Varex Imaging Corp - Quarter Report: 2020 July (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________________________

FORM 10-Q

____________________________________________________________


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 3, 2020


☐			TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-37860

____________________________________________________________

VAREX IMAGING CORPORATION

(Exact name of registrant as specified in its charter)

____________________________________________________________

Delaware

81-3434516

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

1678 S. Pioneer Road

Salt Lake City

Utah

84104

(Address of principal executive offices)

(Zip Code)

(801) 972-5000

(Registrant’s telephone number, including area code)

____________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	VREX	The Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated filer

☒

Accelerated filer

☐

Non-Accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 3, 2020, there were 39.1 million shares of the registrant’s common stock outstanding.

VAREX IMAGING CORPORATION

FORM 10-Q for the Quarter Ended July 3, 2020

INDEX

Part I.

Financial Information

Item 1.

Unaudited Financial Statements

Condensed Consolidated Statements of Operations

Condensed Consolidated Statements of Comprehensive (Loss) Earnings

Condensed Consolidated Balance Sheets

Condensed Consolidated Statements of Cash Flows

Condensed Consolidated Statements of Equity

Notes to the Condensed Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

VAREX IMAGING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended						Nine Months Ended
(In millions, except per share amounts)	July 3, 2020		June 28, 2019		July 3, 2020		June 28, 2019
Revenues, net	$	171.2	$	196.7	$	568.3	$	578.2
Cost of revenues	144.9		136.0		423.3		393.1
Gross margin	26.3		60.7		145.0		185.1
Operating expenses:
Research and development	19.0		20.9		61.6		58.5
Selling, general and administrative	31.4		31.2		101.5		92.3
Impairment of intangible assets	2.7		4.0		2.7		4.8
Total operating expenses	53.1		56.1		165.8		155.6
Operating (loss) earnings	(26.8)		4.6		(20.8)		29.5
Interest income	—		—		0.1		0.1
Interest expense	(6.9)		(5.1)		(16.9)		(15.7)
Other expense, net	(6.1)		(0.1)		(4.5)		(2.6)
Interest and other expense, net	(13.0)		(5.2)		(21.3)		(18.2)
(Loss) earnings before taxes	(39.8)		(0.6)		(42.1)		11.3
Income tax (benefit) expense	(11.6)		0.7		(10.9)		3.7
Net (loss) earnings	(28.2)		(1.3)		(31.2)		7.6
Less: Net earnings attributable to noncontrolling interests	0.1		0.1		0.3		0.2
Net (loss) earnings attributable to Varex	$	(28.3)	$	(1.4)	$	(31.5)	$	7.4
Net (loss) earnings per common share attributable to Varex
Basic	$	(0.73)	$	(0.04)	$	(0.81)	$	0.19
Diluted	$	(0.73)	$	(0.04)	$	(0.81)	$	0.19
Weighted average common shares outstanding
Basic	39.0		38.3		38.7		38.2
Diluted	39.0		38.3		38.7		38.4

See accompanying notes to the condensed consolidated financial statements.

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VAREX IMAGING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) EARNINGS

(Unaudited)


	Three Months Ended						Nine Months Ended
(In millions)	July 3, 2020		June 28, 2019		July 3, 2020		June 28, 2019
Net (loss) earnings	$	(28.2)	$	(1.3)	$	(31.2)	$	7.6
Other comprehensive (loss) earnings, net of tax:
Unrealized (loss)/gain on interest rate swap contracts	0.3		(2.3)		(2.0)		(6.0)


Foreign currency translation adjustments	(3.7)		(0.2)		0.6		(0.2)
Other comprehensive (loss) earnings, net of tax	(3.4)		(2.5)		(1.4)		(6.2)
Comprehensive (loss) earnings	(31.6)		(3.8)		(32.6)		1.4
Less: Comprehensive earnings attributable to noncontrolling interests	0.1		0.1		0.3		0.2
Comprehensive (loss) earnings attributable to Varex	$	(31.7)	$	(3.9)	$	(32.9)	$	1.2

See accompanying notes to the condensed consolidated financial statements.

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VAREX IMAGING CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


(In millions, except share and per share amounts)	July 3, 2020		September 27, 2019
Assets
Current assets:
Cash and cash equivalents	$	87.4	$	29.9
Accounts receivable, net	109.7		141.0
Inventories	283.2		248.2
Prepaid expenses and other current assets	18.6		19.3
Total current assets	498.9		438.4
Property, plant and equipment, net	145.5		142.3
Goodwill	290.8		290.8
Intangible assets, net	70.6		86.3
Investments in privately-held companies	50.9		53.6
Deferred tax assets	6.3		—
Operating lease assets	29.6		—
Other assets	29.1		27.5
Total assets	$	1,121.7	$	1,038.9
Liabilities, redeemable noncontrolling interests and equity
Current liabilities:
Accounts payable	$	79.8	$	58.2
Accrued liabilities and other current liabilities	69.5		75.7
Current operating lease liabilities	5.6		—
Current maturities of long-term debt	27.6		30.7
Deferred revenues	9.4		10.5
Total current liabilities	191.9		175.1
Long-term debt, net	389.5		364.4
Deferred tax liabilities	—		8.2
Operating lease liabilities	24.1		—
Other long-term liabilities	35.1		32.5
Total liabilities	640.6		580.2
Commitments and contingencies
Redeemable noncontrolling interests	10.8		10.5
Equity:
Preferred stock, $.01 par value: 20,000,000 shares authorized, none issued	—		—
Common stock, $.01 par value: 150,000,000 shares authorized

Shares issued and outstanding - 39,056,965 and 38,371,305 at July 3, 2020 and September 27, 2019, respectively.	0.4		0.4

Additional paid-in capital	427.2		371.8
Accumulated other comprehensive loss	(3.1)		(1.7)
Retained earnings	42.6		74.4
Total Varex equity	467.1		444.9
Noncontrolling interests	3.2		3.3
Total equity	470.3		448.2
Total liabilities, redeemable noncontrolling interests and equity	$	1,121.7	$	1,038.9

See accompanying notes to the condensed consolidated financial statements.

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VAREX IMAGING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended
(In millions)	July 3, 2020		June 28, 2019
Cash flows from operating activities:
Net (loss) earnings	$	(31.2)	$	7.6
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Share-based compensation expense	10.2		8.7

Depreciation	17.3		18.7
Amortization of intangible assets	13.1		11.4
Deferred taxes	(15.6)		(5.7)
Loss from equity method investments	1.6		0.7

Amortization of deferred loan costs	2.3		1.8
Impairment of assets	5.4		4.8
Inventory write-down	15.8		3.1
Other, net	0.7		1.0
Changes in assets and liabilities, net of effects of acquisition:
Accounts receivable	31.6		25.1
Inventories	(50.1)		(26.2)
Prepaid expenses and other assets	(7.7)		4.7
Accounts payable	21.7		(4.3)
Accrued liabilities and other current and long-term operating liabilities	11.0		(0.5)
Deferred revenues	(1.1)		(1.9)
Net cash provided by operating activities	25.0		49.0
Cash flows from investing activities:
Purchases of property, plant and equipment	(19.5)		(13.3)

Acquisitions of businesses, net of cash acquired	(1.2)		(69.5)
Investments in privately-held companies	(2.5)		(3.6)

Net cash used in investing activities	(23.2)		(86.4)
Cash flows from financing activities:


Borrowings under credit agreements	91.7		79.0
Repayments of borrowing under credit agreements	(218.0)		(65.7)
Proceeds from issuance of convertible debt	200.0		—
Proceeds from issuance of warrants	49.8		—
Purchases of hedges	(61.0)		—
Payment of debt issuance costs	(8.5)		(0.5)
Proceeds from exercise of stock options	1.5		0.2
Proceeds from shares issued under employee stock purchase plan	3.6		3.8
Taxes related to net share settlement of equity awards	(1.8)		(2.1)
Other financing activities	(0.6)		—
Net cash provided by financing activities	56.7		14.7
Effects of exchange rate changes on cash and cash equivalents and restricted cash	(1.0)		(0.7)
Net increase (decrease) in cash and cash equivalents and restricted cash	57.5		(23.4)
Cash and cash equivalents and restricted cash at beginning of period	31.3		53.4
Cash and cash equivalents and restricted cash at end of period	$	88.8	$	30.0
Supplemental cash flow information:
Cash paid for interest	$	11.6	$	13.7
Cash paid for income tax	6.8		3.8
Supplemental non-cash activities:
Purchases of property, plant and equipment financed through accounts payable	$	1.1	$	0.2

See accompanying notes to the condensed consolidated financial statements.

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VAREX IMAGING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)


	Three Months Ended July 3, 2020
	Common Stock					Additional Paid-in Capital			Accumulated Other Comprehensive Income		Retained Earnings		Total Varex Equity		Noncontrolling Interests		Total Equity

(In millions)	Shares	Amount
April 3, 2020	38.7	$	0.4	$	379.5		$	0.3	$	70.9	$	451.1	$	3.2	$	454.3

Net loss	—	—		—			—		(28.3)		(28.3)		—		(28.3)



Common stock issued under employee stock purchase plan	0.1	—		1.8			—		—		1.8		—		1.8
Share-based compensation	—	—		3.7			—		—		3.7		—		3.7
Unrealized loss on interest rate swap contracts, net of tax	—	—		—			0.3		—		0.3		—		0.3
Conversion feature of Convertible Notes, net of issuance costs	—	—		46.1			—		—		46.1		—		46.1
Purchase of hedges	—	—		(61.0)			—		—		(61.0)		—		(61.0)
Issuance of warrants	—	—		49.8			—		—		49.8		—		49.8
Currency translation adjustments	—	—		—			(3.7)		—		(3.7)		—		(3.7)
Shares issued to settle deferred consideration	0.3	—		7.4			—		—		7.4		—		7.4
Other	—	—		(0.1)			—		—		(0.1)		—		(0.1)
July 3, 2020	39.1	$	0.4	$	427.2		$	(3.1)	$	42.6	$	467.1	$	3.2	$	470.3


	Three Months Ended June 28, 2019
	Common Stock					Additional Paid-in Capital			Accumulated Other Comprehensive Income		Retained Earnings		Total Varex Equity		Noncontrolling Interests		Total Equity

(In millions)	Shares	Amount
March 29, 2019	38.2	$	0.4	$	363.1		$	2.1	$	67.7	$	433.3	$	1.9	$	435.2

Net loss	—	—		—			—		(1.4)		(1.4)		—		(1.4)



Common stock issued upon vesting of restricted shares	0.1	—		1.9			—		—		1.9		—		1.9
Share-based compensation	—	—		3.1			—		—		3.1		—		3.1
Unrealized loss on interest rate swap contracts, net of tax	—	—		—			(2.3)		—		(2.3)		—		(2.3)



Currency translation adjustments	—	—		—			(0.2)		—		(0.2)		—		(0.2)
Noncontrolling interest acquired / consolidated	—	—		—			—		—		—		1.4		1.4

June 28, 2019	38.3	$	0.4	$	368.1		$	(0.4)	$	66.3	$	434.4	$	3.3	$	437.7

See accompanying notes to the condensed consolidated financial statements.

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VAREX IMAGING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)


	Nine Months Ended July 3, 2020
	Common Stock					Additional Paid-in Capital			Accumulated Other Comprehensive Loss		Retained Earnings		Total Varex Equity		Noncontrolling Interests		Total Equity

(In millions)	Shares	Amount
September 27, 2019	38.4	$	0.4	$	371.8		$	(1.7)	$	74.4	$	444.9	$	3.3	$	448.2
Cumulative effect of accounting change	—	—		—			—		(0.3)		(0.3)		—		(0.3)
Net loss	—	—		—			—		(31.5)		(31.5)		(0.1)		(31.6)
Exercise of stock options	0.1	—		1.5			—		—		1.5		—		1.5
Common stock issued upon vesting of restricted shares	0.2	—		—			—		—		—		—		—
Shares withheld on vesting of restricted stock	(0.1)	—		(1.8)			—		—		(1.8)		—		(1.8)
Common stock issued under employee stock purchase plan	0.2	—		3.6			—		—		3.6		—		3.6
Share-based compensation	—	—		10.2			—		—		10.2		—		10.2
Unrealized loss on interest rate swap contracts, net of tax	—	—		—			(2.0)		—		(2.0)		—		(2.0)
Conversion feature of Convertible Notes, net of issuance costs	—	—		46.1			—		—		46.1		—		46.1
Purchase of hedges	—	—		(61.0)			—		—		(61.0)		—		(61.0)
Issuance of warrants	—	—		49.8			—		—		49.8		—		49.8
Currency translation adjustments	—	—		—			0.6		—		0.6		—		0.6



Shares issued to settle deferred consideration	0.3	—		7.4			—		—		7.4		—		7.4
Other	—	—		(0.4)			—		—		(0.4)		—		(0.4)
July 3, 2020	39.1	$	0.4	$	427.2		$	(3.1)	$	42.6	$	467.1	$	3.2	$	470.3


	Nine Months Ended June 28, 2019
	Common Stock					Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Total Varex Equity		Noncontrolling Interests		Total Equity

(In millions)	Shares	Amount
September 28, 2018	38.0	$	0.4	$	357.6		$	5.8	$	62.4	$	426.2	$	2.1	$	428.3
Cumulative effect of accounting change	—	—		—			—		(3.5)		(3.5)		—		(3.5)
Net earnings	—	—		—			—		7.4		7.4		(0.2)		7.2
Exercise of stock options	—	—		0.1			—		—		0.1		—		0.1
Common stock issued upon vesting of restricted shares	0.2	—		—			—		—		—		—		—
Shares withheld on vesting of restricted stock	(0.1)	—		(2.1)			—		—		(2.1)		—		(2.1)
Common stock issued under employee stock purchase plan	0.2	—		3.8			—		—		3.8		—		3.8
Share-based compensation	—	—		8.7			—		—		8.7		—		8.7
Unrealized loss on interest rate swap contracts, net of tax	—	—		—			(6.0)		—		(6.0)		—		(6.0)



Currency translation adjustments	—	—		—			(0.2)		—		(0.2)		—		(0.2)
Noncontrolling interest acquired / consolidated	—	—		—			—		—		—		1.4		1.4

June 28, 2019	38.3	$	0.4	$	368.1		$	(0.4)	$	66.3	$	434.4	$	3.3	$	437.7

See accompanying notes to the condensed consolidated financial statements.

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VAREX IMAGING CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Varex Imaging Corporation (the “Company,” “Varex” or “Varex Imaging”) designs, manufactures, sells and services a broad range of Medical products, which include X-ray imaging components, including X-ray tubes, digital detectors and accessories, high voltage connectors, image processing software and workstations, computer-aided diagnostic software, collimators, automatic exposure control devices, generators, ionization chambers and buckys, for use in a range of applications, including radiographic or fluoroscopic imaging, mammography, computed tomography, oncology and computer-aided detection. The Company sells its products to imaging system original equipment manufacturer (“OEM”) customers for incorporation into new medical diagnostic, radiation therapy, dental, and veterinary imaging systems, to independent service companies, distributors and directly to end-users for replacement purposes.

The Company also designs, manufacturers, sells and services industrial products, which include Linatron^® X-ray accelerators, imaging processing software and image detection products for security and inspection purposes, such as cargo screening at ports and borders and nondestructive examination in a variety of applications. The Company generally sells security and inspection products to OEM customers who incorporate Varex’s products into their inspection systems. The Company conducts an active research and development program to focus on new technology and applications in both the medical and industrial X-ray imaging markets.

Varex Imaging Corporation was incorporated in Delaware on July 18, 2016 and is listed on the NASDAQ Global Select Market under the ticker “VREX.”

Basis of Presentation and Principle of Consolidation

The accompanying condensed consolidated financial statements are unaudited. These condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, these condensed consolidated financial statements include all adjustments necessary for a fair statement of the results for the interim periods.

These condensed consolidated financial statements and the accompanying notes are unaudited and should be read in conjunction with the consolidated financial statements for the fiscal years ended 2019, 2018 and 2017 included in the Company’s Form 10-K, which was filed with the SEC on December 20, 2019. The Company considers events or transactions that occur after the balance sheet date, but before the financial statements are issued, to provide additional evidence relative to certain estimates or to identify matters that require additional disclosures. Except for the change in certain policies upon adoption of the accounting standards described below, there have been no material changes to the Company's significant accounting policies, compared to the accounting policies described in Note 1, Summary of Significant Accounting Policies, in the Company’s Annual Report on Form 10-K for fiscal year 2019. Certain prior period amounts have been reclassified to conform the prior period presentation to the current year.

Segment Reporting

The Company has two reportable operating segments, Medical and Industrial, which align with how its Chief Executive Officer, who has been identified as the Company's Chief Operating Decision Maker ("CODM"), views and measures the Company’s business performance. See Note 16, Segment Information, for further information on the Company’s segments.

Fiscal Year

The fiscal years of the Company as reported are the 52 or 53-week period ending on the Friday nearest September 30. Fiscal year 2020 is the 53-week period ending October 2, 2020. Fiscal year 2019 was the 52-week period that ended on September 27, 2019. The fiscal quarters ended July 3, 2020 and June 28, 2019 were 13-week periods.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates

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include the valuation of inventories, goodwill and intangible assets, impairment on investments, and taxes on earnings. Actual results could differ from these estimates.

Impact of COVID-19

The coronavirus (“COVID-19”) pandemic and the mitigation efforts by governments to attempt to control its spread created uncertainties and disruptions in the economic and financial markets. The extent to which COVID-19 will continue to impact the Company’s business and financial results will depend on numerous evolving factors including, but not limited to: the magnitude and duration of COVID-19, the extent to which it will impact worldwide macroeconomic conditions including interest rates, employment rates, the speed of the anticipated recovery, and governmental and business reactions to the pandemic. During the quarter ended July 3, 2020, as a result of the economic downturn resulting from COVID-19, the Company experienced reduced demand in the Company’s industrial segment and for certain higher end medical products that negatively impacted revenues and gross margin. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the currently estimated future impacts COVID-19 as of July 3, 2020 and through the date of filing this report. The accounting matters assessed included, but were not limited to, the Company’s carrying value of goodwill, intangibles, long-lived assets, equity method investments, inventory and related reserves, and allowance for doubtful accounts. The Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material negative impacts to the Company’s consolidated financial statements in future reporting periods. These future developments are highly uncertain and the outcomes can not be estimated with certainty. Actual results may differ from those estimates, and such differences may be material to the financial statements.

The Company’s Credit Agreement, as defined in Note 11, Borrowings, contains financial covenants, including certain leverage ratio covenants. The Company was in compliance with all financial covenants as of July 3, 2020. However, the adverse effects of the COVID-19 pandemic on the Company’s financial condition and results of operations are expected to be more persistent and have been more severe than previously estimated in the prior quarter forecasted financial results. Specifically, in conjunction with analyzing the results for the Company’s third quarter, the Company now believes that reduced demand in the Company’s industrial segment and for certain higher end medical products will continue to negatively impact revenues, gross margin and the other items used to calculate the Company’s financial covenants contained in its Credit Agreement. Based on the Company’s current forecasts, it is probable that the Company will be in violation of certain leverage ratio covenants contained in its Credit Agreement within the twelve-month period following the issuance of these financial statements, including as early as the end of the Company's fiscal year end 2020. Failure to comply with the covenants, if not amended or waived, would result in an event of default under the Credit Agreement and the acceleration of the outstanding balance of the loans thereunder. If an event of default under the Credit Agreement occurs, then pursuant to cross default and/or cross acceleration clauses, substantially all of the Company’s other outstanding debt and derivative contract payables would become due, and all debt and derivative contracts could be terminated, which would have a material adverse impact to the Company’s operations and liquidity as the Company currently does not have the financial resources to satisfy such obligations if they were to become due and payable. These events and conditions raise substantial doubt about the Company’s ability to continue as a going concern within the twelve-month period following the issuance of these financial statements.

The Company is actively pursuing various options to prevent an event of default from occurring under the Credit Agreement. The Company is implementing actions to improve its financial results and other items used to calculate the financial covenants, such as accelerating the closure of its Santa Clara facility, the previously announced reduction in force, austerity programs related to outside services, and other appropriate actions. The Company is also taking actions to improve cash flow such as working capital reductions and reduced spending for property, plant and equipment, as well as pursuing potential additional fundraising to modify, supplement, or replace its Credit Agreement. While the Company has and continues to take actions to mitigate the risk of an event of default under the Credit Agreement, there is no assurance that it will be successful in doing so. The Company’s unaudited condensed consolidated financial statements have been prepared on a going concern basis and do not reflect any adjustments that might result if the Company is unable to continue as a going concern.

Restricted Cash

Restricted cash primarily consists of cash collateral related to certain leases and inventory arrangements. Restricted cash is included in other assets on the condensed consolidated balance sheet. Cash and cash equivalents and restricted cash as reported within the condensed consolidated statements of cash flows consisted of the following:

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	Nine Months Ended July 3, 2020						Nine Months Ended June 28, 2019
	Beginning of Period		End of Period		Beginning of Period		End of Period
Cash and cash equivalents	$	29.9	$	87.4	$	51.9	$	28.5
Restricted cash	1.4		1.4		1.5		1.5
Cash and cash equivalents and restricted cash as reported per statement of cash flows	$	31.3	$	88.8	$	53.4	$	30.0

Concentration of Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of cash, cash equivalents and trade accounts receivable. Cash held with financial institutions may exceed the Federal Deposit Insurance Corporation insurance limits or similar limits in foreign jurisdictions. The Company has not experienced any losses on its deposits of cash and cash equivalents. The Company performs ongoing credit evaluations of its customers and, except for government tenders, group purchases and orders with a letter of credit, its industrial customers often provide a down payment. The Company maintains an allowance for doubtful accounts based on the expected collectability of accounts receivable. The Company obtains some of the components in its products from a limited group of suppliers or from a single-source supplier. The Company has neither experienced nor expects any significant disruptions to its operations due to supplier concentration.

Credit is extended to customers based on an evaluation of the customer’s financial condition, and collateral is not required. During the periods presented, one of the Company's Medical segment customers accounted for a significant portion of revenues, as follows:


	Three Months Ended					Nine Months Ended
	July 3, 2020		June 28, 2019		July 3, 2020	June 28, 2019
Canon Medical Systems Corporation	23.7	%	17.1	%	21.7%	17.5%

Canon Medical Systems Corporation accounted for 15.7% and 10.1% of the Company’s accounts receivable as of July 3, 2020 and September 27, 2019, respectively.

Investments

The Company accounts for its equity investments in privately-held companies under the equity method of accounting if the Company has the ability to exercise significant influence in these investments. Distributions received from an equity method investment are classified using the cumulative earnings approach. Under the cumulative earnings approach, distributions up to the amount of cumulative equity in earnings recognized will be treated as returns on investment as operating cash flows and those in excess of that amount will be treated as returns of investment as investing cash flows. The Company reviews its equity investments in privately-held companies for impairment whenever events or changes in business circumstances are other than temporary and indicate that the carrying amount of the investments may not be fully recoverable. During the three and nine months ended July 3, 2020, the Company wrote off a $2.7 million cost investment in a privately-held company, the related expense is included as part of other expenses, net in the Company's condensed consolidated financial statements.

Loss Contingencies

From time to time, the Company is a party to or otherwise involved in legal proceedings, claims and government inspections or investigations, customs and duties audits, other contingency matters, both inside and outside the United States, arising in the ordinary course of its business or otherwise. The Company accrues amounts for probable losses, to the extent they can be reasonably estimated, that it believes are adequate to address any liabilities related to legal proceedings and other loss contingencies that the Company believes will result in a probable loss (including, among other things, probable settlement value). A loss or a range of loss is disclosed when it is reasonably possible that a material loss will be incurred and can be estimated or when it is reasonably possible that the amount of a loss, when material, will exceed the recorded provision.

Product Warranty

The Company warrants most of its products for a specific period of time, usually 12 to 24 months from delivery or acceptance, against material defects. The Company provides for the estimated future costs of warranty obligations in cost of revenues

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when the related revenues are recognized. The accrued warranty costs represent the best estimate at the time of sale of the total costs that the Company will incur to repair or replace product parts that fail while still under warranty.

The amount of the accrued estimated warranty costs obligation for established products is primarily based on historical experience as to product failures adjusted for current information on repair costs. For new products, the Company bases warranty estimates on historical experience for similar products and adds a reasonable allowance for warranty expenses associated with new products. On a quarterly basis, the Company reviews the accrued warranty costs and updates the historical warranty cost trends, if required.

The following table reflects the changes in the Company’s accrued product warranty:


	Nine Months Ended
(In millions)	July 3, 2020		June 28, 2019
Accrued product warranty, at beginning of period	$	8.1	$	7.3
Charged to cost of revenues	9.7		9.8
Product warranty expenditures	(9.7)		(9.2)
Accrued product warranty, at end of period	$	8.1	$	7.9

Leases

The Company determines if an arrangement is or contains a lease at the inception of an arrangement. The Company's operating lease right-of-use ("ROU") assets represent the right to use an underlying asset over the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. ROU assets may also include initial direct costs incurred and prepaid lease payments, less lease incentives. Lease liabilities and their corresponding ROU assets are recognized based on the present value of lease payments over the lease term, discounted using the Company's incremental borrowing rate ("IBR"). The Company recognizes operating leases with lease terms of more than twelve months in operating lease assets, current operating lease liabilities, and operating lease liabilities on its condensed consolidated balance sheets. The Company recognizes finance leases with lease terms of more than twelve months in property, plant, and equipment, net, accrued liabilities and other current liabilities, and other long-term liabilities on its condensed consolidated balance sheets. For purposes of calculating lease liabilities and the corresponding ROU assets, the Company's lease term may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option.

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases ("Topic 842"), referred to as ASC 842. The purpose of ASC 842 is to increase the transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet, including those previously classified as operating leases under U.S. GAAP, and disclosing key information about leasing arrangements. ASC 842, as amended, is effective for public entities for annual periods beginning after December 15, 2018, including interim periods within those annual periods and is effective for the Company in fiscal year 2020. The Company adopted the standard using the transition method provided by ASC Update No. 2018-11, Leases ("Topic 842"): Targeted Improvements. Under this method, the Company applied the new leasing rules on September 28, 2019, rather than at the earliest comparative period presented in the financial statements. Prior periods were presented in accordance with the existing lease guidance under ASC 840.

Upon transition, the Company applied the package of practical expedients permitted under ASC 842 transition guidance to its entire lease portfolio at September 28, 2019. As a result, the Company was not required to reassess (i) whether any expired or existing contracts are or contain leases, (ii) the classification of any expired or existing leases, and (iii) initial direct costs for any existing leases. Also, the Company applied the hindsight practical expedient. Furthermore, as a lessee the Company elected to combine lease and non-lease components for the majority of its leases, which means that the Company accounted for each separate lease component and the non-lease components associated with that lease component as a single lease component. The only asset class that did not combine lease and non-lease components were vehicle leases.

The most significant impact of the standards for the Company relate to the recognition of the right-of-use assets and lease liabilities for the operating leases in the balance sheet. Upon adoption of the new lease standard, the Company recognized operating lease right-of-use assets and finance lease right-of-use assets of $26.8 million and $0.6 million, respectively, and corresponding operating lease liabilities and finance lease liabilities of $27.5 million and $0.6 million, respectively. This includes the recording of the Company’s existing capital leases as finance leases at transition. The cumulative impact of adoption was a $0.3 million decrease to

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retained earnings. Refer to Note 3, Leases, for a detailed description of the impact of adopting this standard and its impact on the consolidated financial statements and related disclosures.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which provides the option to reclassify certain income tax effects related to the Tax Cuts and Jobs Act passed in December of 2017 between accumulated other comprehensive income and retained earnings and also requires additional disclosures. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Effective September 28, 2019, the Company adopted ASU 2018-02 and it did not have a material effect on the Company’s financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other, Simplifying the Test for Goodwill Impairment, which simplified the testing required for the impairment of goodwill by removing Step 2 from the goodwill impairment test. Step 2 of the goodwill impairment test measures a goodwill impairment loss by comparing the implied fair value of a reporting units goodwill with the carrying amount of that goodwill. ASU 2017-04 allows an entity to measure the impairment based off Step 1 of the impairment test, which calculates the impairment as the difference between the carrying amount of the reporting unit and its fair value. Adoption of this ASU was required for the Company in the first quarter of fiscal year 2021. The Company elected to early adopt this standard effective April 4, 2020. This adoption was made on a prospective basis, as required by the standard.

Recent Accounting Standards or Updates Not Yet Effective

In March 2020, the FASB issued ASU 2020-04 to provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The Company is currently evaluating the impact from the replacement of the London Interbank Offered Rate (LIBOR) and whether the Company will elect the adoption of the optional guidance.

In December 2019, the FASB issued ASU 2019-12 which simplifies the accounting for income taxes by removing certain exceptions to the current guidance, and improving the consistent application of and simplification of other areas of the guidance. The standard is effective for the Company beginning in the first quarter of fiscal year 2022. Early adoption is permitted. The Company is evaluating the impact of adopting this guidance to its condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." This ASU replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. In addition, the ASU requires new disclosures. This standard will be effective for the Company's interim and annual periods beginning with the first quarter of fiscal 2021 and must be applied on a modified retrospective basis. The Company is evaluating the potential impact of this standard to its condensed consolidated financial statements.

2. REVENUE RECOGNITION

The Company’s revenues are derived primarily from the sale of hardware and services. The Company recognizes its revenues net of any value-added or sales tax and net of sales discounts. The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers.

The Company sells a high proportion of its X-ray products to a limited number of OEM customers. X-ray tubes, digital detectors and image-processing tools and security and inspection products are generally sold on a stand-alone basis. However, the Company occasionally sells its digital detectors, X-ray tubes and imaging processing tools as a package that is optimized for digital X-ray imaging and sells its Linatron ® X-ray accelerators together with its imaging processing software and image detection products to OEM customers that incorporate them into their inspection systems. Service contracts are often sold with certain security and inspection products and computer-aided detection products.

Transaction price and allocation to performance obligations

Transaction prices of products or services are typically based on contracted rates. To the extent that the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the expected value method when there is a large number of transactions with similar characteristics or the most likely amount method when there are two possible outcomes, depending on the circumstances of the transaction, to which the Company expects to be entitled. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available.

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The Company allows customers to return specific parts of purchased X-ray tubes for a partial refund credit, which is identified as variable consideration. ASC 606-10-55-23 requires that for sales with a right of return, revenue is reduced for expected returns, a liability is recorded for expected returns, and an asset is recorded for the right to recover products from customers on settling the liability. The Company recognizes a reduction to revenue and cost of sales at the time of sale and a corresponding contract liability and contract asset. The Company records this estimate based on the historical volume of product returns and adjusts the estimate on a quarterly basis based on the current quarter sales and current quarter returns.

If a contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately.

Contracts and performance obligations

The Company accounts for a contract with a customer when there is an approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of the consideration is probable. The Company's performance obligations consist mainly of transferring control of products and services identified in the contracts or purchase orders. For each contract, the Company considers the obligation to transfer products and services to the customer, which are distinct, to be performance obligations.

Revenue recognition

Revenue is recognized when, or as, obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to customers. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer.

Product revenue is generally recognized when the customer obtains control of the Company’s product, which occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract.

Service revenue is generally recognized over time as the services are rendered to the customer based on the extent of progress towards completion of the performance obligation. The Company recognizes service revenue over the term of the service contract. Services are expected to be transferred to the customer throughout the term of the contract and the Company believes recognizing revenue ratably over the term of the contract best depicts the transfer of value to the customer.

Disaggregation of Revenue

Revenue is disaggregated from contracts between geography and by reportable operating segment, which the Company believes best depicts how the nature, amount, timing, and uncertainty of revenues and cash flows are affected by economic factors.

The following table disaggregates the Company’s revenue by geographic region:


	Three Months Ended						Nine Months Ended
(In millions)	July 3, 2020		June 28, 2019		July 3, 2020		June 28, 2019
Americas	$	58.7	$	73.8	$	191.5	$	216.4
EMEA	46.8		67.3		176.0		198.0
APAC	65.7		55.6		200.8		163.8
	$	171.2	$	196.7	$	568.3	$	578.2

Revenue in the United States of America was $56.9 million and $71.4 million for the three months ended July 3, 2020 and June 28, 2019, respectively. Revenue in the United States of America was $185.6 million and $210.8 million for the nine months ended July 3, 2020 and June 28, 2019, respectively.

Refer to Note 16, Segment Information, for the disaggregation of the Company’s revenue based on reportable operating segments.

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Contract Balances

Contract assets are included within the prepaid expenses and other current assets, and other assets balances. Contract liabilities, which also include refund obligations are included within the accrued liabilities and other current liabilities, deferred revenues, and other long-term liabilities balances. The following table summarizes the changes in the contract assets and refund liabilities for the nine months ended July 3, 2020:


(In millions)	Contract Assets
Balance at September 27, 2019	$	23.7
Costs recovered from product returns during the period	(4.3)
Contract asset from shipments of products, subject to return during the period	5.2
Balance at July 3, 2020	$	24.6


(In millions)	Refund Liabilities
Balance at September 27, 2019	$	26.4
Release of refund liability included in beginning of year refund liability	(4.8)
Additions to refund liabilities	5.7
Balance at July 3, 2020	$	27.3

During the three and nine months ended July 3, 2020, the Company recognized revenue of $0.5 million and $7.8 million respectively, related to contract liabilities which existed at September 27, 2019. During the three and nine months ended June 28, 2019, the Company recognized revenue of $0.7 million and $8.9 million respectively, related to contract liabilities which existed at September 28, 2018.

Remaining Performance Obligations

Remaining performance obligations represent the transaction price of firm orders for which revenue has not yet been recognized. As of July 3, 2020, total remaining performance obligations amounted to $235.7 million. The Company expects to recognize the remaining performance obligations over the next 12 months.

Costs to Obtain or Fulfill a Customer Contract

The Company has certain costs to obtain and fulfill a customer contract, such as commissions and shipping costs. The Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. Incremental costs of obtaining contracts that would be recognized over greater than one year are not material. The Company accounts for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products. These costs are included as a component of cost of revenues.

3. LEASES

On September 28, 2019, the Company adopted a new accounting standard that amends the guidance for the accounting and reporting of leases. The determination of whether an arrangement is, or contains, a lease is performed at the inception of the arrangement. The Company has operating and finance leases for office space, warehouse and manufacturing space, vehicles and certain equipment. The Company's lease agreements do not contain any material residual value guarantees, variable lease costs, bargain purchase options or restrictive covenants. The Company does not have any lease transactions with related parties. Leases with an initial term of 12 months or less are generally not recorded on the balance sheet and expense for these leases is recognized on a straight-line basis over the lease term. The Company's leases have remaining lease terms of one year to approximately seven years, some of which may include options to extend the leases for up to six years and some include options to terminate early. These options have been included in the determination of the lease liability when it is reasonably certain that the option will be exercised.

Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease contract. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of fixed lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, our incremental borrowing rate is based on a credit-adjusted risk-free rate, which best approximates a secured rate over a similar term of lease.

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The following table presents supplemental balance sheet information related to the Company's operating and finance leases:


		July 3, 2020
(In millions)	Balance Sheet Location	Operating Leases		Finance Leases
Assets
Operating lease right-of-use assets	Operating lease assets	$	29.6	$	—
Finance lease right-of-use assets	Property, plant and equipment, net	$	—	$	0.6
Liabilities
Operating lease liabilities (current)	Current operating lease liabilities	$	5.6	$	—
Finance lease liabilities (current)	Accrued liabilities and other current liabilities	$	—	$	0.2
Operating lease liabilities (non-current)	Operating lease liabilities	$	24.1	$	—
Finance lease liabilities (non-current)	Other long-term liabilities	$	—	$	0.4

The following table presents the weighted average remaining lease term and discount rate information related to the Company's operating and finance leases:


	July 3, 2020
	Operating Leases		Finance Leases
Weighted average remaining lease term (in years)	6.7		3.4
Weighted average discount rate	4.7	%	4.1	%

The following table provides information related to the Company’s operating and finance leases:


(In millions)	Three Months Ended July 3, 2020		Nine Months Ended July 3, 2020
Total operating lease costs (a)	$	2.0	$	6.0

Total finance lease costs	$	0.1	$	0.2

Operating cash flows from operating leases	$	1.8	$	5.9
Financing cash flows from finance leases	0.1		0.1
Total cash paid for amounts included in the measurement of lease liabilities	$	1.9	$	6.0

Noncash operating right-of-use assets obtained in exchange for new lease liabilities (b)	$	0.3	$	10.6
Noncash finance right-of-use assets obtained in exchange for new lease liabilities (b)	—		0.2
Total right-of-use assets obtained in exchange for new lease liabilities (b)	$	0.3	$	10.8

^(a)Includes variable and short-term lease expense, which were immaterial for the three and nine months ended July 3, 2020.

^(b)Excludes the impact of adopting the new leases standard in the first quarter of 2020.

For the three and nine months ended June 28, 2019 the Company's lease expense was $1.2 million and $3.8 million, respectively.

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As of July 3, 2020, maturities of operating lease and finance lease liabilities for each of the following five years and a total thereafter were as follows:


(In millions)
Fiscal years:	Operating Leases		Finance Leases
2020 remaining	$	1.7	$	0.1
2021	6.9		0.2
2022	6.5		0.1
2023	4.2		0.1
2024	3.6		0.1
Thereafter	12.4		—
Total future lease payments	$	35.3	$	0.6
Less: imputed interest	(5.6)		—
Present value of lease liabilities	$	29.7	$	0.6

At September 27, 2019, the Company was committed to minimum rentals under non-cancelable operating leases (including rent escalation clauses) for fiscal years 2020 through 2024 and thereafter, as follows: $7.5 million, $5.4 million, $4.7 million, $1.8 million, $0.9 million, and $0.2 million, respectively.

During the second and third quarters of 2020, the Company identified offsetting errors related to the adoption of ASC 842, which was adopted as of September 28, 2019, and recorded first quarter adjustments of $0.3 million to the lease right-of-use asset balance and $0.8 million to the lease liability balance, which reduced these balances and also recorded an adjustment of $0.3 million to increase retained earnings. There was no material impact to the income statement for this correction. We evaluated the materiality of this error on our current quarter and prior quarter consolidated financial statements and have concluded that this error was not material when considering both qualitative and quantitative factors.

4. BUSINESS COMBINATIONS

During April 2019, Varex completed the acquisition of approximately 98.2% of the outstanding shares of common stock of Direct Conversion AB (publ) (“Direct Conversion”) for $69.5 million in cash, net of cash acquired, the assumption of Direct Conversion's debt of $4.5 million and deferred consideration equal to $9.9 million or 0.3 million shares of the Company’s common stock. To settle the deferred consideration, in April 2020, the Company issued the 0.3 million shares of its common stock to certain shareholders of Direct Conversion. In issuing the shares, the Company relied on the exemptions from registration under Section 4(a)(2) of the Securities Act of 1933 (the “Securities Act”), Rule 506 of Regulation D, and/or Regulation S promulgated under the Securities Act.

The acquisition of Direct Conversion expands our detector product portfolio to include photon counting technology. This technology will allow Varex to expand its range of imaging applications and offer new solutions to both Medical and Industrial customers.

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The following table summarizes the purchase price allocation:


(In millions)	Fair Value
Allocation of the purchase consideration:
Accounts receivable	$	2.4
Inventories	5.7
Prepaid expenses and other current assets	0.7
Property, plant, and equipment	0.9
Goodwill	47.2
Intangible assets	32.9
Total assets acquired	$	89.8
Accounts payable	$	(1.0)
Accrued liabilities and other current liabilities	(1.5)
Current maturities of long-term debt	(1.0)
Deferred revenues	(0.9)
Long-term debt	(3.5)
Other long-term liabilities	(1.1)
Total liabilities assumed	$	(9.0)
Noncontrolling interest	$	(1.4)
Net assets acquired, less noncontrolling interest	$	79.4
Net cash paid	$	69.5
Deferred consideration	9.9
Total consideration	$	79.4

The Company recorded the assets acquired and liabilities assumed at their fair values. Intangibles were valued primarily using a discounted cash flow, which included estimated revenue growth and discount rate. The fair value assigned to goodwill is primarily attributable to expected synergies. The goodwill related to the Direct Conversion acquisition is not tax deductible.

The following amounts represent the determination of the fair value and estimated weighted average useful lives of identifiable intangible assets for the Direct Conversion, which are amortized using the straight-line method:


(In millions)	Fair Value		Estimated Weighted Average Useful Life (In Years)
Backlog	$	0.2	1
Trade names	2.5		5
Developed technology	18.4		10
In-process research and development	2.8		indefinite
Customer relationships	9.0		10
Total intangible assets acquired	$	32.9

During the third quarter of 2020 the in-process research and development assets from the Direct Conversion acquisition were determined to be impaired. Refer to Note 10, Goodwill and Intangible Assets, for more information.

5. RELATED PARTY TRANSACTIONS

Investment in Privately-Held Companies

The Company has a 40% ownership interest in dpiX Holding LLC (“dpiX Holding”), a four-member consortium that has a 100% ownership interest in dpiX LLC (“dpiX”), a supplier of amorphous silicon based thin film transistor arrays for digital flat panel

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image detectors. In accordance with the dpiX Holding operating agreement, net profits or losses are allocated to the members in accordance with their ownership interests.

The investment in dpiX Holding is accounted for under the equity method of accounting. When the Company recognizes its share of net profits or losses of dpiX Holding, profits or losses in inventory purchased from dpiX are eliminated. During the three months ended July 3, 2020 and June 28, 2019, the Company recorded (loss)/income on the equity investment in dpiX Holding of $(0.5) million and $0.4 million, respectively. During the nine months ended July 3, 2020 and June 28, 2019, the Company recorded loss on the equity investment in dpiX Holding of $(0.4) million and $(0.3) million, respectively. Income and loss on the equity investment in dpiX Holding is included in other expense, net in the condensed consolidated statements of operations. The carrying value of the equity investment in dpiX Holding was $46.8 million and $48.1 million at July 3, 2020 and September 27, 2019, respectively.

During the three months ended July 3, 2020 and June 28, 2019, the Company purchased glass transistor arrays from dpiX totaling $4.9 million and $5.5 million, respectively. During the nine months ended July 3, 2020 and June 28, 2019, the Company purchased glass transistor arrays from dpiX totaling $15.8 million and $16.7 million, respectively. These purchases of glass transistor arrays are included as a component of inventories on the condensed consolidated balance sheets or cost of revenues in the condensed consolidated statements of operations.

As of July 3, 2020, and September 27, 2019, the Company had accounts payable to dpiX totaling $3.7 million and $3.6 million, respectively.

In October 2013, the Company entered into an amended agreement with dpiX and other parties that, among other things, provides the Company with the right to 50% of dpiX’s total manufacturing capacity produced after January 1, 2014. In addition the amended agreement requires the Company to pay for 50% of the fixed costs (as defined in the amended agreement), as determined at the beginning of each calendar year. In January 2020, the fixed cost commitment was determined and approved by the dpiX board of directors to be $12.7 million for calendar year 2020. As of July 3, 2020, the Company had $6.4 million fixed cost commitments related to this agreement remaining for calendar year 2020. The amended agreement will continue unless the ownership structure of dpiX changes as provided in the amended agreement.

The Company has determined that dpiX is a variable interest entity because at-risk equity holders, as a group, lack the characteristics of a controlling financial interest. Majority votes are required to direct the manufacturing activities, legal operations and other activities that most significantly affect dpiX’s economic performance. The Company does not have majority voting rights and no power to direct the activities of dpiX and therefore is not the primary beneficiary of dpiX. The Company’s exposure to loss as a result of its involvement with dpiX is limited to the carrying value of the Company’s investment of $46.8 million and fixed cost commitments.

In November 2018, the Company and CETTEEN GmbH (“CETTEEN”), formed a German limited liability company that governs the affairs and conduct of the business of VEC Imaging Verwaltungsgesellschaft GmbH (“VEC”), a joint venture formed to develop technology for use in X-ray imaging components. In accordance with the VEC agreement, net profits or losses are allocated to the members in accordance with their ownership interest. The Company's investment in VEC is accounted for under the equity method. As of July 3, 2020, the Company has made contributions totaling $4.0 million, and has committed to contribute an additional $1.1 million as milestones are achieved, and to provide certain full-time employees to support prototyping and manufacturing activities in exchange for a 50% interest in VEC. CETTEEN made contributions of certain assets including intellectual property in exchange for a 50% interest in VEC. The Company's investment in VEC was $2.6 million and $2.0 million at July 3, 2020 and September 27, 2019, respectively.

6. RESTRUCTURING

In July 2018, the Company committed to a plan to relocate the production of amorphous silicon glass for digital detectors, from its Santa Clara facility, to the jointly owned dpiX fabrication facility in Colorado. In July 2019, the Company committed to close its Santa Clara facility and to relocate the remaining production to its other existing facilities. The Company expects operations at the Santa Clara facility to cease by the end of September 2020 and all activities related to the closure of the facility to be complete by the end of December 2020. In connection with the relocation of the glass production and site closure the Company recorded $1.5 million and $0.0 million of restructuring charges for the three months ended July 3, 2020 and June 28, 2019, respectively and $4.0 million and $6.0 million of restructuring charges for the nine months ended July 3, 2020 and June 28, 2019, respectively. The Company expects to incur an additional $4.0 million to $8.0 million of restructuring charges through December 2020.

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Cash outflows associated with these restructuring charges are limited to employee termination expenses, facility closure and equipment sales and disposals. Below is a detail of restructuring charges incurred during the three and nine months ended July 3, 2020 and June 28, 2019, respectively, which predominantly relate to the Company's Medical segment:


		Three Months Ended						Nine Months Ended
(In millions)	Location of Restructuring Charges in Consolidated Statements of Operations	July 3, 2020		June 28, 2019		July 3, 2020		June 28, 2019



Accelerated depreciation	Cost of revenues	$	0.9	$	—	$	2.1	$	4.2
Severance costs	Selling, general and administrative	0.6		—		1.9		1.8

Total restructuring charges		$	1.5	$	0.0	$	4.0	$	6.0

7. FINANCIAL DERIVATIVES AND HEDGING ACTIVITIES

As part of the Company’s overall risk management practices, the Company enters into financial derivatives to manage its financial exposures to foreign currency exchange rates and interest rates.

The Company records all derivatives on the consolidated balance sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. A qualitative assessment of hedge effectiveness is performed on a quarterly basis, unless facts and circumstances indicate the hedge may no longer be highly effective. The changes in fair value for all trades that are not designated for hedge accounting are recognized in current period earnings. The Company does not offset fair value amounts recognized for derivative instruments in its consolidated balance sheets for presentation purposes.

Credit risk related to derivative transactions reflects the risk that a party to the transaction could fail to meet its obligation under the derivative contracts. Therefore, the Company’s exposure to the counterparty’s credit risk is generally limited to the amounts, if any, by which the counterparty’s obligations to the Company exceed the Company’s obligations to the counterparty. The Company’s policy is to enter into contracts only with financial institutions which meet certain minimum credit ratings to help mitigate counterparty credit risk.

Derivatives Designated as Hedging Instruments - Cash Flow Hedges

The Company uses interest rate swap contracts as cash flow hedges to manage its exposure to fluctuations in LIBOR interest rates. Interest rate swap contracts hedging variable rate debt effectively fix the LIBOR component of its interest rate for a specific period of time.

As of July 3, 2020, the Company had the following outstanding derivatives designated as hedging instruments:


(In millions, except for number of instruments)	Number of Instruments	Notional Value
Interest Rate Swap Contracts	6	$	241.9

The following table summarizes the amount of pre-tax earnings recognized from derivative instruments for the periods indicated and the line items in the accompanying statements of operations where the results are recorded for cash flow hedges:


	Amount of Gain (Loss) Recognized in OCI on Derivative Three months ended					Location of Gain or (Loss) Reclassified from Accumulated OCI into Income			Amount of Gain (Loss) Reclassified from Accumulated OCI into Income Three months ended
(In millions)	July 3, 2020		June 28, 2019					July 3, 2020			June 28, 2019
Interest Rate Swap Contracts	$	(0.3)	$	(2.4)	Interest expense	$	(0.7)		$	0.5

	Amount of Gain (Loss) Recognized in OCI on Derivative Nine Months Ended					Location of Gain or (Loss) Reclassified from Accumulated OCI into Income			Amount of Gain (Loss) Reclassified from Accumulated OCI into Income Nine Months Ended
(In millions)	July 3, 2020		June 28, 2019					July 3, 2020			June 28, 2019
Interest Rate Swap Contracts	$	(3.3)	$	(6.1)	Interest expense	$	(0.6)		$	1.6

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The Company expects that approximately $3.2 million of the accumulated other comprehensive loss related to cash flow hedges will be realized in pre-tax earnings over the next 12 months, but the amount will vary depending on interest rates.

These derivative instruments are subject to master netting agreements giving effect to rights of offset with each counterparty. The following table summarizes the fair values of derivative instruments as of the periods indicated and the line items in the accompanying consolidated balance sheets where the instruments are recorded:


(In millions)		Derivative Assets and Liabilities
Derivatives designated as cash flow hedges	Balance sheet location	July 3, 2020		September 27, 2019


Interest rate swap contracts	Accrued liabilities and other current liabilities	$	(3.2)	$	—
Interest rate swap contracts	Other long-term liabilities	—		(0.5)
		$	(3.2)	$	(0.5)

Derivatives Designated as Hedging Instruments - Net Investment Hedges

The Company uses cross currency swap contracts as net investment hedges to manage its risk of variability in foreign currency-denominated net investments in wholly owned international operations. All changes in fair value of the derivatives designated as net investment hedges are reported in accumulated other comprehensive (loss) income along with the foreign currency translation adjustments on those investments. As of July 3, 2020, the Company had the following outstanding derivatives designated as net investment hedging instruments:


(In millions, except for number of instruments)	Number of Instruments	Notional Value
Cross Currency Swap Contracts	4	$	77.7


	Amount of Gain (Loss) Recognized in OCI on Derivative Three months ended					Location of Gain or (Loss) Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing)			Amount of Gain or (Loss) Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing)
(In millions)	July 3, 2020		June 28, 2019					July 3, 2020			June 28, 2019
Cross Currency Swap Contracts	$	(2.2)	$	—	Interest expense	$	0.4		$	—

	Amount of Gain (Loss) Recognized in OCI on Derivative Nine Months Ended					Location of Gain or (Loss) Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing)			Amount of Gain or (Loss) Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing)
(In millions)	July 3, 2020		June 28, 2019					July 3, 2020			June 28, 2019
Cross Currency Swap Contracts	$	2.1	$	—	Interest expense	$	1.1		$	—

These derivative instruments are subject to master netting agreements giving effect to rights of offset with each counterparty. None of the balances were eligible for netting. The following table summarizes the gross fair values of derivative instruments as of the periods indicated and the line items in the accompanying consolidated balance sheets where the instruments are recorded:


(In millions)		Derivative Assets and Liabilities
Derivatives designated as net investment hedges	Balance sheet location	July 3, 2020		September 27, 2019
Cross Currency Swap Contracts	Other current assets	$	1.5	$	—
Cross Currency Swap Contracts	Other non-current assets	0.6		—


		$	2.1	$	—

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Balance Sheet Hedges

The Company’s foreign currency management objective is to mitigate the potential impact of currency fluctuations on the value of its U.S. dollar cash flows and to reduce the variability of certain cash flows at the subsidiary level. These forward contracts are not designated for hedge accounting treatment, therefore, the change in fair value of these derivatives is recorded as a component of other income (expense) and offsets the change in fair value of the foreign currency denominated assets and liabilities, which are also recorded in other income (expense). The Company does not and does not intend to use derivative financial instruments for speculative or trading purposes.

The following table shows the notional amounts of outstanding foreign currency contracts as of July 3, 2020:


	Notional Value of Derivatives not Designated as Hedging Instruments:
(In millions)	Buy contracts		Sell contract
Japanese yen	$	1.5	$	—

Swiss franc	—		(1.0)
Chinese renminbi	2.8		—
Euro	—		(6.8)
	$	4.3	$	(7.8)

8. FAIR VALUE

Assets/Liabilities Measured at Fair Value on a Recurring Basis

In the tables below, the Company has segregated all assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.


	Fair Value Measurements at July 3, 2020
(In millions)	Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Cash equivalents - Money market funds	$	—	$	10.0	$	—	$	10.0
Derivative assets	—		1.9		—		1.9
Total assets measured at fair value	$	—	$	11.9	$	—	$	11.9

Liabilities:
Derivative liabilities	—		3.2		—		3.2

Total liabilities measured at fair value	$	—	$	3.2	$	—	$	3.2

As of July 3, 2020, the outstanding borrowings under the Company's Credit Agreement were $260.5 million, net of deferred loan costs, which approximated its fair value. The fair values of certain of the Company’s financial instruments, including bank deposits included in cash and cash equivalents, accounts receivable and accounts payable, also approximate their fair values due to their short maturities. As of July 3, 2020, the fair value of the Company's Convertible Notes, as defined in Note 11, Borrowings, was $193.3 million. The Company has elected to use the income approach to value its derivative instruments using standard valuation techniques and Level 2 inputs, such as currency spot rates, forward points and credit default swap spreads. There were no financial assets or liabilities measured on a recurring basis using significant unobservable inputs (Level 3) and there were no transfers in or out of Level 1, 2 or 3 during the nine months ended July 3, 2020.

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At September 27, 2019, the Company determined the following levels of inputs at fair value for the following assets or liabilities:


	Fair Value Measurements at September 27, 2019
(In millions)	Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Cash equivalents - Money market funds	$	—	$	8.8	$	—	$	8.8

Total assets measured at fair value	$	—	$	8.8	$	—	$	8.8

Liabilities:
Derivative liabilities	$	—	$	0.7	$	—	$	0.7
Deferred Consideration	8.9		—		—		8.9
Total liabilities measured at fair value	$	8.9	$	0.7	$	—	$	9.6

9. INVENTORIES

The following table summarizes the Company’s inventories:


(In millions)	July 3, 2020		September 27, 2019
Raw materials and parts	$	179.9	$	160.1
Work-in-process	33.1		27.9
Finished goods	70.2		60.2
Total inventories	$	283.2	$	248.2

As a result of the economic downturn resulting from COVID-19, during the three months ended July 3, 2020, the Company discontinued certain products and wrote-down approximately $15.8 million of inventory associated with discontinued products and restructuring activity. These charges are included in cost of revenues in the condensed consolidated statements of operations.

10. GOODWILL AND INTANGIBLE ASSETS

In the third quarter of 2020, changes in facts and circumstances and general market declines from COVID-19 resulted in reduced expectations of future operating results. The Company considered these circumstances and the potential long-term impact on cash flows associated with its reporting units and indefinite-lived intangible assets and determined that an indicator of possible impairment existed within its Medical and Industrial reporting units and indefinite-lived intangible assets. Accordingly, the Company performed a quantitative impairment analysis to determine the fair values of those reporting units and indefinite-lived intangible assets. The Company used both an income approach utilizing the discounted cash flow method ("DCF") and a market approach utilizing the public company market multiple method. The Company developed multiple forecasted future cash flow scenarios for the reporting units and indefinite-lived intangible assets with varied recovery timing and sales impact assumptions. Based on the output of the analysis, the Company determined that the fair values of both the Medical and Industrial reporting units exceeded their carrying amounts. The Company's Industrial reporting unit's fair value exceeded its carrying value by more than 20% and the Company's Medical reporting unit's fair value exceeded its carrying value by more than 30%. Accordingly, no impairment charges were required as of July 3, 2020. However, an impairment charge was required for the Company's in-process R&D as discussed below.

Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated future annual net cash flows, income tax rates, discount rates, growth rates, market multiples, terminal value and other market factors. This fair value measurement was based on significant inputs not observable in the market and thus represents a Level 3 fair value measurement. If current expectations of future growth rates and margins, both in size and timing, are not met, if market factors outside of our control, such as discount rates, change, if market multiples decline, or if management’s expectations or plans otherwise change, including as a result of the development of our global five-year operating plan, then one or more of our reporting units might become

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impaired in the future. The Company will continue to monitor the financial performance of and assumptions for its reporting units. A future impairment charge for goodwill could have a material effect on the Company's consolidated financial position and results of operations.

The following table reflect goodwill by reportable operating segment:


(In millions)	Medical		Industrial		Total
Balance at September 27, 2019	$	173.0	$	117.8	$	290.8


Balance at July 3, 2020	$	173.0	$	117.8	$	290.8

The following table reflects the gross carrying amount and accumulated amortization of the Company’s intangible assets included in other assets in the condensed consolidated balance sheets:


	July 3, 2020										September 27, 2019
(In millions)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Acquired existing technology	$	74.1	$	(35.2)	$	38.9	$	74.1	$	(28.4)	$	45.7
Patents, licenses and other	$	12.8	$	(9.4)	$	3.4	$	12.7	$	(8.4)	$	4.3
Customer contracts and supplier relationship	$	50.7	$	(22.4)	$	28.3	$	50.7	$	(17.2)	$	33.5
Total intangible assets with finite lives	$	137.6	$	(67.0)	$	70.6	$	137.5	$	(54.0)	$	83.5
In-process R&D with indefinite lives	$	—	$	—	$	—	$	2.8	$	—	$	2.8
Total intangible assets	$	137.6	$	(67.0)	$	70.6	$	140.3	$	(54.0)	$	86.3

Amortization expense for intangible assets was $4.2 million and $4.1 million for the three months ended July 3, 2020 and June 28, 2019, respectively and $13.1 million and $11.4 million for the nine months ended July 3, 2020 and June 28, 2019, respectively.

For the three months ended July 3, 2020 and June 28, 2019, the Company recognized intangible asset impairment charges of $2.8 million and $4.0 million, respectively, which are included in impairment of intangible assets in the condensed consolidated statements of operations. For the nine months ended July 3, 2020 and June 28, 2019, the Company recognized intangible asset impairment charges of $2.8 million and $4.8 million, respectively, which are included in impairment of intangible assets in the condensed consolidated statements of operations. These impairment charges related primarily to the Company's Medical reporting segment. The fair value of the asset impaired during the third quarter of 2020 was determined using an estimated weighted average cost of capital of 25.0% (consistent with the rate used at the acquisition date), which reflects the risks inherent in future cash flow projections and represents a rate of return that a market participant would expect for this asset. The Company believes its assumptions are consistent with the plans and estimates that a market participant would use to manage the business. The estimated fair value of the in-process R&D intangible asset as of July 3, 2020 was zero. This fair value measurement was based on significant inputs not observable in the market and thus represents a Level 3 fair value measurement.

In addition, as a result of the impact of COVID-19 as discussed above, the Company determined certain impairment triggers had occurred related to the Company’s finite-lived tangible and intangible assets. Accordingly, the Company analyzed undiscounted cash flows at the asset group level for certain finite-lived tangible and intangible assets as of July 3, 2020. Based on that undiscounted cash flow analysis, the Company determined that estimated undiscounted future cash flows exceeded their net carrying values, and, therefore, as of July 3, 2020, the Company's finite-lived tangible and intangible assets were not impaired.

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11. BORROWINGS

The following table summarizes the Company's short-term and long-term debt:


	July 3, 2020						September 27, 2019				$ Change
(In millions, except for percentages)	Amount		Weighted-Average Interest Rate		Amount		Weighted-Average Interest Rate
Current maturities of long-term debt
Term facility	$	26.8	5.6	%	$	29.4	5.6	%	$	(2.6)
Other debt	0.8				1.3				(0.5)

Total current maturities of long-term debt	$	27.6			$	30.7			$	(3.1)

Non-current maturities of long-term debt:
Revolving credit facility	$	—	—	%	$	59.0	5.6	%	$	(59.0)
Term facility	238.7		5.6	%	308.6		5.6	%	(69.9)
Convertible Notes	200.0				—				200.0
Other debt	8.2				2.5				5.7
Debt issuance costs - Credit Agreement	(5.0)				(5.7)				0.7
Unamortized discount - Convertible Notes	(52.4)				—				(52.4)
Non-current maturities of long-term debt	389.5				364.4				25.1
Total long-term debt, net	$	417.1			$	395.1			$	22.0

Existing Credit Agreement

On May 1, 2017 Varex entered into a new secured revolving credit facility (the “Revolving Credit Facility”) in an aggregate principal amount of up to $200 million with a term of five years, and a secured term facility (the “Term Facility” and together with the Revolving Credit Facility, the “Credit Agreement”) in an aggregate principal amount of $400 million, which was subsequently amended. In connection with the issuance of the Convertible Notes (defined below), on June 6, 2020, the Company amended the Credit Agreement (“Amendment No. 6”) to revise certain covenants, including covenants that restricted the incurrence of debt and restricted the Company’s ability to enter into the Call Spread Transactions (defined below) and issue the Convertible Notes. In connection with Amendment No. 6, Varex permanently reduced the total amount available under the Revolving Credit Facility to $100 million. At July 3, 2020, the Company had $100 million of the Revolving Credit Facility available for borrowings, subject to covenants contained in the Credit Agreement.

The Term Facility will be repaid over five years, with 5.0% payable in quarterly installments during each of the first two years of the term thereof, 7.5% payable in quarterly installments during the third and fourth years of the term thereof, and 10% payable in quarterly installments in the fifth year of the term thereof, with the remaining amount due at maturity. Both the Term Facility and Revolving Credit Facility expire on May 1, 2022.

The Credit Agreement contains various customary restrictive covenants that limits, among other things, the incurrence of indebtedness by Varex and its subsidiaries, the grant or incurrence of liens by Varex and its subsidiaries, the entry into sale and leaseback transactions by Varex and its subsidiaries, and the entry into certain fundamental change transactions by Varex and its subsidiaries. It also contains customary events of default and certain financial covenants. The Company agreed to maintain financial covenants, which include maximum consolidated total leverage ratio, maximum consolidated senior secured leverage ratio, maximum capital expenditures and a minimum consolidated fixed charge coverage ratio. The Company was in compliance with all financial covenants under the Credit Agreement as of July 3, 2020. However, the adverse effects of the COVID-19 pandemic on the Company’s financial condition and results of operations are expected to be more persistent and have been more severe than previously assumed

in prior quarter forecasted cash flow estimates. Based on the Company’s current forecasts, it is probable that the Company will be in violation of certain leverage ratio covenants contained in its Credit Agreement within the twelve-month period following the issuance of these financial statements, including as early as the Company's fiscal year end 2020.

The Credit Agreement is secured by the stock and assets of Varex’s material subsidiaries. The Credit Agreement has several borrowing and interest rate options including the following indices: (a) LIBOR rate subject to a 0.75% floor, or (b) the base rate (equal

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to the greater of the prime rate, the federal funds rate plus 0.50% or the LIBOR rate for a one-month period plus 1.00%). Loans under the Credit Agreement bear interest at a rate per annum using the applicable indices plus a varying interest rate margin of between 1.75% and 3.50% (for LIBOR rate loans) and 0.75%-2.50% (for base rate loans). The Credit Agreement also provides for fees applicable to amounts available to be drawn under outstanding letters of credit of 0.125%, and a fee on unused commitments which ranges from 0.25% to 0.40%.

Convertible Notes

On June 9, 2020, Varex issued $200.0 million in aggregate principal amount of 4.00% unsecured convertible senior notes due 2025 (“Convertible Notes”). The net proceeds from the issuance of the Convertible Notes, after deducting transaction fees and offering expense payable by us, were approximately $193.1 million. The Convertible Notes bear interest at the annual rate of 4.00%, payable semiannually on June 15 and December 15 of each year, beginning on December 15, 2020, and will mature on June 15, 2025, unless earlier converted or repurchased by us.

The Convertible Notes will be convertible into cash, shares of our common stock or a combination thereof, at our election, at an initial conversion rate of 48.05 shares of common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $20.81 per share, subject to adjustment pursuant to the terms of the Indenture governing the Convertible Notes (the "Indenture"). The Convertible Notes may be converted at any time after, and including, December 15, 2024 until the close of business on the second scheduled trading day immediately before the maturity date.

The conversion rate of the Convertible Notes may be adjusted in certain circumstances, including in connection with a conversion of the Convertible Notes made following certain fundamental changes and under other circumstances set forth in the Indenture. It is our current intent and policy to settle any conversions of notes through a combination of cash and shares.

Prior to the close of business on the business day immediately preceding December 15, 2024, the Convertible Notes at the option of the holder can be convertible only under the following circumstances:

1.during any calendar quarter commencing after the calendar quarter ending on September 30, 2020, if the last reported sale price per share of our common stock exceeds 130% of the conversion price for each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;

2.during the five consecutive business days immediately after any five consecutive trading day period (such five consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of our common stock on such trading day and the conversion rate on such trading day;

3.upon the occurrence of certain corporate events or distributions on our common stock, as described in the Indenture; or

4.if we call any notes for redemption (under the conditions specified below).

The Convertible Notes will be redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after June 1, 2023 and on or before the 60th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest, if any, but only if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (ii) the trading day immediately before the date the Company sends such notice. In addition, calling any Convertible Note for redemption will constitute a make-whole fundamental change with respect to that Convertible Note, in which case the conversion rate applicable to the conversion of that Convertible Note will be increased in certain circumstances if it is converted after it is called for redemption. No sinking fund is provided for the Convertible Notes.

Total interest expense related to the Convertible Notes for the three months ended July 3, 2020 was $1.0 million and was comprised of $0.5 million related to the contractual interest coupon and $0.5 million related to the amortization of the discount on the liability component.

Call Spread

On June 4, 2020 and June 5, 2020, in connection with the offering of the Convertible Notes, Varex entered into privately negotiated convertible note hedge transactions (collectively, the “Hedge Transactions”). The Hedge Transactions cover, subject to customary anti-dilution adjustments, the number of shares of our common stock that initially underlie the Convertible Notes. The

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Hedge Transactions are expected generally to reduce the potential dilution and/or offset any cash payments Varex is required to make in excess of the principal amount due upon conversion of the Convertible Notes in the event that the market price of our common stock is greater than the strike price of the Hedge Transactions, which was initially $20.81 per share (subject to adjustment under the terms of the Hedge Transactions). The strike price of $20.81 corresponds to the initial conversion price of the Convertible Notes. The number of shares underlying the Hedge Transactions is 9.6 million.

On June 4, 2020 and June 5, 2020, Varex also entered into privately negotiated warrant transactions (collectively, the “Warrant Transactions” and, together with the Hedge Transactions, the “Call Spread Transactions”), whereby we sold warrants at a higher strike price relating to the same number of shares of our common stock that initially underlie the Convertible Notes, subject to customary anti-dilution adjustments. The initial strike price of the warrants is $24.975 per share (subject to adjustment under the terms of the Warrant Transactions), which is 50% above the last reported sale price of our common stock on June 4, 2020. The Warrant Transactions could have a dilutive effect to our stockholders to the extent that the market price per share of our common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants. The number of shares underlying the Warrant Transactions is 9.6 million. The number of warrants outstanding as of July 3, 2020, was 9.6 million.

We used $11.2 million of the net proceeds from the issuance of the Convertible Notes and $49.8 million from the Warrant Transactions to pay the cost of the Hedge Transactions, which totaled $61.0 million.

The Hedge Transactions and the Warrant Transactions are separate transactions, in each case, and are not part of the terms of the Convertible Notes and will not affect any holder’s rights under the Convertible Notes. Holders of the Convertible Notes will not have any rights with respect to the Call Spread Transactions.

Accounting Treatment of the Convertible Notes and Related Hedge Transactions and Warrant Transactions

As the Call Spread Transactions meet certain accounting criteria, the Call Spread Transactions were classified as equity and are not accounted for as derivatives. The proceeds from the offering of the Convertible Notes were separated into liability and equity components. On the date of issuance, the liability and equity components of the Convertible Notes were calculated to be approximately $152.3 million and $47.7 million, respectively. The initial $152.3 million liability component was determined based on the fair value of similar debt instruments excluding the conversion feature assuming a hypothetical interest rate of 10.45%. The initial $47.7 million equity component represents the difference between the fair value of the initial $152.3 million in debt and the $200.0 million of gross proceeds. The equity component is included in additional paid-in capital in the condensed consolidated balance sheets and will not be subsequently remeasured as long as it continues to meet the conditions for equity classification. The related initial debt discount of $47.7 million is being amortized over the life of the Convertible Notes as non-cash interest expense using the effective interest method at an interest rate of 10.9%.

In connection with the above-noted transactions, we incurred approximately $6.9 million of offering-related costs. These offering fees were allocated to the liability and equity components in proportion to the allocation of proceeds and accounted for as debt and equity issuance costs, respectively. We allocated $5.3 million of debt issuance costs to the liability component, which were capitalized as deferred financing costs within long-term debt. These costs are being amortized as interest expense over the term of the debt using the effective interest method. The remaining $1.6 million of transaction costs allocated to the equity component were recorded as a reduction of the equity component.

12. REDEEMABLE NONCONTROLLING INTERESTS & NONCONTROLLING INTERESTS

In April 2019, a subsidiary of Varex completed the acquisition of 98.2% of the outstanding shares of common stock of Direct Conversion. The Company has subsequently acquired additional shares of Direct Conversion such that the Company now owns 98.7% of the outstanding shares of common stock of Direct Conversion. As the Company has majority voting rights it has consolidated Direct Conversion's operations in its consolidated financial statements and recorded the noncontrolling interest. The noncontrolling interest related to Direct Conversion is included in noncontrolling interest in the equity section of the Company's consolidated balance sheet. Earnings representing the noncontrolling interest's portion of Direct Conversion's income from operations is included in the Company's consolidated statements of operations.

In September 2018, the Company entered into a partnership in Saudi Arabia. The Company has majority voting rights with an approximate 75% interest. Accordingly, the Company has consolidated the operations of the Saudi Arabia partnership in our consolidated financial statements and recorded the noncontrolling interests. The noncontrolling interest related to the partner’s 25% interest in the joint venture is included in noncontrolling interest in the equity section of the Company’s consolidated balance sheet. Earnings representing the noncontrolling partner's share of income from operations is included in the Company's consolidated statements of operations.

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In April 2015, the Company completed the acquisition of 73.5% of the then outstanding shares of MeVis, a publicly traded company based in Bremen, Germany that provides image processing software and services for cancer screening. In August 2015, the Company, through one of its German subsidiaries, entered into a Domination and Profit and Loss Transfer Agreement (the “DPLTA”) with MeVis. In October 2015, the DPLTA became effective upon its registration at the local court of Bremen, Germany. Under the DPLTA, MeVis subordinates its management to the Company and undertakes to transfer all its annual profits and losses to the Company. In return, the DPLTA grants the noncontrolling shareholders of MeVis: (1) an annual recurring net compensation of €0.95 per MeVis share starting from January 1, 2015; and (2) a put right for their MeVis shares at €19.77 per MeVis share. Upon effectiveness of the DPLTA, the noncontrolling interests in MeVis became redeemable as a result of the put right and were reclassified to temporary equity.

At July 3, 2020, noncontrolling shareholders together held approximately 0.5 million shares of MeVis, representing 26.5% of the outstanding shares.

Changes in redeemable noncontrolling interests were as follows:


(In millions)	Redeemable Noncontrolling Interests		Noncontrolling Interest
Balance at September 27, 2019	$	10.5	$	3.3
Net earnings attributable to noncontrolling interests	0.4		(0.1)
Other, including foreign currency remeasurement	(0.1)		—
Balance at July 3, 2020	$	10.8	$	3.2

13. NET (LOSS) EARNINGS PER SHARE

Basic net (loss) earnings per common share is computed by dividing the net (loss) earnings for the period by the weighted average number of shares of common stock outstanding during the reporting period. Diluted net (loss) earnings per common share reflects the effects of potentially dilutive securities, which is computed by dividing net (loss) earnings by the sum of the weighted average number of common shares outstanding and dilutive common shares, which consists of shares underlying stock options, unvested stock awards and purchase rights granted under the employee stock purchase plan.

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net (loss) income per common share is as follows:


	Three Months Ended						Nine Months Ended
(In millions, except per share amounts)	July 3, 2020		June 28, 2019		July 3, 2020		June 28, 2019
Net (loss) earnings attributable to Varex	$	(28.3)	$	(1.4)	$	(31.5)	$	7.4
Weighted average shares outstanding - basic	39.0		38.3		38.7		38.2
Dilutive effect of potential common shares	—		—		—		0.2
Weighted average shares outstanding - diluted	39.0		38.3		38.7		38.4
Net (loss) earnings per share attributable to Varex - basic	$	(0.73)	$	(0.04)	$	(0.81)	$	0.19
Net (loss) earnings per share attributable to Varex - diluted	$	(0.73)	$	(0.04)	$	(0.81)	$	0.19
Anti-dilutive shared based awards, excluded	3.2		2.4		3.0		2.0

The Company excludes potentially dilutive common shares (consisting of shares underlying stock options, unvested stock awards, purchase rights granted under the employee stock purchase plan and warrants) from the computation of diluted weighted average shares outstanding if the inclusion of the shares underlying these stock awards would be anti-dilutive to (loss) earnings per share. Because the Company incurred a net loss for the three and nine months ended July 3, 2020, none of the potentially dilutive common shares were included in the diluted share calculations for those periods as they would have been anti-dilutive.

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14. EMPLOYEE STOCK PLANS

Share-Based Compensation Expense

Share-based compensation expense recognized in the condensed consolidated statements of operations is based on awards ultimately expected to vest. Share-based compensation expense includes expenses related to the Company’s direct employees.

The table below summarizes the effect of recording the share-based compensation expense (which includes the option component of the employee stock purchase plan shares):


	Three Months Ended						Nine Months Ended
(In millions)	July 3, 2020		June 28, 2019		July 3, 2020		June 28, 2019
Cost of revenues	$	0.4	$	0.5	$	1.0	$	1.2
Research and development	0.7		0.3		1.9		1.7
Selling, general and administrative	2.6		2.3		7.3		5.8
Total share-based compensation expense	$	3.7	$	3.1	$	10.2	$	8.7

Stock Option Activity

The following table summarizes the activity for stock options under Varex’s 2020 Omnibus Stock Plan, 2017 Omnibus Stock Plan, and 2017 Employee Stock Purchase Plan for the Company’s employees:


	Options Outstanding
(In thousands, except per share amounts and the remaining term)	Options	Price Range	Weighted Average Exercise Price		Weighted Average Remaining Term (in years)	Aggregate Intrinsic Value⁽¹⁾
Outstanding at September 27, 2019	2,269	$22.63 - $37.60	$	30.60
Granted	398	$28.12 - $28.12	28.12
Canceled, expired or forfeited	(42)	$22.63 - $37.10	29.66
Exercised	(64)	$22.84 - $23.24	22.93
Outstanding at July 3, 2020	2,561	$25.17 - $37.60	$	30.42	4.4	$	—

Exercisable at July 3, 2020	1,705	$25.17 - $37.60	$	30.39	3.1	$	—

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, which is computed based on the difference between the exercise price and the closing price of Varex common stock of $14.94 as of July 3, 2020, the last trading date of the Company's third quarter, and which represents the amount that would have been received by the option holders had all option holders exercised their options and sold the shares received upon exercise as of that date.

Restricted Stock Units

The following table summarizes the activity for restricted stock units under Varex’s 2020 Omnibus Stock Plan and 2017 Omnibus Stock Plan for the Company’s employees:


(In thousands, except per share amounts)	Number of Shares	Weighted Average Grant-Date Fair Value
Outstanding at September 27, 2019	678	$	33.18
Granted	362	25.24
Vested	(220)	32.81
Canceled or expired	(46)	31.30
Outstanding at July 3, 2020	774	$	29.96

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15. TAXES ON EARNINGS

For the three months ended July 3, 2020, the Company recognized income tax benefit of $11.6 million on $39.8 million of pre-tax loss primarily due to losses in the United States. For the three months ended June 28, 2019, the Company recognized income tax expense of $0.7 million on $0.6 million of pre-tax loss. For the nine months ended July 3, 2020, the Company recognized income tax benefit of $10.9 million on $42.1 million of pre-tax loss before tax primarily due to losses in the United States. For the nine months ended June 28, 2019, the Company recognized income tax expense of $3.7 million on $11.3 million of pre-tax income.

As a result of the changes to the U.S. taxation of foreign earnings included in U.S. Tax Reform, the Company reevaluated its previous indefinite reinvestment assertion with respect to these earnings during fiscal year 2018, which resulted in the Company revoking its assertion for current and future earnings for all countries, while maintaining the assertion that historic earnings are indefinitely reinvested outside the U.S. The Company is maintaining this prior assertion for the quarter ended July 3, 2020. Due to the level of earnings available for repatriation, the treaty benefits applicable to jurisdictions in which those earnings are located, and the now favorable U.S. tax treatment of repatriated foreign earnings, the amount of deferred tax liability recorded related to the potential repatriation is approximately $0.1 million. This estimated liability is for U.S. State income taxes and foreign withholding taxes that would apply if the foreign earnings were repatriated in the form of a dividend.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), signed into law on March 27, 2020, has resulted in significant changes to the U.S. federal corporate tax law. Additionally, several state and foreign jurisdictions in which we operate have enacted legislation that complies with or is incremental to the changes included in the CARES Act. The most significant impact of the CARES Act is the ability to carry back a net operating loss for 5 years. The Company has evaluated the other provisions of the CARES Act and does not believe it will have a material effect on the Company’s business, results of operations or financial condition.

16. SEGMENT INFORMATION

The Company has two reportable operating segments Medical and Industrial. The segments align the Company’s products and service offerings with customer use in medical and industrial markets and are consistent with how the Company’s Chief Executive Officer, who is also its CODM, evaluates the business for the allocation of resources. The CODM allocates resources to and evaluates the financial performance of each operating segment primarily based on revenues and gross margin. The operating and reportable segment structure provides alignment between business strategies and operating results.

Description of Segments

The Medical segment designs, manufactures, sells and services X-ray imaging components for use in a range of applications, including radiographic and fluoroscopic imaging, mammography, computed tomography, radiation therapy and computer-aided detection. The Company provides a broad range of X-ray imaging components for Medical customers including X-ray tubes, digital flat panel detectors, generators, high voltage connectors, image-processing software and workstations, computer-aided diagnostic software, collimators, automatic exposure control devices, generators, ionization chambers and buckys. The Company’s X-ray imaging components are primarily sold to imaging system OEM customers that incorporate them into their medical diagnostic, radiation therapy, dental, veterinary and industrial imaging systems. The Company also sells its X-ray imaging components to independent service companies, distributors and directly to end-users for replacement purposes.

The Industrial segment designs, manufactures, sells and services products for use in the security and industrial inspection applications, such as airport security, cargo screening at ports and borders and nondestructive examination in a variety of applications. The products include Linatron X-ray accelerators, X-ray tubes, digital flat panel detectors, high voltage connectors and image processing software that we generally sell to OEM customers that incorporate these products into their inspection systems.

Accordingly, the following information is provided for purposes of achieving an understanding of operations, but it may not be indicative of the financial results of the reported segments were they independent organizations. In addition, comparisons of the Company’s operations to similar operations of other companies may not be meaningful.

Information related to the Company’s segments is as follows:

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	Three Months Ended						Nine Months Ended
(In millions)	July 3, 2020		June 28, 2019		July 3, 2020		June 28, 2019
Revenues
Medical	$	137.6	$	151.6	$	448.6	$	444.4
Industrial	33.6		45.1		119.7		133.8
Total revenues	$	171.2	$	196.7	$	568.3	$	578.2
Gross margin
Medical	$	18.0	$	44.2	$	105.2	$	135.4
Industrial	8.3		16.5		39.8		49.7
Total gross margin	$	26.3	$	60.7	$	145.0	$	185.1
Total operating expenses	53.1		56.1		165.8		155.6
Interest and other expenses, net	(13.0)		(5.2)		(21.3)		(18.2)
(Loss) earnings before taxes	(39.8)		(0.6)		(42.1)		11.3
Income taxes (benefit) expense	(11.6)		0.7		(10.9)		3.7
Net (loss) earnings	(28.2)		(1.3)		(31.2)		7.6
Less: Net earnings attributable to noncontrolling interests	0.1		0.1		0.3		0.2
Net (loss) earnings attributable to Varex	$	(28.3)	$	(1.4)	$	(31.5)	$	7.4

The following table summarizes the Company’s total assets by its reportable segments:



(In millions)	July 3, 2020		September 27, 2019
Identifiable assets
Medical	$	885.5	$	794.3
Industrial	236.2		244.6
Total reportable segments	$	1,121.7	$	1,038.9

17. SUBSEQUENT EVENTS

The Company is not aware of any subsequent events which would require recognition or disclosure in the condensed consolidated financial statements other than those listed below.

On July 29, 2020, Varex commenced the implementation of a reduction in workforce to reduce the Company’s operating cost and address the impact of the COVID-19 pandemic. The action is expected to result in the reduction of the Company’s workforce by approximately 94 employees, of which nearly all are located within the United States. This reduction is in addition to the previously disclosed reduction in workforce associated with the closure of the Company’s Santa Clara facility. The Company expects to complete the reduction in workforce by December 31, 2020.

The Company estimates that it will incur approximately $2.5 million to $3.5 million of cash expenditures in connection with the reduction in workforce. The Company expects to recognize the majority of the pre-tax restructuring charges by the end of the Company’s fiscal year 2020.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results should be read together with our Annual Report on Form 10-K for the fiscal year ended September 27, 2019.

Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995, which provides a “safe harbor” for statements about future events, products and future financial performance that are based on the beliefs of, estimates made by, and information currently available to the management of Varex Imaging Corporation (“we,” “our,” “us,” the “Company,” “Varex,” or “Varex Imaging”). The outcome of the events described in these forward-looking statements are subject to risks and uncertainties (including the risks and uncertainties contained in Part II, Item 1A - Risk Factors of this Quarterly Report), and actual results and the outcome or timing of certain events may differ significantly from those projected in these forward-looking statements or management’s current expectations.

Statements concerning: the impact of the ongoing COVID-19 pandemic on the global economy or the Company; industry or market segment outlook; market acceptance of or transition to new products or technology such as advanced X-ray tube and digital flat panel detector products; growth drivers; future orders, revenues, backlog, earnings or other financial results; liquidity and any statements using the terms “believe,” “expect,” “anticipate,” “can,” “should,” “would,” “could,” “estimate,” “may,” “intended,” “potential,” and “possible” or similar statements are forward-looking statements that involve risks and uncertainties that could cause our actual results and the outcome and timing of certain events to differ materially from those projected or management’s current expectations.

Any forward-looking statement made in this Quarterly Report (including in any exhibits or documents incorporated by reference) is based only on information currently available to Varex and its management and speaks only as of the date on which it is made. By making forward-looking statements, we have not assumed any obligation to, and you should not expect us to, update or revise those statements because of new information, future events or otherwise, including the impact of the COVID-19 pandemic and the responses to it.

Overview

Varex Imaging Corporation is a leading innovator, designer and manufacturer of X-ray imaging components including X-ray tubes, digital detectors, linear accelerators and other image processing solutions, which are key components of X-ray imaging systems. Our components are used in medical imaging as well as in industrial and security imaging applications. Global original equipment manufacturers (“OEM”) incorporate our X-ray imaging components in their systems to detect, diagnose, protect and inspect. Varex has approximately 2,000 full-time equivalents employees, located at manufacturing and service center sites in North America, Europe, and Asia.

Our products are sold in three geographic regions: the Americas, EMEA, and APAC. The Americas includes North America (primarily the United States) and Latin America. EMEA includes Europe, Russia, the Middle East, India and Africa. APAC includes Asia and Australia. Revenues by region are based on the known final destination of products sold.

Our success depends, among other things, on our ability to anticipate and respond to changes in our markets, the direction of technological innovation and the demands of our customers. We continue to invest in research and development and employ over 500 engineers. Combining this focus on innovation and product performance with strong long-term customer relationships allows us to partner with our customers to bring industry-leading products to the X-ray imaging market. We continue to work to improve the life and quality of our imaging components and leverage our scale as the largest X-ray imaging component supplier to provide cost-effective solutions for our customers. Demand for our products can also be impacted by geo-political factors, including the COVID-19 pandemic as well as tariffs on key imported materials used in manufacturing our products and on X-ray imaging products we sell to customers outside the United States. Trade conflicts between the United States and China has negatively impacted our business and are expected to continue.

Impact of COVID-19

The unprecedented nature of the COVID-19 pandemic and its impact on the global economy has created a disruption to Varex’s business which includes increased uncertainty in demand for certain products for medical and industrial applications, as well as increased variability in our supply chain and manufacturing productivity. The economic downturn triggered by COVID-19 has led

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to significantly lower demand from our customers and delays in equipment installations. In conjunction with this reduced forecast and uncertainty beyond the forecast horizon, we evaluated our product offering and decided to discontinue certain low margin, low demand products. As a result, we took approximately $16 million in reserves related to the write-down of the value of all associated inventory and any other associated assets.

The COVID-19 pandemic has had a significant effect on hospitals, clinics and outpatient imaging centers as they have encountered declines in surgeries and other elective procedures. Subsequently, they have reduced their capital purchases of imaging equipment from OEM’s which has led to lower demand for x-ray imaging components. Additionally, equipment installations were delayed, due to reduced access to healthcare institutions. Partially offsetting this has been increased demand for imaging equipment used to diagnose respiratory diseases, such as radiographic x-ray imaging systems and CT imaging systems. We expect uncertainty related to the COVID-19 pandemic to continue for at least the remainder of the current calendar year. The Company expects uncertainty in demand to continue for at least the remainder of the current calendar year. While we have implemented safeguards and procedures to counter the impact of the COVID-19 pandemic, the full extent to which the COVID-19 pandemic has and will directly or indirectly impact us, including our business, financial condition, and results of operations, will depend on future developments that are highly uncertain and cannot be estimated with certainty, including the further mitigation efforts taken to contain it or treat its impact and the economic impact on local, regional, national and international markets. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, suppliers, and stockholders.

Subsequent Measurement of Goodwill

Goodwill is not amortized but is tested annually, or more often if impairment indicators are present, for impairment at a reporting unit level, based on a comparison of the fair value of the reporting unit with its carrying amount. Goodwill is tested for impairment via a one-step process by comparing the fair value of goodwill with its carrying amount. We recognize an impairment for the amount by which the carrying amount exceeds the fair value. We generally use both an income approach utilizing the discounted cash flow method ("DCF") and a market approach utilizing the public company market multiple method, when testing for impairment.

In the third quarter of 2020, changes in facts and circumstances and general market declines from COVID-19 resulted in reduced operating results. We considered these circumstances and the potential long-term impact on cash flows associated with our reporting units and determined that an indicator of possible impairment existed within our Medical and Industrial reporting units. Accordingly, we performed a quantitative impairment analysis to determine the fair values of those reporting units. We used both an income approach utilizing the discounted cash flow method ("DCF") and a market approach utilizing the public company market multiple method. We developed multiple forecasted future cash flow scenarios for the reporting units with varied recovery timing and sales impact assumptions. Based on the output of the analysis, we determined that the fair values of both the Medical and Industrial reporting units exceeded their carrying amounts. Accordingly, no impairment charges were required as of July 3, 2020. However, an impairment charge was required for the Company's in-process R&D. The Company's Industrial reporting unit's fair value exceeded its carrying value by more than 20% and the Company's Medical reporting unit's fair value exceeded its carrying value by more than 30%. The carrying amount of goodwill for the Medical and Industrial reporting units was $173.0 million and $117.8 million, respectively.

Refer to Note 10, Goodwill and Intangible Assets for more information regarding goodwill.

Operating Segments and Products

Our Chief Executive Officer, who is our Chief Operating Decision Maker (“CODM”), evaluates our product groupings and measures our business performance in two reportable operating segments: Medical and Industrial. The segments align our products and service offerings with customer use in medical and industrial markets and are consistent with how the CODM evaluates the business for the allocation of resources. The CODM allocates resources to and evaluates the financial performance of each operating segment primarily based on revenues and gross margin.

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Medical

In our Medical business segment, we design, manufacture, sell and service X-ray imaging components for use in a range of radiographic or fluoroscopic imaging applications including, computed tomography (“CT”), mammography, oncology, cardiac, surgery, dental, and computer-aided detection. We provide a broad range of X-ray imaging components for Medical customers, including X-ray tubes, digital detectors, high voltage connectors, image-processing software and workstations, computer-aided diagnostic software, collimators, automatic exposure control devices, generators, heat exchangers, ionization chambers and buckys.

A significant portion of our revenues come from the sales of high-end X-ray tubes used in CT imaging and high-end dynamic digital detectors used in fluoroscopic and 3D dental imaging applications. These upper-tier imaging components are characterized by increased levels of technological complexity, engineering and intellectual property that typically allow these products to have a higher sales price and gross margin.

The digital detector market has matured from initial product introductions that were made over 15 years ago. For the past few years, we have experienced price erosion for these products, predominantly in the highly-competitive market for radiographic detectors. We anticipate this trend will continue in the foreseeable future.

Our X-ray imaging components are primarily sold to OEM customers that incorporate our products into their X-ray imaging systems for a variety of medical modalities and industrial applications. To a much lesser extent, we also sell our X-ray imaging components to independent service companies, distributors and directly to end-users for replacement purposes.

In China, the government is broadening the availability of healthcare services throughout the country. As a result, the number of diagnostic X-ray imaging systems, including CT, has grown significantly. We are developing CT tubes and related subsystems for Chinese OEMs as they introduce new CT imaging systems in China. Over the long-term, we anticipate that China-based revenues will increase as a percentage of our revenues.

To help mitigate the impact of trade war conflicts between the United States and China, we have implemented changes to secure more non-China sources of supply of parts and materials used to manufacture our X-ray imaging products. We continue to expand manufacturing capabilities at our facilities in China, Germany and the Philippines.

Industrial

In our Industrial business segment, we design, manufacture, sell and service X-ray imaging products for use in a number of markets, including security applications, such as cargo screening at ports and borders and baggage screening at airports, as well as nondestructive testing and inspection applications used in a number of other markets. Our industrial products include Linatron^® X-ray linear accelerators, X-ray tubes, digital detectors and high voltage connectors. In addition, we provide proprietary image-processing and detection software designed to work with these other Varex products to provide package solutions to our Industrial customers.

The security market primarily consists of airport security for carry-on baggage, checked baggage and palletized cargo, as well as cargo security for the screening of trucks, trains and cargo containers at ports and borders. The-end customers for border protection systems are typically government agencies, many of which are in oil-based economies and war zones where there has been significant year-over-year variation in buying patterns.

The non-destructive testing market utilizes X-ray imaging to scan items for inspection of manufacturing defects and product integrity in a wide range of industries including the aerospace, automotive, oil and gas, food packaging, metal castings and 3D printing industries. We provide X-ray sources, digital detectors, high voltage connectors and image processing software to OEM customers, system integrators and manufacturers. In addition, new applications for X-ray sources are being developed, such as sterilization of food and its packaging.

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The economic downturn triggered by the COVID-19 pandemic has reduced the demand for x-ray imaging equipment utilized in the non-destructive testing market as manufacturers have focused on cash preservation which includes reduced spending for capital equipment. Additionally, the unprecedented decrease in passenger air traffic has led to decrease in demand in the security market. The Company expects uncertainty in demand to continue for at least the remainder of the current calendar year.

Critical Accounting Policies and Estimates

The preparation of our condensed consolidated financial statements and related disclosures in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on historical experience and on various other factors that we believe are reasonable under the circumstances. Our critical accounting policies that are affected by accounting estimates require us to use judgments, often as a result of the need to make estimates and assumptions regarding matters that are inherently uncertain, and actual results could differ materially from these estimates.

We periodically review our accounting policies, estimates and assumptions and make adjustments when facts and circumstances dictate. Refer to our Annual Report on Form 10-K for the fiscal year ended September 27, 2019 filed with the SEC on December 20, 2019 and Note 1 “Summary of Significant Accounting Policies” of the notes to the condensed consolidated financial statements of this report for further details. Our critical accounting policies that are affected by accounting estimates include revenue recognition, impairment of investments, assessment of recoverability of goodwill and intangible assets, valuation of derivative instruments, valuation of warranty obligations, and taxes on earnings. Such accounting policies require us to use judgments, often as a result of the need to make estimates and assumptions regarding matters that are inherently uncertain, and actual results could differ materially from these estimates. There have been no material changes to our critical accounting policies, estimates and assumptions or the judgments affecting the application of those estimates and assumptions since the filing of our Annual Report on Form 10-K for year ended September 27, 2019, except for the adoption of Accounting Standards Update ("ASU") 2016-02, Leases ("Topic 842"), referred to as ASC 842, effective September 28, 2019, and the adoptions of ASU 2017-04, Intangibles - Goodwill and Other, which simplifies the test for goodwill impairment, effective April 4, 2020.

Fiscal Year

Our fiscal year is a 52 or 53-week period ending on the Friday nearest September 30. Fiscal year 2020 is the 53-week period ending October 2, 2020. Fiscal year 2019 was a 52-week period that ended on September 27, 2019. The fiscal quarters ended July 3, 2020 and June 28, 2019 were both 13-week periods.

Discussion of Results of Operations for the Three Months Ended July 3, 2020 Compared to the Three Months Ended June 28, 2019

Revenues


	Three Months Ended
(In millions)	July 3, 2020			June 28, 2019			$ Change		% Change
Medical	$	137.6		$	151.6		$	(14.0)	(9.2)	%
Industrial	33.6			45.1			(11.5)		(25.5)	%
Total revenues	$	171.2		$	196.7		$	(25.5)	(13.0)	%
Medical as a percentage of total revenues	80.4		%	77.1		%
Industrial as a percentage of total revenues	19.6		%	22.9		%

Medical revenues decreased by $14.0 million primarily due to decreased sales of digital detectors for dynamic imaging applications, partially offset by increased sales of CT X-ray tubes and digital detectors for radiographic X-ray imaging applications.

Industrial revenues decreased $11.5 million primarily due to decreased sales of X-ray tubes, digital detectors and linear accelerators for security and non-destructive inspection applications.

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Gross Margin


	Three Months Ended
(In millions)	July 3, 2020			June 28, 2019			$ Change		% Change
Medical	$	18.0		$	44.2		$	(26.2)	(59.3)	%
Industrial	8.3			16.5			(8.2)		(49.7)	%
Total gross margin	$	26.3		$	60.7		$	(34.4)	(56.7)	%
Medical gross margin %	13.1		%	29.2		%
Industrial gross margin %	24.7		%	36.6		%
Total gross margin %	15.4		%	30.9		%

The decrease in total gross margin percentage was due to the decrease in both medical and industrial gross margin percentages. The decrease in medical gross margin percentage was primarily due to an unfavorable mix of lower margin products and an approximate $13 million charge for the write-down of inventory associated with discontinued products and restructuring activity. The industrial gross margin percentage decreased due to an unfavorable mix of lower margin products and an approximate $3 million charge for the write-down of inventory associated with discontinued products and restructuring activity.

Operating Expenses


	Three Months Ended
(In millions)	July 3, 2020			June 28, 2019			$ Change		% Change
Research and development	$	19.0		$	20.9		$	(1.9)	(9.1)	%
As a percentage of total revenues	11.1		%	10.6		%
Selling, general and administrative	$	31.4		$	31.2		$	0.2	0.6	%
As a percentage of total revenues	18.3		%	15.9		%
Impairment of intangible assets	$	2.7		$	4.0		$	(1.3)	(32.5)	%
As a percentage of total revenues	1.6		%	2.0		%
Operating expenses	$	53.1		$	56.1		$	(3.0)	(5.3)	%
As a percentage of total revenues	31.0		%	28.5		%

Research and Development

We are committed to investing in the business to support long-term growth and believe long-term research and development expenses of approximately 8% to 10% of annual revenues is the appropriate range that will allow us to innovate and bring new products to market for our global OEM customers. On a dollar basis, research and development costs decreased for the third quarter, but because revenue declined, increased to 11.1% of revenues for the third quarter of 2020.

Selling, General and Administrative

Selling, general and administrative expenses for the third quarter of 2020 increased to 18.3% of total revenues primarily due to lower revenues during the three months ended July 3, 2020.

Interest and Other Expense, Net

The following table summarizes the Company’s interest and other expense, net:


	Three Months Ended
(In millions)	July 3, 2020		June 28, 2019		$ Change
Interest income	$	—	$	—	$	—
Interest expense	(6.9)		(5.1)		(1.8)
Other expense, net	(6.1)		(0.1)		(6.0)
Interest and other expense, net	$	(13.0)	$	(5.2)	$	(7.8)

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Interest and other expense, net increased during the three months ended July 3, 2020. Interest expense increased due to the interest related to our Convertible Notes issued during June 2020 and an increase in our interest rate margin during the three months ended July 3, 2020. Other expense, net increased during the third quarter of 2020, due to the impairment of certain investments in privately-held companies, an increase in the fair value of the deferred consideration related to the Direct Conversion acquisition and a decrease in our income from investments in privately-held companies.

Taxes on (Loss) Earnings

For the three months ended July 3, 2020, we recognized an income tax benefit of $11.6 million on a $39.8 million pre-tax loss. For the three months ended June 28, 2019, we recognized an income tax benefit of $0.7 million on $0.6 million of pre-tax loss.

Discussion of Results of Operations for the Nine Months Ended July 3, 2020 Compared to the Nine Months Ended June 28, 2019

Revenues


	Nine Months Ended
(In millions)	July 3, 2020			June 28, 2019			$ Change		% Change
Medical	$	448.6		$	444.4		$	4.2	0.9	%
Industrial	119.7			133.8			(14.1)		(10.5)	%
Total revenues	$	568.3		$	578.2		$	(9.9)	(1.7)	%
Medical as a percentage of total revenues	78.9		%	76.9		%
Industrial as a percentage of total revenues	21.1		%	23.1		%

Medical revenues increased by $4.2 million primarily due to increased sales of CT X-ray tubes and digital detectors for dental applications, partially offset by decreased sales of radiographic digital detectors.

Industrial revenues decreased $14.1 million due to decreased sales of linear accelerators for cargo inspection and other non-destructive inspection applications.

Gross Margin


	Nine Months Ended
(In millions)	July 3, 2020			June 28, 2019			$ Change		% Change
Medical	$	105.2		$	135.4		$	(30.2)	(22.3)	%
Industrial	39.8			49.7			(9.9)		(19.9)	%
Total gross margin	$	145.0		$	185.1		$	(40.1)	(21.7)	%
Medical gross margin %	23.5		%	30.5		%
Industrial gross margin %	33.2		%	37.1		%
Total gross margin %	25.5		%	32.0		%

The decrease in total gross margin percentage was due to the decrease in both medical and industrial gross margin percentage. The decrease in medical gross margin percentage was primarily due to an unfavorable mix of lower margin products, additional reserves for the settlement of a German customs audit, higher warranty and slow-moving inventory reserves, the write-down of inventory associated with discontinued products, and customer price decreases for digital detectors. The industrial gross margin percentage decreased due to an unfavorable mix of lower margin products and the write-down of inventory associated with discontinued products..

Operating Expenses


	Nine Months Ended
(In millions)	July 3, 2020			June 28, 2019			$ Change		% Change
Research and development	$	61.6		$	58.5		$	3.1	5.3	%
As a percentage of total revenues	10.8		%	10.1		%
Selling, general and administrative	$	101.5		$	92.3		$	9.2	10.0	%
As a percentage of total revenues	17.9		%	16.0		%
Impairment of intangible assets	$	2.7		$	4.8		$	(2.1)	(43.8)	%
As a percentage of total revenues	0.5		%	0.8		%
Operating expenses	$	163.1		$	155.6		$	7.5	4.8	%
As a percentage of total revenues	28.7		%	26.9		%

Research and Development

We are committed to investing in the business to support long-term growth and believe long-term research and development expenses of approximately 8% to 10% of annual revenues is the appropriate range that will allow us to innovate and bring new products to market for our global OEM customers. Research and development costs increased to 10.8% of revenues due to the addition of Direct Conversion for the nine months ended July 3, 2020.

Selling, General and Administrative

Selling, general and administrative expenses for the nine months ended July 3, 2020, increased to 17.9% primarily due to higher audit and consulting fees, an extra week of expenses in the period and the addition of Direct Conversion.

Interest and Other Income (Expense), Net

The following table summarizes the Company’s interest and other income (expense), net:


	Nine Months Ended
(In millions)	July 3, 2020		June 28, 2019		$ Change
Interest income	$	0.1	$	0.1	$	—
Interest expense	(16.9)		(15.7)		(1.2)
Other expense, net	(4.5)		(2.6)		(1.9)
Interest and other expense, net	$	(21.3)	$	(18.2)	$	(3.1)

Interest and other expense, net increased during the nine months ended July 3, 2020. Interest expense increased due to the interest related to our Convertible Notes issued during June 2020. Other expense, net increased during the nine months ended July 3, 2020 due to the impairment of certain investments in privately-held companies and a decrease in the fair value of the deferred consideration related to the Direct Conversion acquisition.

Taxes on (Loss) Earnings

For the nine months ended July 3, 2020, we recognized an income tax benefit of $(10.9) million on $42.1 million of pre-tax loss before tax. For the nine months ended June 28, 2019, the Company recognized income tax expense of $3.7 million on $11.3 million of pre-tax income.

Liquidity and Capital Resources

We assess our liquidity in terms of our ability to generate cash to fund our operating and investing activities. As part of a series of measures to better enable the Company to weather the extraordinary business challenges associated with the COVID-19 global pandemic, we have taken additional measures to manage our cash. These measures include temporary reductions to employee compensation and matching retirement contributions, as well as furloughs, mandatory unpaid leave for U.S. employees that are not directly related to the production of our products and a reduction of the Company’s workforce by approximately 94 employees. We

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continue to evaluate additional cash preserving actions and other sources of capital as needed to secure liquidity in a rapidly changing environment.

The Company is actively pursuing various options to prevent an event of default from occurring under the Credit Agreement. The Company is implementing actions to improve its financial results and other items used to calculate the financial covenants,, such as accelerating the closure of its Santa Clara facility, the previously announced reduction in force, austerity programs related to outside services, and other appropriate actions. The Company is also taking actions to improve cash flow such as working capital reductions and reduced spending for property, plant and equipment, as well as pursuing potential additional fundraising to modify, supplement, or replace its Credit Agreement. While the Company has and continues to take actions to mitigate the risk of an event of default under the Credit Agreement, there is no assurance that it will be successful in doing so. The Company’s unaudited condensed consolidated financial statements have been prepared on a going concern basis and do not reflect any adjustments that might result if the Company is unable to continue as a going concern.

Cash and Cash Equivalents

The following table summarizes our cash and cash equivalents:


(In millions)	July 3, 2020		September 27, 2019		$ Change
Cash and cash equivalents	$	87.4	$	29.9	$	57.5

Borrowings

The following table summarizes the changes in our debt outstanding:


(In millions)	July 3, 2020		September 27, 2019		$ Change
Current portion of Term Facility	$	26.8	$	29.4	$	(2.6)
Current portion of other long-term debt	0.8		1.3		(0.5)
Revolving Credit Facility	—		59.0		(59.0)
Long-term portion of Term Facility	238.7		308.6		(69.9)
Convertible Notes	200.0		—		200.0
Long-term portion of other debt	8.2		2.5		5.7
Total debt outstanding, gross	474.5		400.8		73.7
Debt issuance costs - Credit Agreement	(5.0)		(5.7)		0.7
Unamortized discount - Convertible Notes	(52.4)		—		(52.4)
Total debt outstanding, net	$	417.1	$	395.1	$	22.0

Cash Flows

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	Nine Months Ended
(In millions)	July 3, 2020		June 28, 2019
Net cash flow provided by (used in):
Operating activities	$	25.0	$	49.0
Investing activities	(23.2)		(86.4)
Financing activities	56.7		14.7
Effects of exchange rate changes on cash and cash equivalents and restricted cash	(1.0)		(0.7)
Net increase in cash and cash equivalents and restricted cash	$	57.5	$	(23.4)

Net Cash Provided by Operating Activities. Cash from operating activities consists primarily of the net (loss) earnings adjusted for certain non-cash items, including share-based compensation, depreciation, amortization of intangible assets, deferred income taxes, income from equity investments and the effect of changes in operating assets and liabilities.

For the nine months ended July 3, 2020, compared to the nine months ended June 28, 2019, cash provided by operating activities were as follows:

•Net (loss) earnings were $(31.2) million compared to $7.6 million

•Non-cash adjustments to net earnings of $50.8 million compared to $44.5 million

•Operating assets and liabilities activity:

◦Accounts receivable decreased by $31.6 million compared to $25.1 million,

◦Inventories increased by $50.1 million compared to $26.2 million,

◦Prepaid expenses and other assets decreased by $7.7 million compared to an increase of $4.7 million,

◦Accounts payable increased by $21.7 million compared to a decrease of $4.3 million, and

◦Accrued liabilities and other current and long-term operating liabilities decreased by $11.0 million compared to $0.5 million.

Net Cash Used in Investing Activities. Net cash used in investing activities was $23.2 million and $86.4 million for the nine months ended July 3, 2020 and June 28, 2019, respectively. The decrease in cash used in investing activities was primarily due to a business acquisition during the nine months ended June 28, 2019.

Net Cash Provided by Financing Activities. Financing activities for the nine months ended July 3, 2020 consisted of the issuance of $200.0 million in aggregate principal amount of 4.00% unsecured convertible senior notes due 2025 (“Convertible Notes”). The net proceeds from the issuance of the Convertible Notes, after deducting transaction fees, were approximately $193.1 million. In connection with offering the Convertible Notes, we separately entered into privately negotiated convertible note hedge transactions (collectively, the “Hedge Transactions”). The Hedge Transactions cover, subject to customary anti-dilution adjustments, the number of shares of our common stock that initially underlie the Convertible Notes. We also entered into warrant transactions (collectively, the “Warrant Transactions” and, together with the Hedge Transactions, the “Call Spread Transactions”), whereby we sold warrants at a higher strike price relating to the same number of shares of our common stock that initially underlie the Convertible Notes, subject to customary anti-dilution adjustments. We used $11.2 million of the net proceeds from the issuance of the Convertible Notes to pay the cost of the Call Spread Transactions.

Additionally, during the nine months ended July 3, 2020, we had borrowings under our credit agreement of $91.7 million and repayments of borrowings of $218.0 million. Financing activities for the nine months ended June 28, 2019 consisted of borrowings under our credit agreement of $79.0 million, and repayments of borrowings of $65.7 million.

Days Sales Outstanding

Trade accounts receivable days sales outstanding (“DSO”) was 58 days at July 3, 2020 and 63 days at September 27, 2019. Our accounts receivable and DSO are impacted by a number of factors, primarily including the timing of product shipments, collections performance, payment terms, the mix of revenues from different regions and the effects of economic instability.

Contractual Obligations

In October 2013, we entered into an amended agreement with dpiX and other parties that, among other things, provides us with the right to 50% of dpiX’s total manufacturing capacity produced after January 1, 2014. The amended agreement requires us to pay for 50% of the fixed costs (as defined in the amended agreement), as determined at the beginning of each calendar year. In January 2020, the fixed cost commitment was determined and approved by the dpiX board of directors to be $12.7 million for calendar year 2020. As of July 3, 2020, the Company had $6.4 million fixed cost commitments related to this agreement remaining for calendar

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year 2020. The amended agreement will continue unless the ownership structure of dpiX changes (as defined in the amended agreement).

In October 2015, we committed to grant the noncontrolling shareholders of MeVis: (1) an annual recurring net compensation of €0.95 per MeVis share; and (2) a put right for their MeVis shares at €19.77 per MeVis share. As of July 3, 2020, noncontrolling shareholders together held approximately 0.5 million shares of MeVis, representing 26.5% of the outstanding shares. See Note 12, “Redeemable Noncontrolling Interests” of the notes to the condensed consolidated financial statements for more information.

Contingencies

From time to time, we are a party to or otherwise involved in legal proceedings, claims and government inspections or investigations, customs and duties audits and other loss contingency matters, both inside and outside the United States, arising in the ordinary course of our business or otherwise. Such matters are subject to many uncertainties and outcomes are not predictable with assurance.

Off-Balance Sheet Arrangements

In conjunction with the sale of our products in the ordinary course of business, we provide standard indemnification of business partners and customers for losses suffered or incurred for property damages, death and injury and for patent, copyright or any other intellectual property infringement claims by any third parties with respect to our products. The terms of these indemnification arrangements are generally perpetual. Except for losses related to property damages, the maximum potential amount of future payments we could be required to make under these arrangements is unlimited. As of July 3, 2020, we have not incurred any material costs to defend lawsuits or settle claims related to these indemnification arrangements. As a result, we believe the estimated fair value of these arrangements is minimal.

We have indemnification obligations to our directors and officers and certain of our employees that serve as officers or directors of our foreign subsidiaries that may require us to indemnify our directors and officers and those certain employees against liabilities that may arise by reason of their status or service as directors or officers, and to advance their expenses incurred as a result of any legal proceeding against them as to which they could be indemnified. There is no maximum limit on the indemnification that may be required under these obligations. As of July 3, 2020, we have not incurred any material costs related to these indemnification obligations. As a result, we believe the estimated fair value of these obligations is minimal.

Recent Accounting Standards or Updates Not Yet Effective

See Note 1, “Summary of Significant Accounting Policies” of the notes to the condensed consolidated financial statements for a description of recent accounting standards, including the expected dates of adoption and the estimated effects on our condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risks

We are exposed to four primary types of market risks: foreign currency exchange rate risk, credit and counterparty risk, interest rate risk and commodity price risk.

Foreign Currency Exchange Rate Risk

A significant portion of our customers are outside the United States and our products are generally priced in U.S. Dollars. A strong U.S. Dollar may result in pricing pressure for our customers that are located outside the United States and that conduct their businesses in currencies other than the U.S. Dollar. Such pricing pressure has caused, and could continue to cause, some of our customers to ask for discounted prices, delay purchasing decisions, consider moving to in-sourcing supply of components or migrate to lower cost alternatives. In addition, because our business is global and some payments may be made in local currency, fluctuations in foreign currency exchange rates can impact our revenues and expenses and the profitability in U.S. Dollars of products and services that we provide in foreign markets.

We may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities, and net investments in foreign subsidiaries. We generally hedge portions of foreign currency exposure on the balance sheet, typically for one month. In addition, we hold a cross-currency swap between the Euro and U.S. Dollar as a net investment hedge of our acquisition of Direct Conversion. Depending on the spot rate between the Euro and U.S. Dollar at the time of settlement and whether we have sufficient Euros available, we may have to borrow incrementally in U.S. Dollars to settle this obligation. However, we may choose not to hedge certain foreign exchange exposures for a

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variety of reasons including, but not limited to, accounting considerations or the prohibitive economic cost of hedging particular exposures.

Credit and Counterparty Risk

We use a centralized approach to manage substantially all of our cash and to finance our operations. Our cash and cash equivalents may be exposed to a concentration of credit risk and we may also be exposed to credit risk and interest rate risk to the extent that we enter into credit facilities.

We perform ongoing credit evaluations of our customers and we maintain what we believe to be strong credit controls in evaluating and granting customer credit, including performing ongoing evaluations of our customers’ financial condition and creditworthiness and often using letters of credit and requiring industrial customers to provide a down payment.

Interest Rate Risk

In June 2020, we issued the Convertible Notes with an aggregate principal amount of $200 million. We carry the Convertible Notes at face value less the unamortized debt discount and issuance costs on our consolidated balance sheet. The Convertible Notes have a fixed interest rate; therefore, we have no financial statement risk associated with changes in interest rates with respect to the Convertible Notes. The fair value of the Convertible Notes changes when certain factors such as the market price of our stock or market interest rates change.

At July 3, 2020, we had total borrowings under our Credit Agreement of $260.5 million (net of deferred loan costs). Borrowings under our Credit Agreement bear interest at floating interest rates. As a result, we are exposed to fluctuations in interest rates to the extent of our borrowings under the Credit Agreement. As part of our overall risk management program, we entered into several interest rate swaps designed as cash flow hedges, to hedge the floating LIBOR components of our interest rate which represented a notional value of $241.9 million of our debt as of July 3, 2020. See Note 7, “Financial Derivatives and Hedging Activities” for further information on hedging activities. Excluding the amount of our borrowings that is subject to fixed interest rates under our interest rate swaps and Convertible Notes, and assuming the current level of borrowings remained the same, we estimate that our interest expense would change by approximately $0.2 million annually for each one percentage point change in the average interest rate under our borrowings.

Commodity Price Risk

We are exposed to market risks related to volatility in the prices of raw materials used in our products. The prices of these raw materials fluctuate in response to changes in supply and demand fundamentals and our product margins and level of profitability tend to fluctuate with changes in these raw materials prices. We try to protect against such volatility through various business strategies. During the three months ended July 3, 2020, we did not have any commodity derivative instruments in place to manage our exposure to price changes.

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Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that such information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. The Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), with assistance from other members of management, have evaluated the effectiveness of our disclosure controls and procedures as of July 3, 2020, and based on their evaluation, the CEO and CFO have concluded that the disclosure controls and procedures were not effective as of such date due to the material weaknesses in internal control over financial reporting that were disclosed in our Annual Report on Form 10-K for the fiscal year ended September 27, 2019.

Changes in Internal Control Over Financial Reporting

During the quarter ended July 3, 2020, we made the following changes to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting:

•Re-designed and enhanced control activities related to inventory, including inventory count procedures, inventory valuation, and the classification of inventory.

•Enhanced control activities, including the evidence maintained in support of the execution of the control activities. related to business performance monitoring controls at our international entities.

•Enhanced the design of existing controls and implemented new control activities related to the elimination of intercompany balances.

Remediation of Previously Identified Material Weaknesses

As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended September 27, 2019, we began to implement a remediation plan to address the material weaknesses mentioned above. During the first three quarters of fiscal 2020, we began the implementation of a remediation plan to address the material weaknesses identified as of that date. During the first three quarters of fiscal 2020, we hired additional experienced accounting and financial reporting personnel and engaged knowledgeable consultants to provide advice and assistance in the design and implementation of specific remediation plans to address the reported fiscal 2019 control deficiencies. In addition to the items noted above, we have, with the participation of these accounting personnel and consultants, performed the following:

•Enhanced the design and performance of control activities related to the accuracy of customer order entry, quantity, and pricing information.

•Enhanced the design and performance of control activities related to the assessment of accounting for customer arrangements in accordance with Revenue from Contracts with Customers (“ASC 606”).

•Designed and implemented control activities to identify and appropriately assess the impact of post-close events which occur before the financial statements are available to be issued.

•Re-designed and enhanced control activities, including the evidence maintained in support of the execution of the control activities related to the preparation and review of statement of cash flows.

Because the reliability of the internal control process requires repeatable execution, the successful remediation of these material weaknesses will require review and evidence of operating effectiveness prior to concluding that the controls are effective and there is no assurance that additional remediation steps will not be necessary. As such, as we continue to evaluate and work to improve our internal control over financial reporting, our management may decide to take additional measures to address the material weaknesses or modify the remediation steps already underway. Although significant progress has been made, the previously identified material weaknesses continue to exist as of July 3, 2020, and will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to various claims, complaints and legal actions in the normal course of business from time to time. We do not believe we have any currently pending litigation for which the outcome could have a material adverse effect on our operations or financial position.

Item 1A. Risk Factors

The following risk factors and other information included in this quarterly report on Form 10-Q should be carefully considered. Although the risk factors described below are the ones management deems significant, additional risks and uncertainties not presently known to us or that we presently deem less significant may also adversely affect our business operations. If any of the following risks or additional risks and uncertainties actually occur, our business, operating results, and financial condition could be adversely affected.

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

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

Decreased demand for certain products. As an initial response to the pandemic, governments around the world imposed measures designed to reduce the transmission of COVID-19 and individuals responded to the fears of contracting COVID-19 by modifying their behavior. In particular, restrictions on the movement of people and goods were put into place, overall economic activity decreased, elective procedures and exams were delayed or cancelled, there was a significant reduction in physician office visits, and hospitals were postponing or cancelling capital purchases as well as limiting or eliminating services. Those factors, among others, caused customers to delay or cancel orders for certain Varex products. While healthcare systems and economies around the world have begun to reopen, customer demand has not returned to pre-pandemic levels, and the adverse effects of COVID-19 on our financial statements and results of operations are expected to be more persistent, and have been more severe, than previously assumed. Specifically, we now believe that reduced demand in our industrial segment and for certain higher end medical products will continue to depress our results of operations. In addition, new or continuing outbreaks of COVID-19 could lead to further decreases in demand for certain of our products. The actions taken to combat COVID-19 have had, and we believe will continue to have, a negative impact on our operating results, cash flows and financial condition. We believe that COVID-19’s adverse impact on our operating results, cash flows and financial condition will be primarily driven by: the severity and duration of the COVID-19 pandemic; the COVID-19 pandemic’s impact on the U.S. and international healthcare systems, the U.S. economy and worldwide economy; and the timing, scope and effectiveness of U.S. and international governmental responses to the COVID-19 pandemic and associated economic disruptions.

Disruption in manufacturing, distribution, supply chain and other operations. In addition to adversely affecting demand for our products, COVID-19 and associated economic disruptions have had and could continue to have an adverse impact on our manufacturing capacity, supply chains and distribution systems, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments are taking. For example, at our manufacturing facility in the Philippines, many employees have had significant difficulty getting to work, which caused the facility to operate at a decreased capacity and caused us to shift some manufacturing to another location. A reduction or interruption in any of our manufacturing processes could have a material adverse effect on our business. Supply chain logistics have also become more challenging and could remain challenging and result in higher costs. Our ability to move unfinished goods and finished products around the world have been impacted by the decreased availability of global transportation networks. In addition, regulatory approvals for certain of our products may continue to be delayed due to COVID-19 related closures.

Liquidity and credit impacts. Our failure to comply with the covenants contained in our Credit Agreement, including financial covenants, could result in an event of default, which would materially and adversely affect our results of operations and financial condition. Based on information available as of the date of this filing, it is probable that we will be in violation of certain leverage ratio covenants contained in the Credit Agreement within the twelve-month period following the issuance of the financial statements included in this quarterly report on Form 10-Q, including as early as the end of our fiscal year end 2020, without giving effect to steps management is pursuing to avoid such non-compliance. An event of default under our Credit Agreement would raise substantial doubt as to our ability to continue as a going concern, and would also cause a cross-default under the terms of our other outstanding debt and derivative contracts. Although we are taking steps to mitigate this from occurring, we may not be successful and cash generated from

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our operations together with cash received in the future from possible other sources of funding may not be sufficient to enable us to continue as a going concern. See Note 1, Summary of Significant Accounting Policies, for further information.

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 nine months ended July 3, 2020, that accounted for 22% of its revenue. Varex’s ten largest customers as a group accounted for approximately 56% and 51% of its revenue for the three months ended July 3, 2020 and June 28, 2019, respectively. Varex’s ten largest customers as a group accounted for approximately 53% and 52% of its revenue for the nine months ended July 3, 2020 and June 28, 2019, 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. Although Varex seeks to broaden its customer base, it will continue to depend on sales to a relatively small number of major customers. Because it often takes significant time to replace lost business, it is likely that Varex’s operating results would be materially and adversely affected if one or more of its major OEM customers were to cancel, delay, or reduce orders in the future.

Furthermore, Varex generates significant accounts receivables from the sale of its products and the provision of services directly to its major customers. If one or more of these customers were to cancel a product order or service contract (whether in accordance with its terms or otherwise), become insolvent or otherwise be unable or fail to pay for Varex products and services, Varex’s operating results and financial condition could be materially and adversely affected.

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

End-user product demand, economic uncertainties, the COVID-19 pandemic, natural disasters, and other matters beyond Varex’s control make it difficult for its customers to accurately forecast and plan future business activities; which makes it difficult for Varex to accurately predict the demand for its products. Because the manufacture of our products requires some lead-time, changes in customer purchasing forecasts have previously impacted Varex’s business, resulting in excess inventory and slowdowns in sales. Similar inventory adjustments and slowdowns in sales are likely to occur in the future. Changes to customer forecasts can occur on short notice. Varex’s customers also face inherent competitive issues and new product introduction delays which can result in changes in forecasts. The market and regulatory risks faced by Varex’s customers also ultimately impact Varex’s ability to forecast future business. Varex’s agreements for imaging components, such as its three-year pricing agreement with Canon Medical Systems, may contain purchasing estimates that are based on its customers’ historical purchasing patterns rather than firm commitments, and actual purchasing volumes under the agreements may vary significantly from these estimates. The variation from forecasted purchasing volume may be due, in part, to the increasing life of X-ray tubes, which can result in reduced demand for replacement X-ray tubes in ways Varex may not be able to accurately forecast. Reductions in purchasing patterns have in the past and may in the future materially and adversely affect Varex’s operating results. Decreased economic activity associated with the COVID-19 pandemic has had a significant negative impact on the demand for our industrial products and that impact is likely to continue.

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

Rapidly-evolving technology, intense competition and pricing pressure characterize the market in which Varex competes. Varex often competes with companies that have greater financial, marketing and other resources than Varex. Some of the major diagnostic imaging systems companies, which are the primary OEM customers for Varex’s X-ray components, also manufacture X-ray components, including X-ray tubes, for use in their own imaging systems products. Varex must compete with these in-house manufacturing operations for business. If these customers manufacture a greater percentage of their components in-house or otherwise decrease purchases from external sources, which may occur for a number of reasons, including a strong U.S. Dollar, or a general economic slowdown, Varex could experience reductions in purchasing volume by, or loss of, one or more of these customers. Such a reduction or loss may have a material and adverse effect on its business. In addition, Varex competes against other stand-alone, independent X-ray tube manufacturers for both the OEM business of major diagnostic imaging equipment manufacturers and the independent servicing business for X-ray tubes.

The market for flat panel detectors is also very competitive, and Varex faces intense competition from over a dozen smaller competitors. As a result of these competitive dynamics, to effectively retain the business of its customers and compete with its competitors Varex must have an advantage in one or more significant areas, such as lower product cost, better product quality and/or

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superior technology and/or performance. Varex has made price concessions to maintain existing customers and attract new customers, and may have to make additional price concessions in the future.

In its industrial segment, Varex competes with other OEM suppliers, primarily outside of the United States. The market for its X-ray tube and flat panel products used for nondestructive testing in industrial applications is small and highly fragmented. Some of Varex’s competitors outside the United States may have resources and support from their governments that Varex does not, such as preferences for local manufacturers, and may not be subject to the same trade compliance regulations as Varex. Therefore, Varex’s ability to compete in certain high-growth markets may be limited compared to its competitors.

Varex’s competitors could develop technologies and products that are more effective than those Varex currently uses or produces or that could render its products obsolete or noncompetitive. In addition, the timing of Varex’s competitors’ introduction of products into the market could affect the market acceptance and sales of Varex’s products. Some competitors offer specialized products that provide, or may be perceived by customers to provide, an advantage over Varex’s products. Also, some of Varex’s non-U.S. competitors may not be subject to the same standards, regulatory and/or other legal requirements to which Varex is subject and, therefore, they could have a competitive advantage in developing, manufacturing and marketing products and services. Any inability to develop, gain regulatory approval for and supply commercial quantities of competitive products to the market as quickly and effectively as Varex’s competitors could limit market acceptance of Varex’s products and reduce its sales. Any of these competitive factors could negatively and materially affect Varex’s pricing, sales, revenues, market share and gross margins and its ability to maintain or increase its operating margins.

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

Tariffs and changes in international trade agreements or trade-related laws and regulations may have an indirect adverse impact on our business. As a component manufacturer, our products are integrated into the systems and products of our OEM customers. If the United States, China or other countries levy tariffs, duties or other additional taxes or restrictions on our customer’s products, the demand for such products, and our components included in such products, could decrease, which could have a material adverse effect on our business. Uncertainty over tariffs and trade wars could also cause our customers to delay or cancel orders for our products.

In recent years, the United States has imposed tariffs on items imported from China that are incorporated into our products. Tariffs on items imported by us from China and other countries have increased our costs and has increased prices and lowered gross margins on some of our products. These tariffs have had a direct adverse impact on our business and results of operations, and future tariffs could have a more significant impact on our business. China has imposed retaliatory tariffs that impact a number of Varex products including U.S. origin X-ray tubes, heat exchange units, and certain flat panel detectors. The tariffs levied by China have increased our customers’ costs for products imported into China, which has caused us to make price concessions on some products and has caused some customers to stop purchasing products from us. We expect that tariffs will continue to have a negative effect on our business and results of operations, including the possibility of continued price concessions or loss of business. Tariffs could limit our ability to compete for increased market share in China, which could cause our long-term prospects in China to suffer. The imposition of additional tariffs by the United States could result in the adoption of additional tariffs by China and other countries, as well as further retaliatory actions by any affected country, which could negatively impact the global market for imaging equipment and could have a significant adverse effect on our business.

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

Rapid change and technological innovation characterize the markets in which Varex operates, particularly with respect to flat panel technology. Varex’s customers use its products in their medical diagnostic, security, and industrial imaging systems, and Varex must continually introduce new products at competitive costs while also improving existing products with higher quality, lower costs, and increased features. To be successful, Varex must anticipate its customers’ needs and demands, as well as potential shifts in market preferences. Varex’s failure to do so has in the past resulted, and may in the future result, in the loss of customers and an adverse impact to its financial performance. With a relatively strong U.S. Dollar, Varex’s ability to meet its customers’ pricing expectations is particularly challenging and may result in erosion of product margin and market share.

Varex has in the past spent, and in the future may need to spend, more time and money than it expects to develop, market and introduce new products or enhancements, and, even if Varex succeeds, Varex may not be able to recover all or a meaningful part of its investment. Once introduced, new products may materially and adversely impact sales of Varex’s existing products or make them less desirable or even obsolete, which could materially and adversely impact Varex’s revenues and operating results. In addition, certain

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costs, including installation and warranty costs, associated with new products may be proportionately greater than the costs associated with other products and may therefore disproportionately, materially, and adversely affect Varex’s gross and operating margins. If Varex is unable to lower these costs over time, Varex’s operating results could be materially and adversely affected. Some of the electronic components and integrated circuits used in Varex’s flat panel detectors are susceptible to discontinuance and obsolescence risks, which may force Varex to incorporate newer generations of these components, resulting in unplanned additional R&D expenses, delays in the launch of new products, supply disruption, or inventory write downs.

Varex’s ability to successfully develop and introduce new products and product enhancements and simplifications, and the revenues and costs associated with these efforts, are affected by Varex’s ability to, among other things:

properly identify customer needs or long-term customer demands;

prove the feasibility of new products;

•properly manage and control research and development costs;

•limit the time required from proof of feasibility to routine production;

•timely and efficiently comply with internal quality assurance systems and processes;

•limit the timing and cost of regulatory approvals;

•accurately predict and control costs associated with inventory overruns caused by the phase-in of new products and the phase-out of old products;

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

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

•appropriately manage its supply chain;

•manage customer acceptance and payment for products; and

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

Furthermore, as discussed in greater detail elsewhere in this “Risk Factors” section, Varex cannot be sure that it will be able to successfully develop, manufacture, or introduce new products or enhancements, the roll-out of which involves compliance with complex quality assurance processes, including the Quality System Regulation of the U.S. Food and Drug Administration (“FDA”). Failure to complete these processes timely and efficiently could result in delays that could affect Varex’s ability to attract and retain customers or cause customers to delay or cancel orders, which would materially and adversely affect Varex’s revenues and operating results.

More than half of Varex’s revenues are generated from customers located outside the United States, and economic, political, and other risks associated with international sales and operations could materially and adversely affect Varex’s sales or make them less predictable.

Varex conducts business globally. Revenues generated from customers located outside the United States accounted for approximately 67% and 64% of Varex’s total revenues during the three months ended July 3, 2020 and June 28, 2019, respectively. Revenues generated from customers located outside the United States accounted for approximately 67% and 64% of Varex’s total revenues during the nine months ended July 3, 2020 and June 28, 2019, respectively. As a result, Varex must provide significant service and support globally. Varex intends to continue to expand its presence in international markets and expects to expend significant resources in doing so. Varex cannot be sure that it will be able to meet its sales, service, and support objectives or obligations in these international markets or recover its investment in these international markets. Varex’s future results could be harmed by a variety of factors, including:

•currency fluctuations, and in particular the strength of the U.S. Dollar (which is our functional and reporting currency) relative to many currencies, which have and may in the future adversely affect Varex’s financial results and cause some customers to delay purchasing decisions or move to in-sourcing supply or migrate to lower cost alternatives or ask for additional discounts;

•the longer payment cycles associated with many customers located outside the United States;

•difficulties in interpreting or enforcing agreements and collecting receivables through many foreign countries’ legal systems;

•changes in restrictions on trade between the United States and other countries or unstable regional political and economic conditions;

•changes in the political, regulatory, safety or economic conditions in a country or region

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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;

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

•natural disasters and pandemics;

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

•risks unique to the Chinese market, including import barriers and preferences for local manufacturers;

•failure to obtain proper business licenses or other documentation or to otherwise comply with local laws and requirements regarding marketing, sales, service, or any other business Varex conducts in a foreign jurisdiction, which may result in civil or criminal penalties and restrictions on its ability to conduct business in that jurisdiction; and

•difficulties in protecting Varex’s intellectual property in foreign countries.

Although Varex’s sales fluctuate from period to period, in recent years Varex’s international operations have represented a larger share of its business. The more Varex depends on international sales, the more vulnerable Varex becomes to these factors.

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.

Varex’s effective tax rate is impacted by tax laws in both the United States and in foreign countries. Earnings from Varex’s international subsidiaries are generally taxed at rates that differ from U.S. rates. 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. While U.S. Tax Reform imposed a current tax on cumulative undistributed earnings, these earnings could also become subject to incremental foreign withholding or U.S. state taxes should they be actually remitted to the United States, in which case Varex’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. 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.

Varex has entities in certain jurisdictions with cumulative net operating losses for which no income tax benefit can be recorded due to full valuation allowance positions. There could be additional future losses in these and other jurisdictions that would negatively impact Varex's effective tax rate.

Varex's Credit Agreement restricts certain activities, and failure to comply with the terms of the Credit Agreement may have an adverse effect on Varex's business, liquidity and financial position.

Varex is party to a Credit Agreement, which contains restrictive financial covenants, including financial covenants that require Varex to comply with specified financial ratios. If we do not increase our earnings, we are at risk of not being in compliance with certain of our financial covenants, including our consolidated total leverage ratio and our consolidated senior secured leverage ratio. Varex may have to curtail some of its operations to comply with these covenants. In addition, its credit facilities contain other affirmative and negative covenants that could restrict its operating and financing activities. These provisions limit its ability to, among other things, incur future indebtedness, contingent obligations or liens, guarantee indebtedness, make certain investments and capital expenditures, sell stock or assets, pay dividends and consummate certain mergers or acquisitions. Failure to comply with the Credit Agreement requirements, including the requirement to timely deliver financial statements within applicable grace periods, could result in an event of default. Upon an event of default, if the Credit Agreement is not amended or the event of default is not waived, the lender could declare all amounts then outstanding, together with accrued interest, to be immediately due and payable. If this happens, Varex may not be able to make those payments or borrow sufficient funds from alternative sources to make those payments. Even if Varex were to obtain additional financing, that financing may be on unfavorable terms.

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

As of July 3, 2020, Varex’s total combined indebtedness was approximately $417.1 million (net of $57.4 million of debt discount and deferred loan costs). The borrowings under Varex’s Credit Agreement bear interest at floating interest rates and borrowings under the Convertible Notes bear interest at a fixed rate of 4.00%. As part of its overall risk management practices, Varex entered into financial derivatives, particularly interest rate swaps designed as cash flow hedges, to hedge the floating LIBOR interest rate on $241.9 million of its debt. As a result, Varex will be exposed to fluctuations in interest rates to the extent of the balance of its borrowings under the LIBOR-based portion of its credit facilities.

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

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

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

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

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

In addition, Varex’s actual cash requirements in the future may be greater than expected. Varex’s cash flow from operations may not be sufficient to repay all of the outstanding debt as it becomes due, and Varex may not be able to borrow money, sell assets, or otherwise raise funds on acceptable terms, or at all, to refinance Varex’s debt. For example, holders of the Convertible Notes will have the right to require Varex to repurchase all or a portion of the Convertible Notes on the occurrence of a fundamental change at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. Further, if a make-whole fundamental change as defined in the Indenture governing the Convertible Notes occurs prior to the maturity date of the Convertible Notes, Varex will in some cases be required to increase the conversion rate for a holder that elects to convert its Convertible Notes in connection with such make-whole fundamental change. On the conversion of the Convertible Notes, unless Varex elects to deliver solely shares of common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), Varex will be required to make cash payments for the Convertible Notes being converted. However, Varex may not have enough available cash or be able to obtain financing at the time Varex is required to make such repurchases of the Convertible Notes surrendered or pay cash with respect to the Convertible Notes being converted.

Varex may still incur substantially more debt or take other actions that would diminish its ability to make payments on the Convertible Notes when due. Varex’s ability to repay its debt depends on future performance, which is subject to economic, financial, competitive, and other factors beyond our control.

Varex may incur substantial additional debt in the future, subject to the restrictions contained in our current and future debt instruments. We are not restricted under the terms of the Indenture governing the Convertible Notes from incurring additional debt, securing existing or future debt, or taking a number of other actions that could have the effect of diminishing Varex’s ability to make payments on the Convertible Notes when due.

Varex’s ability to pay our debt when due or to refinance our indebtedness, including the Credit Agreement and the Convertible Notes, depends on Varex’s financial condition at such time, the condition of capital markets, and Varex’s future performance, which is subject to economic, financial, competitive, and other factors beyond Varex’s control.

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 Annual Report on Form 10-K, we received a notification letter from Nasdaq advising us that we were not in compliance with Nasdaq listing requirements. While with the filing of our Form 10-K we regained compliance with the Nasdaq listing requirements, if we had failed to regain compliance in a timely manner, it would have negatively impacted Varex.

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Varex must, among other things, establish and maintain effective internal controls and procedures for financial reporting and disclosure purposes. Internal control over financial reporting is complex and may be revised over time to adapt to changes in Varex’s business or changes in applicable accounting rules. As described in the following risk factor, Varex has identified material weaknesses in its internal control over financial reporting. Varex cannot assure that its internal control over financial reporting will be effective in the future or that additional material weaknesses will not be discovered with respect to a prior period for which it had previously believed that internal controls were effective.

Matters impacting Varex’s internal controls may cause Varex to be unable to report its financial information on a timely basis or may cause Varex to restate previously-issued financial information, thereby subjecting Varex to adverse regulatory consequences, including sanctions or investigations by the SEC or in respect of violations of applicable stock exchange listing rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in Varex and the reliability of its financial statements, which could affect Varex’s stock price.

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

As a result of the delayed filing of our Annual Report on Form 10-K, Varex will not be eligible to register the offer and sale of our securities using a registration statement on Form S-3 until one year from the date it regained and maintains its status as a current filer. Should Varex wish to register the offer and sale of its securities to the public prior to the time it is eligible to use Form S-3, both the transaction costs and the amount of time required to complete the transaction could increase, making it more difficult to execute any such transaction successfully and potentially harming our financial condition.

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

As further described in Item 9A in our Annual Report on Form 10-K, for the fiscal year ended September 27, 2019, at the end of each of fiscal year 2019 and 2018, management determined that Varex’s internal control over financial reporting and its disclosure controls and procedures were not effective and that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified material weaknesses within our risk assessment process and control environment. Management also identified business process control deficiencies which resulted in material weaknesses in the business processes for revenue, inventory and financial close. These material weaknesses resulted in immaterial audit adjustments and out of period adjustments to Varex's consolidated financial statements. Until remediated, these material weaknesses could result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected on a timely basis. There can be no assurance that the remedial measures being implemented by Varex's management will be successful. 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 may face additional risks from the acquisition or development of new lines of business.

From time to time, Varex may acquire or develop new lines of business. There are substantial risks and uncertainties associated with new lines of business, particularly in instances where the markets are not fully developed. Risks include developing knowledge of and experience in the new business, recruiting market professionals, increasing research and development expenditures, and developing and capitalizing on new relationships with experienced market participants. This may mean significant investment and involvement of Varex’s senior management to acquire or develop, then integrate, the business into its operations. Timelines for integration of new businesses may not be achieved, and price and profitability targets may not prove feasible, as new products can carry lower gross margins than existing products. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences may also impact whether implementation of a new business will be successful. Failure to manage these risks could have a material and adverse effect on Varex’s business, results of operations, and/or financial condition.

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

Varex’s ability to identify and take advantage of attractive acquisitions or other business development opportunities is an important component in implementing its overall business strategy. Varex must grow its businesses in response to changing technologies, customer demands, and competitive pressures. In some circumstances, Varex may decide to grow its business through the acquisition of complementary businesses, products, or technologies, rather than through internal development; however, there is no guarantee that these acquisitions will be successful or that Varex will realize a return on its investment.

Identifying suitable acquisition candidates can be difficult, time consuming, and costly, and Varex may not be able to identify suitable candidates or successfully complete or finance identified acquisitions, including as a result of failing to obtain regulatory or competition clearances, which could impair Varex’s growth and ability to compete. In addition, completing an acquisition can divert Varex’s management and key personnel from its current business operations, which could harm its business and affect its financial results. Even if Varex completes an acquisition, Varex may not be able to successfully integrate newly-acquired organizations, products, technologies, or employees into its operations or may not fully realize some of the expected synergies.

Integrating an acquisition can also be expensive and time consuming and may strain Varex’s resources. It may cost Varex more to commercialize new products than originally anticipated or cause Varex to increase its expenses related to research and development, either of which could materially and adversely impact its results of operations. In many instances, integrating a new business will also involve implementing or improving internal controls appropriate for a public company into a business that lacks them. It is also possible that an acquisition could increase Varex’s risk of litigation, as a third party may be more likely to assert a legal claim following an acquisition because of perceived deeper pockets or a perceived greater value of a claim. In addition, Varex may be unable to retain the employees of acquired companies or the acquired company’s customers, suppliers, distributors, or other partners for a variety of reasons, including the fact that these entities may be Varex’s competitors or may have close relationships with its competitors.

Further, Varex may find that it needs to restructure or divest acquired businesses or assets of those businesses. Even if it does so, an acquisition may not produce the full efficiencies, growth, or benefits that were expected. If Varex decides to sell assets or a business, it may be difficult to identify buyers or alternative exit strategies on acceptable terms, in a timely manner, or at all, which could delay the accomplishment of its strategic objectives. Varex may be required to dispose of a business at a lower price or on less advantageous terms, or to recognize greater losses than it had anticipated.

If Varex acquires a business, it allocates the total purchase price to the acquired business’ tangible assets and liabilities, identifiable intangible assets, and liabilities based on their fair values as of the date of the acquisition and records the excess of the purchase price over those values as goodwill. If it fails to achieve the anticipated growth from an acquisition, or if it decides to sell assets or a business, it may be required to recognize an impairment loss on the write down of its assets and goodwill, which could materially and adversely affect its financial results. In addition, acquisitions can result in potentially dilutive issuances of equity securities or the incurrence of debt, contingent liabilities or expenses, or other charges, any of which could harm Varex’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. 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.

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

The majority of Varex’s products are manufactured at its facility in Salt Lake City, Utah. Varex’s manufacturing operations are subject to potential power failures, the breakdown, failure, or substandard performance of equipment, the improper installation or operation of equipment, pandemics, and natural or other disasters. Loss or damage to its manufacturing facility due to any of these factors or otherwise could materially and adversely affect Varex’s ability to manufacture sufficient quantities of its products or otherwise deliver products to meet customer demand or contractual requirements, which may result in a loss of revenue and other adverse business consequences. Because of the time required to obtain regulatory approval and licensing of a manufacturing facility, Varex may not be available on a timely basis to replace any lost manufacturing capacity. The occurrence of these or any other

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operational issues at Varex’s manufacturing facilities could have a material and adverse effect on Varex’s business, financial condition, and results of operations.

Some of Varex’s products are manufactured in Wuxi, China; Walluf, Germany; Heerlen and Dinxperlo, the Netherlands; and Calamba City, Philippines, which are subject to similar risks but may also face additional regulatory and political risks, which could impact Varex’s ability to manufacture and ship products in a timely manner or at all. Varex also manufactures security products in Las Vegas, Nevada, and these operations are also subject to potential power failures, the breakdown, failure, or substandard performance of equipment, the improper installation or operation of equipment, earthquakes, and other disasters, all of which could materially and adversely affect Varex’s ability to deliver products to meet customer demand. In addition, Varex’s costs associated with manufacturing its products can vary significantly from quarter to quarter, and fluctuations thereof may adversely affect its business, operating results, and/or financial condition.

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. 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. This, in turn, has caused Varex’s customers to be more cautious with, and sometimes freeze, delay, or dramatically reduce purchases and capital project expenditures. Some countries have adopted and may in the future adopt austerity or stimulus programs that could negatively affect Varex’s results from period to period. In addition, actions taken by the current U.S. administration may also create global economic uncertainty, which may cause our customers to reduce their spending, which, in turn, could adversely affect our business, financial condition, operating results, and cash flows. An uncertain economic environment may also disrupt supply or affect our service business, as customers’ constrained budgets may result in pricing pressure, extended warranty provisions, and even cancellation of service contracts.

In addition, concerns over continued economic instability could make it more difficult for Varex to collect outstanding receivables. A weak or deteriorating healthcare market would inevitably materially and adversely affect Varex’s business, financial conditions, and results of operations.

Because Varex’s products are generally priced in U.S. Dollars, the strengthening of the U.S. Dollar in the last several years has caused, and could continue to cause, some customers to ask for discounts, delay purchasing decisions, or consider moving to in-sourcing such components or migrating to lower cost alternatives. Further, because Varex’s business is global and some payments may be made in local currency, fluctuations in foreign currency exchange rates can impact its results by affecting product demand, revenues and expenses, and/or the profitability in U.S. 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. 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. 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.

The loss of a supplier or 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.

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

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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. 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.

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

Varex relies on the supplies of certain raw materials such as tungsten, lead, iridium, and copper for security and inspection products and copper, lead, tungsten, rhenium, molybdenum zirconium, and various high grades of steel alloy for X-ray tubes. Worldwide demand, availability, and pricing of these raw materials have been volatile, and Varex expects that availability and pricing will continue to fluctuate in the future. If supplies are restricted or become unavailable or if prices increase, this could constrain Varex’s manufacturing of affected products, reduce its profit margins, or otherwise materially and adversely affect its business.

Varex is required to disclose (1) the presence in a company’s products of certain metals known as “conflict minerals,” which are metals mined from the Democratic Republic of the Congo and adjoining countries, and (2) procedures regarding a manufacturer’s efforts to identify the sourcing of those minerals from this region. Varex’s complex supply chain may inhibit Varex’s ability to sufficiently verify the origins of the relevant minerals used in its products through the due diligence procedures that it implements, which may harm Varex’s reputation. In addition, Varex may encounter challenges in satisfying customers who require that all of the components of Varex products are certified as conflict-free, which could place Varex at a competitive disadvantage if it is unable to do so. Moreover, complying with these rules requires investigative efforts, which has and will continue to cause Varex to incur associated costs and could materially and adversely affect the sourcing, supply, and pricing of materials used in Varex’s products or result in process or manufacturing modifications, all of which could materially and adversely affect its results of operations.

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

In the past year, Varex's stock price has ranged from a low of $14.27 to a high of $33.00. Varex cannot guarantee that an active trading market will be sustained for its common stock. Nor can Varex predict the prices at which shares of its common stock may trade. Varex has experienced and expects in the future to experience fluctuations in its operating results, including revenues and margins, from period to period. These fluctuations may cause Varex’s stock price to be volatile, which could cause losses for its stockholders.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

•accounting changes and adoption of new accounting pronouncements.

Because many of Varex’s operating expenses are based on anticipated capacity levels, and a high percentage of these expenses are fixed for the short term, a small variation in the timing of revenue recognition can cause significant variations in operating results from quarter to quarter. If Varex’s gross margins fall below the expectation of securities analysts and investors, the trading price of Varex common stock may decline.

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

Regulatory requirements affecting Varex’s operations and sales outside the United States vary from country to country, often differing significantly from those in the United States. In general, outside the United States, some of Varex’s products are regulated as medical devices by foreign governmental agencies similar to the FDA.

For Varex to market its products internationally, Varex must obtain clearances or approvals for products and product modifications. 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.

Within the EU/EEA, Varex must obtain, and in turn affix, a CE mark certification, which is a European marking of conformity that indicates that a product meets the essential requirements of the Medical Device Directive. Compliance with the Medical Device Directive is done through a self-certification process that is then verified by an independent certification body called a “Notified Body,” which is an organization empowered by the legislature to conduct this verification. Once the CE mark is affixed, the Notified Body will regularly audit Varex to ensure that it remains in compliance with the applicable European laws and Medical Device Directive. By affixing the CE mark to its product, Varex is certifying that its products comply with the laws and regulations required by the EU/EEA countries, thereby allowing the free movement of its products within these countries and others that accept CE mark standards. 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. 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.

Varex is also subject to international laws and regulations of general applicability relating to matters such as environmental protection, safe working conditions, and manufacturing practices, as well as others. These are often comparable to, if not more stringent than, the equivalent regulations in the United States. Sales overseas are also affected by regulation of matters such as product standards, packaging, labeling, environmental and product recycling requirements, import and export restrictions, tariffs, duties, and taxes.

In addition, Varex is required to timely file various reports with international regulatory authorities similar to the reports it is required to timely file with U.S. regulatory authorities, including reports required by international adverse event reporting regulations. If these reports are not timely filed, regulators may impose sanctions, including temporarily suspending Varex’s market authorizations or CE mark, and sales of its products may suffer.

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Further, as Varex enters new businesses or pursues new business opportunities internationally, or as regulatory schemes change, Varex may become subject to additional laws, rules, and regulations. Becoming familiar with and implementing the infrastructure necessary to comply with these laws, rules, and regulations is costly. Additionally, in some countries, Varex relies or may rely in the future on foreign distributors and agents to assist in complying with foreign regulatory requirements, and Varex cannot be sure that they will always do so. The failure of Varex or its agents to comply with these laws, rules, and regulations could delay the introduction of new products, cause reputational harm, or result in investigations, fines, injunctions, civil penalties, criminal prosecution, or an inability to sell Varex’s products in or to import its products into certain countries, which could materially and adversely affect Varex’s business.

Compliance with U.S. laws and regulations applicable to the marketing, manufacture, and distribution of Varex’s 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 Varex from distributing its products, require Varex to recall its products, or result in significant penalties or other harm to Varex’s business.

Some of Varex’s products and those of OEMs that incorporate Varex’s products are subject to extensive and rigorous government regulation in the United States. Compliance with these laws and regulations is expensive and time-consuming, and failure to comply with these laws and regulations could materially and adversely affect Varex’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 makes announced and unannounced periodic and on-going inspections of medical device manufacturers to determine compliance with QSR and, in connection with these inspections, issues reports known as Form FDA 483 reports when the FDA believes the manufacturer has failed to comply with applicable regulations and/or procedures. If observations from the FDA issued on Form FDA 483 reports are not addressed and/or corrective action is not taken in a timely manner and to the FDA’s satisfaction, the FDA may issue a warning letter and/or proceed directly to other forms of enforcement action. Similarly, if a warning letter were issued, prompt corrective action to come into compliance would be required. Failure to respond in a timely manner to Form FDA 483 observations, a warning letter, or any other notice of noncompliance and to promptly come into compliance could result in the FDA bringing an enforcement action, which could include the total shutdown of Varex’s production facilities, denial of importation rights to the United States for products manufactured in overseas locations, adverse publicity, and criminal and civil fines. The expense and costs of any corrective actions that Varex may take, which may include product recalls, correction and removal of products from customer sites, and/or changes to its product manufacturing and quality systems, could materially and adversely impact Varex’s financial results and may also divert management resources, attention, and time. Additionally, if a warning letter were issued, customers could delay purchasing decisions or cancel orders, and Varex could face increased pressure from its competitors, who could use the warning letter against Varex in competitive sales situations, either of which could materially and adversely affect Varex’s reputation, business, and stock price.

In addition, Varex is required to timely file various reports with the FDA, including reports required by the medical device reporting regulations (“MDRs”), that require Varex report to regulatory authorities if its devices may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur. If Varex initiates a correction or removal of a device to reduce a risk to health posed by the device, Varex would be required to submit a publicly-available correction and removal report to the FDA and, in many cases, similar reports to other regulatory agencies. This report could be classified by the FDA as a device recall, which could lead to increased scrutiny by the FDA, other international regulatory agencies, and Varex’s customers regarding the quality and safety of Varex’s devices. If these MDRs or correction and removal reports are not filed on a timely basis, regulators may impose sanctions, sales of Varex’s products may suffer, and Varex may be subject to product liability or regulatory enforcement actions, all of which could harm its business.

Government regulation may also cause significant delays or even prevent the marketing and full commercialization of future products or services that Varex may develop and/or may impose costly requirements on Varex’s business. Further, as Varex enters new businesses or pursues new business opportunities, Varex will become subject to additional laws, rules, and regulations, including FDA and foreign rules and regulations. Becoming familiar with and implementing the infrastructure necessary to comply with these laws, rules, and regulations is costly and time consuming. In addition, failure to comply with these laws, rules and regulations could delay the introduction of new products and could materially and adversely affect Varex’s business.

If Varex or any of its 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, Varex may face:

•adverse publicity affecting both Varex and its customers;

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•increased pressures from competitors;

•investigations by governmental authorities;

•fines, injunctions, civil penalties, and criminal prosecution;

•partial suspension or total shutdown of production facilities or the imposition of operating restrictions;

•increased difficulty in obtaining required clearances or approvals or losses of clearances or approvals already granted;

•seizures or recalls of Varex products or those of its customers;

•delays in purchasing decisions by customers or cancellation of existing orders;

•the inability to sell Varex products; and

•difficulty in obtaining product liability or operating insurance at a reasonable cost, or at all.

Varex is also subject to federal and state laws and regulations of general applicability relating to matters such as environmental protection, safe working conditions, manufacturing practices, and other matters. Insurance coverage is not commercially available for violations of law, including the fines, penalties, or investigatory costs that Varex may incur as the consequence of regulatory violations. Consequently, Varex does not have insurance that would cover this type of liability.

Varex sells certain X-ray tube products as replacements which are subject to medical device certification and product registration laws and regulations, which vary by country and are subject to change, and Varex may be unable to receive registration approval or renewal of existing registrations if it fails to meet regulatory approval requirements or if the approval process becomes commercially infeasible or impractical.

Varex markets and distributes certain X-ray tubes through distributors and third-party/multi-vendor service organizations that are used as equivalent replacements for specific OEM tubes. Varex is subject to medical device certification and product registration laws, which vary by country and are subject to periodic reviews and changes by regulatory authorities in those countries. For example, to sell X-ray tubes for replacement applications in China, product registrations must be approved by the new National Medical Products Administration (“NMPA”). Varex must comply with the requirements of the NMPA, and Varex may not be able to receive registration approval or renewal of existing registrations if it fails to meet regulatory approval requirements or if the process of gaining approval becomes commercially infeasible or impractical. Certain of these local laws and regulations have the effect of serving as a barrier to trade and can be difficult to navigate predictably.

In addition, certain countries in which 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.

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.

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. Medicare and Medicaid programs, foreign government programs, private insurance plans, health maintenance organizations, and preferred provider organizations. Without adequate reimbursement, the demand for Varex’s customers’ products, and therefore indirectly Varex’s products, may be limited.

Healthcare reform proposals and medical cost containment measures in the United States and in many foreign countries could limit the use of both Varex’s and its customers’ products, reduce reimbursement available for such use, further tax the sale or use of Varex’s products, and further increase the administrative and financial burden of compliance. These reforms and measures, including the uncertainty in the medical community regarding their nature and effect, could have a material and adverse effect on Varex’s and its customers’ purchasing decisions regarding its products and treatments and could harm Varex’s business, results of operations, financial condition, and prospects. Varex cannot predict the specific healthcare programs and regulations that will be ultimately implemented by local, regional, and national governments globally. However, any changes that lower reimbursements for Varex’s or its customers’ products and/or procedures using these products, including, for example, existing reimbursement incentives to convert from analog to digital X-ray systems, or changes that reduce medical procedure volumes or increase cost containment pressures on Varex or others in the healthcare sector could materially and adversely affect Varex’s business and results of operations.

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Varex is subject to federal, state, and foreign laws governing its business practices which, if violated, could result in substantial penalties. Additionally, challenges to or investigations into Varex’s practices could cause adverse publicity and be costly to respond to and thus could harm its business.

Anti-corruption laws and regulations. Varex is subject to the U.S. Foreign Corrupt Practices Act and anti-corruption laws, as well as similar laws in foreign countries, such as the U.K. Bribery Act. In general, there is a worldwide trend to strengthen anti-corruption laws and their enforcement, and the healthcare industry and medical equipment manufacturers have been particular targets of these investigation and enforcement efforts. Any violation of these laws by Varex or its agents or distributors could create substantial liability for Varex, subject its officers and directors to personal liability, and cause a loss of reputation in the market. Varex operates in many countries, including India and China, where the public sector is often perceived as being corrupt. Varex’s strategic business plans include expanding its business in regions and countries that are rated as higher risk for corruption activity by Transparency International e.V., an international non-profit that publishes an annual corruption perception index. Becoming familiar with and implementing the infrastructure necessary to comply with laws, rules, and regulations applicable to new business activities and mitigating and protecting against corruption risks could be costly. Failure by Varex or its agents or distributors to comply with these laws, rules, and regulations could delay its expansion into high-growth markets and could materially and adversely affect its business. Varex will likely do more business, directly and potentially indirectly, in countries where the public sector is perceived to be corrupt. Increased business in higher-risk countries could subject Varex and its officers and directors to increased scrutiny and increased liability from its business operations.

Competition and trade compliance laws. Varex is subject to various competition and trade compliance laws in the jurisdictions where it operates. Regulatory authorities in those jurisdictions may have the power to subject Varex to sanctions and impose changes or conditions in the way Varex conducts its business. An increasing number of jurisdictions provide private rights of action for competitors or consumers to assert claims of anti-competitive conduct and seek damages. Increased government scrutiny of Varex’s actions or enforcement or private rights of action could materially and adversely affect its business or damage its reputation. Varex may be required to conduct internal investigations or face audits or investigations by one or more domestic or foreign government agencies, which could be costly and time consuming and could divert its management and key personnel from its business operations. An adverse outcome under any such investigation or audit could subject Varex to fines and/or or criminal or other penalties, which could materially and adversely affect Varex’s business and financial results. Furthermore, competition laws may prohibit or increase the cost of future acquisitions that Varex may desire to undertake.

Laws governing collection and processing of personal information. Varex is subject to laws governing collection, storage, processing and transfer of personal information in the jurisdictions it operates. Compliance with these laws and regulations, such as the General Data Protection Regulation (GDPR) can cause a significant administrative burden on our business. If Varex were to be found in violation of GDPR or other similar laws and regulations, we may be required to change our business practices and/or be subject to significant civil penalties, business disruption, and reputational harm, any of which could have an adverse effect on our business.

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. The U.S. Medicare and Medicaid “anti-kickback” laws, and similar state laws, prohibit payments or other remuneration that is intended to induce hospitals, physicians, or others either to refer patients or to purchase, lease, or order, or to arrange for or recommend the purchase, lease, or order of healthcare products or services for which payment may be made under federal and state healthcare programs, such as Medicare and Medicaid. These laws affect Varex’s sales, marketing, and other promotional activities by limiting the kinds of financial arrangements Varex may have with hospitals, physicians, or other potential purchasers of its products. They particularly impact how Varex structures its sales offerings, including discount practices, customer support, education and training programs, physician consulting, research grants, and other fee-for-service arrangements. These laws are broadly written, and it is often difficult to determine precisely how these laws will be applied to specific circumstances.

Federal and state “false claims” laws generally prohibit knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other government payors that are false or fraudulent, or for items or services that were not provided as claimed. Although Varex does not submit claims directly to payors, manufacturers can be, and have been, held liable under these laws if they are deemed to “cause” the submission of false or fraudulent claims by providing inaccurate billing or coding information to customers or through certain other activities, including promoting products for uses not approved or cleared by the FDA, which is called off-label promotion. Violating “anti-kickback” and “false claims” laws can result in civil and criminal penalties, which can be substantial, as well as potential mandatory or discretionary exclusion from healthcare programs for noncompliance. Even an unsuccessful challenge or investigation into Varex’s practices could cause adverse publicity and be costly to defend and thus could harm its business and results of operations. Additionally, several recently-enacted state and federal laws, including laws in

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Massachusetts and Vermont, and the federal Physician Payment Sunshine Act, now require, among other things, extensive tracking and maintenance of databases regarding the disclosure of equity ownership and payments to physicians, healthcare providers, and hospitals. These laws may require 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.

Varex is subject to similar laws in foreign countries where it conducts business. For example, within the EU, the control of unlawful marketing activities is a matter of national law in each of the member states. The member states of the EU closely monitor perceived unlawful marketing activity by companies. Varex could face civil, criminal, and administrative sanctions if any member state determines that Varex has breached its obligations under such state’s national laws. Industry associations also closely monitor the activities of member companies. If these organizations or authorities name Varex as having breached its obligations under their regulations, rules, or standards, its reputation would suffer, and its business and financial condition could be materially and adversely affected.

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

Varex could experience an increase in warranty claims as a result of issues with product quality or product failures as a direct result of Varex’s design, manufacturing, or issues in its supply chain. Such an occurrence may damage Varex’s market reputation, cause sales to decline, or require repairs or voluntary remedial measures to enhance customer satisfaction, which could materially and adversely impact Varex’s financial results. Increased warranty claims on any given product could cause Varex to halt production on that product and significantly impair Varex’s liquidity and profitability, and cause reputational harm to Varex. Because some categories of products tend to experience higher numbers of warranty claims than others, a shift in the types of products that Varex’s customers purchase could lead to an increase in warranty claims. If actual levels of warranty claims are greater than the level of claims Varex estimates, cost of sales could increase, and Varex’s financial condition could be materially and adversely affected. In addition, product quality issues could result in significant follow-on effects for Varex, including, among other things, reputational harm to Varex and its customers, loss of customers, and liability as a result of product quality issues. These outcomes would materially and adversely affect Varex’s business and financial condition.

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

Many of Varex’s products have a long production cycle, and Varex must anticipate demand for its products to ensure adequate manufacturing or testing capacity. If Varex is unable to anticipate demand, and its manufacturing or testing capacity does not keep pace with product demand, Varex will not be able to fulfill orders in a timely manner, which may negatively impact its financial results and overall business. Conversely, if demand for Varex’s products decreases, the fixed costs associated with excess manufacturing capacity may harm its financial results, including by decreasing gross margins and increasing research and development costs as a percentage of revenue.

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

Varex designs, manufactures, sells, and services Linatron^® X-ray accelerators, image-processing software, and image detection products for security and inspection, such as cargo screening at ports and borders and nondestructive examination for a variety of applications, as well as industrial applications. Varex generally sells security and inspection products to OEMs who incorporate its products into their inspection systems, which are then sold to customs and other government agencies, as well as to commercial organizations in the casting, power, aerospace, chemical, petro-chemical, and automotive industries. Varex believes growth in its security and inspection products will be driven by security cargo screening and border protection needs, as well as by the needs of customs agencies to verify shipments for assessing duties and taxes. This business is heavily influenced by domestic and international government policies on border and port security, political change, and government budgets. In addition, Varex believes growth in this product line may be driven in part by industrial customers engaged in 3-D printing, which, as a developing market, may be difficult to predict. Orders for Varex’s security and inspection products have been and may continue to be unpredictable, as governmental agencies may place large orders with Varex or its OEM customers in a short time period and then may not place any orders for a long time period thereafter. Because it is difficult to predict Varex’s OEM customer delivery, the actual timing of sales and revenue recognition varies significantly. The market for border protection systems has slowed significantly, and end customers, particularly in oil-based economies and war zones in which Varex has a significant customer base, are delaying system deployments or tenders and considering moving to alternative sources, resulting in a decline in the demand for security and inspection products.

The demand for Varex’s security and inspection products is heavily influenced by U.S. and foreign governmental policies on national and homeland security, border protection, and customs activities, which depend upon government budgets and appropriations

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that are subject to economic conditions, as well as political changes and oil prices. Varex has seen customers freeze or dramatically reduce purchases and capital project expenditures, delay projects, or act cautiously as governments around the world wrestle with spending priorities. As economic growth remains sluggish in various jurisdictions and appears to be deteriorating in others, and as concerns about levels of government employment and government debt continue, Varex expects that these effects will also continue. Bid awards in this business may be subject to challenge by third parties, as Varex has previously encountered with a large government project. These factors make this business more unpredictable and could cause volatility in Varex’s revenues and earnings.

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

Varex conducts certain manufacturing operations internationally to reduce costs and streamline its manufacturing operations. There are administrative, legal, and governmental risks to operating internationally that could increase operating expenses or hamper the development of these operations. The risks from operating internationally that could increase Varex’s operating expenses and materially and adversely affect its operating results, financial condition, and ability to deliver its products and grow its business include, among others:

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

•fluctuations in currency exchange rates;

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

•difficulties in enforcing contracts and protecting intellectual property;

•diversion of management attention;

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

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

•inadequacy of the local infrastructure to support its operations.

Varex’s international locations expose it to higher security risks compared to its United States locations, which could result in both harm to its employees and contractors or substantial costs. Some of its services are performed in or adjacent to high-risk locations where the country or location and surrounding area is suffering from political, social, or economic turmoil, war or civil unrest, or has a high level of criminal or terrorist activity. In those locations where Varex has employees or operations, Varex may incur substantial costs to maintain the safety of its personnel. Despite these precautions, the safety of its personnel in these locations may continue to be at risk, and Varex may in the future suffer the loss of employees and contractors, which could harm its business reputation and operating results.

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

Varex files applications as appropriate for patents covering new products and manufacturing processes. Varex cannot be sure, however, that patents will be issued from any of Varex’s pending or future patent applications. Varex also cannot be sure that its current patents, the claims allowed under its current patents, or patents for technologies licensed to Varex will be sufficiently broad to protect its technology position against competitors. Issued patents owned by, or licensed to, Varex may be challenged, invalidated, or circumvented, or the rights granted under the patents may not provide Varex with competitive advantages. Asserting Varex’s patent rights against others in litigation or other legal proceedings is costly and diverts managerial resources. For example, during fiscal year 2019, Varex initiated litigation asserting claims of patent infringement against a third party. Varex intends to prosecute its claims vigorously, and Varex has experienced, and will continue to experience, increased legal expenses related to this litigation that could adversely affect its financial results. An adverse finding in this or similar patent infringement litigation could adversely impact Varex’s competitive position. In addition, Varex may not be able to detect patent infringement by others or may lose its competitive position in the market before Varex is able to do so.

Varex also relies on a combination of copyright, trade secret, and other laws, and contractual restrictions on disclosure, copying and transferring title (including confidentiality agreements with vendors, strategic partners, co-developers, employees, consultants, and other third parties), to protect its proprietary, and other confidential rights. These protections may prove to be inadequate, since agreements may still be breached, and Varex may not have adequate remedies for a breach. Varex’s trade secrets may become known to or be independently developed by others, including as a result of misappropriation by unauthorized access to Varex’s technology systems. If Varex’s proprietary or confidential information is misappropriated, its business and financial results

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could be materially and adversely impacted. Varex has trademarks, both registered and unregistered, that are maintained and enforced to provide customer recognition for its products in the marketplace, but unauthorized parties may still use them. Varex also licenses certain patented or proprietary technologies from others. In some cases, products with substantial revenues may depend on these license rights. If Varex were to lose the rights to license these technologies, or its costs to license these technologies were to materially increase, its business would suffer. As Varex expands its manufacturing capabilities outside of the United States, more of Varex’s intellectual property may be held in jurisdictions that do not have robust intellectual property protections, which may make it harder for Varex to adequately protect its Intellectual Property.

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

There is a substantial amount of litigation over patent and other intellectual property rights in the industries in which Varex competes. Varex’s competitors, like companies in many high technology businesses, continually review other companies’ activities for possible conflicts with their own intellectual property rights. In addition, non-practicing entities may review Varex’s activities for conflicts with their patent rights. Determining whether a product infringes on a party’s intellectual property rights involves complex legal and factual issues, and the outcome of this type of litigation is often uncertain. Parties may claim that Varex is infringing upon their intellectual property rights. Varex may not be aware of intellectual property rights of others that relate to its products, services, or technologies. From time to time, Varex has received notices from parties asserting infringement, and Varex has been subject to lawsuits alleging infringement of patent or other intellectual property rights. Any dispute regarding patents or other intellectual property could be costly and time consuming and could divert Varex’s management and key personnel from its business operations. Varex may not prevail in a dispute. Varex does not maintain insurance for intellectual property infringement, so costs of defense, whether or not Varex is successful in defending an infringement claim, will be borne by Varex and could be significant. If Varex is unsuccessful in defending or appealing an infringement claim, Varex may be subject to significant damages, and its combined financial position, results of operations, or cash flows could be materially and adversely affected. Varex may also be subject to injunctions against development and sale of its products, the effect of which could be to materially reduce its revenues. Furthermore, a third party claiming infringement may not be willing to license its rights to Varex, and even if a third-party rights holder is willing to do so, the amounts Varex might be required to pay under the associated royalty or license agreement could be significant. Varex could decide to alter its business strategy or voluntarily cease the allegedly infringing actions rather than face litigation or pay a royalty, which could materially and adversely impact its business and results of operations.

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

Varex’s business exposes it to potential product liability claims that are inherent in the manufacture, sale, installation, servicing, and support of components that are used in medical devices and other devices that deliver radiation. Because Varex’s products, through incorporation in OEMs’ systems, are involved in the intentional delivery of radiation to the human body and other situations where people may come into contact with radiation (for example, when Varex’s security and inspection products are being used to scan cargo or in the diagnosis of medical problems), the possibility for significant personal injury or loss of life exists. Although Varex’s products are incorporated into OEMs’ systems, and thus only perform pursuant to the design and operating systems of OEMs, Varex may also be subject to claims for property damage, personal injury, or economic loss related to or resulting from any errors or defects in its products or the installation, servicing, or support of its products. Any accident or mistreatment could subject Varex to legal costs, litigation, adverse publicity, and damage to its reputation, whether or not its products or services were a factor.

If Varex’s X-ray inspection systems fail to detect the presence of bombs, explosives, weapons, contraband, or other threats to personal safety, Varex could be subject to product and other liability claims or negative publicity, which could result in increased costs, reduced sales, and a decline in the market price of Varex’s common stock. There are many factors beyond Varex’s control that could result in the failure of its products to detect the presence of bombs, explosives, weapons, contraband, or other threats to personal safety, including operator error and misuse of or malfunction of Varex equipment. The failure of Varex’s systems to detect the presence of these dangerous materials may lead to personal injury, loss of life, and extensive property damage and may result in potential claims against Varex.

Product liability actions are subject to uncertainty and may be expensive, time consuming, and disruptive to Varex’s operations. For these and other reasons, Varex may choose to settle product liability claims against it regardless of their actual merit. A product liability action determined against Varex could result in adverse publicity or significant damages, including the possibility of punitive damages, and Varex’s combined financial position, results of operations, or cash flows could be materially and adversely affected.

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If a product Varex designs or manufactures were defective (whether due to design, labeling or manufacturing defects, improper use of the product, or other reasons), Varex may be required to correct or recall the product and notify regulatory authorities. The adverse publicity resulting from a correction or recall could damage Varex’s reputation and cause customers to review and potentially terminate their relationships with Varex. A product correction or recall could consume management time and have an adverse financial impact on its business, including incurring substantial costs, losing revenues, and accruing losses.

Varex maintains limited product liability insurance coverage. Varex’s product liability insurance policies are expensive and have high deductible amounts and self-insured retentions. Varex’s insurance coverage may prove to be inadequate, and future policies may not be available on acceptable terms or in sufficient amounts, if at all. If a material claim is not insured or is in excess of Varex’s insurance coverage, Varex could have to pay substantial damages, which could have a material and adverse effect on its financial position and/or results of operations.

Certain of Varex’s products are subject to regulations relating to use of radioactive material, compliance with which may be costly, and a failure to comply therewith may materially and adversely affect Varex’s business.

As a manufacturer and seller of medical devices and devices emitting radiation or utilizing radioactive by-product material, Varex and some of its suppliers and distributors are subject to extensive regulation by United States governmental authorities, such as the FDA, the Nuclear Regulatory Commission (“NRC”), and state and local regulatory agencies, which is intended to ensure the devices are safe and effective and comply with laws governing products which emit, produce, or control radiation. These regulations govern, among other things, the design, development, testing, manufacturing, packaging, labeling, distribution, import/export, sale, and marketing and disposal of Varex’s products. Varex is also subject to international laws and regulations that apply to manufacturers of radiation-emitting devices and products utilizing radioactive materials. These are often comparable to, if not more stringent than, the equivalent regulations in the United States.

Varex’s industrial and medical devices utilizing radioactive material are subject to NRC clearance and approval requirements, and the manufacture and sale of these products are subject to extensive federal and state regulation that varies from state to state and among regions. Varex’s manufacture, distribution, installation, service, and removal of industrial devices utilizing radioactive material or emitting radiation also requires Varex to obtain a number of licenses and certifications for these devices and materials. Service of these products must also be in accordance with a specific radioactive materials licenses. Obtaining licenses and certifications may be time consuming, expensive, and uncertain.

The handling and disposal of radioactive materials resulting from the manufacture, use, or disposal of Varex’s products may impose significant costs and requirements. Disposal sites for the lawful disposal of materials generated by the manufacture, use, or decommissioning of Varex’s products may no longer accept these substances in the future or may accept them on unfavorable terms.

If Varex is unable to obtain required FDA clearances or approvals for a product or is unduly delayed in doing so, or the uses of that product were limited, Varex’s business could suffer.

Typically, Varex’s OEM customers are responsible for obtaining 510(k) pre-market notification clearance on their systems that integrate Varex products. A substantial majority of Varex’s products are “Class I” devices that do not require 510(k) clearance, but Varex does produce software that is classified as a Class II device subject to 510(k) clearance. Unless an exception applies, Varex may be required by FDA regulations to obtain a 510(k) pre-market notification clearance in connection with the manufacture of a new medical device or a new indication for use of, or other significant change in, an existing currently marketed medical device before it can market or sell those products in the United States. Modifications or enhancements to a product that could significantly affect its safety or effectiveness, or that would constitute a major change in the intended use of the device, technology, materials, labeling, packaging, or manufacturing process also require a new 510(k) clearance. Although manufacturers make the initial determination whether a change to a cleared device requires a new 510(k) clearance, Varex cannot ensure that the FDA will agree with its decisions not to seek additional approvals or clearances for particular modifications to its products or that Varex will be successful in obtaining new 510(k) clearances for modifications. Obtaining clearances or approvals is time consuming, expensive, and uncertain. Varex may not be able to obtain the necessary clearances or approvals or may be unduly delayed in doing so, which could harm its business. Furthermore, even if Varex is granted regulatory clearances or approvals, they may include significant limitations on the indicated uses of the product, which may limit the market for the product. If Varex is unable to obtain required FDA clearance or approval for a product or is unduly delayed in doing so, or the uses of that product were limited, Varex’s business could suffer.

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

Information technology (including technology from third party providers) helps Varex operate efficiently, interface with and support its customers, maintain financial accuracy and efficiency, and produce its financial statements. In the ordinary course of its business, Varex collects, processes and stores sensitive data, including intellectual property, proprietary business information and that of customers, suppliers and business partners, third parties accessing its website, patient data and personally identifiable information of customers and employees, in Varex’s data centers, and on its networks, as well as third party off-site infrastructure. Despite security measures, there is an increasing threat of information security attacks, including from computer viruses or other malicious codes, unauthorized access attempts, and cyber-attacks that pose risks to companies, including Varex. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently, have become increasingly sophisticated and generally are not recognized until launched against a target, Varex may be unable to anticipate these techniques or to implement adequate preventative measures, which could result in data leaks or otherwise compromise our confidential or proprietary information and disrupt our operations. If Varex does not allocate and effectively manage the resources necessary to build and sustain the proper technology infrastructure, Varex could be subject to, among other things, transaction errors, processing inefficiencies, the loss of customers, business disruptions, or the loss of or damage to intellectual property through a security breach or misappropriation of intellectual property. Such security breaches could expose Varex to a risk of loss of information, litigation, and possible liability to employees, customers, and/or regulatory authorities. If Varex’s data management systems do not effectively collect, secure, store, process, and report relevant data for the operation of its business, whether due to equipment malfunction or constraints, software deficiencies, or human error, Varex’s ability to effectively plan, forecast, and execute its business plan and comply with applicable laws and regulations will be impaired, perhaps materially. Any such impairment could materially and adversely affect Varex’s financial condition, results of operations, cash flows, and the timeliness with which Varex reports its operating results internally and externally.

Varex uses certain cloud-based software. A security breach, whether of Varex’s products, of Varex’s customers’ network security and systems, or of third-party hosting services could disrupt access to Varex’s customers’ stored information and could lead to the loss of, damage to or public disclosure of Varex’s customers’ stored information, including patient health information. Such an event could have serious negative consequences, including possible patient injury, regulatory action, fines, penalties and damages, reduced demand for Varex’s solutions, an unwillingness of its customers to use its solutions, harm to its reputation and brand, and time-consuming and expensive litigation, any of which could have a material and adverse effect on Varex’s financial results.

Unfavorable results of legal proceedings could materially and adversely affect Varex’s financial results.

From time to time, Varex is a party to or otherwise involved in legal proceedings, claims, government inspections, audits or investigations, and other legal matters, both inside and outside the United States, arising in the ordinary course of its business or otherwise. Legal proceedings are often lengthy, taking place over a period of years with interim motions or judgments subject to multiple levels of review (such as appeals or rehearings) before the outcome is final. Litigation and other legal proceedings, claims, government inspections, audits and investigations are subject to significant uncertainty and may be expensive, time consuming, and disruptive to Varex’s operations. For these and other reasons, Varex may choose to settle legal proceedings and claims, regardless of their actual merit.

If a legal proceeding were ultimately resolved against Varex, it could result in significant compensatory damages, and, in certain circumstances, punitive damages, disgorgement of revenue or profits, remedial corporate measures, or injunctive relief imposed on Varex. If Varex’s existing insurance does not cover the amount or types of damages awarded, or if other resolution or actions taken as a result of such legal proceeding were to restrain its ability to market one or more of its material products or services, its combined financial position, results of operations, or cash flows could be materially and adversely affected. In addition, legal proceedings, and any adverse resolution thereof, can result in adverse publicity and damage to Varex’s reputation, which could materially and adversely impact its business.

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

Varex’s future success depends, to a great degree, on its ability to retain, attract, expand, integrate, and train its management team and other key personnel, such as qualified engineering, service, sales, marketing, and other staff. Varex competes for key personnel with other medical equipment and software manufacturers and technology companies, as well as universities and research institutions. Because this competition is intense, particularly in Utah, where unemployment rates are relatively low, compensation-related costs could increase significantly if the supply of qualified personnel decreases or demand increases. If Varex is unable to hire and train qualified personnel, Varex may not be able to maintain or expand its business. Additionally, if Varex is unable to retain key personnel, Varex may not be able to replace them readily or on terms that are reasonable, which also could hurt its business.

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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, such as the delay that occurred with the filing of this Quarterly Report on Form 10-Q to implement ASC 842.

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.

Varex is subject to environmental laws around the world. These laws regulate many aspects of its operations, including its handling, storage, transport, and disposal of hazardous substances, such as the chemicals and materials that Varex uses in the course of its manufacturing operations. They can also impose cleanup liabilities, including with respect to discontinued operations. As a consequence, Varex can incur significant environmental costs and liabilities, some recurring and others not recurring. Although its follows procedures intended to comply with existing environmental laws, Varex, like other businesses, may mishandle or inadequately manage hazardous substances used in its manufacturing operations and can never completely eliminate the risk of contamination or injury from certain materials that it uses in its business and, therefore, it cannot completely eliminate the prospect of resulting claims and damage payments. Varex may also be assessed fines and/or other penalties for failure to comply with environmental laws and regulations. Insurance has provided coverage for portions of cleanup costs resulting from historical occurrences, but Varex does not expect to maintain insurance coverage for costs or claims that might result from any future contamination.

Future changes in environmental laws could also increase its costs of doing business, perhaps significantly. Several countries, including some in the EU, now require medical equipment manufacturers to bear certain disposal costs of products at the end of the product’s useful life, increasing its costs. The EU has also adopted directives that may lead to restrictions on the use of certain hazardous substances or other regulated substances in some of its products sold there. These directives, along with another that requires substance information to be provided upon request, could increase Varex’s operating costs in order to maintain its access to certain markets. All of these costs, and any future violations or liabilities under environmental laws or regulations, could have a material adverse effect on its business.

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

Varex conducts some of its activities, including manufacturing, research and development, administration, and data processing at facilities located in areas that have in the past experienced or may in the future experience natural disasters. Varex’s insurance coverage for such disasters may not be adequate or continue to be available at commercially-reasonable terms, or at all. A major disaster (such as a major fire, hurricane, earthquake, flood, tsunami, volcanic eruption or terrorist attack) affecting Varex’s facilities, or those of its suppliers, could significantly disrupt its operations and delay or prevent product manufacture and shipment during the time required to repair, rebuild, or replace its or its suppliers’ damaged manufacturing facilities. These delays could be lengthy and costly. If any of Varex’s customers’ facilities are adversely affected by a disaster, shipments of its products could be delayed. Additionally, customers may delay purchases of Varex’s products until its operations return to normal. For example, following the earthquake and tsunami disasters in Japan in 2011, the operations of Canon Medical Systems, our largest customer, were impacted, and, as a consequence, orders to and product shipment from our business were delayed for several months. Even if Varex's suppliers or customers are able to quickly respond to a disaster, the ongoing effects of the disaster could create some uncertainty in the operations of its business. In addition, Varex’s facilities may be subject to a shortage of available electrical power and other energy supplies. Any shortages may increase its costs for power and energy supplies or could result in blackouts, which could disrupt the operations of its affected facilities and harm its business. Further, Varex’s products are typically shipped from a limited number of ports, and any disaster, strike, or other event blocking shipment from these ports could delay or prevent shipments and harm its business. In addition, concerns about terrorism, the effects of a terrorist attack, political turmoil, or an outbreak of epidemic diseases

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could have a negative effect on Varex’s business operations, those of its suppliers and customers, and the ability to travel, resulting in adverse consequences on its revenues and financial performance.

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

The conversion of the Convertible Notes may dilute the ownership interests of Varex’s stockholders. On conversion of the Convertible Notes, Varex has the option to pay or deliver, as the case may be, cash, shares of common stock, or a combination of cash and shares of common stock. If Varex elects to settle our conversion obligation in shares of common stock or a combination of cash and shares of common stock, any sales of Varex common stock issuable on such conversion could adversely affect prevailing market prices of Varex’s common stock. In addition, the existence of the Convertible Notes may encourage short selling by market participants because the conversion of the Convertible Notes could be used to satisfy short positions, or anticipated conversion of the Convertible Notes into shares of Varex’s common stock, any of which could depress the market price of Varex’s common stock.

The conditional conversion feature of the Convertible Notes, if triggered, may adversely affect our financial condition and operating results.

In the event the conditions for optional conversion of the Convertible Notes by holders are met before the close of business on the business day immediately preceding June 1, 2025, holders of the Convertible Notes will be entitled to convert the Convertible Notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Notes, unless Varex elects to satisfy our conversion obligation by delivering solely shares of common stock (other than paying cash in lieu of delivering any fractional share), Varex may settle all or a portion of its conversion obligation in cash, which could adversely affect Varex’s liquidity. In addition, even if holders do not elect to convert their Convertible Notes, Varex could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as a current rather than long-term liability, which would result in a material reduction of Varex net working capital and may seriously harm Varex’s business.

Varex entered into certain hedging positions that may affect the value of the Convertible Notes and the volatility and value of Varex’s common stock.

In connection with the issuance of the Convertible Notes, Varex entered into certain convertible note hedge transactions. These hedge transactions are expected generally to reduce potential dilution of our common stock on any conversion of the Convertible Notes or offset any cash payments we are required to make in excess of the principal amount of such converted Convertible Notes, as the case may be, with such reduction or offset subject to a cap. The counterparties to these hedging positions or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to Varex’s common stock or purchasing or selling Varex’s common stock in secondary market transactions prior to the maturity of the Convertible Notes (and are likely to do so during any observation period related to a conversion of Convertible Notes or following any repurchase of Convertible Notes by Varex on any fundamental change repurchase date or otherwise). This activity could cause or avoid an increase or a decrease in the market price of Varex common stock or the Convertible Notes. In addition, if any such hedging positions fail to become effective, the counterparties to these hedging positions or their respective affiliates may unwind their hedge positions, which could adversely affect the value of Varex common stock.

Certain provisions in Varex’s Amended and Restated Certificate of Incorporation, its Amended and Restated Bylaws, its Indenture, and of Delaware law, may prevent or delay an acquisition of Varex, which could decrease the trading price of Varex’s common stock.

Varex’s Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws contain, and Delaware law contains, provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the bidder and to encourage prospective acquirers to negotiate with Varex’s board of directors rather than to attempt a hostile takeover. These provisions include, among others:

•the inability of Varex’s stockholders to call a special meeting;

•the inability of Varex’s stockholders to act without a meeting of stockholders;

•rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings;

•the right of Varex’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;

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•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; and,

•the requirement that the affirmative vote of stockholders holding at least 66 2/3% of Varex’s voting stock is required to amend certain provisions in Varex’s Amended and Restated Certificate of Incorporation (relating to the term and removal of its directors, the filling of its board vacancies, the calling of special meetings of stockholders, stockholder action by written consent, the elimination of liability of directors to the extent permitted by Delaware law and indemnification of directors and officers), although this requirement will expire on the completion of the 2021 annual meeting of stockholders, after which Varex's Amended and Restated Certificate of Incorporation may be amended by the affirmative vote of the holders of at least a majority of the outstanding voting stock.

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. Section 203 provides that, subject to limited exceptions, persons that acquire, or who are affiliated with a person that acquires, more than 15% of the outstanding voting stock of a Delaware corporation (an “interested stockholder”) shall not engage in any business combination with that corporation, including by merger, consolidation, or acquisitions of additional shares, for a three-year period following the date on which the person became an interested stockholder, unless: (1) prior to such time, the board of directors of such corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (2) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of such corporation at the time the transaction commenced; or (3) on or subsequent to such time the business combination is approved by the board of directors of such corporation and authorized at a meeting of stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock of such corporation not owned by the interested stockholder.

These provisions are not intended to make Varex immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that Varex’s board of directors determines is not in the best interests of Varex and Varex’s stockholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors.

Furthermore, certain provisions in Varex’s Indenture governing the Convertible Notes may make it more difficult or expensive for a third party to acquire Varex. For example, the Indenture requires Varex, at the holders’ election, to repurchase the Convertible Notes for cash on the occurrence of a fundamental change and, in certain circumstances, to increase the conversion rate for a holder that converts its Convertible Notes in connection with a make-whole fundamental change. A takeover of Varex may trigger the requirement that we repurchase the Convertible Notes or increase the conversion rate, which could make it costlier for a third party to acquire Varex. Varex’s Indenture also prohibits Varex from engaging in a merger or acquisition unless, among other things, the surviving entity assumes the obligations under the Convertible Notes and Varex’s Indenture. These and other provisions in Varex’s Indenture could deter or prevent a third party from acquiring Varex even when the acquisition may be favorable to holders of the Convertible Notes or Varex’s stockholders.

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

Varex entered into a Separation and Distribution Agreement when it spun off from Varian. The agreement provides for, among other things, indemnification obligations designed to make Varex financially responsible for any Varex liabilities; the failure of Varex to pay, perform, or otherwise promptly discharge any Varex liabilities or contracts in accordance with their respective terms; any guarantee, indemnification obligation, surety bond or other credit support agreement, arrangement, commitment, or understanding by Varian for the benefit of Varex, unless related to Varian liabilities; any breach by Varex of the Separation and Distribution Agreement or any of the ancillary agreements; any action by Varex in contravention of its Amended and Restated Certificate of Incorporation or Amended and Restated Bylaws; and, any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to all information contained in the Registration Statement on Form 10 (as amended or supplemented) or any other disclosure document that describes the separation, the distribution, Varex and its subsidiaries, or the transactions contemplated by the Separation and Distribution Agreement, subject to certain exceptions. If Varex is required to indemnify Varian under the circumstances set forth in the Separation and Distribution Agreement, Varex may be subject to substantial liabilities.

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In connection with Varex’s spin-off from Varian, Varian has agreed to indemnify Varex for certain liabilities. However, there can be no assurance that the indemnity will be sufficient to insure Varex against the full amount of such liabilities or that Varian’s ability to satisfy its indemnification obligation will not be impaired in the future.

Pursuant to the Separation and Distribution Agreement and certain other agreements with Varian, Varian agreed to indemnify Varex for certain liabilities. However, third parties could also seek to hold Varex responsible for any of the liabilities that Varian retained, and there can be no assurance that the indemnity from Varian will be sufficient to protect Varex against the full amount of such liabilities or that Varian will be able to fully satisfy its indemnification obligations. In addition, Varian’s insurers may attempt to deny coverage to Varex for liabilities associated with certain occurrences of indemnified liabilities prior to the separation. Moreover, even if Varex ultimately succeeds in recovering from Varian or such insurance providers any amounts for which Varex is held liable, Varex may be temporarily required to bear these losses. Each of these risks could negatively affect Varex’s business, financial position, results of operations, and/or cash flows.

Potential liabilities may arise due to fraudulent transfer considerations, which could materially and adversely affect Varex’s financial condition and its results of operations.

In connection with the spin-off, Varian completed several corporate restructuring transactions, which, along with the separation and distribution, may be subject to federal and state fraudulent conveyance and transfer laws. If, under these laws, a court were to determine that, at the time of the separation and distribution, any entity involved in these restructuring transactions or the separation and distribution:

•was insolvent;

•was rendered insolvent by reason of the separation and distribution;

•had remaining assets constituting unreasonably small capital; or,

•intended to incur, or believed it would incur, debts beyond its ability to pay these debts as they matured,

then the court could void the separation and distribution, in whole or in part, as a fraudulent conveyance or transfer. The court could then require Varex’s stockholders to return to Varian some or all of the shares of Varex common stock issued in the distribution or require Varian or Varex, as the case may be, to fund liabilities of the other company for the benefit of creditors. The measure of insolvency will vary depending upon the jurisdiction whose law is being applied. Generally, however, an entity would be considered insolvent if the fair value of its assets was less than the amount of its liabilities or if it incurred debt beyond its ability to repay the debt as it matures.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On April 24, 2020, the Company issued 0.3 million shares of its common stock to certain former shareholders of Direct Conversion AB (publ) (“Direct Conversion”) pursuant to the purchase agreement. The Company's shares were issued as part of the purchase price of Direct Conversion as part of the deferred consideration pursuant to the purchase agreement. In issuing these shares, the Company relied on the exemptions from registration under Section 4(a)(2) of the Securities Act of 1933, (the “Securities Act”), Rule 506 of Regulation D, and/or Regulation S promulgated under the Securities Act. Information relating to the issuance of these shares was provided in the Company’s Amended Current Report on Form 8-K/A filed with the Securities and Exchange Commission on April 29, 2020 and is incorporated by reference.

On June 9, 2020, the Company issued an aggregate of $200 million principal amount of its 4.00% Convertible Senior Notes due 2025 in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The Convertible Notes are convertible into shares of the Company’s common stock on the terms set forth in the Indenture entered into by and among the Company and Wells Fargo Bank, National Association, as trustee on June 9, 2020. Information relating to the issuance of the Convertible Notes was provided in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 9, 2020 and is incorporated by reference.

Item 3. Defaults Upon Senior Securities

None.

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Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

(a) Exhibits required to be filed by Item 601 of Regulation S-K:


Exhibit No.						Description




























3.1						Amended and Restated Certificate of Incorporation, dated January 27, 2017 (as corrected December 11, 2017) (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed November 27, 2018, SEC File No. 001-37860).

3.2						Amended and Restated Bylaws of the Company, as amended January 27, 2017 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed January 30, 2017, SEC File No. 001-37860).

4.1						Indenture, dated June 9, 2020, by and among Varex Imaging Corporation and Wells Fargo Bank, National Association, as Trustee, including form of 4.00% Convertible Senior Notes due 2025 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed June 9, 2020).

10.1						Amendment No. 6 to Credit Agreement dated June 3, 2020 between Varex Imaging Corporation, Bank of America, N.A., as administrative agent, and the lenders and guarantors party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 4, 2020).

10.2						Form of Base Convertible Bond Hedge Confirmation, dated June 4, 2020, between Varex Imaging Corporation and each of the counterparties thereto (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed June 9, 2020).

10.3						Form of Base Warrant Confirmation, dated June 4, 2020, between Varex Imaging Corporation and each of the counterparties thereto (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed June 9, 2020).

10.4						Form of Additional Convertible Bond Hedge Confirmation, dated June 5, 2020, between Varex Imaging Corporation and each of the counterparties thereto (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed June 9, 2020).

10.5						Form of Additional Warrant Confirmation, dated June 5, 2020, between Varex Imaging Corporation and each of the Counterparties (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed June 9, 2020).

31.1*						Chief Executive Officer Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act

31.2*						Chief Financial Officer Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act

32.1*						Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*						Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS*						XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH*						XBRL Taxonomy Extension Schema Document

101.CAL*						XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*						XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*						XBRL Taxonomy Extension Label Linkbase Document

101.PRE*						XBRL Taxonomy Extension Presentation Linkbase Document

104*						Cover Page Interactive Data File - (formatted as Inline XBRL and contained in Exhibit 101)

*						Filed herewith.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			VAREX IMAGING CORPORATION


Date:	August 14, 2020	By:	/s/ SHUBHAM MAHESHWARI
			Shubham Maheshwari
			Chief Financial Officer
			(Duly Authorized Officer and Principal Financial Officer)