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Item 1A. Risk Factors

2023-05-02 compared with 2023-01-31 · 90 added, 114 removed, 655 unchanged (24% of the section changed)

Summary of Principal Risk Factors

Investing in Varex Imaging Corporation ("we," "our," "us," the "Company," "Varex," or "Varex Imaging") common stock involves risks.

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

• The global economy has been adversely impacted by economic instability and geopolitical tensions that have in the past adversely affected, and could in the future continue to adversely affect, our business, financial condition, operating results, cash flows and stock price.

Investing in Varex Imaging Corporation ("we," "our," "us," the "Company," or "Varex") common stock involves risks.

See below and Part I, Item 2 " Management’s Discussion and Analysis of Financial Condition and Results of Operations " and Part I, Item 3 " 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:

• The global economy has been and continues to be adversely impacted by economic instability and geopolitical tensions.

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

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• Our success depends on the successful acquisition, development, introduction, and commercialization of new lines of business, new technologies, new generations of products and enhancements to or simplifications of existing product lines.

• More than half our revenue is generated from customers located outside the United States and is subject to global, regional, and country-specific economic instability, shifting political environments, changing tax treatment, and other risks associated with international operations and sales that could materially and adversely impact our business and financial results.

• More than half of our revenue is generated from customers located outside the United States and is subject to global, regional, and country-specific economic instability, shifting political environments, changing tax treatment, and other risks associated with international operations and sales that could materially and adversely impact our business and financial results.

• 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 continuing economic disruptions.

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

• We may be unable to complete future acquisitions or realize expected benefits from acquisitions of or investments in new business, products, or technologies, which could harm our business.

• We may be unable to complete future acquisitions or realize expected benefits from acquisitions of or investments in new businesses, products, or technologies, which could harm our business.

• Warranty claims may materially and adversely affect our business.

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• Our business is subject to evolving Environmental, Social, and Governance (“ESG”) requirements and stakeholder expectations that could expose us to numerous risks.

• Supply chain disruptions, including the loss of a supplier, and any inability to obtain supplies of important components have impacted our ability to manufacture products, have caused delays in our ability to deliver products, and have increased our costs and may continue to do so.

• Shortages, changes in source of, and increases in prices for, raw materials have negatively impacted our ability to manufacture products, have caused delays, and have increased our cost of goods.

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

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

• Compliance with laws, regulations, certifications and registrations across the globe applicable to the marketing, manufacturing, sale, and distribution of our products and to our operations generally, may be costly, and failure to comply may result in our inability to sell products, unfavorable legal proceedings, significant penalties and other harm to our business.

• Compliance with laws, regulations, certifications and registrations across the globe applicable to our operations, and to the marketing, manufacturing, sale, and distribution of our products, may be costly, and failure to comply may result in our inability to sell products, unfavorable legal proceedings, significant penalties and other harm to our business.

• Initiation of legal proceedings, defense against legal proceedings and unfavorable results of legal proceedings could materially and adversely affect our financial results.

• We have significant debt obligations and could incur additional debt that could adversely affect our business, profitability, liquidity, credit rating, and ability to meet our obligations.

• Conversion of the Convertible Notes may dilute the ownership interest of our stockholders or may otherwise depress the market price of our common stock or may adversely affect our financial condition and operating results, and certain hedging positions we entered may affect the value of the Convertible Notes and the volatility and value of our common stock.

• Our Asset-Based Loan credit facility and the indenture governing our Senior Secured Notes 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.

• The ABL Facility and the indenture governing our Senior Secured Notes impose significant operating and financial restrictions that may limit 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.

• Conversion of our outstanding Convertible Notes may dilute the ownership interest of our stockholders, may otherwise depress the market price of our common stock, or may adversely affect our financial condition and operating results, and certain hedging positions we entered may affect the value of the Convertible Notes and the volatility and value of our common stock.

• Liabilities related to our operations when we were part of Varian Medical Systems, Inc., a Siemens Healthineers Company ("Varian"), or liabilities associated with the spin-off from Varian, could materially and adversely affect our business, financial condition, results of operations, and cash flows.

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Risks Relating to Our Business

The global economy has been adversely impacted by economic instability and geopolitical tensions that have in the past adversely affected, and could in the future continue to adversely affect, our business, financial condition, operating results, cash flows and stock price.

The global economy has been and continues to be adversely impacted by economic instability and geopolitical tensions.

In many markets where we operate, global economic instability and geopolitical tensions have contributed to, volatility in commodity prices, and in the credit and capital markets;

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the imposition of sanctions and countermeasures;

an energy crisis in Europe;

and increased likelihood of new and unfavorable trade regulations.

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Some countries have adopted, and may in the future adopt, austerity or stimulus programs that could negatively affect our results from period to period.

We have experienced, and continue to experience, difficulties in obtaining materials used to build our products and these difficulties have in the past impacted, and could in the future impact, 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 2023.

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 2022 and the first quarter of fiscal year 2023, inventory levels increased, however, uneven component flow and delayed deliveries impacted our ability to finish products resulting in higher inventory count.

If our actions to mitigate such challenges are not successful, material shortages could slow or 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.

We have experienced, and in some areas continue to experience, difficulties in obtaining materials used to build our products, and these difficulties have in the past impacted, and could in the future impact, our ability to deliver finished products to our customers.

If we are unable to produce and deliver products to our customers without unreasonable delay, those customers may seek alternative suppliers or decide to in-source certain products.

Further, our competitors with greater financial resources may be better able to restructure their manufacturing and supply chains in response to geopolitical and economic trends and thereby have a competitive advantage over us.

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 and continues to be impacted by the decreased availability of global transportation networks.

We have been and continue to be 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 continue to be adversely impacted.

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.

Inflation has the potential to increase our overall cost structure, particularly if we are unable to achieve commensurate increases in the prices we charge our customers.

In addition to material shortages, our ability to move unfinished goods and finished products around the world has been, and in some cases continues to be, impacted by the decreased availability of global transportation networks.

We have been and, in some cases, continue to be subject to price increases on both the components used to make our products, and for transportation of unfinished goods and finished products across the globe.

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

See Part I, Item 2 " 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, and economic pressures on our business.

Inflation has the potential to increase our overall cost structure.

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

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Dollars of products and services that we provide in foreign markets.

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

If the measures we take to mitigate the impact of inflation and exchange rate fluctuations are not effective, our business, financial condition, results of operations and liquidity could be materially adversely affected.

Even if such measures are effective, the benefits of such measures may not be realized until after the costs of inflation have been incurred.

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

We had one customer during the three months ended December 30, 2022 that accounted for 20% of our revenue.

Our ten largest customers as a group accounted for approximately 55% and 50% of our revenue for the three months ended December 30, 2022 and December 31, 2021, respectively.

Although we seek to broaden our customer base, we will continue to depend on sales to a relatively small number of major customers.

We had one customer during the three months ended March 31, 2023 that accounted for 18.3% of our revenue.

Our ten largest customers as a group accounted for approximately 53% and 51% of our revenue for the three months ended March 31, 2023 and April 1, 2022, respectively.

Our ten largest customers as a group accounted for approximately 51% and 50% of our revenue for the six months ended March 31, 2023 and April 1, 2022, respectively.

We will continue to depend on sales to a relatively small number of major customers.

Because we often take significant time to replace lost business, it is likely that our operating results would be materially and adversely affected if one or more of our major OEM customers were to cancel, delay, or reduce orders in the future.

Furthermore, we generate significant accounts receivables from the sale of our products and the provision of services directly to our major customers.

We had one customer during the three months ended December 30, 2022 that accounted for 9.2% of our accounts receivable.

We had one customer that accounted for 12.7% of our accounts receivables as of March 31, 2023.

If one or more of these customers were to cancel a product order or service contract (whether in accordance with its terms or otherwise), become insolvent, or otherwise be unable or fail to pay for our products and/or services, our operating results and financial condition could be materially and adversely affected.

We may not be able to accurately predict the demand or delivery schedules for our products.

End-user product demand, economic uncertainties, the COVID-19 pandemic, natural disasters, armed conflict, geopolitical tensions, and other matters beyond our control make it difficult for our customers to accurately forecast and plan future business activities;

End-user product demand, economic uncertainties, the impact of pandemic diseases, natural disasters, armed conflict, geopolitical tensions, and other matters beyond our control make it difficult for our customers to accurately forecast and plan future business activities;

which makes it difficult for us to accurately predict the demand for our products.

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Some competitors offer specialized products that provide, or may be perceived by customers to provide, an advantage over our products.

Also, some of our non-U.S.

competitors may not be subject to the same standards, regulatory and/or other legal requirements to which we are subject and, therefore, they could have a competitive advantage in developing, manufacturing and marketing products and services.

Also, some of our non-United States competitors may not be subject to the same standards, regulatory and/or other legal requirements to which we are subject and, therefore, they could have a competitive advantage in developing, manufacturing and marketing products and services.

Any inability to develop, gain regulatory approval for and supply commercial quantities of competitive products to the market as quickly and effectively as our competitors could limit market acceptance of our products and reduce our sales.

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We operate in a market characterized by rapid change and technological innovation, particularly with respect to flat panel technology.

Our customers use our products in their medical diagnostic, security, and industrial imaging systems, and we must continually introduce new products at competitive costs while also improving existing products with higher quality, lower costs, and increased features.

Our customers use our products in their medical diagnostic, security, and industrial imaging systems, and we must continually introduce new products at competitive prices while also improving existing products with higher quality, lower costs, and increased features.

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

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• price our products competitively and profitably, which can be particularly difficult with a strong U.S.

• manufacture, deliver, and install our products in sufficient volumes on time and accurately predict and control costs associated with manufacturing installation, warranty, and maintenance of the products;

• manufacture, deliver, and install our products on time in sufficient volumes and accurately predict and control costs associated with manufacturing installation, warranty, and maintenance of the products;

• appropriately manage our supply chain;

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• anticipate, respond to, and compete successfully with competitors.

Furthermore, as discussed in greater detail elsewhere in this “Risk Factors” section, we cannot be sure that we will be able to successfully develop, manufacture, or introduce new products or enhancements, the roll-out of which involves compliance with complex quality assurance processes, including the Quality System Regulation of the U.S.

Food and Drug Administration (“FDA”).

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We conduct business globally.

Revenues generated from customers located outside the United States accounted for approximately 64% and 70% of our total revenues for the three months ended December 30, 2022 and December 31, 2021, respectively.

Revenues generated from customers located outside the United States accounted for approximately 71% and 69% of our total revenues for the three months ended March 31, 2023 and April 1, 2022, respectively and approximately 70% and 70% of our total revenues for the six months ended March 31, 2023 and April 1, 2022, respectively.

As a result, we 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 put into place by both China and the United States;

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

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

government shutdown;

• conflicts between countries, including the current military conflict between Russia and Ukraine, and related sanctions, and growing tensions surrounding China and Taiwan;

• any inability to obtain required export or import licenses or approvals, including the inability to obtain required export licenses during a United States government shutdown;

• natural disasters and pandemics;

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• difficulties in protecting our intellectual property in foreign countries.

Although our sales fluctuate from period to period, in recent years our international operations have represented a larger share of our business.

In recent years our international operations have represented a larger share of our business.

The more we depend on international sales, the more vulnerable we become to these factors.

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 continuing economic disruptions.

The pandemic caused by the spread of COVID-19 adversely impacted our operations, cash flow, and financial position.

The pandemic created significant volatility, uncertainty and economic disruption that could continue into the future.

In addition, in part due to the COVID-19 pandemic, we have observed an overall tightening and increasingly competitive labor market, which has resulted in increased wages offered by other employers and voluntary attrition of employees in the industry, making it more difficult to recruit, hire, and retain talent.

New or continuing outbreaks of COVID-19 could have a negative impact on our business, 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 or to provide service to our customers or to meet and build relationships with customers, suppliers, or other third parties.

For example, the Chinese government has in the past closed, and, in light of surging infection and morbidity rates in China from the easing of China’s zero COVID-19 policy, may in the future close, our factory in China for extended periods of time to combat COVID-19 infection rates in the region.

Even though the effects of COVID-19 have been lessening worldwide, a resurgence of COVID-19 or other infections variants could have an adverse impact on our operating results, cash flows and financial condition.

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.

The pandemic caused by the spread of COVID-19 created significant volatility, uncertainty and economic disruption that has adversely impacted our operations, cash flow, and financial position.

Additionally, local government lockdowns and prohibitions on travel have at times in the past adversely affected our ability to manufacture and sell our products;

provide services to our customers;

or meet and build relationships with customers, suppliers, and other third parties.

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

A resurgence of COVID-19 or other infectious diseases could result in future governmental restrictions and shutdowns, which would have an adverse impact on our operating results, cash flows and financial condition.

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

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Competition for qualified personnel has increased over the past years.

As a result of the COVID-19 pandemic, we have observed an overall tightening and increasingly competitive labor market, which has resulted in increased wages offered by other employers and voluntary attrition of employees in the industry, making it more difficult to recruit, hire, and retain talent.

Because competition is intense, particularly in Utah, where unemployment rates are relatively low, compensation-related costs have and could continue to increase significantly.

We have observed an overall tightening and increasingly competitive labor market, which has resulted in increased wages offered by other employers and voluntary attrition of employees in the industry, making it more difficult to recruit, hire, and retain talent.

Because competition is intense, particularly in Utah, where unemployment rates are relatively low, compensation-related costs have increased, and could continue to increase, significantly.

If we are unable to hire and train qualified personnel, we may not be able to maintain or expand our business.

Additionally, our U.S.-based employees, including our senior management team, work for us on an at-will basis and there is no assurance that any such employee will remain with us.

Replacing key employees, including our Chief Executive Officer, and management personnel may be difficult or costly and may take an extended period of time because of the limited number of individuals in our industry and where we are located with the breadth of skills and experience that we require.

Further, in 2021 and into 2022, the labor market in the U.S.

experienced significant increases in workers leaving their positions (often referred to as the "Great Resignation"), which made the market to replace these individuals competitive and resulted in significant wage inflation in response to labor shortages.

During the Great Resignation, we have faced and may continue to face increased challenges of employee attraction and retention.

Additionally, our United States-based employees, including our senior management team, work for us on an at-will basis and there is no assurance that any such employee will remain with us.

Replacing key employees, including our executive officers, and management personnel may be difficult or costly and may take an extended period of time because of the limited number of individuals in our industry and where we are located with the breadth of skills and experience that we require.

We have faced and may continue to face increased challenges of employee attraction and retention.

To the extent we hire employees from competitors, we also may be subject to allegations that they have been improperly solicited or divulged proprietary or other confidential information.

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In addition, some of our products are multi-purpose products designed and intended to be used by OEMs and end users for a wide range of imaging and irradiation purposes including for use in new and emerging industries.

Certain of these industries may be subject to varying, inconsistent, and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions.

The demand for our products may be negatively impacted depending on how laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions develop, and we cannot reasonably predict the nature of these developments or the effect, if any, that these developments could have on our business.

We cannot reasonably predict the nature of these developments or the effect, if any, that these developments could have on our business.

We may be unable to complete future acquisitions or realize expected benefits from acquisitions of or investments in new businesses, products, or technologies, which could harm our business.

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Because our products, through incorporation into OEMs’ systems, are involved in the intentional delivery of radiation to the human body and other situations where people may come into contact with radiation (for example, when our 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 our products are incorporated into OEMs’ systems, and thus only perform pursuant to the design and operating systems of OEMs, we may also be subject to claims for property damage, personal injury, or economic loss related to or resulting from any errors or defects in our products or the installation, servicing, or support of our products.

We may also be subject to claims for property damage, personal injury, or economic loss related to or resulting from any errors or defects in our products or the installation, servicing, or support of our products.

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

If our X-ray inspection systems fail to detect the presence of bombs, explosives, weapons, contraband, or other threats to personal safety, we 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 our common stock.

There are many factors beyond our control that could result in the failure of our 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 our equipment.

There are many factors beyond our control that could result in such a failure, including operator error and misuse of or malfunction of our equipment.

The failure of our 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 us.

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As a result, the value and liquidity of our cash, cash equivalents and marketable securities may fluctuate substantially.

Therefore, although we have not realized any significant losses on our cash, cash equivalents and marketable securities, future fluctuations in their value could result in significant losses and could have a material adverse impact on our financial condition and operating results.

See Quantitative and Qualitative Disclosures about Market Risks for more information regarding the risks related to credit risks and fluctuations on our business.

Future fluctuations in their value could result in significant losses and could have a material adverse impact on our financial condition and operating results.

See Part I, Item 3 " Quantitative and Qualitative Disclosures about Market Risk " for more information regarding the risks related to credit risks and fluctuations on our business.

Our business is subject to evolving ESG requirements and stakeholder expectations that could expose us to numerous risks.

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In addition, our customers have adopted, and may continue to adopt, procurement policies that require us to comply with social, and environmental responsibility provisions.

An increasing number of investors have adopted, and may continue to adopt, ESG policies for their portfolio companies, and various voluntarily sustainability initiatives and organizations have promulgated different social and environmental responsibility and sustainability guidelines.

An increasing number of investors have adopted, and may continue to adopt, ESG policies for their portfolio companies, and various voluntary sustainability initiatives and organizations have promulgated different social and environmental responsibility and sustainability guidelines.

These practices, policies, provisions, and initiatives are under active development, subject to change, can be unpredictable and conflicting, and may prove difficult and expensive for us to comply with and could negatively affect our reputation, business, or financial condition.

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Supply chain disruptions, including the loss of a supplier, and any inability to obtain supplies of important components have impacted our ability to manufacture products, have caused delays in our ability to deliver products, and have increased our costs and may continue to do so.

As discussed under the heading " Risks Relating to Our Business " above, supply chain disruptions have had, and will likely continue to have, an impact on our ability to manufacture our products.

We have experienced delays in receiving materials used to make our products due both to material shortages and shipping delays.

These delays are likely to continue.

Material shortages have caused, and could continue to cause, us to temporarily stop production of certain products or miss opportunities to pursue additional product sales.

If we are unable to obtain the materials necessary to make our products or if we must pay more for those materials, it could have a material adverse effect on our business and financial results.

As discussed under the heading " Risks Relating to Our Business " above, supply chain disruptions have had, and could continue to have, an impact on our ability to manufacture certain products.

We have experienced some delays in receiving materials used to make certain products due both to material shortages and shipping delays.

These delays for certain products could continue in the future.

Material shortages have caused, and could in the future cause, us to temporarily stop production of certain products or miss opportunities to pursue additional sales of some products.

If we are unable to obtain the materials necessary to make certain products or if we must pay more for certain materials, it could have a material adverse effect on our business and financial results.

We obtain some of the components included in our products from a limited group of suppliers or from sole-source suppliers, such as wave guides for industrial linear accelerators, transistor arrays, cesium iodide coatings and specialized integrated circuits for flat panel detectors, X-ray tube targets, housings, glass frames, high-voltage cable, bearings and various other components.

For example, our major supplier of our amorphous silicon-based thin film transistor arrays for flat panels used in our digital image detectors is dpiX LLC.

Although we hold a 40% ownership interest in dpiX, we do not have majority voting rights or the power to direct the activities of dpiX.

We do not have majority voting rights or the power to direct the activities of dpiX.

In addition, Varian is our sole source supplier for a key component in linear accelerators used in our security and inspection products subsystems, which are specially made for us.

If current suppliers cease producing these or other components, there can be no assurance that the components will be available from other suppliers on reasonable terms or at all.

If current suppliers cease producing these or other components, or fail to provide products on our delivery timelines, there can be no assurance that the components will be available from other suppliers on reasonable terms or at all, and this could materially and adversely affect out business and financial results.

If we lose any of these limited- or sole-source suppliers, if their operations are substantially interrupted, or if any of them fail to meet performance or quality specifications or delivery deadlines, we may be required to obtain and qualify one or more replacement suppliers or to manufacture the components internally.

Such an event (1) may then also require us to redesign or modify our products to incorporate new parts and/or further require us to obtain clearance, qualification, or certification of these products, including by the FDA, or obtain other applicable regulatory approvals in other countries, or (2) could significantly increase costs for the affected products and cause material delays in delivery of those and other related products.

Such an event (1) may then also require us to redesign or modify our products to incorporate new parts and/or further require us to obtain clearance, qualification, or certification of these products, including by the FDA, or obtain other applicable regulatory approvals in other countries, (2) could significantly increase costs for the affected products and cause material delays in delivery of those and other related products, or (3) could prevent us from meeting our delivery obligations to our customers.

In addition, manufacturing capacity limitations of any of our suppliers or other inability of these suppliers to meet increasing demand or delivery deadlines could limit growth opportunities for the affected product lines and damage customer relationships.

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In addition, we may encounter challenges in satisfying customers who require that all of the components of our products are certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so.

Moreover, complying with these rules requires investigative efforts, which has and will continue to cause us to incur associated costs and could materially and adversely affect the sourcing, supply, and pricing of materials used in our products or result in process or manufacturing modifications, all of which could materially and adversely affect our results of operations.

Moreover, complying with these rules requires investigative efforts, which has caused, and will continue to cause, us to incur associated costs and could materially and adversely affect the sourcing, supply, and pricing of materials used in our products or result in process or manufacturing modifications, all of which could materially and adversely affect our results of operations.

If we are not able to match our manufacturing capacity with demand for our products, our financial results may suffer.

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

The demand for our 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.

The demand for our security and inspection products is heavily influenced by United States and foreign governmental policies on national and homeland security, border protection, and customs activities, which depend upon government budgets and appropriations that are subject to economic conditions, as well as political changes and oil prices.

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

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• inadequacy of the local infrastructure to support our operations.

Our international locations expose us to higher security risks compared to our U.S.

locations, which could result in both harm to our employees and contractors or substantial costs.

Our international locations expose us to higher security risks compared to our United States locations, which could result in both harm to our employees and contractors or substantial costs.

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

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If any of our customers’ facilities are adversely affected by such a disaster or event, shipments of our products could be delayed.

Additionally, customers may delay purchases of our products until our operations return to normal.

Additionally, customers may delay purchases of our products until our or their operations return to normal.

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

Even if our suppliers or customers are able to quickly respond to such a disaster or event, the ongoing effects of such a disaster or event could create some uncertainty in the operations of our business.

Even if our suppliers or customers are able to quickly respond to such a disaster or event, the ongoing effects could create some uncertainty in the operations of our business.

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

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Tariffs on items imported by us from China and other countries have increased our costs and have increased prices and lowered gross margins on some of our products, thereby having a direct adverse impact on our business and results of operations.

China has imposed retaliatory tariffs that impact a number of our products, including U.S.

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

China has imposed retaliatory tariffs that impact a number of our products, including United States origin X-ray tubes, heat exchange units, and certain flat panel detectors.

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 our products.

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Our effective tax rate is impacted by tax laws in both the United States and in foreign countries.

Earnings from our international subsidiaries are generally taxed at rates that differ from U.S.

Earnings from our international subsidiaries are generally taxed at rates that differ from United States rates.

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

Furthermore, while U.S.

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

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

Statutory changes included in proposed U.S.

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

Furthermore, while United States tax reform imposed a current tax on cumulative undistributed earnings, these earnings could also become subject to incremental foreign withholding or United States state taxes should they actually be remitted to the United States, in which case our financial results could be materially and adversely affected.

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

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

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

Compliance with foreign laws and regulations applicable to the marketing, manufacturing, and distribution of our products may be costly, and failure to comply may result unfavorable legal proceedings, in significant penalties and other harm to our business.

Compliance with foreign laws and regulations applicable to the marketing, manufacturing, and distribution of our products may be costly, and failure to comply may result in unfavorable legal proceedings, in significant penalties and other harm to our business.

Regulatory requirements affecting our operations and sales outside the United States vary from country to country, often differing significantly from those in the United States.

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Sales overseas are also affected by regulation of matters such as product standards, packaging, labeling, environmental and product recycling requirements, import and export restrictions, tariffs, duties, and taxes.

In addition, we are required to timely file various reports with international regulatory authorities similar to the reports we are required to timely file with U.S.

regulatory authorities, including reports required by international adverse event reporting regulations.

In addition, we are required to timely file various reports with international regulatory authorities similar to the reports we are required to timely file with United States regulatory authorities, including reports required by international adverse event reporting regulations.

If these reports are not timely filed, regulators may impose sanctions, including temporarily suspending our market authorizations or CE mark, and sales of our products may suffer.

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

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

Compliance with U.S.

laws and regulations applicable to the marketing, manufacturing, and distribution of our products may be costly, and failure or delays in obtaining regulatory clearances or approvals or failure to comply with applicable laws and regulations could prevent us from distributing our products, require us to recall our products, or result in unfavorable legal proceedings, significant penalties or other harm to our business.

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

Compliance with United States laws and regulations applicable to the marketing, manufacturing, and distribution of our products may be costly, and failure or delays in obtaining regulatory clearances or approvals or failure to comply with applicable laws and regulations could prevent us from distributing our products, require us to recall our products, or result in unfavorable legal proceedings, significant penalties or other harm to our business.

Some of our products and those of OEMs that incorporate our products are subject to extensive and rigorous government regulation in the United States.

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

Generally, our manufacturing operations for medical devices, and those of our 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.

Generally, our manufacturing operations for medical devices, and those of our third-party manufacturers, are required to comply with the QSR of the FDA, as well as other federal and state regulations for medical devices and radiation-emitting products.

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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In addition, failure to comply with these laws, rules and regulations could delay the introduction of new products and could materially and adversely affect our business.

If we or any of our suppliers, distributors, agents, or customers fail to comply with FDA, Federal Trade Commission, or other applicable U.S.

regulatory requirements or are perceived to have failed to comply with regulations, we may face:

If we or any of our suppliers, distributors, agents, or customers fail to comply with FDA, Federal Trade Commission, or other applicable United States regulatory requirements or are perceived to have failed to comply with regulations, we may face:

• adverse publicity affecting both us and our customers;

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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.

For example, in July 2021, the United States 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.

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Our manufacture, distribution, installation, service, and removal of industrial devices utilizing radioactive material or emitting radiation also requires us to obtain a number of licenses and certifications for these devices and materials.

Service of these products must also be performed in accordance with a specific radioactive materials licenses.

Service of these products must also be performed in accordance with specific radioactive materials licenses.

Obtaining licenses and certifications may be time consuming, expensive, and uncertain.

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Modifications or enhancements to a product that could significantly affect its safety or effectiveness, or that would constitute a major change in the intended use of the device, technology, materials, labeling, packaging, or manufacturing process also require a new 510(k) clearance.

Although manufacturers make the initial determination whether a change to a cleared device requires a new 510(k) clearance, we cannot ensure that the FDA will agree with our decisions not to seek additional approvals or clearances for particular modifications to our products or that we will be successful in obtaining new 510(k) clearances for modifications.

We cannot ensure that the FDA will agree with our decisions not to seek additional approvals or clearances for particular modifications to our products or that we will be successful in obtaining new 510(k) clearances for modifications.

Obtaining clearances or approvals is time consuming, expensive, and uncertain.

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As a consequence, we can incur significant environmental costs and liabilities, some recurring and others not recurring.

Although we follow procedures intended to comply with existing environmental laws, we, like other businesses, may mishandle or inadequately manage hazardous substances used in our manufacturing operations and can never completely eliminate the risk of contamination or injury from certain materials that we use in our business and, therefore, we cannot completely eliminate the prospect of resulting claims and damage payments.

Like other businesses, we may mishandle or inadequately manage hazardous substances used in our manufacturing operations and can never completely eliminate the risk of contamination or injury from certain materials that we use in our business and, therefore, we cannot completely eliminate the prospect of resulting claims and damage payments.

We may also be assessed fines and/or other penalties for failure to comply with environmental laws and regulations.

Insurance has provided coverage for portions of cleanup costs resulting from historical occurrences, but we do not expect to maintain insurance coverage for costs or claims that might result from any future contamination.

Pursuant to the Separation and Distribution Agreement we entered into with Varian when we spun off from Varian, we are obligated to indemnify Varian for 20% of the cleanup liabilities related to prior corporate restructuring activities while a division of Varian.

This includes facilities sold as part of Varian’s electron devices business in 1995 and thin film systems business in 1997.

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We anticipate that we will be obligated to reimburse Varian for 20% of the liabilities of Varian related to these CERCLA sites (after adjusting for any insurance proceeds or tax benefits received by Varian).

In connection with the CERCLA sites, to date Varian has been required to pay only a small portion of the total cleanup costs and we currently anticipate that any reimbursement to Varian in the future will not be material.

We assess this indemnification obligation quarterly with Varian and make accruals accordingly.

These accruals can sometimes fluctuate significantly from period to period.

Future changes in environmental laws could also increase our costs of doing business, perhaps significantly.

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

As of December 30, 2022, our total combined indebtedness was approximately $449.7 million.

As of March 31, 2023, our total combined indebtedness was approximately $449.4 million.

The borrowings under our Convertible Senior Unsecured Notes due 2025 (the “Convertible Notes”) bear interest at a fixed rate of 4.00% and borrowings under our 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 30, 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").

As of March 31, 2023, after adjustment to our available borrowing base under the $100 million revolving credit agreement we entered into on September 30, 2020 (the “Asset-Based Loan,” or "ABL Facility"), we had approximately $90 million of additional available borrowing capacity.

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.

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

Furthermore, the covenants in the indenture governing our Convertible Notes do not restrict the incurrence of indebtedness by us or any of our subsidiaries, and the covenants that may be contained in any future debt instruments could allow us to incur a significant amount of additional indebtedness.

The more leveraged we become, the more we, and in turn holders of our notes, will be exposed to certain risks described above under “ Risks Relating to Our Indebtedness—We have significant debt obligations that could adversely affect our business, profitability and ability to meet our obligations .”

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

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compliance with a fixed charge coverage ratio that is included in our ABL Facility;

interest rate fluctuations and the adverse impact of the COVID-19 outbreak on the U.S.

interest rate fluctuations and the lingering impact of the COVID-19 outbreak on the United States.

and world-wide economies and on our business.

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

During the year ended December 30, 2022, our stock price has ranged from a low of $18.90 to a high of $32.41.

During the year ended March 31, 2023, our stock price has ranged from a low of $17.22 to a high of $23.78.

We cannot guarantee that an active trading market will be sustained for our common stock.

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Because many of our 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 our gross margins fall below the expectation of securities analysts and investors, the trading price of our common stock may decline.

If our gross margins fall below the expectation of securities analysts and investors, the trading price of our common stock has declined in the past and may decline again in the future.

Conversion of the Convertible Notes may dilute the ownership interest of our stockholders or may otherwise depress the market price of our common stock.

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These and other provisions in our indenture could deter or prevent a third party from acquiring us even when the acquisition may be favorable to holders of the Convertible Notes or our stockholders.

Liabilities related to our operations when we were part of Varian, or liabilities associated with our spin-off from Varian, could materially and adversely affect our business, financial condition, results of operations, and cash flows.

Liabilities related to our operations when we were part of Varian, or liabilities associated with the spin-off from Varian, could materially and adversely affect our business, financial condition, results of operations, and cash flows.

We entered into a Separation and Distribution Agreement when we spun off from Varian.

The agreement provides for, among other things, indemnification obligations designed to make Varex financially responsible for liabilities allocable to Varex before the spin-off;

and for information contained in our registration statement that describes Varex, our separation from Varian, and the transactions contemplated by the Separation and Distribution Agreement.

The Separation and Distribution Agreement also provides for indemnification obligations designed to make Varian financially responsible for liabilities allocable to Varian before the spin-off.

The agreement provides for, among other things, indemnification obligations designed to make Varex financially responsible for information contained in our registration statement that describes Varex, our separation from Varian, the transactions contemplated by the Separation and Distribution Agreement, and liabilities that were allocable to Varex before the spin-off.

We may be subject to substantial liabilities if we were required to indemnify Varian or if Varian were required, but unable, to indemnify us.

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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