Varex Imaging(VREX) - 2020 Q4 - Annual Report

Part I Business Varex manufactures X-ray imaging components for medical and industrial OEMs, with FY20 results impacted by COVID-19 and a concentrated customer base - Varex is a leading designer and manufacturer of X-ray imaging components for medical, industrial, and security applications, serving global Original Equipment Manufacturers (OEMs)[20] - The business is organized into two reportable segments: Medical and Industrial, with the Medical segment serving applications like CT and mammography, and the Industrial segment serving security and non-destructive testing markets[29][30][38] - The COVID-19 pandemic negatively impacted the business, leading to lower customer demand, supply chain disruptions, and a $15.8 million pre-tax charge for inventory write-downs and restructuring in Q3 2020[24] - The company has a high customer concentration, with the top five customers accounting for approximately 40% of total revenue in fiscal year 2020, and Canon Medical Systems representing about 21% of total revenue[42] - To mitigate the impact of US-China trade tariffs and be closer to its customer base, Varex is expanding its manufacturing capabilities and implementing local sourcing strategies in China, Germany, and the Philippines[37] Risk Factors The company faces material risks from the COVID-19 pandemic, high customer concentration, significant debt, and material weaknesses in internal controls - The COVID-19 pandemic has adversely affected operations, cash flow, and financial position due to decreased product demand and disruptions in manufacturing and supply chains[103][104][105] - Varex has a high dependency on a limited number of OEM customers, with one customer accounting for 21% of revenue in FY2020 and the top ten accounting for 52%[106][107] - The company has identified material weaknesses in its internal control over financial reporting related to its risk assessment process, control environment, inventory, and financial reporting, which could result in a loss of investor confidence[212] - Significant debt obligations of approximately $511.3 million could adversely affect the business, and the associated credit facilities impose significant operating and financial restrictions[213][219] - Changes in import/export regulations and tariffs, particularly between the U.S. and China, have negatively impacted the business by increasing costs and causing some customers to reduce purchases[167][168][170] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[243] Properties Varex's primary owned facility is in Salt Lake City, Utah, and the company owns or leases 34 other facilities globally totaling over 2 million square feet - The company's main property is an owned facility in Salt Lake City, Utah, with approximately 494,000 square feet of space on 37 acres, used for manufacturing, administration, and R&D[244] - Varex owns or leases 34 other facilities globally, including primary owned sites in Las Vegas, Nevada, and Franklin Park, Illinois, and primary leased facilities in the Philippines, China, and Germany[244][245][246] Legal Proceedings The company is not currently involved in any litigation expected to have a material adverse effect on its financial position or operations - Varex is subject to various claims in the normal course of business but does not believe any currently pending litigation will have a material adverse effect[247] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[247] Part II Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Varex's common stock trades on NASDAQ under 'VREX', and the company has no current plans to pay cash dividends - The company's common stock is traded on the NASDAQ under the symbol 'VREX'[249] - Varex has never paid cash dividends and does not plan to in the near future[249] Selected Financial Data The company presents five years of financial data, showing a revenue decline and a significant net loss of $57.9 million in fiscal year 2020 Five-Year Financial Summary | Fiscal Year | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | $738.3M | $780.6M | $773.4M | $698.1M | $620.1M | | Gross Profit | $190.2M | $256.7M | $253.9M | $253.5M | $248.4M | | Net (Loss) Earnings Attributable to Varex | $(57.9)M | $15.5M | $27.5M | $51.6M | $68.5M | | Diluted (Loss) Earnings Per Share | $(1.49) | $0.40 | $0.72 | $1.36 | $1.82 | | Total Assets | $1,139.5M | $1,038.9M | $987.9M | $1,040.1M | $622.4M | | Total Debt (long-term) | $452.8M | $364.4M | $364.8M | $463.9M | $0M | Fiscal Year 2020 Quarterly Results | Quarter (FY 2020) | Q1 | Q2 | Q3 | Q4 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $200.1M | $197.0M | $171.2M | $170.0M | | Gross Profit | $61.1M | $57.6M | $26.3M | $45.2M | | Net Loss Attributable to Varex | $(1.3)M | $(1.9)M | $(28.3)M | $(26.4)M | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) FY20 revenues decreased 5% due to COVID-19, gross margin fell to 26%, and the company reported a net loss while undertaking significant debt refinancing Results of Operations | Metric | FY 2020 | FY 2019 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $738.3M | $780.6M | (5)% | | Medical Revenues | $584.5M | $596.8M | (2)% | | Industrial Revenues | $153.8M | $183.8M | (16)% | | Gross Profit | $190.2M | $256.7M | (26)% | | Gross Margin | 26% | 33% | -7 p.p. | | Operating (Loss) Earnings | $(33.7)M | $45.7M | N/A | - The decrease in gross margin was primarily due to $22.2 million of restructuring and product discontinuation charges, higher manufacturing costs, and an unfavorable product mix[288] Cash Flow Summary | Cash Flow Activity (in millions) | FY 2020 | FY 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $13.2 | $71.9 | | Net cash used in investing activities | $(26.9) | $(93.2) | | Net cash provided by financing activities | $83.6 | $(0.1) | - The company significantly altered its capital structure by issuing $200.0 million in Convertible Notes and $300.0 million in Senior Secured Notes, using the proceeds to terminate and repay its previous credit agreement[304][305] - Total order backlog decreased by 21.7% from $265.2 million at the end of FY 2019 to $207.6 million at the end of FY 2020[328] Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks including foreign currency, credit, interest rate, and commodity price volatility, and uses derivatives to hedge - Primary market risks are identified as foreign currency exchange rate risk, credit and counterparty risk, interest rate risk, and commodity price risk[331] - The company uses foreign currency forward and option contracts to hedge against exchange rate risks associated with assets, liabilities, and net investments in foreign subsidiaries[333] Financial Statements and Supplementary Data The report includes audited financial statements for FY2018-2020, with an unqualified opinion on financials but an adverse opinion on internal controls Report of Independent Registered Public Accounting Firm The auditor issued an unqualified opinion on financial statements but an adverse opinion on internal controls due to identified material weaknesses - The auditor, PricewaterhouseCoopers LLP, concluded that the company did not maintain effective internal control over financial reporting as of October 2, 2020[382] - Material weaknesses were identified in: (i) the control environment due to insufficient resources, (ii) the risk assessment process, (iii) controls for inventory accounting, and (iv) controls over the financial reporting close process[382][383] Consolidated Financial Statements FY20 results show a net loss of $57.9 million on $738.3 million in revenue, with total assets of $1.14 billion and equity of $465.8 million Consolidated Statements of Operations | (In millions) | FY 2020 | FY 2019 | FY 2018 | | :--- | :--- | :--- | :--- | | Revenues, net | $738.3 | $780.6 | $773.4 | | Gross profit | $190.2 | $256.7 | $253.9 | | Operating (loss) earnings | $(33.7) | $45.7 | $44.5 | | Net (loss) earnings attributable to Varex | $(57.9) | $15.5 | $27.5 | Consolidated Balance Sheets | (In millions) | Oct 2, 2020 | Sep 27, 2019 | | :--- | :--- | :--- | | Total current assets | $522.0 | $438.4 | | Total assets | $1,139.5 | $1,038.9 | | Total current liabilities | $160.6 | $175.1 | | Total liabilities | $673.7 | $580.2 | | Total stockholders' equity | $465.8 | $448.2 | Notes to Consolidated Financial Statements Notes detail the adoption of a new lease standard, a 2019 acquisition, significant 2020 debt refinancing, and an impairment charge for R&D - The company adopted the new lease standard ASC 842 in fiscal year 2020, resulting in the recognition of operating lease right-of-use assets of $26.8 million and lease liabilities of $27.5 million upon transition[471][473] - In April 2019, Varex acquired 98.2% of Direct Conversion AB for $69.5 million in cash, assumption of debt, and deferred consideration, adding $47.2 million in goodwill and $32.9 million in intangible assets[490][492] - In June 2020, the company issued $200.0 million of 4.00% convertible senior unsecured notes due 2025, and in September 2020, it issued $300.0 million of 7.875% senior secured notes due 2027[523][537][545] - Due to COVID-19 impacts, an interim impairment test was performed in Q3 2020, and while no goodwill impairment was found, a $2.8 million impairment charge was recorded for in-process R&D intangible assets[556][558] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[340] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were not effective as of October 2, 2020 - Management concluded that disclosure controls and procedures were not effective as of October 2, 2020, due to material weaknesses in internal control over financial reporting[342] - Management's assessment concluded that internal control over financial reporting was not effective as of October 2, 2020[345] - Material weaknesses were identified in the Control Environment, Risk Assessment, Inventory and cost of revenues, and the Financial Reporting close process[347][350] - The company has substantially completed remediation for material weaknesses reported in the prior fiscal year (FY 2019) related to revenue, certain inventory controls, and aspects of the financial close process[349][352] Other Information The company reports no other information for this item - None[354] Part III Directors, Executive Officers and Corporate Governance Information regarding directors and corporate governance is incorporated by reference from the company's 2021 proxy statement - Information required by this item is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting of Stockholders[357] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2021 proxy statement - Information required by this item is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting of Stockholders[360] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides details on equity compensation plans, with other ownership information incorporated by reference from the 2021 proxy statement Equity Compensation Plan Information | Plan Category | Securities to be issued upon exercise (thousands) | Weighted-average exercise price | Securities remaining for future issuance (thousands) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 3,677 | $29.23 | 5,328 | | Equity compensation plans not approved by security holders | — | — | — | | Total | 3,677 | $29.23 | 5,328 | - Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the definitive proxy statement[363] Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the 2021 proxy statement - Information required by this item is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting of Stockholders[364] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2021 proxy statement - Information required by this item is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting of Stockholders[365] Part IV Exhibits and Financial Statement Schedules This section lists the consolidated financial statements and all exhibits filed as part of the annual report - This item lists the consolidated financial statements and exhibits filed with the Form 10-K[367][368] Form 10-K Summary The company reports no Form 10-K summary - None[372]