What changed in this filing

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Item 1A. Risk Factors

2022-05-04 compared with 2022-02-08 · 63 added, 33 removed, 686 unchanged (12% of the section changed)

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Investing in our common stock involves risks.

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

• 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.

See below and Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk for a discussion of the following principal risks and other risks that make an investment in Varex speculative or risky:

• Supply chain disruptions and logistical challenges, including increased difficulty in obtaining supplies of important components, and increasing costs, as well as uncertainty caused by the military conflict between Russia and Ukraine, have increased our costs, impacted our ability to obtain materials needed to manufacture products, and caused product delivery delays.

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

• Our business and financial results may be adversely affected by the effects of inflation.

• 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.

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Risks Relating to Our Business

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, including supply chain disruptions and logistical challenges, as well as the military conflict between Russia and Ukraine, have increased our costs, and have impacted and may in the future impact our ability to obtain materials needed to manufacture our products, to deliver those products to our customers, and otherwise adversely impact our financial condition and results of operations.

Current economic conditions have had, and we believe will continue to have, an adverse impact on our manufacturing capacity, supply chain and distribution systems.

We have experienced difficulties in obtaining materials used to build our products and these difficulties have impacted our ability to deliver finished products to our customers.

We have experienced, and continue to experience, difficulties in obtaining materials used to build our products and these difficulties have impacted our ability to deliver finished products to our customers.

We believe that it will continue to be difficult to obtain certain materials throughout fiscal year 2022.

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

We have used more of our inventory on hand than we have used historically and are purchasing materials that are critical to our processes, often at higher costs.

Shortages of materials, particularly micro-controller chips and associated electronic components, have caused and may continue to cause, delays in manufacturing products for our customers.

In some cases, raw material shortages and delivery delays from our suppliers are communicated to us with very little advanced warning, which has caused operational and customer order fulfillment challenges.

During fiscal year 2021, inventory levels decreased due to our strong growth and, despite a concerted effort, it has continued to be difficult to replenish that inventory.

While we are dedicating significant resources to manage, mitigate, and resolve these issues, we currently expect supply chain challenges to continue to impact our ability to deliver products to our customers over the next several quarters.

If our actions to mitigate such challenges are not successful, material shortages could cause us to temporarily stop production of certain products.

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We have been subject to price increases on both the components used to make our products, and for moving unfinished goods and finished products across the globe.

Increased freight charges and shipping delays have also become more common during the pandemic and are expected to continue into the foreseeable future.

If we are not able to mitigate these price increases and/or raise prices for our products, our operations, cash flow, and financial position could be adversely impacted.

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

See Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information regarding the risks related to supply chain disruptions and logistical challenges on our business.

The escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine have introduced further uncertainty into the economic environment, which could impact our business.

Although the length and impact of the ongoing military conflict is highly unpredictable, the conflict in Ukraine could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions.

Poor relations between the United States and Russia;

sanctions by the United States, European Union, and other countries against Russia;

the response by Russia and other countries to these sanctions;

and any escalation of political tensions or economic instability in the area could have an adverse impact on our business, our customers, and our suppliers.

Further, our customers, suppliers, and other third parties with whom we do business may have staff, operations, materials or equipment located in Ukraine or Russia, which could impact our supply chain, the services being provided to us, or our financial condition or results of operations.

COVID-19 has adversely 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.

For example, increases in COVID-19 related employee absences may from time to time make it more difficult to manufacture our

The pandemic has also created significant volatility, uncertainty and economic disruption.

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

Local government lockdowns or prohibitions on travel could adversely affect our ability to manufacture or sell our products.

For example, the Chinese government has closed, and may in the future close, our factory in China for extended periods of time to combat COVID-19 infection rates in the region.

This could impact our ability to manufacture our products and provide service to our customers in the region.

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

the severity and duration of the COVID-19 pandemic;

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

the COVID-19 pandemic’s impact on the United 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.

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.

In addition, government action related to the COVID-19 pandemic, such as potential vaccine mandates or testing requirements, 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.

See Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information regarding the risks related to COVID-19 on our business.

Our business and financial results may be adversely affected by the effects of inflation

Inflation has the potential to adversely affect our liquidity, business, financial condition and results of operations by increasing our overall cost structure, particularly if we are unable to achieve commensurate increases in the prices we charge our customers.

The existence of inflation in the economy has resulted in, and may continue to result in, higher interest rates and capital costs, shipping costs, supply shortages, increased costs of labor, weakening exchange rates and other similar effects.

As a result of inflation, we have experienced and may continue to experience, cost increases.

Although we may take measures to mitigate the impact of this inflation, if these measures are not effective, our business, financial condition, results of operations and liquidity could be materially adversely affected.

Even if such measures are effective, there could be a difference between the timing of when these beneficial actions impact our results of operations and when the cost of inflation is incurred.

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 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 had one customer during the three months ended April 1, 2022 that accounted for 18% of its revenue.

Varex’s ten largest customers as a group accounted for approximately 51% and 52% of its revenue for the three months ended April 1, 2022 and April 2, 2021, respectively.

Varex’s ten largest customers as a group accounted for approximately 50% and 51% of its revenue for the six months ended April 1, 2022 and April 2, 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 65% of Varex’s total revenues for the three months ended December 31, 2021 and January 1, 2021, respectively.

Revenues generated from customers located outside the United States accounted for approximately 69% and 66% of Varex’s total revenues for the three months ended April 1, 2022 and April 2, 2021, respectively.

Revenues generated from customers located outside the United States accounted for approximately 70% and 66% of Varex’s total revenues for the six months ended April 1, 2022 and April 2, 2021, respectively.

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

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• the imposition by governments of additional taxes, tariffs, global economic sanctions programs, or other restrictions on foreign trade such as the tariffs recently put into place by both China and the United States;

• conflicts between countries, including the current military conflict between Russian and Ukraine, and related sanctions;

• any inability to obtain required export or import licenses or approvals, including the inability to obtain required export licenses during a U.S.

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A change in the percentage of Varex’s total earnings from the international subsidiaries, a change in the mix of particular tax jurisdictions between the international subsidiaries, or a change in currency exchange rates could cause Varex’s effective tax rate to increase.

The Tax Cuts and Jobs Act of 2017 (“U.S.

Tax Reform”) was signed into law on December 22, 2017.

Prior to the enactment of U.S.

Tax Reform, Varex was not taxed in the United States on certain undistributed earnings of certain foreign subsidiaries.

Furthermore, while U.S.

Tax Reform imposed a current tax on cumulative undistributed earnings, these earnings could also become subject to incremental foreign withholding or U.S.

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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.

In addition, poor relations between the United States and Russia;

sanctions by the United States, European Union, and other countries against Russia;

the response by Russia and other countries to these sanctions;

and any escalation of political tensions or economic instability in the area could have an adverse impact on our business, our customers, and our suppliers.

During fiscal year 2022, 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.

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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.

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.

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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.

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.

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Varex’s results have been and may continue to be affected by continuing worldwide economic instability, including changes in foreign currency exchange rates and fluctuations in the price of crude oil and other commodities.

The global economy has been impacted by a number of economic and political factors.

The global economy has been impacted by a number of economic and political factors, including the political conflict between Russia and Ukraine and the growing concern over inflation.

In many markets, these conditions have shrunk capital equipment budgets, slowed decision-making and made it difficult for Varex’s customers and vendors to accurately forecast and plan future business activities.

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• 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.

Varex’s international locations expose it to higher security risks compared to its U.S.

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.

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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.

An adverse finding in 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.

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If Varex cannot support its performance claims and demonstrate compliance with the applicable European laws and the Medical Device Directive, Varex would lose its right to affix the CE mark to its products, which would prevent Varex from selling its products within the EU/EEA/Switzerland territory and in other countries that recognize the CE mark.

In April 2017, the European Commission adopted two new regulations on medical devices.

These new regulations impose stricter requirements for placing medical devices in the EU market, as well as for Notified Bodies.

These new regulations have resulted in the limited availability of recognized Notified Bodies, which could delay our ability to obtaining CE marks.

In April 2017, the European Commission adopted two regulations on medical devices that impose stricter requirements for placing medical devices in the EU market, as well as for Notified Bodies.

These regulations have resulted in the limited availability of recognized Notified Bodies, which could delay our ability to obtaining CE marks.

Varex may be subject to risks associated with additional testing, modification, certification, or amendment of its existing market authorizations, or Varex may be required to modify products already installed at its customers’ facilities to comply with the official interpretations of these revised regulations.

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Laws and ethical rules governing interactions with healthcare providers .

Varex does not generally sell its products directly to healthcare providers, but may occasionally sell its products to healthcare providers through distributors.

Varex does not generally sell its products directly to healthcare providers, but may occasionally sell its products to healthcare providers through distributors or otherwise engage healthcare providers to provide services.

Medicare and Medicaid “anti-kickback” laws, and similar state laws, prohibit payments or other remuneration that is intended to induce hospitals, physicians, or others either to refer patients or to purchase, lease, or order, or to arrange for or recommend the purchase, lease, or order of healthcare products or services for which payment may be made under federal and state healthcare programs, such as Medicare and Medicaid.

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These laws may require Varex to implement the necessary and costly infrastructure to track and report certain payments to healthcare providers.

Failure to comply with these new tracking and reporting laws could subject Varex to significant civil monetary penalties.

Failure to comply with these tracking and reporting laws could subject Varex to significant civil monetary penalties.

From time to time, new laws or regulations may be adopted and compliance with these laws or regulations could be costly or time consuming.

For example, in July 2021, the U.S.

government passed the Uyghur Forced Labor Prevention Act (the “UFLPA”), which imposes importation limits on goods produced using forced labor in China, especially the Xinjiang Uyghur Autonomous Region, and imposes related sanctions.

Guidance related to compliance with the UFLPA has not yet been issued, and we cannot yet evaluate the impact that compliance with the UFLPA will have on our business or financial condition.

Varex is subject to similar laws in foreign countries where it conducts business.

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

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

As of April 1, 2022, Varex’s total combined indebtedness was approximately $451.6 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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We and our subsidiaries may be able to incur substantial indebtedness in the future.

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").

As of April 1, 2022, 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.

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The ABL Facility and the indenture governing our Senior Secured Notes impose significant operating and financial restrictions that may limit our current and future operating flexibility, particularly our ability to respond to changes in the economy or our industry or to take certain actions, which could harm our long-term interests and may limit our ability to make payments on the notes.

Our ABL Facility and the indenture governing our Senior Secured Notes impose significant operating and financial restrictions on us.

These restrictions limit our ability, among other things, to:

Our ABL Facility and the indenture governing our Senior Secured Notes impose significant operating and financial restrictions on us limit our ability, among other things, to:

• incur, assume or permit to exist additional indebtedness (including guarantees thereof);

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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