they be actually remitted to the United States, in which case Varex’s financial results could be materially and adversely affected.

The changes included in U.S.

Tax Reform are broad, complex, and subject to change and interpretation.

Additional statutory changes or interpretive guidance issued by Federal or local authorities could have a material impact on income tax expense, the effective rate, or the value of deferred tax assets and liabilities.

In addition, significant judgments and estimates are required to evaluate our tax position and the impact of the new tax law.

If these judgments and estimates are incorrect, or if the underlying assumptions are modified by subsequent guidance or are different from what we expect, our tax liability could differ significantly from our current estimates.

Statutory changes included in proposed US legislation, if passed, including interpretive guidance, could have a material impact on income tax expense, the effective rate, or the value of deferred tax assets and liabilities.

Changes in the valuation of Varex’s deferred tax assets or liabilities, additional changes in tax laws or rates, changes in the interpretation of tax laws in other jurisdictions, or other changes beyond Varex’s control could materially and adversely affect its financial position and results of operations.

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In addition, acquisitions can result in potentially dilutive issuances of equity securities or the incurrence of debt, contingent liabilities or expenses, or other charges, any of which could harm Varex’s business and affect its financial results.

Additionally, Varex participates in joint ventures and has investments in privately-held companies (for example, its 40% ownership in dpiX LLC, its major supplier of its amorphous silicon-based thin film transistor arrays (flat panels used in its digital detectors) that are subject to risk of loss of investment capital.

Additionally, Varex participates in joint ventures and has investments in privately-held companies, for example, its 40% ownership in dpiX LLC, its major supplier of its amorphous silicon-based thin film transistor arrays (flat panels used in its digital detectors) and 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 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, Varex could lose some or all of its investment in these companies.

There is no guarantee that the time and money invested by Varex in these projects will yield the expected returns.

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

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

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 Varex’s ability to manufacture products, have caused delays in its ability to deliver products, and have increased its 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 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 have caused, and could continue to 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.

Shortages, changes in source of, and increased in prices for, raw materials have negatively impacted Varex’s ability to manufacture products, have caused delays, and have increased 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.

Varex expects 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 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.

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

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Walluf, Germany;

Heerlen and Doetinchem, the Netherlands;

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.

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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.

An uncertain economic environment may also disrupt supply or affect our service business, as customers’ constrained budgets may result in pricing pressure, extended warranty provisions, and even cancellation of service contracts.

In addition, concerns over continued economic instability could make it more difficult for Varex to collect outstanding receivables.

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Dollars of products and services that Varex provides in foreign markets.

Changes in monetary or other policies here and abroad, including as a result of economic and/or political instability or in reaction thereto, would also likely affect foreign currency exchange rates.

Changes in monetary or other policies here and abroad, including efforts 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’s sales in these countries, or in Europe generally, would likely be materially and adversely affected until stable exchange rates are established.

Additionally, fluctuations in commodities prices could materially and adversely affect Varex’s performance.

Rising commodities prices will increase Varex’s costs and those of Varex’s medical OEM customers, which could in turn result in reduced demand for Varex’s products.

Rising commodities prices have increased Varex’s costs and those of Varex’s medical OEM customers, which could in turn result in reduced demand for Varex’s products or impact Varex's financial results.

Further, Varex’s security product revenues from oil-producing countries, in which Varex has a significant customer base, have in the past suffered as a result of volatility in oil prices and remain sensitive to fluctuations in the future.

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.

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.

Shortage of, and greater demand for, components and subassemblies could also increase manufacturing costs if the supply/demand imbalance increases the price of the components and subassemblies.

Any of these events could materially and adversely affect Varex’s business and financial results.

A shortage or change in source of, or increase in price of, raw materials could restrict Varex’s ability to manufacture products, cause delays, or significantly increase its cost of goods.

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.

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.

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These processes (including, for example, in the EU, the European Economic Area (“EEA”), Switzerland, Brazil, Australia, China, Japan and Canada) can be time consuming, expensive and uncertain, which can delay Varex’s ability to market products in those countries.

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

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

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Compliance with these laws and regulations is expensive and time-consuming, and failure to comply with these laws and regulations could materially and adversely affect Varex’s business.

Generally, Varex’s manufacturing operations for medical devices, and those of its third-party manufacturers, are required to comply with the Quality System Regulations (“QSR”) of the FDA, as well as other federal and state regulations for medical devices

and radiation-emitting products.

The FDA, 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.

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Certain of these local laws and regulations have the effect of serving as a barrier to trade and can be difficult to navigate predictably.

In addition, certain countries in which Varex products are sold require products to undergo re-registration if the product is altered in any significant way, and it may be determined that the separation of Varex from Varian, including Varex’s new name, will require these products to be re-registered as Varex products, even if they are physically unchanged.

In addition, certain countries in which Varex products are sold require products to undergo re-registration if the product is altered in any significant way.

These registration processes can be costly and time consuming, and customers may decide to purchase products from Varex’s competitors that do not have to be involved in a re-registration process.

In addition, Varex’s inability to receive or renew product registrations may prevent Varex from marketing and/or distributing those particular products for replacement applications in the specific country.

Existing and future healthcare reforms, including the Affordable Care Act and changes to reimbursement rates, may indirectly have a material adverse effect on Varex’s business and results of operations.

Existing and future healthcare reforms, and changes to reimbursement rates, may indirectly have a material adverse effect on Varex’s business and results of operations.

Sales of Varex’s products to OEMs in the medical sector indirectly depend on whether adequate reimbursement is available for its customers’ products from a variety of sources, such as government healthcare insurance programs, including U.S.

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In addition, legal proceedings, and any adverse resolution thereof, can result in adverse publicity and damage to Varex’s reputation, which could materially and adversely impact its business.

New accounting pronouncements or changes in interpretation or application of generally accepted accounting principles may materially and adversely affect Varex’s operating results.

Varex prepares its financial statements in accordance with GAAP.

These principles are subject to interpretation by the FASB, American Institute of Certified Public Accountants, the SEC, and various other regulatory and/or accounting bodies.

New accounting pronouncements, or a change in interpretations of, or its application of, existing principles can have a significant effect on Varex’s reported results and may even affect its reporting of transactions completed before a change is announced.

In addition, when Varex is required to adopt new accounting standards, Varex’s methods of accounting for certain items may change, which could cause its

results of operations to fluctuate from period to period, make it more difficult to compare its financial results to prior periods, and could cause Varex to delay required filings under the Exchange Act.

As its operations evolve over time, Varex may introduce new products and/or new technologies that require Varex to apply different accounting principles, including ones regarding revenue recognition, than Varex has applied in past periods.

The application of different types of accounting principles and related potential changes may make it more difficult to compare its financial results from quarter to quarter, and the trading price of Varex common stock could suffer or become more volatile as a result.

Environmental laws impose compliance costs on Varex’s business and may also result in liability.

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All of these costs, and any future violations or liabilities under environmental laws or regulations, could have a material adverse effect on its business.

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

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

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

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

For example, as a result of the delayed filing of our 2019 Annual Report on Form 10-K, we received a notification letter from Nasdaq advising us that we were not in compliance with Nasdaq listing requirements.

While we promptly regained compliance with the Nasdaq listing requirements, if we had failed to regain compliance in a timely manner, it would have negatively impacted Varex.

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

Failure to maintain effective internal controls and procedures could negatively impact Varex.

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

In the past, Varex has 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’s business or changes in applicable accounting rules.

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

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

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

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

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

As further described in Item 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.

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

If Varex’s internal controls and procedures are not effective, our financial statements may not accurately reflect the results of our business and operations.

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

Risks Relating to Our Indebtedness

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

As of July 2, 2021, Varex’s total combined indebtedness was approximately $511.7 million.

As of December 31, 2021, Varex’s total combined indebtedness was approximately $480.1 million.

The borrowings under Varex’s unsecured convertible senior notes due 2025 (the “Convertible Notes”) bear interest at a fixed rate of 4.00% and borrowings under Varex’s senior secured notes due 2027 (the “Senior Secured Notes”) bear interest at a fixed rate of 7.875%.

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• 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;

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We and our subsidiaries may be able to incur substantial indebtedness in the future.

As of July 2, 2021, we had approximately $100 million of additional available borrowing capacity (subject to borrowing base availability) under the new revolving credit agreement that we entered into on September 30, 2020 (the “Asset-Based Loan”, or "ABL Facility").

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.

As of December 31, 2021, we had approximately $100 million of additional available borrowing capacity (subject to borrowing base availability) under the revolving credit agreement that we entered into on September 30, 2020 (the “Asset-Based Loan”, or "ABL Facility").

In addition to any amounts that might be available to us for borrowing under the ABL Facility, subject to certain conditions, we will have the right to request an increase of aggregate commitments under the ABL Facility by an aggregate amount of up to $75 million by obtaining additional commitments either from one or more of the lenders under the ABL Facility or other lending institutions.

Although the ABL Facility and the indenture governing our Senior Secured Notes contain restrictions on our and our subsidiaries’ ability to incur additional indebtedness, these restrictions are subject to a number of important qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial.

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and world-wide economies and on our business.

Interest rates in the U.S.

generally increased in fiscal 2018 and 2019, but decreased in fiscal 2020.

We cannot predict the future level of interest rates or the effect of any increase in interest rates on the availability or aggregate cost of our borrowings.

We cannot be certain that any additional required financing, whether debt or equity, will be available in amounts needed or on terms acceptable to us, if at all.

The ABL Facility contains a minimum Fixed Charge Coverage Ratio of 1.00 to 1.00 that is tested when excess availability under the ABL is less than the greater of (i) 10.0% of the Line Cap (the lesser of (a) the aggregate commitments under the ABL Facility and (b) the aggregate borrowing base) and (ii) $7.5 million.

If we have to borrow in excess of 10.0% of the Line Cap and $7.5 million, and we do not increase our earnings, we also would be at risk of not being in compliance with the ABL Facility’s fixed charge coverage ratio.

The ABL Facility contains a minimum Fixed Charge Coverage Ratio of 1.00 to 1.00 that is tested when excess availability under the ABL is less than the greater of (i) 10.0% of the Loan Cap (the lesser of (a) the aggregate commitments under the ABL Facility and (b) the aggregate borrowing base) and (ii) $7.5 million.

If we have to borrow in excess of 10.0% of the Loan 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.

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• 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 its or its competitors’ pricing or discount levels;

• changes in foreign currency exchange rates and other economic uncertainty;

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• 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);

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• the right of Varex’s board of directors to issue preferred stock without stockholder approval;

• the division of Varex’s board of directors into three classes of directors, with each class serving a staggered three-year term, and this classified board provision could have the effect of making the replacement of incumbent directors more time-consuming and difficult, until the 2022 annual meeting of stockholders, after which directors will be elected annually;

• a provision that stockholders may only remove directors with cause while the board is classified;

• the ability of Varex’s directors, and not stockholders, to fill vacancies on Varex’s board of directors.

• 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.

In addition, because Varex did not elect to be exempt from Section 203 of the Delaware General Corporation Law (the “DGCL”), this provision could also delay or prevent a change of control that stockholders may favor.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors