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 January 3, 2020 or ☐ 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 (NASDAQ:VREX) Q1 2020 Earnings Conference Call February 11, 2020 5:00 PM ET Company Participants Howard Goldman - Director of IR Sunny Sanyal - President and CEO Clarence Verhoef - CFO Conference Call Participants Anthony Petrone - Jefferies Larry Solow - CJS Securities Suraj Kalia - Oppenheimer Mark Strouse - JP Morgan Jim Sidoti - Sidoti & Co Operator Greetings and welcome to the Varex Imaging Corporation First Quarter Fiscal Year 2020 Conference Call. At this time, all participa ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ____________________________________________________________ FORM 10-K ____________________________________________________________ ☒ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended September 27, 2019 or ☐ 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 ______________________ ...

| --- | --- | --- | --- | |-------|-------|--------------------------------------------|-------| | | | A WORLD LEADER IN X-RAY IMAGING COMPONENTS | | | | | | | | | | September 2019 | 1 | | --- | --- | |------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ...

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 28, 2019 or UNITED STATES SECURITIES AND EXCHANGE COMMISSION ____________________________________________________________ FORM 10-Q ____________________________________________________________ Washington, D.C. 20549 ☐ 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 ____________ ...

Financial Data and Key Metrics Changes - Quarterly revenues increased by 3% compared to the prior year, driven by record global CT tube sales and double-digit growth in oncology and mammography imaging products [9][10] - Operating earnings for the third quarter were $5 million, down from $7 million in the same quarter a year ago, while adjusted operating earnings were $19 million, comparable to the prior year [21][29] - Gross margin was 31%, down from 33% in the prior year, with adjusted gross margin at 34%, compared to 35% in the prior year [27][32] - Net loss of $1 million or $0.04 per diluted share in the third quarter compared to net earnings of $4 million or $0.10 per diluted share in the prior year [32] Business Line Data and Key Metrics Changes - Medical segment revenues increased by 3%, with higher sales of CT, oncology, and mammography products, partially offset by lower sales of radiographic detectors [26] - Industrial segment revenues also rose by 3%, primarily driven by increased demand for X-ray tubes for airport security [26][13] Market Data and Key Metrics Changes - The company experienced a significant increase in shipments of CT tubes to OEM customers in China, with expectations to ship more than twice the number of units compared to the previous year [12] - The global detector business faced challenges due to tariff-related losses in radiographic detector sales in China, but plans to establish local production in Wuxi are underway [16] Company Strategy and Development Direction - The company is focusing on a local-for-local strategy to mitigate tariff impacts by establishing local manufacturing and sourcing [16] - Plans to close digital detector manufacturing operations in Santa Clara, California, are expected to yield annual benefits of $21 million to $27 million once completed [19][24] - The company is actively pursuing small tuck-in acquisitions while prioritizing debt reduction over the next 12 to 18 months [90][91] Management's Comments on Operating Environment and Future Outlook - Management noted that the tariff situation has not significantly impacted product costs, and they are closely monitoring developments [11] - The effective tax rate for fiscal year 2019 is now expected to be approximately 26%, affecting adjusted net earnings per diluted share guidance to be in the range of $1.25 to $1.45 [36] - The company maintains its revenue outlook for fiscal year 2019, expecting revenues between $760 million and $785 million [35] Other Important Information - The company launched three new industrial digital detectors and one detector for 3D dental applications during the quarter [15] - The acquisition of Direct Conversion contributed approximately $2 million in revenues, with integration activities ongoing [10][63] Q&A Session Summary Question: Has anything other than the tax rate changed in guidance? - Management clarified that expectations for gross margins and operating expenses remain the same, with the only change being related to tax impact [39][41] Question: Can you discuss the factors that would drive the wide range for Q4 guidance? - Management indicated that guidance is based on annual expectations and will not change unless known events occur [42][46] Question: What is the timeline for the closure of the Santa Clara facility? - The facility is expected to cease operations by mid-2021, with most benefits realized after full closure [23][55] Question: How is the direct conversion acquisition performing? - The acquisition was slightly a drag on earnings due to R&D expenses, but overall it is expected to be a breakeven transaction [56] Question: What is the status of the China OEM order book? - Management reported that 8 out of 10 Chinese OEMs have contracts with the company, with a backlog of approximately $140 million [71] Question: How are new industrial products performing? - The company launched a new small footprint linear accelerator and several digital detectors, focusing on oil and gas applications [82]

```markdown Part I. Financial Information [Unaudited Financial Statements](index=4&type=section&id=Item%201.%20Unaudited%20Financial%20Statements) Varex Imaging Corporation's unaudited condensed consolidated financial statements are presented, including earnings, balance sheets, cash flows, and equity [Condensed Consolidated Statements of Earnings](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Earnings) Varex reported **$195.8 million** in revenues and **$5.8 million** in net earnings for the three months ended March 29, 2019, a decrease from the prior year Condensed Consolidated Statements of Earnings (Unaudited) | (In millions, except per share amounts) | Three Months Ended March 29, 2019 | Three Months Ended March 30, 2018 | Six Months Ended March 29, 2019 | Six Months Ended March 30, 2018 | |:---|:---:|:---:|:---:|:---:| | **Revenues** | $195.8 | $201.2 | $381.5 | $377.4 | | **Gross margin** | $64.4 | $70.1 | $124.4 | $131.6 | | **Operating earnings** | $14.5 | $17.2 | $24.9 | $30.7 | | **Net earnings attributable to Varex** | $5.8 | $12.2 | $8.8 | $23.6 | | **Diluted EPS attributable to Varex** | $0.15 | $0.32 | $0.23 | $0.62 | [Condensed Consolidated Balance Sheets](index=6&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Varex reported total assets of **$965.6 million** and total liabilities of **$519.6 million** as of March 29, 2019, with decreased cash and long-term debt Condensed Consolidated Balance Sheet Highlights (Unaudited) | (In millions) | March 29, 2019 | September 28, 2018 | |:---|:---:|:---:| | **Total current assets** | $437.3 | $458.1 | | Cash and cash equivalents | $31.0 | $51.9 | | Inventories, net | $261.2 | $235.1 | | **Total assets** | $965.6 | $987.9 | | **Total current liabilities** | $156.3 | $152.0 | | **Long-term debt** | $316.7 | $364.8 | | **Total liabilities** | $519.6 | $548.5 | | **Total Varex equity** | $433.3 | $426.2 | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operations was **$32.9 million** for the six months ended March 29, 2019, decreasing due to lower net earnings and increased inventories Condensed Consolidated Statements of Cash Flows (Unaudited) | (In millions) | Six Months Ended March 29, 2019 | Six Months Ended March 30, 2018 | |:---|:---:|:---:| | **Net cash provided by operating activities** | $32.9 | $45.5 | | **Net cash used in investing activities** | $(7.6) | $(6.9) | | **Net cash used in financing activities** | $(45.6) | $(66.7) | | **Net decrease in cash and cash equivalents** | $(20.9) | $(27.9) | [Notes to the Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20the%20Condensed%20Consolidated%20Financial%20Statements) Detailed notes explain Varex's accounting policies and financial results, including revenue recognition, segment performance, debt, and the Direct Conversion AB acquisition - The company adopted the new revenue recognition standard ASC 606 on September 29, 2018, using the modified retrospective method, resulting in a net cumulative reduction to retained earnings of **$3.5 million**, net of tax[69](index=69&type=chunk)[106](index=106&type=chunk) - The company has two reportable segments: Medical and Industrial, generating **$292.8 million** and **$88.7 million** in revenue respectively for the six months ended March 29, 2019[32](index=32&type=chunk)[138](index=138&type=chunk) - One customer, Canon Medical Systems Corporation, accounted for **17.7%** of revenues for the six months ended March 29, 2019[42](index=42&type=chunk) - On April 29, 2019, the company acquired approximately **97.4%** of Direct Conversion AB for **€62.1 million**, plus assumed net debt of **€2.6 million**, funded with **$7 million** in cash and **$64 million** of debt[140](index=140&type=chunk)[141](index=141&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=29&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Varex's financial performance for the three and six months ended March 29, 2019, covering revenue, gross margin, liquidity, and capital resources [Results of Operations](index=31&type=section&id=Results%20of%20Operations) Medical revenues decreased by **$9.6 million** while Industrial revenues grew by **$4.2 million** for the quarter, with overall gross margin percentage declining Revenues by Segment - Three Months Ended | (In millions) | March 29, 2019 | March 30, 2018 | $ Change | % Change | |:---|:---:|:---:|:---:|:---:| | Medical | $148.9 | $158.5 | $(9.6) | (6.1)% | | Industrial | $46.9 | $42.7 | $4.2 | 9.8% | | **Total revenues** | **$195.8** | **$201.2** | **$(5.4)** | **(2.7)%** | Gross Margin by Segment - Three Months Ended | (In millions) | March 29, 2019 | March 30, 2018 | $ Change | % Change | |:---|:---:|:---:|:---:|:---:| | Medical | $46.1 (31.0%) | $53.5 (33.8%) | $(7.4) | (13.8)% | | Industrial | $18.3 (39.0%) | $16.6 (38.9%) | $1.7 | 10.2% | | **Total gross margin** | **$64.4 (32.9%)** | **$70.1 (34.8%)** | **$(5.7)** | **(8.1)%** | - The decrease in medical gross margin percentage was due to higher costs of quality, primarily in the detector business, plus increased freight and tariff costs[165](index=165&type=chunk) - For the six months ended March 29, 2019, Medical revenues decreased by **$4.9 million**, while Industrial revenues increased by **$9.0 million**, resulting in a total revenue increase of **$4.1 million**[175](index=175&type=chunk)[176](index=176&type=chunk) [Liquidity and Capital Resources](index=35&type=section&id=Liquidity%20and%20Capital%20Resources) Varex's liquidity is supported by operating cash flow and a credit facility, with cash at **$31.0 million** and net debt at **$346.1 million** as of March 29, 2019 - The company had **$150.0 million** available for borrowings under its revolving credit facility as of March 29, 2019[188](index=188&type=chunk) Cash Flow Summary - Six Months Ended | (In millions) | March 29, 2019 | March 30, 2018 | |:---|:---:|:---:| | Net cash provided by operating activities | $32.9 | $45.5 | | Net cash used in investing activities | $(7.6) | $(6.9) | | Net cash used in financing activities | $(45.6) | $(66.7) | - The company has a fixed cost commitment of **$14.7 million** for calendar year 2019 with its supplier dpiX, of which **$11.0 million** remained as of March 29, 2019[195](index=195&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=37&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Varex is exposed to foreign currency, credit, interest rate, and commodity price risks, managing interest rate risk through swaps hedging **$270.0 million** of debt - The company is exposed to foreign currency risk as a significant portion of customers are outside the U.S. and products are generally priced in U.S. Dollars[202](index=202&type=chunk) - To manage interest rate risk on its floating-rate debt, the company uses interest rate swaps to hedge the LIBOR component on a notional value of **$270.0 million** of its debt[206](index=206&type=chunk) - The company is exposed to commodity price risk from raw materials like tungsten, lead, copper, and molybdenum, but did not have any commodity derivative instruments in place during the quarter[207](index=207&type=chunk)[263](index=263&type=chunk) [Controls and Procedures](index=38&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls and procedures were ineffective as of March 29, 2019, due to material weaknesses in internal control over financial reporting - The CEO and CFO concluded that disclosure controls and procedures were not effective as of March 29, 2019, due to material weaknesses in internal control over financial reporting[208](index=208&type=chunk) - Material weaknesses were identified in IT general controls (user access and program change management) and business process controls related to revenue, inventory, German operations, and the financial reporting close process[209](index=209&type=chunk)[212](index=212&type=chunk)[215](index=215&type=chunk) - The company began implementing a remediation plan to address the material weaknesses, which will not be considered remediated until the controls operate effectively for a sufficient period[216](index=216&type=chunk) Part II. Other Information [Legal Proceedings](index=41&type=section&id=Item%201.%20Legal%20Proceedings) Varex is involved in various legal actions, including patent infringement, but management anticipates no material adverse effect on operations or financial position - The company has initiated litigation asserting claims of patent infringement against a third party in the current fiscal year[217](index=217&type=chunk) - Management believes that no currently pending litigation is expected to have a material adverse effect on the company's financial position or operations[217](index=217&type=chunk) [Risk Factors](index=41&type=section&id=Item%201A.%20Risk%20Factors) This section outlines significant risks to Varex's business, including customer dependence, competition, tariffs, new product development, acquisitions, debt, and internal control weaknesses [Business and Market Risks](index=41&type=section&id=Business%20and%20Market%20Risks) Varex faces significant business and market risks, including high dependence on limited OEM customers, intense competition, and negative impacts from U.S. and China tariffs - Varex is dependent on a limited number of OEM customers, with one customer accounting for **18%** of revenue and the ten largest customers accounting for **53%** in the six months ended March 29, 2019[219](index=219&type=chunk) - The company faces intense competition from other manufacturers and from its own OEM customers' in-house manufacturing operations[223](index=223&type=chunk) - Tariffs implemented by the U.S. and retaliatory tariffs by China have increased costs, forced price concessions, and are expected to continue to have a negative effect on the business[226](index=226&type=chunk) [Operational and Strategic Risks](index=43&type=section&id=Operational%20and%20Strategic%20Risks) Operational and strategic risks include new product development, acquisition integration, potential disruptions at the Salt Lake City facility, and managing manufacturing costs - The company's success depends on the continuous development and commercialization of new products, which involves significant investment and risk[229](index=229&type=chunk) - Acquisitions, such as the recent purchase of Direct Conversion AB, present risks including difficult integration, diversion of management attention, and potential failure to realize expected synergies[234](index=234&type=chunk)[235](index=235&type=chunk) - The majority of products are manufactured at the Salt Lake City, Utah facility, making the company vulnerable to disruptions at this single location[247](index=247&type=chunk) [Financial and Economic Risks](index=45&type=section&id=Financial%20and%20Economic%20Risks) Varex faces financial and economic risks from its **$346.1 million** debt, foreign currency exposure from international revenues, and potential impacts from tax law changes - As of March 29, 2019, total debt was approximately **$346.1 million**, with credit facilities containing restrictive covenants that limit activities like incurring future debt and making certain investments[242](index=242&type=chunk)[243](index=243&type=chunk) - Approximately **63%** of revenues were generated from customers outside the U.S. for the three months ended March 29, 2019, exposing the company to risks like currency fluctuations, tariffs, and political instability[249](index=249&type=chunk)[251](index=251&type=chunk) - Changes in tax laws, particularly the U.S. Tax Reform Act of 2017, and shifts in the geographic mix of earnings could significantly impact the company's effective tax rate[253](index=253&type=chunk) [Regulatory and Legal Risks](index=50&type=section&id=Regulatory%20and%20Legal%20Risks) Varex's products are subject to extensive regulation by the FDA and foreign agencies, with non-compliance risking recalls and fines, alongside anti-corruption and healthcare laws - The company's manufacturing operations must comply with the FDA's Quality System Regulations (QSR), with non-compliance potentially leading to enforcement actions, including production shutdowns and fines[272](index=272&type=chunk) - Marketing products internationally requires obtaining and maintaining clearances, such as the CE mark in Europe, with new EU Medical Device Regulations entering into force in 2020 imposing stricter requirements[281](index=281&type=chunk)[283](index=283&type=chunk) - The company is subject to anti-corruption laws like the FCPA and U.K. Bribery Act, as well as anti-kickback and false claims laws, which carry risks of substantial penalties and reputational damage[289](index=289&type=chunk)[292](index=292&type=chunk) [Risks Related to Public Company Status and Separation from Varian](index=49&type=section&id=Risks%20Related%20to%20Public%20Company%20Status%20and%20Separation%20from%20Varian) Varex faces risks from public company compliance, material weaknesses in internal controls, and challenges from its separation from Varian, including financial representativeness and indemnification - Management identified material weaknesses in internal controls related to IT general controls and business processes, which could result in a material misstatement if not remediated[269](index=269&type=chunk) - Historical financial information may not be indicative of future results as a standalone company due to changes in corporate functions, economies of scale, and financing[331](index=331&type=chunk)[332](index=332&type=chunk) - Under the Tax Matters Agreement, Varex could be required to indemnify Varian for material taxes if the spin-off is deemed taxable due to certain actions by Varex, which may discourage a change of control[330](index=330&type=chunk)[337](index=337&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=64&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) As part of the Direct Conversion AB acquisition, Varex will make a deferred payment to former shareholders, comprising cash and unregistered common stock - As part of the Direct Conversion acquisition, a deferred payment equal to the value of **345,598** common shares is due to the former shareholders one year after closing[345](index=345&type=chunk) - The payment will be a mixture of cash and common stock, with any shares issued being unregistered, relying on exemptions under Section 4(a)(2) and Regulation D[345](index=345&type=chunk) [Exhibits](index=65&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including the Share Purchase Agreement for Direct Conversions AB, a Credit Agreement amendment, and CEO/CFO certifications - Exhibit **10.1** is the Share Purchase Agreement dated March 21, 2019, for the acquisition of Direct Conversions AB (publ)[350](index=350&type=chunk) - Exhibit **10.2** is Amendment No. 3 to the Credit Agreement, dated March 21, 2019[350](index=350&type=chunk) - Exhibits **31.1**, **31.2**, **32.1**, and **32.2** contain the required CEO and CFO certifications pursuant to the Securities Exchange Act and Sarbanes-Oxley Act[350](index=350&type=chunk) ```

Revenue Performance - Total revenues for the three months ended December 28, 2018, were $185.7 million, an increase of $9.5 million or 5.4% compared to $176.2 million for the same period in 2017[147] - Medical segment revenues increased by $4.7 million to $143.9 million, primarily due to increased sales of digital detectors for oncology, dental, and fluoroscopic applications[147] - Industrial segment revenues increased by $4.8 million to $41.8 million, driven by higher sales of X-ray tubes and linear accelerators[148] Gross Margin - Total gross margin decreased to $60.0 million, a decline of $1.5 million or 2.4% from $61.5 million, with a gross margin percentage of 32.3%[149] - Medical gross margin percentage decreased to 31.3%, down from 33.3%, primarily due to restructuring charges[149] Expenses - Research and development expenses for the first quarter of 2019 were $18.8 million, representing 10.1% of total revenues, down from 11.2% in the prior year[150] - Selling, general and administrative expenses increased to $30.8 million, or 16.6% of total revenues, up from 16.0%[150] Market Trends - The company anticipates continued growth in China-based revenues as a percentage of total revenues due to increased healthcare service availability[138] - The digital detector market is experiencing price erosion, particularly in the competitive radiographic detector market, which is expected to continue[136] Research and Development - The company maintains a long-term research and development expense target of approximately 8% to 10% of annual revenues to support innovation[151] Financial Position - Interest and other expense, net decreased slightly to $6.3 million for the three months ended December 28, 2018, compared to $6.5 million for the same period in 2017, primarily due to a decrease in total debt outstanding[153] - The effective tax rate increased to 26.8% for the three months ended December 28, 2018, from a benefit of (60.6)% in the same period of 2017, reflecting one-time benefits from the U.S. Tax Reform enacted in 2017[154] - Total debt outstanding, net decreased to $375.4 million as of December 28, 2018, from $389.8 million as of September 28, 2018, a reduction of $14.4 million[162] - Cash and cash equivalents increased to $55.1 million as of December 28, 2018, up from $51.9 million as of September 28, 2018, an increase of $3.2 million[161] Cash Flow - Net cash provided by operating activities was $20.0 million for the three months ended December 28, 2018, compared to $40.1 million for the same period in 2017, a decrease of 50%[163] - Days Sales Outstanding (DSO) improved to 65 days as of December 28, 2018, down from 68 days as of September 28, 2018, indicating better collection performance[167] - Net cash used in investing activities was $3.4 million for the three months ended December 28, 2018, compared to $2.6 million for the same period in 2017, reflecting increased capital expenditures[165] - Financing activities included borrowings of $4.0 million and repayments of $19.0 million for the three months ended December 28, 2018, compared to borrowings of $2.0 million and repayments of $32.0 million in the same period of 2017[166] Liquidity - The company had a liquidity availability of $137.0 million under its credit facility as of December 28, 2018, indicating strong liquidity position[160] - The company reevaluated its indefinite reinvestment assertion for foreign earnings, resulting in a deferred tax liability of approximately $0.1 million related to potential repatriation[159]