UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ____________________________________________________________
FORM 10-Q
 ____________________________________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 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
 ____________________________________________________________ 
LOGOA24.JPG
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)
 ____________________________________________________________ 
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   ý 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   ý     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
 
x
 
Accelerated filer
 
o
 
 
 
 
 
 
 
Non-Accelerated filer
 
o   
 
Smaller reporting company
 
o
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
o
 
 
 
 
 
 
 
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.
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   ¨  No   ý
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
As of May 2, 2019 , there were 38.3 million shares of the registrant’s common stock outstanding.



VAREX IMAGING CORPORATION
FORM 10-Q for the Quarter Ended March 29, 2019
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1
Table of Contents

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements

VAREX IMAGING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
 

Three Months Ended
 
Six Months Ended
(In millions, except per share amounts)
March 29, 2019
 
March 30, 2018
 
March 29, 2019
 
March 30, 2018
Revenues
$
195.8

 
$
201.2

 
$
381.5


$
377.4

Cost of revenues
131.4

 
131.1

 
257.1


245.8

Gross margin
64.4

 
70.1

 
124.4


131.6

Operating expenses:
 
 
 
 





Research and development
18.8

 
22.0

 
37.6


41.8

Selling, general and administrative
31.1

 
30.9

 
61.9


59.1

Total operating expenses
49.9

 
52.9

 
99.5


100.9

Operating earnings
14.5

 
17.2

 
24.9


30.7

Interest income
0.1

 
—

 
0.1


0.1

Interest expense
(5.5
)
 
(5.6
)
 
(10.6
)

(11.1
)
Other (expense) income, net
(1.3
)
 
4.1

 
(2.5
)

3.1

Interest and other expense, net
(6.7
)
 
(1.5
)
 
(13.0
)

(7.9
)
Earnings before taxes
7.8

 
15.7

 
11.9


22.8

Taxes (benefit) on earnings
1.9

 
3.4

 
3.0


(1.1
)
Net earnings
5.9

 
12.3

 
8.9


23.9

Less: Net earnings attributable to noncontrolling interests
0.1

 
0.1

 
0.1


0.3

Net earnings attributable to Varex
$
5.8

 
$
12.2

 
$
8.8


$
23.6

Net earnings per common share attributable to Varex
 
 
 
 
 
 
 
Basic
$
0.15

 
$
0.32

 
$
0.23

 
$
0.62

Diluted
$
0.15

 
$
0.32

 
$
0.23

 
$
0.62

Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
38.2

 
37.8

 
38.1

 
37.8

Diluted
38.5

 
38.4

 
38.4

 
38.3

 
See accompanying notes to the condensed consolidated financial statements.

2
Table of Contents



VAREX IMAGING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(Unaudited)


Three Months Ended
 
Six Months Ended
(In millions)
March 29, 2019
 
March 30, 2018
 
March 29, 2019
 
March 30, 2018
Net earnings
$
5.9

 
$
12.3

 
$
8.9


$
23.9

Other comprehensive earnings, net of tax:
 
 
 
 





Unrealized (loss)/gain on interest rate swap contracts
(1.4
)
 
2.1

 
(3.7
)
 
4.0

Other comprehensive earnings, net of tax
(1.4
)
 
2.1

 
(3.7
)

4.0

Comprehensive earnings
4.5

 
14.4

 
5.2


27.9

Less: Comprehensive earnings attributable to noncontrolling interests
0.1

 
0.1

 
0.1


0.3

Comprehensive earnings attributable to Varex
$
4.4

 
$
14.3

 
$
5.1


$
27.6



  See accompanying notes to the condensed consolidated financial statements.


3
Table of Contents

VAREX IMAGING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions, except share and per share amounts)
March 29, 2019
 
September 28, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
31.0

 
$
51.9

Accounts receivable, net
124.5

 
154.0

Inventories, net
261.2

 
235.1

Prepaid expenses and other current assets
20.6

 
17.1

Total current assets
437.3

 
458.1

Property, plant and equipment, net
137.1

 
144.9

Goodwill
243.6

 
243.6

Intangible assets
65.8

 
73.8

Investments in privately-held companies
52.0

 
51.0

Other assets
29.8

 
16.5

Total assets
$
965.6

 
$
987.9

Liabilities, redeemable noncontrolling interests and equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
62.3

 
$
66.3

Accrued liabilities
51.7

 
47.5

Current maturities of long-term debt
29.4

 
25.0

Deferred revenues
12.9

 
13.2

Total current liabilities
156.3

 
152.0

Long-term debt
316.7

 
364.8

Deferred tax liabilities
19.0

 
23.2

Other long-term liabilities
27.6

 
8.5

Total liabilities
519.6

 
548.5

Redeemable noncontrolling interests
10.8

 
11.1

Equity:
 
 
 
Preferred stock, $.01 par value: 20,000,000 shares authorized, none issued
—

 
—

Common stock, $.01 par value:
 
 
 
Authorized shares - 150,000,000
 
 
 
Shares issued and outstanding - 38,249,440 and 38,026,597 at March 29, 2019 and September 28, 2018, respectively.
0.4

 
0.4

Additional paid-in capital
363.1

 
357.6

Accumulated other comprehensive income
2.1

 
5.8

Retained earnings
67.7

 
62.4

Total Varex equity
433.3

 
426.2

Noncontrolling interests
1.9

 
2.1

Total equity
435.2

 
428.3

Total liabilities, redeemable noncontrolling interests and equity
$
965.6

 
$
987.9

See accompanying notes to the condensed consolidated financial statements.

4
Table of Contents

VAREX IMAGING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

Six Months Ended
(In millions)
March 29, 2019
 
March 30, 2018
Cash flows from operating activities:
 
 
 
Net earnings
$
8.9


$
23.9

Adjustments to reconcile net earnings to net cash provided by operating activities:





Share-based compensation expense
5.6


4.7

Depreciation
14.1


10.5

Amortization of intangible assets
7.3


8.4

Deferred taxes
(2.6
)

(11.1
)
Income from equity method investments
(0.3
)

(3.2
)
Amortization of deferred loan costs
1.2

 
1.2

Impairment of intangible assets
0.8

 
—

Other, net
1.4

 
—

Changes in assets and liabilities, net of effects of acquisition:





Accounts receivable
29.4


34.4

Inventories
(26.4
)

(11.0
)
Prepaid expenses and other assets
2.5


1.3

Accounts payable
(2.7
)

(7.2
)
Accrued operating liabilities and other long-term operating liabilities
(4.4
)

(6.0
)
Deferred revenues
(1.9
)

(0.4
)
Net cash provided by operating activities
32.9


45.5

Cash flows from investing activities:





Purchases of property, plant and equipment
(7.6
)

(6.9
)
Net cash used in investing activities
(7.6
)
 
(6.9
)
Cash flows from financing activities:





Taxes related to net share settlement of equity awards
(2.1
)
 
(2.3
)
Borrowings under credit agreements
7.0

 
10.0

Repayments of borrowing under credit agreements
(52.0
)
 
(78.0
)
Proceeds from exercise of stock options
0.1

 
2.2

Proceeds from shares issued under employee stock purchase plan
1.9

 
1.4

Payment of debt issuance costs
(0.5
)
 
—

Net cash used in financing activities
(45.6
)

(66.7
)
Effects of exchange rate changes on cash and cash equivalents and restricted cash
(0.6
)

0.2

Net decrease in cash and cash equivalents and restricted cash
(20.9
)

(27.9
)
Cash and cash equivalents and restricted cash at beginning of period
53.4


83.6

Cash and cash equivalents and restricted cash at end of period
$
32.5


$
55.7

Supplemental cash flow information:
 
 
 
Cash paid for interest
$
9.1

 
$
9.9

Cash paid for income tax
0.3

 
11.9

Supplemental non-cash activities:
 
 
 
Purchases of property, plant and equipment financed through accounts payable
$
0.6

 
$
5.5

See accompanying notes to the condensed consolidated financial statements.

5
Table of Contents

VAREX IMAGING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)

 
Three Months Ended March 29, 2019
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income
 
Retained Earnings
 
Total Varex Equity
 
Noncontrolling Interests
 
Total Equity
 
 
 
 
 
 
 
(In millions)
Shares
 
Amount
 
 
 
 
 
 
December 29, 2018
38.1

 
$
0.4

 
$
362.1

 
$
3.5

 
$
61.3

 
$
427.3

 
$
1.9

 
$
429.2

Adjustment to adoption of ASC 606
—

 
—

 
—

 
—

 
0.6

 
0.6

 
—

 
0.6

Net earnings
—

 
—

 
—

 
—

 
5.8

 
5.8

 
—

 
5.8

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
)
Share-based compensation
—

 
—

 
3.0

 
—

 
—

 
3.0

 
—

 
3.0

Unrealized loss on interest rate swap contracts, net of tax
—

 
—

 
—

 
(1.4
)
 
—

 
(1.4
)
 
—

 
(1.4
)
March 29, 2019
38.2

 
$
0.4

 
$
363.1

 
$
2.1

 
$
67.7

 
$
433.3

 
$
1.9

 
$
435.2


 
Three Months Ended March 30, 2018
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income
 
Retained Earnings
 
Total Varex Equity
 
Noncontrolling Interests
 
Total Equity
 
 
 
 
 
 
 
(In millions)
Shares
 
Amount
 
 
 
 
 
 
December 30, 2017
37.7

 
$
0.4

 
$
348.1

 
$
2.6

 
$
46.5

 
$
397.6

 
$
—

 
$
397.6

Net earnings
—

 
—

 
—

 
—

 
12.2

 
12.2

 
—

 
12.2

Exercise of stock options
0.1

 
—

 
0.4

 
—

 
—

 
0.4

 
—

 
0.4

Common stock issued upon vesting of restricted shares
0.2

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Shares withheld on vesting of restricted stock
(0.1
)
 
—

 
(2.3
)
 
—

 
—

 
(2.3
)
 
—

 
(2.3
)
Share-based compensation
—

 
—

 
2.6

 
—

 
—

 
2.6

 
—

 
2.6

Unrealized gain on interest rate swap contracts, net of tax
—

 
—

 
—

 
2.1

 
—

 
2.1

 
—

 
2.1

March 30, 2018
37.9

 
$
0.4

 
$
348.8

 
$
4.7

 
$
58.7

 
$
412.6

 
$
—

 
$
412.6


See accompanying notes to the condensed consolidated financial statements.


6
Table of Contents

VAREX IMAGING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)

 
Six Months Ended March 29, 2019
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income
 
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

Effect of adoption of ASC 606
—

 
—

 
—

 
—

 
(3.5
)
 
(3.5
)
 
—

 
(3.5
)
Net earnings
—

 
—

 
—

 
—

 
8.8

 
8.8

 
(0.2
)
 
8.6

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
0.1

 
—

 
1.9

 
—

 
—

 
1.9

 
—

 
1.9

Share-based compensation
—

 
—

 
5.6

 
—

 
—

 
5.6

 
—

 
5.6

Unrealized loss on interest rate swap contracts, net of tax
—

 
—

 
—

 
(3.7
)
 
—

 
(3.7
)
 
—

 
(3.7
)
March 29, 2019
38.2

 
$
0.4

 
$
363.1

 
$
2.1

 
$
67.7

 
$
433.3

 
$
1.9

 
$
435.2


 
Six Months Ended March 30, 2018
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income
 
Retained Earnings
 
Total Varex Equity
 
Noncontrolling Interests
 
Total Equity
 
 
 
 
 
 
 
(In millions)
Shares
 
Amount
 
 
 
 
 
 
September 29, 2017
37.6

 
$
0.4

 
$
342.7

 
$
0.8

 
$
35.1

 
$
379.0

 
$
—

 
$
379.0

Net earnings
—

 
—

 
—

 
—

 
23.6

 
23.6

 
—

 
23.6

Exercise of stock options
0.1

 
—

 
2.2

 
—

 
—

 
2.2

 
—

 
2.2

Common stock issued upon vesting of restricted shares
0.2

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Shares withheld on vesting of restricted stock
(0.1
)
 
—

 
(2.3
)
 
—

 
—

 
(2.3
)
 
—

 
(2.3
)
Common stock issued under employee stock purchase plan
0.1

 
—

 
1.5

 
—

 
—

 
1.5

 
—

 
1.5

Share-based compensation
—

 
—

 
4.7

 
—

 
—

 
4.7

 
—

 
4.7

Unrealized gain on interest rate swap contracts, net of tax
—

 
—

 
—

 
3.9

 
—

 
3.9

 
—

 
3.9

March 30, 2018
37.9

 
$
0.4

 
$
348.8

 
$
4.7

 
$
58.7

 
$
412.6

 
$
—

 
$
412.6


See accompanying notes to the condensed consolidated financial statements.


7
Table of Contents

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 X-ray imaging components, including X-ray tubes, digital detectors and accessories, high voltage connectors, high-energy inspection accelerators, 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 and 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, veterinary and industrial 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, consisting only of normal recurring 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 2018, 2017 and 2016 included in the Company’s Form 10-K, which was filed with the SEC on November 27, 2018 . 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.
Out-of-Period Adjustments
During the three months ended March 29, 2019 , the Company identified  and recorded adjustments of $1.5 million on a pre-tax basis ( $1.1 million on an after-tax basis) that reduced income for second quarter of 2019 related to errors originating in the first quarter of 2019 principally related to an overstatement of inventory and an understatement of the write-off of deferred financing costs. During the first quarter of 2019 these errors were partially offset by out-of-period adjustments recorded in the first quarter of 2019 that reduced income in the first quarter of 2019 by $1.1 million on a pre-tax basis ( $0.6 million on an after-tax basis) related to errors originating in fiscal year 2018 principally related to an overstatement of inventory at the end of fiscal year 2018. We evaluated the materiality of these errors on our current quarter, prior quarter and prior year consolidated financial statements and have concluded that although the errors are more quantitatively significant to the current quarter these errors were not material when considering both qualitative and quantitative factors. We also evaluated the materiality of these errors on our forecasted full year fiscal 2019 results and have concluded these errors are not material to the expected full year 2019 results.  
During the quarter ended March 29, 2019 , the Company also identified and recorded an adjustment to our condensed consolidated balance sheet of $0.6 million to correct our retained earnings and deferred revenues recorded as part of our adoption of ASC 606 in the quarter ended December 29, 2019. The adjustment reduced our deferred revenue by $0.6 million with a corresponding increase to retained earnings. We evaluated the materiality of this error on our current and prior quarter consolidated financial statements and have concluded that this error was not material.

8


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, views and measures the Company’s business performance. See Note 13 , “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 2019 is the 52-week period ending September 27, 2019 . Fiscal year 2018 was the 52-week period that ended on September 28, 2018 .  The fiscal quarters ended  March 29, 2019  and  March 30, 2018  were both 13-week periods.
Variable Interest Entities
For entities in which the Company has variable interests, the Company determines whether the Company is the primary beneficiary of the entity by analyzing which entity has the power to direct the activities that most significantly impact the variable interest entity’s economic performance and which entity has the obligation to absorb losses or the right to receive benefits from the variable interest entity. If the Company is the primary beneficiary of a variable interest entity, the assets, liabilities and results of operations of the variable interest entity are included in the Company’s condensed consolidated financial statements. During the three and six months ended March 29, 2019 , the Company had two variable interest entities, one of which is consolidated, because it was determined that the Company is its primary beneficiary. As of March 29, 2019 , total assets and liabilities for the consolidated variable interest entity was  $18.1 million  and  $7.1 million , respectively.
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. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers currency on hand, demand deposits, time deposits and all highly-liquid investments with an original maturity of three months or less at the date of purchase to be cash and cash equivalents.
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:
 
Six Months Ended March 29, 2019
 
Six Months Ended March 30, 2018
 
Beginning of Period
 
End of Period
 
Beginning of Period
 
End of Period
Cash and cash equivalents
$
51.9

 
$
31.0

 
$
83.3

 
$
55.4

Restricted cash
1.5

 
1.5

 
0.3

 
0.3

Cash and cash equivalents and restricted cash as reported per statement of cash flows
$
53.4

 
$
32.5

 
$
83.6

 
$
55.7

Fair Value
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. There is a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities.

9


Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or, other inputs that are observable or can be corroborated by observable market data.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Derivative Instruments and Hedging Activities  
The Company records all derivatives on the balance sheet at fair value. For a derivative such as an interest rate swap that is designated as a cash flow hedge, the effective portion of changes in the fair value of the derivative is initially reported in accumulated other comprehensive income (loss) on the consolidated balance sheet and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. To the extent the effective portion of a hedge subsequently becomes ineffective, the corresponding amount of the change in fair value of the derivative initially reported in accumulated other comprehensive income (loss) is reclassified and is recognized directly in earnings. Accordingly, on a quarterly basis, the Company assesses the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of a hypothetical designated perfect hedged item or transaction. If the change in the actual swap is greater than the change in the hypothetical perfect swap, the difference is referred to as “ineffectiveness” and is recognized in earnings in the current period.
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 upon the expected collectability of all 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 customer accounted for a significant portion of revenues, which are as follows:
 
Three Months Ended
 
Six Months Ended
 
March 29, 2019
 
March 30, 2018
 
March 29, 2019
 
March 30, 2018
Canon Medical Systems Corporation
17.1
%
 
17.3
%
 
17.7%
 
19.2%
Canon Medical Systems Corporation accounted for 11.6% and 9.8% of the Company’s accounts receivable as of March 29, 2019 and September 28, 2018 , respectively.
Inventories
Inventories are valued at the lower of cost or net realizable value. Costs include materials, labor and manufacturing overhead and is computed using standard cost (which approximates actual cost) on a first-in-first-out basis. We evaluate the carrying value of our inventories taking into consideration such factors as historical and anticipated future sales compared to quantities on hand and the prices we expect to obtain for our products in our respective markets. We adjust excess and obsolete inventories to net realizable value and write-downs of excess and obsolete inventories are recorded as a component of cost of revenues.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated depreciation. Major improvements are capitalized, while repairs and maintenance are expensed as incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Land is not subject to depreciation, but land improvements are depreciated over fifteen years. Land leasehold rights and leasehold improvements are amortized over the lesser of their estimated useful lives or remaining lease terms. Buildings are depreciated over twenty years. Machinery and equipment are depreciated over their estimated useful lives, which range from three to seven years. Assets subject to lease are amortized over the lesser of their estimated useful lives or remaining lease terms. Estimated useful lives are periodically reviewed and, when appropriate, changes are made prospectively. When certain events or changes in operating conditions occur, asset lives may be adjusted, and an impairment assessment may be performed on the

10


recoverability of the carrying amounts. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are removed from the accounts.
Investments
The Company accounts for its equity investments in privately-held companies under the equity method of accounting because the Company holds at least a 20% ownership interest or has the ability to exercise significant influence in these investments. The Company monitors these equity investments for impairment and makes appropriate reductions in carrying values if the Company determines that impairment charges are required for an other than temporary decline in fair value based primarily on the financial condition and near-term prospects of these companies.
Goodwill and Intangible Assets
Goodwill is recorded when the purchase price of an acquisition exceeds the fair value of the net identified tangible and intangible assets acquired. Purchased intangible assets are carried at cost, net of accumulated amortization. Intangible assets with finite lives are amortized over their estimated useful lives of primarily two to seven years using the straight-line method.
There were no impairment charges against goodwill during the three and six months ended March 29, 2019 and March 30, 2018 .
Loss Contingencies
From time to time, the Company is a party to or otherwise involved in legal proceedings, claims and government inspections or investigations and other legal matters, both inside and outside the United States, arising in the ordinary course of its business or otherwise. The Company accrues amounts, 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 it believes will result in a probable loss.
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 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, we base warranty estimates on historical experience for similar products and add 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:
(In millions)
Warranty Allowance
Accrued product warranty, September 28, 2018
$
7.3

Charged to cost of revenues
5.2

Product warranty expenditures
(5.7
)
Accrued product warranty, March 29, 2019
$
6.8

Revenue Recognition
Effective September 29, 2018 , we adopted the requirements of Accounting Standards Update (“ASU”) 2014-09 and related amendments, Revenue from Contracts with Customers (“ASC 606”), which superseded all prior revenue recognition methods and industry-specific guidance. See “Recently Adopted Accounting Pronouncements” below.
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 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

11


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.
The Company determines revenue recognition through the following steps:
•
Identification of the contract, or contracts, with a customer
•
Identification of the performance obligations in the contract
•
Determination of the transaction price
•
Allocation of the transaction price to the performance obligations in the contract
•
Recognition of revenue when, or as, a performance obligation is satisfied
Deferred Revenues
Deferred revenue primarily represents (i) the amount billed or received applicable to non-software products for which parts and services under the warranty contracts have not been delivered, and (ii) the amount billed or received for service contracts for which the services have not been rendered.
Share-Based Compensation Expense
The Company has an equity-based incentive plan that provides for the grant of nonqualified stock options, restricted stock units and other types of stock awards to officers and other employees and the grant of nonqualified stock options and deferred stock units to non-employee members of the Company's board of directors. The Company also permits employees to purchase shares under the Varex employee stock purchase plan.
The Company values stock options granted under the equity-based incentive plan and the option component of the shares purchased under the employee stock purchase plan using the Black-Scholes option-pricing model. Share-based compensation expense for restricted stock units and deferred stock units is measured using the fair value of the Company’s stock on the date of grant and is amortized over the award’s respective service period. The Black-Scholes option-pricing model requires the input of certain assumptions, and changes in the assumptions can materially affect the fair value estimates of share-based payment awards.
The Company measures and recognizes expense for all share-based payment awards based on their fair values. Share-based compensation expense recognized in the condensed consolidated statements of earnings includes compensation expense for the share-based payment awards based on the grant date fair value estimated in accordance with the guidance on share-based compensation. The share-based compensation expense that is recognized is based on the value of the portion of share-based payment awards that is ultimately expected to vest. The Company attributes the value of share-based compensation to expense using the straight-line method. The Company considers only the direct tax impacts of share-based compensation awards when calculating the amount of tax windfalls or shortfalls.
Shipping and Handling Costs
Shipping and handling costs are included as a component of cost of revenues.
Research and Development
Research and development costs have been expensed as incurred. These costs primarily include employees’ compensation, consulting fees and material costs.
Taxes on Earnings
Current income tax expense is the amount of income taxes expected to be payable for the current year. Deferred income tax liabilities or assets are established for the expected future tax consequences resulting from the differences in financial reporting and tax bases of assets and liabilities. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax assets will not be realized. In addition, the Company provides reserves for uncertain tax positions when such tax positions do not meet the recognition thresholds or measurement standards prescribed by the authoritative guidance for accounting for income taxes. Amounts for uncertain tax positions are adjusted in periods when new information becomes available or when positions are effectively settled. Interest and penalties related to uncertain tax positions are recognized as a component of income tax expense.
On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform”). U.S. Tax Reform significantly revised the U.S. corporate income tax structure including a

12


lower corporate statutory rate and changes to the way foreign earnings are taxed. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law is enacted. In accordance with these rules, the Company has included the impact of certain provisions of U.S. Tax Reform to the extent they are effective. The SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) that allows for reasonable estimated amounts to be recorded and a measurement period of up to one year from the date of enactment to revise these provisional amounts as new information is obtained and additional guidance is issued. During the three months ended December 28, 2018, the Company completed its analysis of U.S. Tax Reform, and the accounting for the income tax effects has been finalized for the measurement period under SAB 118 with no significant adjustment from the provisional amounts. The determination of the tax effects of U.S. Tax Reform may change following future legislation or further interpretation of U.S. Tax Reform, based on the publication of recently proposed U.S. Treasury regulations and guidance from the Internal Revenue Service and state tax authorities.
Significant judgments and estimates are required in evaluating the Company’s tax positions and provision for taxes on earnings. The Company accounts for uncertainty in income taxes following a two-step approach for recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining whether the weight of available evidence indicates that it is more likely than not that, based on the technical merits, the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. Recognition and measurement are based on management’s best judgment given the facts, circumstances and information available at the end of the accounting period.
The Company is subject to taxes on earnings in both the United States and numerous foreign jurisdictions. Foreign earnings are generally taxed at rates that differ from the United States rates, earnings in certain foreign jurisdictions are currently subject to tax in the United States, and the benefit of losses generated in some other foreign jurisdictions is reduced due to full valuation allowance positions in those jurisdictions. Our effective tax rate is impacted by these factors as well as existing laws in both the United States and in the respective countries in which foreign subsidiaries do business. In addition, a change in the mix of earnings and losses among the various jurisdictions could increase or decrease our effective tax rate.
Foreign Currency Translation
The Company uses the U.S. Dollar as the functional currency of its foreign operations. Gains and losses from remeasurement of foreign currency balances into U.S. Dollars are included in the condensed consolidated statements of earnings.
Recently Adopted Accounting Pronouncements
In November 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which requires that the statement of cash flows explain the change in the total amount of restricted cash during the period and other additional disclosures. The Company adopted ASU 2016-18 in the first quarter of 2019 using the retrospective transition method by restating our condensed consolidated statements of cash flows to include restricted cash balances. Net cash flows for the three months ended March 29, 2019 and March 30, 2018 did not change as a result of adopting ASU 2016-18.
The Company adopted ASC 606 as of September 29, 2018 , using the modified retrospective transition method applied to those contracts which were not completed as of that date. The Company recorded a net reduction to retained earnings of $4.1 million , net of tax, as of September 29, 2018 due to the impact of adopting ASC 606. During the second quarter of 2019 the Company recorded an increase to retained earnings of $0.6 million , net of tax, to correct an immaterial error related to the adoption of ASC 606. The net cumulative impact of adopting ASC 606 was $3.5 million , net of tax. Refer to Note 9 . Revenue Recognition to the Unaudited Condensed Consolidated Financial Statement on this Quarterly report for the detailed impact of adopting ASC 606.
Recent Accounting Standards or Updates Not Yet Effective
In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from U.S. federal tax legislation commonly referred to as the Tax Cuts and Jobs Act, which was enacted in December 2017 (the “2017 Tax Act”). ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12 which targets improvements to accounting for hedging activities which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The guidance is effective for fiscal years beginning after December 15, 2018, and

13


interim periods within those fiscal years. The Company does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04 which clarified its guidance to simplify the measurement of goodwill by eliminating the Step 2 impairment test. The new guidance requires companies to perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The amendment will be effective for the Company beginning in its first quarter of fiscal year 2021. The amendment is required to be adopted prospectively. Early adoption is permitted. The Company is evaluating the impact of adopting this amendment to its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02 on accounting for leases. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. The new standard will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statement of earnings. The new standard is required to be adopted using a modified retrospective method to each prior reporting period presented with various optional practical expedients. The new standard will be effective for the Company beginning in its first quarter of fiscal year 2020 with early adoption permitted. The Company is evaluating the impact of adopting this new standard to its consolidated financial statements.
2 . 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 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 equity 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 March 29, 2019 and March 30, 2018 , the Company recorded income on the equity investment in dpiX Holding of zero and $3.8 million , respectively. During the six months ended March 29, 2019 and March 30, 2018 , the Company recorded (loss) and income on the equity investment in dpiX Holding of $(0.7) million and $3.1 million , respectively. Income and loss on the equity investment in dpiX Holding is included in other expense, net in the condensed consolidated statements of earnings. The carrying value of the equity investment in dpiX Holding was $48.2 million and $48.9 million at March 29, 2019 and September 28, 2018 , respectively.
During the three months ended March 29, 2019 and March 30, 2018 , the Company purchased glass transistor arrays from dpiX totaling $1.4 million and $5.4 million , respectively. During the six months ended March 29, 2019 and March 30, 2018 , the Company purchased glass transistor arrays from dpiX totaling $4.2 million and $12.0 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 earnings.
As of March 29, 2019 , and September 28, 2018 , the Company had accounts payable to dpiX totaling $3.4 million and $3.7 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. 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 2019, the fixed cost commitment was determined and approved by the dpiX board of directors to be $14.7 million for calendar year 2019. As of March 29, 2019 , the Company had $11.0 million fixed cost commitments related to this agreement remaining for calendar year 2019. 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 $48.2 million and fixed cost commitments.

14


3 . FINANCIAL DERIVATIVES AND HEDGING ACTIVITIES
As part of the Company’s overall risk management practices, the Company enters into financial derivatives, which include interest rate swaps designed as cash flow hedges, to hedge the LIBOR-based, floating interest rate on its debt.
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.
The effective portion of the gain or loss on derivative instruments designated and qualifying for cash flow hedge accounting is deferred in other comprehensive income. Any ineffectiveness in these designated hedging relationships is recognized in current period earnings. The changes in fair value for all trades that are not designated for hedge accounting are recognized in current period earnings. Deferred gains or losses from designated cash flow hedges are reclassified into earnings in the period that the hedged interest expense effect earnings. The effectiveness of cash flow hedges is assessed at inception and quarterly thereafter. If the instrument were to no longer qualify for hedge accounting due to it becoming probable that the originally-forecasted hedged transactions will not occur, then hedge accounting would cease and the related change in fair value of the ineffective portion of the derivative instrument would be reclassified from accumulated other comprehensive income (loss) and recognized in earnings. The Company does not offset fair value amounts recognized for derivative instruments in its balance sheet 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 that hedge variable rate debt effectively fix the LIBOR component of their interest rates for a specific period of time.
The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is deferred as a component of accumulated other comprehensive income in the accompanying consolidated balance sheets and is subsequently reclassified into earnings in the period that the hedged interest expense effects earnings. The ineffective portion of the changes in fair value of derivatives designated as cash flow hedges are recognized directly to earnings and reflected in the accompanying condensed consolidated statements of earnings. No ineffectiveness was reported in earnings for the period ending March 29, 2019 .
As of March 29, 2019 , 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

 
$
270.0

These contracts have maturities of four years or less.
The following table summarizes the amount of income 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 (Effective Portion)
Three months ended
 
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Three months ended
 
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
Three months ended
(In millions)
March 29, 2019
 
March 30, 2018
 
 
March 29, 2019
 
March 30, 2018
 
 
March 29, 2019
 
March 30, 2018
Interest Rate Swap Contracts
$
(1.2
)
 
$
2.8

 
Interest expense
 
$
0.6

 
$
(0.1
)
 
Interest expense
 
$
—

 
$
—


15


 
Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)
Six months ended
 
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Six months ended
 
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
Six months ended
(In millions)
March 29, 2019
 
March 30, 2018
 
 
March 29, 2019
 
March 30, 2018
 
 
March 29, 2019
 
March 30, 2018
Interest Rate Swap Contracts
$
(3.7
)
 
$
4.8

 
Interest expense
 
$
1.0

 
$
(0.3
)
 
Interest expense
 
$
—

 
$
—

The Company expects that approximately $1.7 million recorded as a component of accumulated other comprehensive income (loss) will be realized in the statements of earnings over the next 12 months and 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:
 
 
Derivative Assets and Liabilities
(In millions)
 
 
 
March 29, 2019
 
September 28, 2018
Derivatives designated as cash flow hedges
 
Balance sheet location
 
 
 
 
Interest rate swap contracts
 
Other current assets
 
$
1.7

 
$
2.2

Interest rate swap contracts
 
Other non-current assets
 
1.3

 
5.5

 
 
 
 
$
3.0

 
$
7.7

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 March 29, 2019 :
In millions
Notional Amounts (in U.S. dollars)
 
Net Unrealized Gain (Loss)
Japanese yen
$
1.8

 
$
—

Swiss franc
1.2

 
—

Chinese renminbi
3.4

 
—

Euro
70.7

 
(0.6
)
 
$
77.1

 
$
(0.6
)

16


4. 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 March 29, 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
$
—

 
$
3.6

 
$
—

 
$
3.6

Interest rate swap contracts
—

 
3.0

 
—

 
3

Total assets measured at fair value
$
—

 
$
6.6

 
$
—

 
$
6.6

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Foreign currency forward contracts
$
—

 
$
0.6

 
$
—

 
$
0.6

As of March 29, 2019 , the outstanding borrowings under the Company's credit agreement were $346.1 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. 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 three months ended March 29, 2019 .
At September 28, 2018 , the Company determined the following levels of inputs at fair value for the following assets or liabilities:
 
Fair Value Measurements at September 28, 2018
(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
$
—

 
$
18.4

 
$
—

 
$
18.4

Interest rate swap contracts
—

 
7.7

 
—

 
7.7

Total assets measured at fair value
$
—

 
$
26.1

 
$
—

 
$
26.1

5. INVENTORIES, NET
The following table summarizes the Company’s inventories, net:
(In millions)
March 29, 2019
 
September 28, 2018
Raw materials and parts, net
$
163.2


$
149.9

Work-in-process, net
32.6


25.4

Finished goods, net
65.4


59.8

Total inventories, net
$
261.2


$
235.1

6. INTANGIBLE ASSETS
The following table reflects the gross carrying amount and accumulated amortization of the Company’s finite-lived intangible assets included in other assets in the condensed consolidated balance sheets:

17


(In millions)
March 29, 2019
 
September 28, 2018
Acquired existing technology
$
55.6

 
$
57.9

Patents, licenses and other
9.9

 
9.9

Customer contracts and supplier relationship
42.1

 
42.6

Accumulated amortization
(45.8
)
 
(40.6
)
Total intangible assets with finite lives
61.8

 
69.8

In-process research and development with indefinite lives
4.0

 
4.0

Total intangible assets
$
65.8

 
$
73.8

Amortization expense for intangible assets was $3.6 million and $4.2 million for the three months ended March 29, 2019 and March 30, 2018 , respectively, and $7.3 million and $8.4 million for the six months ended March 29, 2019 and March 30, 2018 , respectively.
During the three and six months ended March 29, 2019 , the Company recognized an intangible asset impairment charge of  $0.8 million  as certain assets were determined not to be recoverable due to a change in the expected future economic benefit of the assets. The impairment charge is included in selling, general and administrative expenses on the condensed consolidated statements of earnings.
7. BORROWINGS
Existing Credit Facility
On May 1, 2017 in connection with an acquisition 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 five -year term, 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 is subsequently amended. 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. Varex used the net proceeds from the Term Facility, and the net proceeds from approximately $97 million drawn on the Revolving Credit Facility, to pay the purchase price for the acquisition of the medical imaging business of PerkinElmer, Inc., plus related credit facility fees, and to repay all Varex’s obligations under the previous credit agreement. 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, including the requirement to maintain certain financial ratios. 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, or (b) the base rate (equal 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% ); provided that if the base rate shall be less than zero. 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 2.75% (for LIBOR rate loans) and 0.75% - 1.75% (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% .
(In millions)
March 29, 2019
 
September 28, 2018
 
$ Change
Current portion of Term Facility
$
29.4

 
$
25.0

 
$
4.4

Revolving Credit Facility
—

 
28.0

 
(28.0
)
Long-Term portion of Term Facility
323.6

 
345.0

 
(21.4
)
Total debt outstanding, gross
353.0

 
398.0

 
(45.0
)
Debt issuance costs
(6.9
)
 
(8.2
)
 
1.3

Total debt outstanding, net
$
346.1

 
$
389.8

 
$
(43.7
)
On October 3, 2018, the Company, in accordance with the terms of the Credit Agreement, provided notice to the administrative agent that effective as of October 10, 2018, the Company was permanently reducing the revolving credit commitment

18


under the Credit Agreement by $50.0 million such that the revolving credit commitment under the Credit Agreement is now $150.0 million . The reduction in the revolving credit commitment also reduced the fees paid by the Company in connection with such commitment.
At March 29, 2019 , the Company had $150.0 million of the Revolving Credit Facility available for borrowings, subject to covenants contained in the Credit Agreement.
8 . REDEEMABLE NONCONTROLLING INTERESTS
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 March 29, 2019 , noncontrolling shareholders together held approximately 0.5 million shares of MeVis, representing 26.3% of the outstanding shares.
Changes in redeemable noncontrolling interests were as follows:
(In millions)
Redeemable Noncontrolling Interests
Balance at beginning of period, September 28, 2018
$
11.1

Net earnings attributable to noncontrolling interests
0.3

Other, including foreign currency remeasurement
(0.6
)
Balance at end of period, March 29, 2019
$
10.8

9 . REVENUE RECOGNITION
The Company adopted ASC 606 on September 29, 2018, using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for fiscal year 2019 reflect the application of ASC 606 guidance while the reported results for fiscal year 2018 were prepared under the guidance of ASC 605, “Revenue Recognition.” The primary impacts of the adoption include: (1) recording a separate contract liability and contract asset related to the sale of X-ray tubes that were sold with an option for the customer to require the Company to repurchase specific parts of the X‑ray tube at a specific price; and (2) recording a contract liability related to the deferral of revenue for service type warranties that are provided to certain customers who purchase Linatron ®  X-ray accelerators.
The Company has made the following accounting policy elections and elected to use certain practical expedients, as permitted by the FASB, in applying ASC 606: (1) the Company accounts for amounts collected from customers for sales and other taxes, net of related amounts remitted to tax authorities; (2) the Company does not adjust the promised amount of consideration for the effects of a significant financing component, if, at contract inception, the Company expects the period between the time when the Company transfers a promised good or service to the customer and the time when the customer pays for that good or service will be one year or less; (3) the Company expenses costs to obtain a contract as they are incurred if the expected period of benefit, and therefore the amortization period, is one year or less; (4) the Company accounts for shipping and handling activities that occur after control transfers to the customer as a fulfillment cost rather than an additional promised service and these fulfillment costs are included as a component of cost of revenues; and (5) the Company does not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer.
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

19


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.
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.
The beginning net cumulative-effect adjustment to the balance sheet for the adoption of ASC 606 is as follows:
 
Balance at
 
Adjustment Due to
 
Balance at
(in millions)
September 28, 2018
 
ASC 606
 
September 29, 2018
Assets:
 
 
 
 
 
Prepaid expenses and other current assets
$
17.1

 
$
6.4

 
$
23.5

Other assets
16.5

 
18.0

 
34.5

Liabilities and Equity:
 
 
 
 
 
Deferred revenues
13.2

 
0.3

 
13.5

Accrued liabilities
47.5

 
7.1

 
54.6

Deferred tax liabilities
23.2

 
(0.8
)
 
22.4

Other long-term liabilities
8.5

 
21.3

 
29.8

Retained earnings
62.4

 
(3.5
)
 
58.9


The following tables compare the reported condensed consolidated balance sheet and statement of operations as of and for the three and six months ended March 29, 2019 , to the amounts that would have been reported if ASC 605 had been in effect:
 
March 29, 2019
(in millions)
Balance without Adoption
 
As Reported
Assets:
 
 
 
Prepaid expenses and other current assets
$
14.2

 
$
20.6

Other assets
$
11.9

 
$
29.8

Liabilities and equity:
 
 
 
Deferred revenues
$
12.8

 
$
12.9

Accrued liabilities
$
44.6

 
$
51.7

Deferred tax liabilities
$
19.8

 
$
19.0

Other long-term liabilities
$
6.4

 
$
27.6

Retained earnings
$
71.0

 
$
67.7



20


 
Three Months Ended March 29, 2019
Six Months Ended March 29, 2019
(In millions)
Balance without Adoption
 
As Reported
Balance without Adoption
 
As Reported
Revenues
195.5

 
195.8

381.1

 
381.5

Cost of revenues
131.3

 
131.4

256.9

 
257.1

Taxes on earnings
1.9

 
1.9

3.0

 
3.0

Net earnings attributable to Varex
5.6

 
5.8

8.6

 
8.8

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
 
Six Months Ended
(In millions)
March 29, 2019
 
March 30, 2018
 
March 29, 2019
 
March 30, 2018
Americas
$
74.2

 
$
70.6

 
$
142.6

 
$
134.3

EMEA
68.2

 
70.1

 
130.8

 
125.1

APAC
53.4

 
60.5

 
108.1

 
118.0

 
$
195.8

 
$
201.2

 
$
381.5

 
$
377.4

Revenue in the United States of America was $72.2 million and $69.2 million for the three months ended March 29, 2019 and March 30, 2018 , respectively. Revenue in the United States of America was $139.4 million and $130.7 million for the six months ended March 29, 2019 and March 30, 2018 , respectively.
Refer to Note 13 , Segment Information , for the disaggregation of the Company’s revenue based on reportable operating segments.

21


Contract Balances
Contract assets are included within the prepaid expenses and other current assets, and other assets balances. Contract liabilities are included within the accrued liabilities, deferred revenues, and other long-term liabilities balances. The following table summarizes the changes in the contract assets and contract liabilities for the three months ended March 29, 2019 :
(In millions)
Contact Assets
Balance at September 29, 2018
$
24.4

Costs recovered from X-ray tube returns during the period
(3.0
)
Contract asset from shipments of X-ray tubes, subject to product return during the period
2.8

Balance at March 29, 2019
$
24.2

(In millions)
Contract Liabilities
Balance at September 29, 2018
$
41.9

Recognition of revenue included in beginning of year contract liability
(3.3
)
Additions to contract liabilities, net of revenue recognized during the period
2.6

Balance at March 29, 2019
$
41.2

Remaining Performance Obligations
Remaining performance obligations represent the transaction price of firm orders for which revenue has not yet been recognized. As of March 29, 2019 , total remaining performance obligations amounted to $286.5 million . The Company expects to recognize a majority of 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.
10. NET EARNINGS PER SHARE
Basic net earnings per common share is computed by dividing the net earnings for the period by the weighted average number of shares of common stock outstanding during the reporting period. Diluted net earnings per common share reflects the effects of potentially dilutive securities, which is computed by dividing net 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 income per common share is as follows:
 
Three Months Ended
 
Six Months Ended
(In millions, except per share amounts)
March 29, 2019
 
March 30, 2018
 
March 29, 2019
 
March 30, 2018
Net earnings attributable to Varex
$
5.8

 
$
12.2

 
$
8.8

 
$
23.6

Weighted average shares outstanding - basic
38.2

 
37.8

 
38.1

 
37.8

Dilutive effect of potential common shares
0.3

 
0.6

 
0.3

 
0.5

Weighted average shares outstanding - diluted
38.5

 
38.4

 
38.4

 
38.3

Net earnings per share attributable to Varex - basic
$
0.15

 
$
0.32

 
$
0.23

 
$
0.62

Net earnings per share attributable to Varex - diluted
$
0.15

 
$
0.32

 
$
0.23

 
$
0.62

Anti-dilutive employee shared based awards, excluded
2.0

 
0.1

 
2.2

 
1.0


22


The Company excludes potentially dilutive common shares (consisting of shares underlying stock options, unvested stock awards and purchase rights granted under the employee stock purchase plan) from the computation of diluted weighted average shares outstanding if the inclusion of the shares underlying these stock awards would be anti-dilutive to earnings per share.
11. EMPLOYEE STOCK PLANS
Share-Based Compensation Expense
Share-based compensation expense recognized in the condensed consolidated statements of earnings 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
 
Six Months Ended
(In millions)
March 29, 2019
 
March 30, 2018
 
March 29, 2019
 
March 30, 2018
Cost of revenues
$
0.4

 
$
0.4

 
$
0.7

 
$
0.6

Research and development
0.9

 
0.5

 
1.4

 
0.8

Selling, general and administrative  
1.7

 
1.7

 
3.5

 
3.3

Total share-based compensation expense
$
3.0

 
$
2.6

 
$
5.6

 
$
4.7

Stock Option Activity
The following table summarizes the activity for stock options under Varex’s 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)
Number of Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Term (in years)
 
Aggregate Intrinsic Value (1)
Balance at September 28, 2018
2,011

 
$
30.35

 
 
 
 
Granted
297

 
31.42

 
 
 
 
Canceled, expired or forfeited
(4
)
 
31.08

 
 
 
 
Exercised
(5
)
 
24.87

 
 
 
 
Balance at March 29, 2019
2,299

 
$
30.50

 
4.56
 
$
8,526.0

 
 
 
 
 
 
 
 
Exercisable at March 29, 2019
1,352

 
$
29.22

 
3.73
 
$
6,508.0

(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 $33.88 as of March 29, 2019 , the last trading date of the Company's second 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 2017 Omnibus Stock Plan for the Company’s employees:
(In thousands, except per share amounts)
Number of Shares

Weighted Average Grant-Date Fair Value
Balance at September 28, 2018
641


$
33.60

Granted
287


31.30

Vested
(193
)

31.50

Canceled or expired
(40
)

33.88

Balance at March 29, 2019
695


$
33.21


23


12. TAXES ON EARNINGS
 
Three Months Ended
 
Six Months Ended
 
March 29, 2019
 
March 30, 2018
 
March 29, 2019
 
March 30, 2018
Estimated effective tax rate
24.4
%
 
21.7
%
 
25.2
%
 
(4.8
)%
The Company recognized an income tax expense of $1.9 million and $3.4 million for the three months ended March 29, 2019 and March 30, 2018 , respectively, for effective rates of 24.4% and 21.7% , respectively. The Company recognized an income tax expense of $3.0 million and an income tax benefit of $1.1 million for the six months ended March 29, 2019 and March 30, 2018 , respectively, for effective rates of 25.2% and (4.8)% , respectively.
The Company's effective tax rate for the three months ended March 29, 2019 , increased primarily due to slightly greater losses in certain jurisdictions for which no benefit can be recorded due to full valuation allowance positions. The Company’s year-to-date effective tax rate increased as a result of one-time benefits booked in the first quarter of fiscal year 2018, the period of enactment of the Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform”). U.S. Tax Reform significantly revised the U.S. corporate income tax structure. Among the revisions impacting the Company’s effective tax rate are a lower U.S. corporate statutory rate. As a September fiscal year filer, the lower corporate income tax rate is phased in from a U.S. statutory federal rate of 24.5% in fiscal year ending September 28, 2018 to a rate of 21% for the fiscal year ending September 27, 2019. U.S. GAAP requires the impact of tax legislation to be recognized in the period in which the law is enacted. The lower U.S. statutory rate has been included in the estimated annual effective rate used to calculate the year-to-date income tax benefit as of the end of the quarter. The repeal of the deduction for domestic production applies to the Company for the fiscal year beginning September 29, 2018, and so no benefit of such deduction has been included in the calculation of the estimated annual effective rate.
The SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) that allows for reasonable estimated amounts to be recorded and a measurement period of up to one year from the date of enactment to revise these provisional amounts as new information is obtained and additional guidance is issued. During the three months ended December 28, 2018, the Company completed its analysis of U.S. Tax Reform, and the accounting for the income tax effects has been finalized for the measurement period under SAB 118, with no significant adjustments from the provisional amounts. Other U.S. Tax Reform provisions, including GILTI (global intangible low-taxed income), BEAT (base-erosion anti-abuse tax), FDII (foreign-derived intangible income), limitations on interest expense deductions (if certain conditions apply), and other components also have finalized and became effective during the current quarter, and have been included in the calculation of our estimated annual effective rate. The determination of the tax effects of U.S. Tax Reform may change following future legislation or further interpretation of U.S. Tax Reform, based on the publication of recently proposed U.S. Treasury regulations and guidance from the Internal Revenue Service and state tax authorities.
The guidance for accounting for U.S. Tax Reform requires taxpayers to make an election regarding the accounting for GILTI. This policy election is to either: (1) treat GILTI as a period cost if and when incurred, or (2) recognize deferred taxes for basis differences that are expected to reverse as GILTI in future years. During the first quarter of fiscal year 2019, the Company has made the accounting policy election to account for GILTI under the period cost method.
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 March 29, 2019 . 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 actually repatriated in the form of a dividend. In accordance with the measurement period under SAB 118, the Company’s indefinite reinvestment assertion is now finalized and is no longer provisional.
13 . SEGMENT INFORMATION
The Company has two reportable operating segments, Medical and Industrial, which align with how its Chief Executive Officer views and measures the Company's business performance. The Company's Chief Executive Officer is the Chief Operating Decision Maker and allocates resources to and evaluates the financial performance of each operating segment primarily based on revenues and gross margin.

24


Description of Segments
The Medical segment designs, manufactures, sells and services X-ray imaging components for use in a range of applications, including radiographic or fluoroscopic imaging, mammography, special procedures, 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 detectors, 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 security and inspection products, which include Linatron X‑ray accelerators, X-ray tubes, digital detectors, high voltage connectors, image processing software and image detection products for security and inspection purposes, such as cargo screening at ports and borders, airports, and nondestructive examination in a variety of applications. The Company generally sells its Industrial products to OEM customers that incorporate its products into their inspection systems.
The following segment information 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:

Three Months Ended
 
Six Months Ended
(In millions)
March 29, 2019
 
March 30, 2018
 
March 29, 2019
 
March 30, 2018
Revenues
 
 
 
 
 
 
 
Medical
$
148.9

 
$
158.5

 
$
292.8


$
297.7

Industrial
46.9

 
42.7

 
88.7


79.7

Total revenues
195.8

 
201.2

 
$
381.5


$
377.4

Gross margin
 
 
 
 
 
 
 
Medical
46.1

 
53.5

 
$
91.2

 
$
99.9

Industrial
18.3

 
16.6

 
33.2

 
31.7

Total gross margin
$
64.4

 
$
70.1

 
$
124.4

 
$
131.6

Total operating expenses
49.9

 
52.9

 
99.5

 
100.9

Interest and other income (expenses), net
(6.7
)
 
(1.5
)
 
(13.0
)
 
(7.9
)
Earnings before taxes
7.8

 
15.7

 
11.9

 
22.8

Taxes on earnings
1.9

 
3.4

 
3.0

 
(1.1
)
Net earnings
5.9

 
12.3

 
8.9

 
23.9

Less: Net earnings attributable to noncontrolling interests
0.1

 
0.1

 
0.1

 
0.3

Net earnings attributable to Varex
$
5.8

 
$
12.2

 
$
8.8

 
$
23.6

The following table summarizes the Company’s total assets by its reportable segments:
(In millions)
March 29, 2019
 
September 28, 2018
Identifiable assets
 
 
 
Medical
$
743.5


$
770.6

Industrial
222.1


217.3

Total reportable segments
$
965.6


$
987.9

14 . 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.

25


On April 29, 2019, the Company paid €62.1 million for approximately 97.4% of the outstanding shares of common stock of Direct Conversion AB (publ) and assumed €2.6 million of Direct Conversion net debt f or a total acquisition price of €64.7 million . In addition to the payment made at closing, the former shareholders of Direct Conversion will receive a deferred payment equal to the value of 0.3 million shares of the Company’s common stock, subject to certain adjustments, payable on the first anniversary of the closing of the transaction. The deferred payment is to be made in a mixture of the Company's common stock and cash.
The Company funded the acquisition using $7 million of available cash and $64 million of debt under its existing credit facility, as amended on March 21, 2019.
Due to the timing of the acquisition we have not yet completed the necessary valuation of the various assets acquired or an allocation of the purchase price among the various types of assets and liabilities.


26

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 28, 2018 .
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: 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; 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.

Overview
Varex Imaging Corporation is a leading innovator, designer and manufacturer of X-ray imaging components, which include tubes, digital flat panel detectors and other image processing solutions, which are key components of X-ray imaging systems. With a 65+ year history of successful innovation, Varex’s components are used in medical imaging as well as in industrial and security imaging applications. Global OEM manufacturers of X-ray imaging systems use the company’s X-ray sources, digital detectors, connecting devices and imaging software as components in their systems to detect, diagnose and protect. Varex has approximately 2,000 full-time equivalents employees, located at manufacturing and service center sites in North America, Europe, and Asia. For more information about Varex, visit vareximaging.com.
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 have over 500 engineers at the Company. 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. In addition, total product lifecycle cost is important. We continue 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. Demand for our products can also be impacted by geo-political factors, including tariffs on key imported materials used in manufacturing our products and also on X-ray imaging products we sell to customers outside the United States.
Operating Segments and Products
Our Chief Executive Officer, who is our Chief Operating Decision Maker (“CODM”), evaluates the product groupings and measures the 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 continues to mature from initial product introductions that were made approximately 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. The trade conflicts between the United States and China have negatively impacted our detector business in China and are expected to continue. Nonetheless, we anticipate that China-based revenues will continue to increase as a percentage of our revenues.
Industrial
In our Industrial business segment, we design, manufacture, sell and service products for use in security applications, such as cargo screening at ports and borders and at airports and industrial nondestructive inspection examination in a variety of applications. The products include Linatron ® X-ray linear accelerators, X-ray tubes, digital detectors, high voltage connectors, image-processing software and image detection products that we generally sell to OEM customers that incorporate these products into their imaging systems.

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.
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 28, 2018 filed with the SEC on November 27, 2018 and Note 3 “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

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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 28, 2018 , except for the adoption of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”) effective September 29, 2018 . The change to revenues in the first quarter of fiscal year 2019 due to the adoption of ASC 606 was not material and we do not expect that the adoption of ASC 606 will have a material impact on our consolidated financial statements for fiscal year 2019.
Fiscal Year
Our fiscal year is a 52 or 53-week period ending on the Friday nearest September 30. Fiscal year 2019 is the 52-week period ending September 27, 2019 . Fiscal year 2018 was a 52-week period that ended on September 28, 2018 . The fiscal quarters ended  March 29, 2019  and  March 30, 2018  were both 13-week periods.
Discussion of Results of Operations for the Three Months Ended March 29, 2019 Compared to the Three Months Ended March 30, 2018
Revenues
 
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
)%
Medical as a percentage of total revenues
76
%
 
79
%
 
 
 
 
Industrial as a percentage of total revenues
24
%
 
21
%
 
 
 
 
Medical revenues decreased by $9.6 million primarily due to decreased sales of radiographic and dental detectors and aftermarket X-ray tubes.
Industrial revenues increased $4.2 million primarily due to increased sales of X-ray tubes for airport security, digital detectors and linear accelerators for non-destructive testing applications.
Gross Margin
 
Three Months Ended
 
 
 
 
(In millions)
March 29, 2019
 
March 30, 2018
 
$ Change
 
% Change
Medical
$
46.1

 
$
53.5

 
$
(7.4
)
 
(13.8
)%
Industrial
18.3

 
16.6

 
1.7

 
10.2
 %
Total gross margin
$
64.4

 
$
70.1

 
$
(5.7
)
 
(8.1
)%
Medical gross margin %
31.0
%
 
33.8
%
 
 
 
 
Industrial gross margin %
39.0
%
 
38.9
%
 
 
 
 
Total gross margin %
32.9
%
 
34.8
%
 
 
 
 
The decrease in total gross margin percentage was primarily due to the decrease in medical gross margin percentage. The decrease in medical gross margin percentage was due to higher costs of quality, primarily in our detector business, plus increased freight and tariff costs. The industrial gross margin percentage was basically flat as compared to the prior period.

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Operating Expenses
 
Three Months Ended
 
 
 
 
(In millions)
March 29, 2019
 
March 30, 2018
 
$ Change
 
% Change
Research and development
$
18.8

 
$
22.0

 
$
(3.2
)
 
(14.5
)%
As a percentage of total revenues
9.6
%
 
10.9
%
 
 
 
 
Selling, general and administrative
$
31.1

 
$
30.9

 
$
0.2

 
0.6
 %
As a percentage of total revenues
15.9
%
 
15.4
%
 
 
 
 
Operating expenses
$
49.9

 
$
52.9

 
$
(3.0
)
 
(5.7
)%
As a percentage of total revenues
25.5
%
 
26.3
%
 
 
 
 
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 for the second quarter of 2019 decreased to 9.6% of revenues, primarily due to less prototype material costs.
Selling, General and Administrative
Selling, general and administrative expenses for the second quarter of 2019 were 15.9% of revenues as compared to 15.4% of revenues for the second quarter of 2018. Selling, general and administrative expenses for the second quarter of 2019 included approximately $4.9 million of certain expenses for litigation, restructuring and impairment.
Interest and Other Expense, Net
The following table summarizes the Company’s interest and other expense, net:
 
Three Months Ended
 
 
(In millions)
March 29, 2019
 
March 30, 2018
 
$ Change
Interest income
$
0.1

 
$
—

 
$
0.1

Interest expense
(5.5
)
 
(5.6
)
 
0.1

Other
(1.3
)
 
4.1

 
(5.4
)
Interest and other expense, net
$
(6.7
)
 
$
(1.5
)
 
$
(5.2
)
Interest and other expense, net increased, primarily due to a decrease in our income from equity method investments compared to the three months ended March 30, 2018 .
Taxes on Earnings
 
Three Months Ended
 
March 29, 2019
 
March 30, 2018
Estimated effective tax rate
24.4
%
 
21.7
%
We recognized an income tax expense of $1.9 million and $3.4 million for the three months ended March 29, 2019 and March 30, 2018 , respectively, for effective rates of 24.4% and 21.7% , respectively.
Our effective tax rate for the three months ended March 29, 2019 , increased primarily due to slightly greater losses in certain jurisdictions for which no benefit can be recorded due to full valuation allowance positions. U.S. Tax Reform significantly revised the U.S. corporate income tax structure. Among the revisions impacting our effective tax rate are a lower U.S. corporate statutory rate. As a September fiscal year filer, the lower corporate income tax rate is phased in from a U.S. statutory federal rate of 24.5% in fiscal year ending September 28, 2018 to a rate of 21% for the fiscal year ending September 27, 2019. U.S. GAAP requires the impact of tax legislation to be recognized in the period in which the law is enacted. The lower U.S. statutory rate has been included in the estimated annual effective rate used to calculate the year-to-date income tax benefit as of the end of the quarter. The repeal of the deduction for domestic production applies for the fiscal year beginning September 29, 2018, and so no benefit of such deduction has been included in the calculation of the estimated annual effective rate.

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The changes included in U.S. Tax Reform are broad, complex, and subject to interpretation. In response to U.S. Tax Reform, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) that allows for reasonable estimated amounts to be recorded and a measurement period of up to one year from the date of enactment to revise these provisional amounts as new information is obtained and additional guidance is issued. During the three months ended December 28, 2018, we completed our analysis of U.S. Tax Reform, and the accounting for the income tax effects has been finalized for the measurement period under SAB 118, with no significant adjustments from the provisional amounts. Other U.S. Tax Reform provisions, including GILTI (global intangible low-taxed income), BEAT (base-erosion anti-abuse tax), FDII (foreign-derived intangible income), limitations on interest expense deductions (if certain conditions apply), and other components also have finalized and became effective during the current quarter, and have been included in the calculation of our estimated annual effective rate. The determination of the tax effects of U.S. Tax Reform may change following future legislation or further interpretation of U.S. Tax Reform, based on the publication of recently proposed U.S. Treasury regulations and guidance from the Internal Revenue Service and state tax authorities.
The guidance for accounting for U.S. Tax Reform requires taxpayers to make an election regarding the accounting for GILTI. This policy election is to either: (1) treat GILTI as a period cost if and when incurred, or (2) recognize deferred taxes for basis differences that are expected to reverse as GILTI in future years. During the first quarter of fiscal year 2019, we have made the accounting policy election to account for GILTI under the period cost method.
As a result of the changes to the U.S. taxation of foreign earnings included in U.S. Tax Reform, we reevaluated our previous indefinite reinvestment assertion with respect to these earnings during fiscal year 2018, which resulted in us revoking our assertion for current and future earnings for all countries, while maintaining the assertion that historic earnings are indefinitely reinvested outside the U.S. We are maintaining this prior assertion for the quarter ended March 29, 2019 . 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 actually repatriated in the form of a dividend. In accordance with the measurement period under SAB 118, our indefinite reinvestment assertion is now finalized and is no longer provisional.
Discussion of Results of Operations for the Six Months Ended March 29, 2019 Compared to the Six Months Ended March 30, 2018

Revenues
 
Six Months Ended
 
 
 
 
(In millions)
March 29, 2019
 
March 30, 2018
 
$ Change
 
% Change
Medical
$
292.8

 
$
297.7

 
$
(4.9
)
 
(1.6
)%
Industrial
88.7

 
79.7

 
9.0

 
11.3
 %
Total revenues
$
381.5

 
$
377.4

 
$
4.1

 
1.1
 %
Medical as a percentage of total revenues
77
%
 
79
%
 
 
 
 
Industrial as a percentage of total revenues
23
%
 
21
%
 
 
 
 
Medical revenues decreased by $4.9 million primarily due to decreased sales of radiographic detectors and aftermarket X-ray tubes, partially offset by increased sales of digital detectors for oncology applications.
Industrial revenues increased $9.0 million due to increased sales of X-ray tubes for airport security and linear accelerators, for both security and inspection applications.
Gross Margin

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Six Months Ended
 
 
 
 
(In millions)
March 29, 2019
 
March 30, 2018
 
$ Change
 
% Change
Medical
$
91.2

 
$
99.9

 
$
(8.7
)
 
(8.7
)%
Industrial
33.2

 
31.7

 
1.5

 
4.7
 %
Total gross margin
$
124.4

 
$
131.6

 
$
(7.2
)
 
(5.5
)%
Medical gross margin %
31.1
%
 
33.6
%
 
 
 
 
Industrial gross margin %
37.4
%
 
39.8
%
 
 
 
 
Total gross margin %
32.6
%
 
34.9
%
 
 
 
 
The decrease in total gross margin percentage was primarily due to restructuring charges related to discontinuation of the amorphous silicon glass fabrication at the Santa Clara facility and higher quality costs. The decrease in medical gross margin percentage was due to the restructuring charges and higher quality costs, which were partially offset by margin improvements from a favorable product mix of high-end digital detectors. The industrial gross margin percentage decreased primarily due to higher manufacturing costs.
Operating Expenses
 
Six Months Ended
 
 
 
 
(In millions)
March 29, 2019
 
March 30, 2018
 
$ Change
 
% Change
Research and development
$
37.6

 
$
41.8

 
$
(4.2
)
 
(10.0
)%
As a percentage of total revenues
9.9
%
 
11.1
%
 
 
 
 
Selling, general and administrative
$
61.9

 
$
59.1

 
$
2.8

 
4.7
 %
As a percentage of total revenues
16.2
%
 
15.7
%
 
 
 
 
Operating expenses
$
99.5

 
$
100.9

 
$
(1.4
)
 
(1.4
)%
As a percentage of total revenues
26.1
%
 
26.7
%
 
 
 
 

  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 decreased to 10% of revenues due to less prototype material costs for the six months ended March 29, 2019 .
Selling, General and Administrative
Selling, general and administrative expenses for the six months ended March 29, 2019 , were 16.2% as compared to 15.7% for the six months ended March 30, 2018 . Selling, general and administrative expenses increased as a percentage of total revenues primarily due to certain expenses relating to restructuring, impairment and professional service fees for accounting and legal.    
Interest and Other Income (Expense), Net
The following table summarizes the Company’s interest and other income (expense), net:
 
Six Months Ended
 
 
(In millions)
March 29, 2019
 
March 30, 2018
 
$ Change
Interest income
$
0.1

 
$
0.1

 
$
—

Interest expense
(10.6
)
 
(11.1
)
 
0.5

Other
(2.5
)
 
3.1

 
(5.6
)
Interest and other income (expense), net
$
(13.0
)
 
$
(7.9
)
 
$
(5.1
)
Interest and other expense, net increased, primarily due to a decrease in our income from equity method investments compared to the six months ended March 30, 2018 .

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Taxes on Earnings
 
Six Months Ended
 
March 29, 2019
 
March 30, 2018
Estimated effective tax rate
25.2
%
 
(4.8
)%
We recognized an income tax expense of $3.0 million and a benefit of $1.1 million for the six months ended March 29, 2019 and March 30, 2018 , respectively, for effective rates of 25.2% and (4.8)% , respectively.
Our year-to-date effective tax rate increased as a result of one-time benefits booked in the first quarter of fiscal year 2018, the period of enactment of the Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform”). U.S. Tax Reform significantly revised the U.S. corporate income tax structure. Among the revisions impacting our effective tax rate are a lower U.S. corporate statutory rate. As a September fiscal year filer, the lower corporate income tax rate is phased in from a U.S. statutory federal rate of 24.5% in fiscal year ending September 28, 2018 to a rate of 21% for the fiscal year ending September 27, 2019. U.S. GAAP requires the impact of tax legislation to be recognized in the period in which the law is enacted. The lower U.S. statutory rate has been included in the estimated annual effective rate used to calculate the year-to-date income tax benefit as of the end of the quarter. The repeal of the deduction for domestic production applies for the fiscal year beginning September 29, 2018, and so no benefit of such deduction has been included in the calculation of the estimated annual effective rate.
The changes included in U.S. Tax Reform are broad, complex, and subject to interpretation. In response to U.S. Tax Reform, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) that allows for reasonable estimated amounts to be recorded and a measurement period of up to one year from the date of enactment to revise these provisional amounts as new information is obtained and additional guidance is issued. During the three months ended December 28, 2018, we completed our analysis of U.S. Tax Reform, and the accounting for the income tax effects has been finalized for the measurement period under SAB 118, with no significant adjustments from the provisional amounts. Other U.S. Tax Reform provisions, including GILTI (global intangible low-taxed income), BEAT (base-erosion anti-abuse tax), FDII (foreign-derived intangible income), limitations on interest expense deductions (if certain conditions apply), and other components also have finalized and became effective during the current quarter, and have been included in the calculation of our estimated annual effective rate. The determination of the tax effects of U.S. Tax Reform may change following future legislation or further interpretation of U.S. Tax Reform, based on the publication of recently proposed U.S. Treasury regulations and guidance from the Internal Revenue Service and state tax authorities.
The guidance for accounting for U.S. Tax Reform requires taxpayers to make an election regarding the accounting for GILTI. This policy election is to either: (1) treat GILTI as a period cost if and when incurred, or (2) recognize deferred taxes for basis differences that are expected to reverse as GILTI in future years. During the first quarter of fiscal year 2019, we have made the accounting policy election to account for GILTI under the period cost method.
As a result of the changes to the U.S. taxation of foreign earnings included in U.S. Tax Reform, we reevaluated our previous indefinite reinvestment assertion with respect to these earnings during fiscal year 2018, which resulted in us revoking our assertion for current and future earnings for all countries, while maintaining the assertion that historic earnings are indefinitely reinvested outside the U.S. We are maintaining this prior assertion for the quarter ended March 29, 2019 . 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 actually repatriated in the form of a dividend. In accordance with the measurement period under SAB 118, our indefinite reinvestment assertion is now finalized and is no longer provisional.


Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate cash to fund our operating and investing activities. We continue to generate substantial cash from operating activities and believe that our operating cash flow, credit facility, and other sources of liquidity will be sufficient to allow us to continue to invest in our existing businesses, consummate strategic acquisitions and manage our capital structure on a short and long-term basis. Availability under our credit facility was $150.0 million as of March 29, 2019 .

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Cash and Cash Equivalents
The following table summarizes our cash and cash equivalents:
(In millions)
March 29, 2019
 
September 28, 2018
 
$ Change
Cash and cash equivalents
$
31.0

 
$
51.9

 
$
(20.9
)
Borrowings
The following table summarizes the changes in our debt outstanding:
(In millions)
March 29, 2019
 
September 28, 2018
 
$ Change
Current portion of Term Facility
$
29.4

 
$
25.0

 
$
4.4

Revolving Credit Facility
—

 
28.0

 
(28.0
)
Long-Term portion of Term Facility
323.6

 
345.0

 
(21.4
)
Total debt outstanding, gross
353.0

 
398.0

 
(45.0
)
Debt issuance costs
(6.9
)
 
(8.2
)
 
1.3

Total debt outstanding, net
$
346.1

 
$
389.8

 
$
(43.7
)
Cash Flows
 
Six Months Ended
(In millions)
March 29, 2019
 
March 30, 2018
Net cash flow provided by (used in):
 
 
 
Operating activities
$
32.9

 
$
45.5

Investing activities
(7.6
)
 
(6.9
)
Financing activities
(45.6
)
 
(66.7
)
Effects of exchange rate changes on cash and cash equivalents
(0.6
)
 
0.2

Net increase in cash and cash equivalents
$
(20.9
)
 
$
(27.9
)
Net Cash Provided by Operating Activities. Cash from operating activities consists primarily of net 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 six months ended March 29, 2019 , compared to the six months ended March 30, 2018 , cash provided by operating activities were as follows:
•
Net earnings were $8.9 million compared to $23.9 million
•
Non-cash adjustments to net earnings of $27.5 million compared to $10.5 million
•
Operating assets and liabilities activity:
◦
Accounts receivable decreased to $29.4 million from $34.4 million .
◦
Inventories increased to $26.4 million from $11.0 million .
◦
Prepaid expenses and other assets increased to $2.5 million from 1.3 million
◦
Accrued liabilities and other long-term liabilities decreased by $4.4 million compared to an increase of $6.0 million
Net Cash Used in Investing Activities. Net cash used in investing activities was $7.6 million and $6.9 million for the six months ended March 29, 2019 and March 30, 2018 , respectively, and related to capital expenditures for property plant and equipment for both periods.
Net Cash Used in Financing Activities. Financing activities for the six months ended March 29, 2019 consisted of borrowings under our credit agreement of $7.0 million , and repayments of borrowings of $52.0 million . Financing activities for the six months ended March 30, 2018 consisted of borrowings under our credit agreement of $10.0 million , and repayments of borrowings of $78.0 million .

34
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Days Sales Outstanding
Trade accounts receivable days sales outstanding (“DSO”) was 57 days at March 29, 2019 and 58 days September 28, 2018 . 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 2019, the fixed cost commitment was determined and approved by the dpiX board of directors to be $14.7 million for calendar year 2019. As of March 29, 2019 , the Company had $11.0 million remaining fixed cost commitments related to this agreement remaining for calendar year 2019. 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 March 29, 2019 , noncontrolling shareholders together held approximately 0.5 million shares of MeVis, representing 26.3% of the outstanding shares. See Note 8 , “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 and other legal 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 March 29, 2019 , 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 March 29, 2019 , 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. In addition, because our business is global and some payments may be made in

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local currency, fluctuations in foreign currency exchange rates can impact our revenues and expenses and/or the profitability in U.S. Dollars of products and services that we provide in foreign markets.
Credit and Counterparty Risk
We use a centralized approach to manage substantially all 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 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
At March 29, 2019 , we had borrowings of $346.1 million . Borrowings under our credit facilities 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 facilities. 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 $270.0 million of our debt as of March 29, 2019 . See Note 3 , “Financial Derivatives and Hedging Activities” for further information on hedging activities.
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 March 29, 2019 , we did not have any commodity derivative instruments in place to manage our exposure to price changes.
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 March 29, 2019 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 are described below.
Description of Material Weaknesses
We have identified the following control deficiencies that constituted material weaknesses in our internal control over financial reporting as of March 29, 2019 :
•
As a result of our risk assessment processes being inadequate to identify and assess the risks in our information technology environment and business processes, we did not appropriately design controls in response to the risks of material misstatement. Specifically, we did not adequately identify new and evolving risks of material misstatement, and design and implement controls to address those risks as a result of changes to our business operating environment including becoming an independent publicly traded company. Although this deficiency did not result in a material misstatement to our consolidated financial statements, until remediated, it could result in material misstatements potentially impacting all financial statement accounts and disclosures in our annual or interim consolidated financial statements that would not be prevented or detected. This material weakness contributed to the following control deficiencies, which are also considered to be material weaknesses:

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◦
We did not design and maintain effective controls over certain information technology general controls (ITGCs) for information systems that are relevant to the preparation of our financial statements. Specifically, we did not design and maintain:
▪
User access controls that adequately restrict user and privileged access to certain financial applications, programs, and data to appropriate Company personnel, and
▪
Program change management controls for certain financial systems to ensure that information technology program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately.

These IT deficiencies did not result in a material misstatement to the consolidated financial statements, however, until remediated, the deficiencies, when aggregated, could impact the effectiveness of IT-dependent controls (such as automated controls that address the risk of material misstatement to one or more assertions, along with the IT controls and underlying data that support the effectiveness of system-generated data and reports) that could result in material misstatements potentially impacting all financial statement accounts and disclosures in our annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, our management has determined these deficiencies in the aggregate constitute a material weakness.
We have also determined that as a result of our inadequate risk assessment processes, other business process controls were not operating effectively. Specifically, we identified the following areas of control deficiencies which independently resulted in material weaknesses in our internal control over financial reporting:
◦
We did not design and maintain effective controls related to accounting for revenue, deferred revenue and related accounts receivable, including maintaining effective business process controls to prevent or detect misstatements in the processing of customer transactions. Specifically, we did not design and maintain effective controls related to the review of the completeness and accuracy of customer order entry, quantity and pricing. Additionally we did not design and maintain effective controls for the effect of the adoption of Revenue from Contracts with Customers (“ASC 606”) to prevent and detect misstatements. Specifically, we did not design and maintain effective controls related to the accuracy of recording the effect of the adoption of ASC 606.
◦
We did not design and maintain effective controls related to accounting for inventory and cost of revenues, including maintaining effective business process controls to prevent or detect misstatements in the accuracy and valuation of inventory. Specifically, we did not maintain effective controls related to certain cycle count programs, the valuation of inventory at lower of cost or market, and presentation and disclosure of inventory classifications.
◦
We did not design and maintain effective controls related to accounting for our operations in Germany, including maintaining effective business process controls and appropriate segregation of duties to prevent or detect misstatements in the financial information of our German operations. Specifically, we did not maintain effective controls related to the authorization of transactions and journal entries, and the cutoff, completeness and accuracy of transactions in the German operations.
◦
We did not design and maintain effective controls in our financial reporting close process to prevent or detect misstatements in the translation of foreign currency denominated account balances to US dollars and the reporting of certain footnote information. Specifically, we did not maintain effective controls related to the accuracy of the translation of foreign currency denominated transactions to US dollars, and the reporting of segment footnote disclosures.
These deficiencies in the areas of revenue, inventory, German operations and the financial reporting close process resulted in immaterial audit adjustments to the consolidated financial statements as of and for the year ended September 28, 2018 and to the recording of out of period adjustments as of and for the three and six months ended March 29, 2019, as disclosed in note 1 to the Company's condensed consolidated interim financial statements, however, until remediated, these deficiencies could result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, our management has determined these deficiencies constitute material weaknesses.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Remediation

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As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended September 28, 2018 , we began implementing a remediation plan to address the material weaknesses mentioned above. The material weaknesses 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. For example, in this fiscal year we initiated litigation asserting claims of patent infringement against a third party. 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.
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 six months ended March 29, 2019 , that accounted for 18% of its revenue. Varex’s ten largest customers as a group accounted for approximately 54% and 53% of its revenue for the three months ended March 29, 2019 and March 30, 2018 , respectively. Varex’s ten largest customers as a group accounted for approximately 53% and 51% of its revenue for the six months ended March 29, 2019 and March 30, 2018 , 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, 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. 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. In addition, 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.

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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, including Varex’s customers. 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, 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. 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. 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, in order for Varex to effectively retain the business of its customers and compete with its competitors, it must have an advantage in one or more significant areas, such as lower product cost, better product quality and/or 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. In addition, some of Varex’s competitors outside the United States may have resources and support from their governments that Varex cannot replicate, 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.
Existing competitors’ actions and new entrants may materially and adversely affect Varex’s ability to compete. These 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, a marketing advantage over Varex’s products. Also, some of Varex’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. In addition, some of its smaller competitors could be acquired by larger companies that have greater financial strength, which could enable them to compete more aggressively. Varex’s competitors could also acquire some of its customers, suppliers or distributors, which could disrupt supply or distribution arrangements, result in a loss of customers, and lead to less predictable and reduced revenues. 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.
The United States has recently implemented new tariffs on imported steel, aluminum and many other items. Tariffs on items imported by us from China and other countries have increased our costs and could result in increased prices or lower gross margins on some of our products sold. These tariffs have already had a direct adverse impact on our business and results of operations, and future tariffs could have a more significant impact on our business in the future. Retaliatory tariffs implemented by China 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, or in some cases, has caused customers to look elsewhere for products. 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. 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.
In addition, 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

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adverse effect on our business. Uncertainty over tariffs and trade wars could also cause our customers to delay or cancel orders for our products.
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. In order 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 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.
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

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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.
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 needs to 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. For example, in April 2019, we acquired Direct Conversion AB (publ), in May 2017, we acquired the medical imaging business of PerkinElmer, Inc., and during fiscal year 2015, Varex acquired Claymount Investments B.V. and MeVis Medical Solutions AG.
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 its major supplier of its amorphous silicon-based thin film transistor arrays (flat panels) used in its digital detectors, dpiX LLC) 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.
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 $21.57 to a high of $39.39. 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

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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:
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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;
•
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);
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fluctuation in its effective tax rate, which may or may not be known to Varex in advance;
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the availability of economic stimulus packages or other government funding, or reductions thereof;
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disruptions in the supply or changes in the costs of raw materials, labor, product components or transportation services;
•
changes to its organizational structure, which may result in restructuring or other charges;
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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, as well as ongoing costs associated with legal proceedings; 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.
Our secured revolving credit facility and secured term loan credit facility restrict certain activities, and failure to comply with the terms of these facilities may have an adverse effect on our business, liquidity and financial position.
Varex is party to a secured revolving credit facility and a secured term loan credit facility, each of which contains restrictive financial covenants, including financial covenants that require Varex to comply with specified financial ratios. 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. If Varex fails to comply with the credit facility requirements, it may be in default. Upon an event of default, if the credit facility documents are 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.
Varex has significant debt obligations that could adversely affect Varex’s business, profitability and ability to meet its obligations.
As of March 29, 2019 , Varex’s total combined indebtedness was approximately $346.1 million (net of deferred loan costs). The borrowings under Varex’s credit facilities bear interest at floating interest rates. 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 $270.0 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:
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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;
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increasing Varex’s vulnerability to shifts in interest rates and to general adverse economic and industry conditions;

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•
limiting Varex’s flexibility in planning for, or reacting to, changes in its business and the industry; and
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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.
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, and natural or other disasters. Loss or damage to this 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 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 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 manufactures its security products in Las Vegas, Nevada, and certain flat panels in Santa Clara, California, 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.
Significantly 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 63% and 66% of Varex’s total revenues during the three months ended March 29, 2019 and March 30, 2018 , respectively Varex conducts business globally. Revenues generated from customers located outside the United States accounted for approximately 63% and 65% of Varex’s total revenues during the six months ended March 29, 2019 and March 30, 2018 , 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:
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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;
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the longer payment cycles associated with many customers located outside the United States;
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difficulties in interpreting or enforcing agreements and collecting receivables through many foreign countries’ legal systems;
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changes in restrictions on trade between the United States and other countries or unstable regional political and economic conditions;
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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;
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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;
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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;

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risks unique to the Chinese market, including import barriers and preferences for local manufacturers;
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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
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that it may be more difficult to protect 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. For example, recent trade disputes as well as tariffs enacted by China and the United States have had a negative effect on Varex’s business and will likely continue to negatively impact our business.
A change in the percentage of Varex’s total earnings from international sales or continued 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 the countries in which its international subsidiaries do business. 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 or decrease. The Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform”) was signed into law on December 22, 2017. The law includes significant changes to the U.S. corporate income tax system, including a Federal corporate rate reduction from 35% to 21%, limitations on the deductibility of interest expense and executive compensation, and extensive changes to the way foreign earnings are taxed in the U.S.
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’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 and the pending withdrawal of the United Kingdom from the European Union (“EU”) 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

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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 such time as 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. While Varex entered into a Supply Agreement for this component, there can be no assurance that this component will continue to be available 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, Varex may be required to obtain and qualify one or more replacement suppliers. Such an event (i) 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 (ii) 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 limited- or sole-source suppliers or other inability of these suppliers to meet increasing demand 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 upon 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

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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.

Fulfilling obligations incidental to being a public company, including with respect to the requirements of and related rules under the Sarbanes-Oxley Act of 2002, will 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. In addition, 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, expose it to lawsuits and restrict its ability to access financing.
Varex recently transitioned from an “emerging growth company” to a “large accelerated filer.” As a large accelerated filer, the Sarbanes-Oxley Act requires that Varex, 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, in preparation for its first full year of Sarbanes-Oxley Act compliance, Varex 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.
Varex identified material weaknesses in its internal control related to ineffective information technology general and business processes controls which, if not remediated appropriately or timely, could result in loss of investor confidence and adversely impact our stock price.
During Varex's 2018 fiscal year end financial reporting process, management determined that Varex did not appropriately design controls in response to the risk of material misstatements. As a result, management identified material weaknesses related to ineffective information technology general controls (“ITGCs”) in the areas of user access and program change-management over certain information technology (“IT”) systems that support the Company’s financial reporting processes. Management also identified business process control deficiencies which independently, as well as when combined with the material weaknesses in ITGCs, resulted in material weakness in the areas of customer order entry and pricing, implementation of ASC 606, cycle count programs, capitalization of manufacturing variances, our German operations and the financial close process. As a result, management concluded that Varex's internal control over financial reporting was not effective as of September 28, 2018. These material weaknesses and deficiencies did not result in a material misstatement to the consolidated financial statements; however, until remediated, these material weaknesses and deficiencies 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. 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, negatively affect investor confidence in our financial statements and adversely impact our stock price.

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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.
Most of Varex’s products are non-classified or Class I devices, with a small number of software products designated as Class II devices. 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 U.S. Food and Drug Administration (“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 that 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. In addition, 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:
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adverse publicity affecting both Varex and its customers;
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increased pressures from competitors;
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investigations by governmental authorities;
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fines, injunctions, civil penalties, and criminal prosecution;
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partial suspension or total shutdown of production facilities or the imposition of operating restrictions;
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increased difficulty in obtaining required clearances or approvals or losses of clearances or approvals already granted;
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seizures or recalls of Varex products or those of its customers;
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delays in purchasing decisions by customers or cancellation of existing orders;

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the inability to sell Varex products; and
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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 process of gaining approval 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 have to be approved by the Chinese FDA or province-specific authorities. Registration requirements are subject to change, and Varex may not be able to receive registration approval or renewal of existing registrations if Varex 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.
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, such as what may occur in connection with Brexit, may add additional complexity, cost and delays in marketing or selling Varex’s products. Brexit could lead to legal uncertainty and potentially divergent national laws and regulations and, given the lack of comparable precedent, it is unclear what financial, regulatory and legal implications the withdrawal of the United Kingdom from the EU would have and how such withdrawal would affect Varex.
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

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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. EU Medical Device Regulations, which will enter into force in 2020, replaced Medical Device Directive 93/42/EEC and Active Implantable Medical Device 90/385/EEC, and will enter into force in 2022. These new regulations impose stricter requirements for placing medical devices in the EU market, as well as for Notified Bodies. 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.
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.
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.
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 and the Law On the Fundamentals of Health Protection in the Russian Federation. In general, there is a worldwide trend to strengthen anti-corruption laws and their enforcement, and the healthcare

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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. Transparency International’s 2017 Corruption Perceptions Index measured the degree to which public sector corruption is perceived to exist in 180 countries/territories around the world and found that two-thirds of the countries in the index, including many that Varex considers to be high-growth areas for Varex’s products, such as China and India, scored below 50 on a scale from 100 (very clean) to 0 (highly corrupt). Varex operates in many countries where the public sector is 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. 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 quite costly. In addition, 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 inevitably 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 in which it operates. Regulatory authorities under whose laws Varex operates may have enforcement powers that can subject Varex to sanctions and can impose changes or conditions in the way Varex conducts its business. In addition, an increasing number of jurisdictions also provide private rights of action for competitors or consumers to seek damages asserting claims of anti-competitive conduct. 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. In addition, Varex may conduct, or it 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 and ethical rules governing interactions with healthcare providers . Generally, Varex does not sell its products directly to healthcare providers, although occasionally it may 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 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

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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 could significantly impair Varex’s liquidity and profitability, as well as 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 needs to 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.
Additionally, Varex’s manufacturing is primarily conducted at its Salt Lake City, Utah; Las Vegas, Nevada; and Calamba City, Philippines facilities. If any of these facilities experiences a disruption, Varex would have no other means of manufacturing the components manufactured at each respective facility until Varex is able to restore the capability at its current facilities or develop the same capability at an alternative facility.
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.
In addition, 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 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. Furthermore, bid awards in this business may be subject to challenge by third parties, as Varex has previously

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encountered with a large government project. These factors make this business more unpredictable and could cause volatility in Varex’s revenues and earnings, and therefore the price of Varex’s common stock.
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 in order 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:
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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;
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fluctuations in currency exchange rates;
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difficulties in coordinating its operations globally and in maintaining uniform standards, controls, procedures, and policies across its operations;
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difficulties in enforcing contracts and protecting intellectual property;
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diversion of management attention;
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imposition of burdensome governmental regulations, including changing laws and regulations with respect to collection and maintenance of personally identifiable data;
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regional and country-specific political and economic instability, as discussed in greater detail below; and
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inadequacy of the local infrastructure to support its operations.
In addition, 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.
Protecting Varex’s intellectual property can be costly, and Varex may not be able to maintain its rights, and, in either case, its competitive position would be harmed if Varex is not able to do so.
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 the current fiscal year, 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, and its trade secrets may otherwise 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 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 third parties may still use them. Varex also has agreements with third parties that license to Varex certain patented or proprietary technologies. In some cases, products with

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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.
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 upon a third party’s intellectual property rights involves complex legal and factual issues, and the outcome of this type of litigation is often uncertain. Third 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 third parties asserting infringement, and Varex has been subject to lawsuits alleging infringement of third-party 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. If actual liabilities significantly exceed its estimates regarding potential liabilities, 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. As such, 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 injury and/or death exists to the intended or unintended recipient of such delivery. In addition, 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. Examples of these factors include 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 significant 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. If a product liability action were ultimately determined against Varex, it 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) or found to be so by a competent regulatory authority, Varex may be required to correct or recall the product and notify other regulatory authorities. The adverse publicity resulting from a correction or recall, however imposed, 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 under GAAP.
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, or for which insurance coverage is denied or limited, 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 Varex’s 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 license. Obtaining licenses and certifications may be time consuming, expensive, and uncertain.
In addition, Varex is subject to a variety of environmental laws regulating its manufacturing operations and the handling, storage, transport, and disposal of hazardous substances, which impose liability for the cleanup of any contamination from these substances. In particular, 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, the substantial majority of which are Class I devices. A small portion of Varex’s products, however, is 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 our business, we collect, process and store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners, third parties accessing our website, patient data and personally identifiable information of our customers and employees, in our data centers, and on our networks, as well as third party off-site infrastructure. Despite our 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.
Moreover, 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 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 is 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 or treble 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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Changes in interpretation or application of generally accepted accounting principles may materially and adversely affect Varex’s operating results.
Varex prepares its financial statements to conform to 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. A change in interpretations of, or its application of, these 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 and make it more difficult to compare its financial results to prior periods.
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 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.

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Certain provisions in Varex’s Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, 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;
•
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: (i) 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; (ii) 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 (iii) 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.
Varex believes these provisions will protect its stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with Varex’s board of directors and by providing Varex’s board of directors with more time to assess any acquisition proposal. 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.
In addition, an acquisition or further issuance of Varex’s stock could trigger the application of Section 355(e) of the Internal Revenue Code of 1986, causing the distribution to be taxable to Varian. Under the Tax Matters Agreement, entered into by Varex and Varian in connection with the separation, Varex would be required to indemnify Varian for the resulting tax, and this indemnity obligation might discourage, delay, or prevent a change of control that Varex stockholders may consider favorable.
Prior to its separation from Varian, Varex had no history of operating as an independent company, and its historical results as a part of Varian are not necessarily representative of the results that it would have achieved as a separate, publicly-traded company and may not be a reliable indicator of its future results.
Some of the information about Varex in its Annual Report on Form 10-K for the fiscal year ended 2018 refers to Varex’s business as operated by and integrated with Varian. Varex’s historical financial information prior to January 28, 2017 included in its Annual Report on Form 10-K for the fiscal year ended 2018 is derived from the consolidated financial statements and accounting records of Varian. Accordingly, this historical financial information does not necessarily reflect the financial condition, results of

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operations, or cash flows that Varex would have achieved as a separate, publicly-traded company during the periods presented or that which Varex will achieve in the future, primarily as a result of the factors described below:
•
Prior to the separation, Varex’s business was operated by Varian as part of its broader corporate organization, rather than as an independent company. Varian or one of its affiliates performed various corporate functions for Varex such as accounting, legal, human resources, information technology, treasury, tax, facilities, research and development, insurance, and other corporate and infrastructure services. Varex’s historical financial results reflect allocations of corporate expenses from Varian for such functions and are likely to be less than the expenses Varex would have incurred had it operated as a separate publicly-traded company. Following the separation, Varex’s costs related to such functions previously performed by Varian may therefore increase.
•
Prior to the separation, Varex’s business was integrated with the other businesses of Varian. Historically, Varex has shared economies of scope and scale in costs, employees, vendor relationships, and customer relationships. Although Varex entered into a Transition Services Agreement with Varian, the arrangements provided by such agreement may not fully capture the benefits that Varex enjoyed when integrated with Varian and may result in Varex paying higher charges than in the past for these services. This could have a material and adverse effect on Varex’s results of operations and financial condition.
•
Generally, Varex’s working capital requirements and capital for its general corporate purposes, including acquisitions and capital expenditures, have historically been satisfied as part of the corporate-wide cash management policies of Varian. Following the separation, Varex may need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities, strategic relationships or other arrangements, which may or may not be available and may be more costly.
•
The cost of capital for Varex’s business is expected to be higher than Varian’s cost of capital prior to the separation.
Other significant changes have occurred and are likely to continue to occur in Varex’s cost structure, management, financing, and business operations as a result of operating as a company separate from Varian, including as a result of additional costs incurred by Varex as a result of the separation.
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 separated 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.
In connection with Varex’s separation 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.

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If the distribution, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, Varian, Varex, and Varian stockholders could be subject to significant tax liabilities, and, in certain circumstances, Varex could be required to indemnify Varian for material taxes and other related amounts pursuant to indemnification obligations under the Tax Matters Agreement.
It was a condition to the distribution that Varian receive an opinion of counsel, satisfactory to the Varian board of directors, regarding the qualification of the distribution, together with certain related transactions, as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. The opinion of counsel was based upon and relied on, among other things, certain facts and assumptions, as well as certain representations, statements, and undertakings of Varian and Varex, including those relating to the past and future conduct of Varian and Varex. If any of these representations, statements, or undertakings are, or become, inaccurate or incomplete, or if Varian or Varex breaches any of its covenants in the separation documents, the opinion of counsel may be held to be invalid, and the conclusions reached therein could be jeopardized. Notwithstanding the opinion of counsel, the Internal Revenue Service (the “IRS”) could determine that the distribution, together with certain related transactions, should be treated as a taxable transaction if it determines that any of the facts, assumptions, representations, statements, or undertakings upon which the opinion of counsel was based are false or have been violated or if it disagrees with the conclusions in the opinion of counsel. The opinion of counsel is not binding on the IRS, and there can be no assurance that the IRS will not assert a contrary position.    
If the distribution, together with certain related transactions, fails to qualify as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code, Varian would recognize taxable gain as if it had sold the Varex common stock in a taxable sale for its fair market value, and Varian stockholders who received Varex shares in the distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares.
Under the Tax Matters Agreement entered into by Varian and Varex in connection with the separation, Varex is generally required to indemnify Varian for any taxes resulting from the separation (and any related costs and other damages) to the extent such amounts resulted from (i) an acquisition of all or a portion of the equity securities or assets of Varex, whether by merger or otherwise (and regardless of whether Varex participated in or otherwise facilitated the acquisition), (ii) other actions or failures to act by Varex, or (iii) should any of the representations or undertaking of Varex contained in any of the separation-related agreements or in the documents relating to the opinion of counsel be incorrect or violated. Any such indemnity obligations could be material.
Varex may not be able to engage in certain desirable strategic or capital-raising transactions following the separation.
Under current law, a spin-off can be rendered taxable to the parent corporation and its stockholders as a result of certain post-spin-off acquisitions of shares or assets of the spun-off corporation. For example, a spin-off may result in taxable gain to the parent corporation under Section 355(e) of the Code if the spin-off were later deemed to be part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, shares representing a 50% or greater interest (by vote or value) in the spun-off corporation. The Tax Matters Agreement prohibits Varex from taking or failing to take any other action that would prevent the distribution and certain related transactions from qualifying as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. These restrictions may limit Varex’s ability to pursue certain strategic transactions, equity issuances or repurchases, or other transactions that it may believe to be in the best interests of its stockholders or that might increase the value of its business.
As a result of the distribution, certain members of management and directors hold stock in both Varian and Varex, and as a result may face actual or potential conflicts of interest.
After the distribution, certain of the management and directors of each of Varian and Varex own both Varian common stock and Varex common stock. This ownership overlap could create, or appear to create, potential conflicts of interest when Varex management and directors and Varian’s management and directors face decisions that could have different implications for Varex and Varian. For example, potential conflicts of interest could arise in connection with the resolution of any dispute between Varex and Varian regarding the terms of the agreements governing the distribution and Varex’s relationship with Varian thereafter. These agreements include the Separation and Distribution Agreement, the Tax Matters Agreement, the Employee Matters Agreement, the Transition Services Agreement, the Intellectual Property Matters Agreement, the Trademark License Agreement, and one or more Supply/Distribution Agreements. Potential conflicts of interest may also arise out of any commercial arrangements that Varex or Varian may enter into in the future.

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Varex may not achieve some or all of the expected benefits of the separation, and the separation may materially and adversely affect Varex’s business.
Varex may not be able to achieve the full strategic and financial benefits expected to result from the separation, or such benefits may be delayed or not occur at all. The separation and distribution is expected to provide the following benefits, among others:
•
more effective pursuit of each company’s distinct operating priorities and strategies;
•
more efficient allocation of capital for both Varian and Varex;
•
direct access by Varex to the capital markets;
•
facilitation of incentive compensation arrangements for employees more directly tied to the performance of the relevant company’s business, and potential enhancement of employee hiring and retention by, among other things, improving the alignment of management and employee incentives with performance and growth objectives, while at the same time creating an independent equity structure that will facilitate Varex’s ability to effect future acquisitions utilizing Varex common stock; and
•
a distinct investment identity of Varex, allowing investors to evaluate the merits, performance, and future prospects of Varex separately from Varian.
Varex may not achieve these and other anticipated benefits for a variety of reasons, including, among others: (i) following the separation, Varex may be more susceptible to market fluctuations and other adverse events than if it were still a part of Varian; and, (ii) following the separation, Varex’s business is less diversified and has less scale than Varian’s business prior to the separation. If Varex fails to achieve some or all of the benefits expected to result from the separation, or if such benefits are delayed, the business, operating results, and financial condition of Varex could be materially and adversely affected.
Varex or Varian may fail to perform under various transaction agreements that have been executed as part of the separation, or Varex may fail to have necessary systems and services in place when certain of the transaction agreements expire.
In connection with the separation, Varex and Varian entered into a Separation and Distribution Agreement, as well as various other agreements, including a Transition Services Agreement, an Intellectual Property Matters Agreement, a Tax Matters Agreement, one or more Supply/Distribution Agreements, a Trademark License Agreement, and an Employee Matters Agreement. The Separation and Distribution Agreement, the Tax Matters Agreement, the Employee Matters Agreement, and the Intellectual Property Matters Agreement determine the allocation of assets and liabilities between the companies following the separation for those respective areas and include any necessary indemnifications related to liabilities and obligations. The Transition Services Agreement provides for the performance of certain services by each company for the benefit of the other for a limited period of time after the separation, and the Supply/Distribution Agreements provide for the provision of products and services by each company and for the benefit of the other. Varex will rely on Varian to satisfy its performance and payment obligations under these agreements. If Varian is unable to satisfy its obligations under these agreements, including its indemnification obligations, Varex could incur operational difficulties or losses. If Varex does not have in place its own systems and services, or if Varex does not have agreements with other providers of these services once certain transaction agreements expire, Varex may not be able to operate its business effectively, and its profitability may decline.
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 separation and distribution, Varian has undertaken 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

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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

Pursuant to the Share Purchase Agreement dated March 21, 2019, between the Company, Varex Imaging Investments, B.V. (“ VII ”), a wholly owned subsidiary of the Company, and certain shareholders of Direct Conversion AB (publ) (“ Direct Conversion ”), pursuant to which VII acquired 97.4% of the outstanding shares of Direct Conversion, the Company agreed to pay to the former shareholders of Direct Conversion, on the first anniversary of the closing, a payment equal to the value of 345,598 shares of the Company’s common stock (subject to reduction to settle purchase price adjustments and indemnity claims). The payment is to be made in a mixture of cash and shares of Company common stock. To the extent shares of the Company’s common stock are issued, the Company will rely on the exemptions from registration under Section 4(a)(2) of the Securities Act of 1933 and Rule 506 of Regulation D promulgated thereunder.


Item 3. Defaults Upon Senior Securities

None.


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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.INS*
 
XBRL Instance 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
 
 
 
*
 
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:
May 8, 2019
By:
/s/ CLARENCE R. VERHOEF
 
 
 
Clarence R. Verhoef
 
 
 
Senior Vice President and Chief Financial Officer
 
 
 
(Duly Authorized Officer and Principal Financial Officer)


64


1.
        
















SHARE PURCHASE AGREEMENT
relating to
Direct Conversion AB (publ)

Dated 21 March, 2019











CONTENTS
1.
 
DEFINITIONS AND INTERPRETATION
 
0
2.
 
SALE AND PURCHASE
 
7

3.
 
CONSIDERATION
 
7

4.
 
CONDITIONS
 
10

5.
 
COMPLETION
 
11

6.
 
WARRANTIES OF SELLERS
 
13

7.
 
PURCHASER WARANTIES
 
22

8.
 
COVENANTS
 
22

9.
 
INDEMNIFICATION
 
25

10.
 
SPECIFIC INDEMNITY BY THE SELLERS
 
28

11.
 
THIRD PARTY CLAIMS AND RECVERY
 
29

12.
 
SETTLEMENT OF CLAIMS
 
29

13.
 
CONFIDENTIALITY
 
30

14.
 
ANNOUNCEMENTS
 
30

15.
 
SELLERS' REPRESENTATIVE
 
31

16.
 
COSTS AND EXPENSES
 
31

17
 
ENTIRE AGREEMENT
 
31

18.
 
AMENDMENS AND WAIVERS
 
31

19.
 
NOTICES
 
31

20.
 
ASSIGNMENTS
 
32

21.
 
PARTIAL INVALIDITY
 
32

22.
 
GOVERNING LAW AND DISPUTES
 
33


Appendix A          (Sellers Details, Shares and Pro Rata Shares)
Appendix B          (Subsidiaries and ownership of the subsidiaries)
Appendix 1.1          (Operating Leases)
Appendix 1.1(i)      (Management Incentive Agreement)
Appendix 3.4(a)      (Form of Completion Statements)
Appendix 3.7          (Accredited Investor Questionnaire)
Appendix 4.1(c)      (Information Request)
Appendix 4.1(d)      (Material Agreements)
Appendix 6.1          (Data room documents)
Appendix 6.5(c)      (Share Registry)
Appendix 6.7(a)      ( Accounts)
Appendix 6.7(l)      ( Loans or other financial facilities available to the group companies)
Appendix 6.10(a)      (Intellectual Property Rights)
Appendix 6.11(a)      (Insurance)
Appendix 6.13(d)      (Software and licences)
Appendix 6.15(a)      ( Lease Agreements)
Appendix 6.18(a)      (Litigation)
Appendix 6.22          (Brokers)





This Share Purchase Agreement (this “ Agreement ”) is made effective as of 21 March 2019 between:
(1)
the shareholders of the Company whose names and personal identity number or company registration number, as applicable, are set forth in Appendix A (“ Sellers ”);
(2)
Varex Imaging Investments B.V., a company organised under the laws of the Netherlands with registered number 09198892 and having its registered address at Postbus 44 7090AA Dinxperlo, Netherlands (“ Purchaser ”); and
(3)
Varex Imaging Corporation, a company organised under the laws of Delaware, U.S.A. and having its principal business address at 1678 S. Pioneer Road, Salt Lake City, Utah 84104, U.S.A. (“ Parent ”).
together the “ Parties ” and each individually a “ Party ”.
BACKGROUND:
A
Direct Conversion AB (publ) is a company organised under the laws of Sweden with registered number 556542-8918 and having its registered address at Svärdvägen 23, 182 33 Danderyd (“ Company ”). The Company has a share capital of SEK 81,512,260 divided into 16,302,452 shares.
B
Sellers are the owners and registered holders of the number of shares in the Company as set forth in Appendix A, representing 95.31 percent of the shares on a fully diluted basis (“ Shares ”).
C
As per the Signing Date, the Company owns the Visuray Shares.
D
In addition to Sellers, the Company has a number of minority shareholders. Sellers and Purchaser intend to jointly approach the minority shareholders to encourage such minority shareholders to sell their interest in the Company on the terms of a simplified share purchase agreement in the form agreed to between Purchaser and Sellers’ Representative.
E
The Company is, directly or indirectly, the owner of the Subsidiaries set out in Appendix B and is, together with the Subsidiaries, primarily engaged in the development and manufacturing of digital X-ray imaging for medical, dental and industrial markets (the “ Business ”).
F
Sellers have agreed to sell and Purchaser has agreed to purchase the Shares on the terms and conditions set forth in this agreement.
IT IS AGREED:
1.
Definitions and Interpretation
1.1
Definitions
In this agreement the following terms have the following meanings:
“ Accounting Expert ” means KPMG, or if such accounting firm is unable or unwilling to serve as the Accounting Expert, such internationally recognized accounting firm to be agreed upon by Purchaser and Sellers’ Representative;
“ Accounting Principles ” means:
(a) the accounting policies, principles, estimation techniques, measurement bases, practices and procedures used by the Group Companies in the preparation of the Accounts on a consistent basis, to the extent not inconsistent with accounting standards detailed in paragraph (b); and
(b) to the extent not covered by paragraph (a) International Financial Reporting Standards as adopted by the EU, Interpretations issued by the International Financial Reporting Interpretations Committee which have




been confirmed by the International Accounting Standards Board and other generally accepted accounting principles and practices in Sweden in force and mandatory at the Accounts Date;
“ Accounts ” means the statutory consolidated audited annual accounts of the Company (including balance sheet, profit and loss account, cash flow statement, notes and management report (Sw. förvaltningsberättelse )), the statutory audited annual accounts of each of the Group Companies (including balance sheet, profit and loss account, cash flow statement, notes and management report (Sw. förvaltningsberättelse )) and statements from the auditor of the respective Group Companies for the financial year ended on the Accounts Date, attached as appendix 6.7(a);
“ Accounts Date ” means 31 December, 2018;
“ Adjustment Date ” means the earliest of:
(a) the date of agreement between Sellers and Purchaser on the Completion Statements;
(b) the day Sellers pursuant to clause 3.4(c) shall be deemed to have finally and irrevocably accepted the Completion Statements; or
(c) if Sellers have raised objections to the Completion Statements, the first Business Day following the date on which a dispute in relation to them has been finally resolved, either by agreement between Sellers and Purchaser or by the Accounting Expert pursuant to clause 3.5;
“ Adjustment Statement ” has the meaning set forth in clause 3.4(b);
“ Affiliate ”, in relation to a company, means any other company directly or indirectly controlling, controlled by or under common control with such company, and “control” for these purposes means:
(a) holding the majority of the voting rights or share capital of such company; or
(b) otherwise having the power to direct the management and policies of such company;
“ Agreement ” has the meaning set forth in the preamble;
“ Arbitration Rules ” means the Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of Commerce;
“ Bank ” means DNB Bank ASA, Sweden Branch;
“ Bring Down of Disclosure ” means a review of the Warranties given at Completion by Sellers and the Key Persons, immediately prior to Completion in order to identify any facts or circumstances which constitute a breach under the Warranties;
“ Business ” has the meaning set forth in the preamble;
“ Business Day ” means a day when banks are open for general banking business in Sweden;
“ Business Warranties ” means all Warranties except the Fundamental Warranties;
“ Cash ” means the aggregate amount of cash (including cash in hand, in transit and at bank, together with accrued interest) held by or on behalf of all Group Companies, not included in Working Capital and also subtracting out any outstanding checks, as at close of business on the Completion Date as calculated by aggregating, without duplication, all line items marked with “C” in the Form of Completion Statement;
“ Cash Consideration ” has the meaning set forth in clause 3.1(b)(i);
“ Claim ” means any bona fide claim made by a Party in respect of a Loss;
“ Company ” has the meaning set forth in the preamble;




“ Completion ” means the completion of the Transaction contemplated by this agreement;
“ Completion Date ” means the date on which Completion takes place in accordance with the provisions of this agreement;
“ Completion Statements ” means a consolidated balance sheet as of and per the Completion Date, setting forth the assets and liabilities of the Group Companies (where no item included in Working Capital shall be taken into account in Cash or Debt and vice versa), such balance sheet to be prepared in accordance with the Form of Completion Statements and by using the applicable Accounting Principles, which for the avoidance of doubt excludes the application of IFRS 16 which entered into effect on 1 January 2019;
“ Consideration ” means the purchase price for the Shares calculated in accordance with clause 3.1(a);
“ Confidential Information ” means any information of any kind or nature whatsoever, whether written or oral, including, without limitation, this agreement and financial information, trade secrets, customer lists and other information, regarding Purchaser, Sellers or any of the Group Companies which is not known to the general public;
“ Covenants ” means the covenants of Sellers set forth in clause 8 and “Covenant” means any of them;
“ Data Room Documents ” means the information and documents contained in the electronic data room maintained by Firmex in relation to the Group Companies and their respective businesses and assets as listed in appendix 6.1;
“ Debt ” means the aggregate amount (expressed as a positive number) of all borrowings and indebtedness in the nature of borrowings of all Group Companies (other than between Group Companies), not included in Working Capital, as at close of business on the Completion Date, including:
(a) loans and bank overdrafts;
(b) liabilities under acceptances of trade bills (other than in respect of purchases in the ordinary course of business) and acceptance credits;
(c) liabilities under any bond, note, loan stock, debenture or other similar instrument or security;
(d) liabilities under finance or equivalent leases (however excluding the operating leases set forth on Appendix 1.1), hire purchase agreements and conditional sale agreements;
(e) liabilities under factoring arrangements;
(f) amounts raised by any other transactions having the commercial effect of borrowings;
(g) outstanding deferred consideration;
(h) liabilities under any currency or interest swap or other interest or currency protection, hedging or financial futures transaction or arrangement;
(i) liabilities under any guarantee of, or indemnity against financial Loss in respect of, any obligation of another person (other than another Group Company);
(j) liabilities in relation to any letter of credit, bond or guarantee given by a third party in relation to any obligation and/or liability of any Group Company;
(k) accrued interest, charges and costs relating to any of the above items (including those relating to early repayment, discharge or termination on or around Completion); and
(l) corporation tax liabilities relating to any period before Completion;




as calculated by aggregating, without duplication, all line items marked with “D” in the Form of Completion Statements;
“ Due Diligence ” has the meaning set forth in clause 6.1;
“ Encumbrance ” means an option, lien, mortgage, claim, or any other encumbrance, including any obligation to create any of them;
“ Estimated Cash ”, “ Estimated Debt ” and “ Estimated Working Capital ” each have the meaning given in clause 3.2;
“ Estimated Cash Consideration ” has the meaning set forth in clause 3.3(a);
“ Form of Completion Statements ” means the format for a completion statement set forth in appendix 3.4(a);
“ Fundamental Warranties ” means Warranties set forth in clauses 6.3 to 6.6 and 6.22;
“ Group Company ” means the Company or any of the Subsidiaries and “ Group Companies ” means the Company and the Subsidiaries, collectively;
“ Indemnified Party ” means Purchaser Indemnitees in the case of a Claim by Purchaser Indemnitees or Seller Indemnitees in the case of a Claim by Seller Indemnitees;
“ Indemnifying Party ” means Sellers in the case of a Claim by Purchaser Indemnitees or Purchaser in the case of a Claim by Seller Indemnitees;
“ Intellectual Property ” means inventions and discoveries, whether patentable or not, patents, designs, trademarks, copyrights (including copyrights in software) Internet domain names, trade names, brand names, logos, trade secrets and confidential and proprietary information and know-how and all materials (whether stored digitally or otherwise), including, but not limited to, software, programs, scripts, applications, source code and object code, comments to the source or object code, specifications, documents, abstracts and summaries of them and any and all other intellectual, intangible and proprietary rights of a similar kind, whether registered or not, including registrations of such rights and pending applications for the registration of them including without limitation the intellectual property rights listed in appendix 6.10(a);
“ Insurer ” means the insurer providing the R&W Policy;
“ Key Persons ” means the following individuals: Pasi Laukka, Rasmus Ljungwe, Christer Ullberg, Spencer Gunn and Alex Stewart, each individually a “ Key Person ”;
“ Longstop Time ” means 5:00 pm CET on 30 April 2019, or such other time and date as may be agreed in writing between Sellers and Purchaser;
“ Loss ” means any direct or reasonably foreseeable indirect loss (however excluding any loss of profit), claim, damage, interest, penalties, fines, costs or expense (including reasonable legal fees, but excluding any punitive damages) and the cost of enforcing any right to indemnification hereunder;
“ Management Incentive Agreement ” means an agreement attached to this Agreement as Appendix 1.1(i), to be entered into between Purchaser and certain members of Company management as well as consultants in a form agreed to by the parties thereto;
“ Material Adverse Effect ” means a material adverse effect on the condition of the business assets or results of operations of any Group Company taken as a whole, except any such effect resulting from or arising in connection with:
(a) this agreement or any transactions contemplated hereby or the announcement hereof;
(b) change or conditions affecting the industry generally; or




(c) changes in economic, regulatory or political conditions generally;
“ Material Agreements ” means each agreement and other undertaking by or to any of the Group Companies, the value of which, in respect of total turnover during one (1) year, is not less than EUR 100,000 or which involves financial or guarantee commitments of the Group Companies in excess of EUR 50,000, or which contains undertakings or provisions that restrict the ability or right of any of the Group Companies to engage in any business or compete with any person, or which has not been entered into in the ordinary course of the Business or which is otherwise of material importance to any of the Group Companies or the Business and are listed in appendix 4.1(d);
“ Minority Owners ” means such owners of the Company not being Sellers on the Signing Date and not parties to this Agreement;
“ Ordinary Course of Business ” means the carrying on by any Group Company of the Business in the ordinary course (as conducted prior to the Signing Date on a going concern basis and in each case, in accordance with past practices and always in accordance with generally accepted principles and sound business practice);
“ Parent ” has the meaning set forth in the preamble;
“ Parties ” or “ Party ” have the meanings set forth in the preamble;
“ Purchaser Indemnitees ” has the meaning set forth in clause 10.1;
“ R&W Insurance ” means a representations and warranties insurance provided by the Insurer in accordance with the R&W Policy;
“ R&W Policy ” means a policy of insurance entered into between Purchaser and the Insurer which, in accordance with its terms, will provide warranty insurance coverage in respect of the Business Warranties;
“ SCC ” has the meaning set forth in clause 22.2;
“ SEK ” means the currency Swedish kronor;
“ Sellers ” has the meaning set forth in the preamble;
“ Sellers’ Knowledge ” means the actual knowledge of any Seller and any Key Person after reasonable inquiry and investigation;
“ Sellers’ Representative ” means Jean-Philippe Flament;
“ Share Percentage ” has the meaning set forth in clause 3.1(b)(ii);
“ Signing Date ” means the date of this Agreement;
“ Statutory Books ” means the shareholders' register and minutes from shareholders' meetings and board meetings;
“ Stock Based Consideration ” has the meaning set forth in clause 3.1(b)(iii);
“ Subsidiaries ” means those companies set forth in Appendix B and “Subsidiary” means any of them;
“ Surviving Sections ” means clauses 1, 4, 13, 14, 15, 17, 18, 19, 20, 21 and 22;
“ Target Working Capital ” means EUR 3,801,785;
“ Taxes ” means all forms of current and deferred, national, provincial and municipal taxation, levies, imposts and social security charges, including without limitation corporate income taxes, wage withholding taxes, social security contributions, value added tax, customs and excise duties, capital tax and legal transaction taxes, withholding taxes relating to dividends, interest and royalty withholding tax, real estate taxes, business activity




tax, municipal taxes, environmental taxes and duties and any other type of taxes in any relevant jurisdiction, as well as any surcharge, penalties and interest relating to them;
“ Tax Warranties ” means the Warranties set forth in clause 6.16;
“ Third Party Claim ” means any claim by a third party (including tax and other authorities) against any Group Company;
“ Transaction Account ” means an account opened by the Purchaser with the Bank for transfer of the Cash Consideration to Sellers;
“ Transaction Documents ” means this Agreement, the Management Incentive Agreement, the certificates and other documents to be delivered pursuant to clause 6 of this Agreement;
“ Transaction Expenses ” means all fees and expenses incurred by the Company or Sellers at or prior to Completion in connection with the preparation, negotiation and execution of the Transaction Documents, and the performance and consummation of the transactions contemplated hereby and thereby, including, but not limited to, any legal, broker or banker fees and expenses;
“ Transactions ” means the transactions contemplated by this Agreement;
“ Visuray ” means Visuray Plc, a Maltese company, with company registration number C 52301;
“ Visuray Loan ” means the EUR 600,000 draw down facility (of which EUR 535,000 have been drawn down) owed by Visuray to the Company;
“ Visuray Shares ” means the Company’s holding of 1,150,000 shares in Visuray;
“ Warranties ” means the warranties (Sw. garantier ) of Sellers set forth in clause 6; and
“ Working Capital ” means:
(a) accounts receivables and inventory; minus
(b) accounts payables; plus/minus
(c) net Value Added Taxes (VAT);
as at close of business on the Completion Date as calculated by aggregating, without duplication, all line items in the Form of Completion Statements marked with “WC+” and by subtracting, without duplication, all line items marked with “WC-” in the Form of Completion Statements.

1.2    Interpretation
In this agreement, unless the context requires otherwise:
(a)
any references to the Parties mean the Parties to this agreement from time to time and include their respective successors in title, permitted assignees, estates and legal representatives;
(b)
a person being “controlled” (including the terms “control”, “controlling”, “controlled by” and “under common control with” and the like) means the possession, direct or indirect, of the power of another person to direct or cause the direction of the management and policies of such person, whether through the ownership of voting securities, by contract or otherwise;
(c)
the index and the headings to clauses and paragraphs of this Agreement are for information only and shall not form part of the operative provisions of, and shall be ignored in construing, this Agreement;
(d)
unless the context otherwise requires, words denoting the singular shall include the plural and vice versa and words denoting any gender shall include all genders;




(e)
a reference in this Agreement to a statute or any provision of it shall refer also to that statute or provision as amended or re-enacted;
(f)
a reference to a clause or an appendix is a reference to a clause of, or an appendix to, this Agreement; and
(g)
the background in and appendices to this Agreement form part of the operative provisions of this Agreement and references to this Agreement shall include references to such background and appendices.
2.     SALE AND PURCHASE
19.1
Subject to the terms of this Agreement, Sellers shall sell and Purchaser shall purchase the Shares on and with effect from Completion.
19.2
The Shares shall be sold free from all Encumbrances and together with all rights of any nature attached or accruing to them on or after Completion (including the right to receive all dividends and distributions declared, paid or made by the Company on or after the Completion Date).
3.    CONSIDERATION
3.1    Amount
(a)
The purchase price payable by Purchaser for the Shares shall be determined as follows:
Share Percentage x (Cash Consideration + Stock Based Consideration) = the purchase price for the Shares (the “ Consideration ”)
(b)
The below terms shall have the following definitions:
(i)
“ Cash Consideration ” means:
(A)
EUR 65,200,000;
(B)
plus the Cash;
(C)
less the Debt;
(D)
plus the amount of any excess in the Working Capital above the Target Working Capital or less the amount of any shortfall in the Working Capital below the Target Working Capital, as the case may be;
(E)
plus the purchase price for the Visuray Shares (to the extent not already included in the Cash); and
(F)
plus EUR 550,000, which represents a credit for previously incurred research and development cost.
(ii)
“ Share Percentage ” means 95.31 percent which is equal to the aggregate number of the Shares divided by 100 percent of the outstanding shares of the Company; and
(iii)
“ Stock Based Consideration ” means the right to receive, on the first anniversary of the Completion Date, the number of shares of Parent’s common stock equal to EUR 10,000,000 divided by the closing price of Parent’s common stock traded on the NASDAQ global select market on the last trading day immediately prior to the Completion Date.
3.2    Determination of Estimated Cash Consideration
Working together from the Signing Date, Purchaser and Sellers’ Representative shall jointly determine reasonable estimates of the Cash, the Debt and the Working Capital ( “Estimated Cash” , “Estimated Debt”




and “Estimated Working Capital” respectively). If Purchaser and Seller do not agree on reasonable estimates by a date that is three (3) Business Days before the Completion Date, the estimates for Estimated Cash, Estimated Debt and Estimated Working Capital shall be based on (a) those items Purchaser and Sellers’ Representative have agreed upon and (b) with respect to those items that Purchaser and Sellers’ Representative have not agreed upon, if any, Sellers’ good faith reasonable estimate of such items.
3.3    Consideration paid on the Completion Date
(a)
Purchaser shall pay the following amount to Sellers on the Completion Date ( “Estimated Cash Consideration” ):
the Share Percentage multiplied by the sum of:
(i)
EUR 65,200,000;
(ii)
plus the Estimated Cash;
(iii)
less the Estimated Debt;
(iv)
plus the amount of any excess in the Estimated Working Capital above the Target Working Capital or less the amount of any shortfall in the Estimated Working Capital below the Target Working Capital, as the case may be;
(v)
plus the purchase price for the Visuray Shares (to the extent not already included in the Cash); and
(vi)
plus EUR 550,000, which represents a credit for previously incurred research and development cost.
(b)
Unpaid Transaction Expenses shall be deducted from the Consideration. On the Completion Date, such Unpaid Transaction Expenses will be paid from the Consideration directly to the applicable party as set forth in a funds flow memorandum to be prepared by Purchaser and Sellers prior to Completion. The Estimated Cash Consideration (less unpaid Transaction Expenses) shall, no later than on the Completion Date, be paid in EUR by Purchaser to the Transaction Account for settlement in accordance with section 5.2(a)(i)(A).
3.4    Completion Statements
(a)
Within 40 Business Days following the Completion Date, Purchaser shall provide Sellers with draft Completion Statements in the format as set forth in the Form of Completion Statements.
(b)
Sellers may, within 20 Business Days from receipt of the draft Completion Statements, submit to Purchaser a written statement setting forth those items and amounts in the draft Completion Statements with which the Sellers’ Representative disagrees, the reasons for such disagreement and details of its proposed adjustments to the draft Completion Statements ( “Adjustment Statement” ).
(c)
In the event that Sellers do not deliver to Purchaser the Adjustment Statement pursuant to, and within the period set forth in clause 3.4(b), Sellers shall be deemed to have finally and irrevocably accepted the draft Completion Statements and they shall constitute the agreed Completion Statements.
3.5    Disputes in relation to the Completion Statements
(a)
Any dispute relating to or arising out of clause 3.4 shall be resolved in the following manner:
(i)
Sellers and Purchaser shall attempt to resolve the dispute and agree the Completion Statements within 20 Business Days of receipt by Purchaser of the Adjustment Statement (or such longer period as may be agreed in writing between Sellers and Purchaser); and
(ii)
if Sellers and Purchaser have not resolved the dispute within the period specified in clause 3.5(a)(i), the matter shall, upon request by either Sellers or Purchaser, be referred to expert determination with the Accounting Expert, who shall give its determination to Sellers and Purchaser in a written report in English as to what adjustments, if any, are required to the draft Completion Statements in respect of




each disputed amount and item, such determination to be given within 40 Business Days of his receipt of all relevant information relating to the disputed amounts and items.
(b)
The Accounting Expert shall consider only those amounts and items as to which the Sellers’ Representative has disagreed pursuant to clause 3.4(b) and which have not been resolved by the Sellers’ Representative and Purchaser pursuant to clause 3.5(a)(i) and the decision of the Accounting Expert shall in no event go beyond any of the disagreements of and the calculations made by the Sellers’ Representative or Purchaser pursuant to clause 3.4. The Accounting Expert may not award damages or penalties to any Party with respect to any matter.
(c)
The Accounting Expert shall be jointly appointed by Purchaser and Sellers and shall act in its capacity as an expert and not as an arbitrator. The decision of the Accounting Expert shall be final and binding upon the Parties.
(d)
For the avoidance of doubt, Sellers will be represented by Sellers’ Representative in all measures that will be taken in accordance with this clause and Sellers are bound by all actions taken by Sellers' Representative hereunder.
(e)
Each Party shall bear the fees, costs and expenses of its own accountants and shall share the fees and expenses of the Accounting Expert in proportion to which their respective calculations deviates from the Accounting Expert's final calculation of the disputed mounts.
3.6    Adjusting payment
Within ten (10) Business Days of the Adjustment Date:
(a)
if the Cash Consideration exceeds the Estimated Cash Consideration, Purchaser shall pay the difference to the Transaction Account and instruct the Bank to distribute the difference to Sellers; or
(b)
if the Cash Consideration is less than the Estimated Cash Consideration, Purchaser shall deduct the difference from the Stock Based Consideration and shall provide Sellers’ representative with a letter notifying Sellers of such deduction.
3.7    Payment of Stock Based Consideration
Subject to any amounts deducted for (a) adjustments under clause 3.6 and (b) Claims for indemnification under clause 9, on the first anniversary of the Completion Date, Purchaser shall deliver the Stock Based Consideration to the Sellers. In the event that the Purchaser is not, despite its reasonable endeavours, successful in transferring the Stock Based Consideration to the Sellers, the Purchaser shall instead deliver the Stock Based Consideration to the Sellers’ Representative (which shall in turn deliver the Stock Based Consideration to the Sellers). In relation to Sellers selling less than 200,000 shares in the Company, Purchaser shall pay the Stock Based Consideration in an equivalent amount in cash, unless the Seller in question and Purchaser agree otherwise. In relation to Sellers selling 200,000 shares or more in the Company, Purchaser shall pay the Stock Based Consideration in Parent common stock, unless the Seller in question and Purchaser agree otherwise. To facilitate the issuance of the Stock Based Consideration, prior to Closing, each Seller shall deliver a completed questionnaire in the form attached hereto as Appendix 3.7 (Accredited Investor Questionnaire) . Purchaser may elect, in relation to Sellers which shall receive the Stock Based Consideration in Parent common stock, but have not delivered said questionnaire (completed) to the Purchaser, to pay the Stock Based Consideration in an equivalent amount in cash.
4.    CONDITIONS
4.1
Conditions Precedent to Purchaser's obligations
The obligation of Purchaser to complete the Transaction shall be subject to the satisfaction or the waiver by the Purchaser of the following conditions precedent:




(a)
shareholders of the Company holding more than 90 percent of the shares in the Company (on a fully diluted basis) having entered into (i) this Agreement as Sellers or (ii) a simplified share purchase agreement according to which they will sell their shares in the Company to the Purchaser as of the Completion Date;
(b)
the Transaction Documents (other than this Agreement) shall have been executed and delivered by the parties thereto (other than Purchaser) and true and complete copies shall have been delivered to Purchaser;
(c)
Sellers have no later than five (5) Business Days prior to Completion Date delivered to the Bank information requested in Appendix 4.1(c) (Information Request) ;
(d)
any and all required consents under any of the Material Agreements to the change of control or change of management of any of the Group Companies having been obtained on terms and conditions acceptable to Purchaser, in its sole discretion;
(e)
the non-existence of a breach of the Warranties and the Covenants as of the Completion Date which constitutes, or which may give rise to, Loss in an amount equal to not less than EUR 100,000;
(f)
there is not appearing or occurring any Material Adverse Effect during the period between the Signing Date and the Completion Date;
(g)
the board of directors has given the shareholders of the Company notice of a shareholders' meeting to be held on the Completion Date, at which meeting new board members selected by Purchaser shall be appointed;
(h)
the receipt of all necessary approvals and clearances in respect to the Transaction from the German competition authority (De. Bundeskartellamt );
(i)
the Company shall divest the Visuray Shares no later than on the Completion Date; and
(j)
no governmental authority shall have enacted, issued, promulgated, enforced or entered any governmental order which is in effect and has the effect of making the transactions contemplated by this Agreement illegal, otherwise restraining or prohibiting consummation of such transactions or causing any of the transactions contemplated hereunder to be rescinded following completion thereof.
4.2
Conditions Precedent to Sellers’ obligations
The obligation of Sellers to complete the Transaction shall be subject to the satisfaction or the waiver by Sellers’ Representative of the following conditions precedent:
(a)
the Transaction Documents (other than this Agreement) shall have been executed and delivered by the parties thereto (other than Sellers) and true and complete copies shall have been delivered to Sellers;
(b)
the Bank has issued transfer notes to the Sellers with trade date as per Completion Date;
(c)
the non-existence of a breach of warranties and the covenants of Purchaser as of the Completion Date which constitutes, or which may give rise to, a Loss in an amount equal to not less than EUR 100,000;
(d)
the receipt of all necessary approvals and clearances in respect to the Transaction from the German competition authority (De. Bundeskartellamt );
(e)
there not appearing or occurring any Material Adverse Effect during the period between the Signing Date and the Completion Date; and
(f)
no governmental authority shall have enacted, issued, promulgated, enforced or entered any governmental order which is in effect and has the effect of making the transactions contemplated by this Agreement illegal, otherwise restraining or prohibiting consummation of such transactions or causing any of the transactions contemplated hereunder to be rescinded following completion thereof.




4.3
Non-fulfilment
(a)
In the event that the conditions set forth in clause 4.1 have not been fulfilled on or before the Longstop Time (unless such non-fulfilment is due primarily to the failure of Purchaser to perform or comply with any of the covenants, agreements or conditions contained in this Agreement), Purchaser shall be entitled, in its sole discretion, to terminate this Agreement in writing, and Sellers shall not be entitled to any compensation of any kind due to such termination. Such termination shall not affect the Surviving Sections, which shall survive.
(b)
In the event that the conditions set forth in clause 4.2 have not been fulfilled on or before the Longstop Time (unless such non-fulfilment is due primarily to the failure of Sellers to perform or comply with any of the covenants, agreements or conditions contained in this Agreement), Sellers shall be entitled, in their sole discretion, to terminate this Agreement in writing, and Purchaser shall not be entitled to any compensation of any kind due to such termination. Such termination shall not affect the Surviving Sections, which shall survive.
5.    Completion
5.1
Completion arrangements
Completion of the sale and purchase of the Shares shall take place at the offices of DLA Piper Sweden KB at 10:00 am, on the date that is no later than one Business Day after the last of the conditions to Completion set forth in clause 4 have been satisfied or waived (other than conditions which, by their nature, are to be satisfied on the Completion Date) or at such other place as may be agreed in writing between Purchaser and the Sellers’ Representative.
5.2
Completion actions
(a)
On Completion the following events shall take place in the following order (but shall be deemed to have taken place simultaneously), and Completion shall not be deemed to have occurred until and unless all of the actions to occur on the Completion pursuant to this clause 5.2 have been performed or the performance thereof have been waived by the appropriate Party:
(i)
Purchaser shall:
(A)
pay (less unpaid Transaction Expenses) the Estimated Cash Consideration by wire transfer of immediately available funds to the Transaction Account and instruct the Bank to distribute the Estimated Cash Consideration to Sellers (through standard DVP settlement);
(B)
pay the Transaction Expenses in accordance with the funds flow memorandum to be prepared by Purchaser and Sellers prior to Completion; and
(C)
deliver to Sellers’ Representative the Transaction Documents (other than this Agreement) fully executed by Purchaser.
(ii)
Sellers shall:
(A)
present evidence satisfactory to Purchaser that the conditions set forth in clause 4.1(a)-4.1(i) have been fulfilled;
(B)
present evidence that Sellers have instructed Sellers' banks to transfer the Shares as per Completion Date in accordance with the transfer notes issued by the Bank and sent to the Sellers prior to Completion;
(C)
deliver to Purchaser the Transaction Documents (other than this Agreement) fully executed by the parties thereto, other than Purchaser;
(D)
present resignations for each director or deputy director of each Group Company as well as confirmations by each retiring director or deputy director of each Group Company, that none




of them has any claim against any Group Company in such capacity other than any fees or reimbursement in the ordinary course of such assignment and as specified in the confirmation;
(E)
Sellers shall deliver to Purchaser the results (in writing) of the Bring Down Disclosure;
(F)
if requested by Purchaser, cause the Group Companies to issue powers of attorney, enabling the persons appointed by Purchaser to sign for and on behalf of the Group Companies until new signatories have been duly registered (to the extent requested by Purchaser and necessary under applicable laws in order for such persons to represent the Group Companies); and
(G)
hold a shareholders' meeting of the Company at which new board members selected by Purchaser shall be appointed and, unless not already divested, the divestment of the Visuray Shares shall be approved.
5.3
Non-compliance
If, on the Completion Date, any Party does not comply with its obligations under clause 5.2 in any material respect, then Sellers (in the case of Purchaser's non-compliance) or Purchaser (in the case of Sellers' non-compliance) may by notice to the other:
(a)
terminate this Agreement, which, however, shall not prejudice such Party's right to indemnification with respect to the defaults which have occurred and shall not affect the Surviving Sections, which shall survive such termination;
(b)
effect the Completion so far as is practicable which, however, shall not prejudice such Party's right to indemnification with respect to the defaults which have occurred; or
(c)
specify a new date for the Completion, which shall be a Business Day no more than 20 Business Days after the original Completion Date, in which case the provisions of this clause 5.3 (except for this clause 5.3(c)) shall apply to the Completion so deferred.
5.4
Effect of termination
If this Agreement is terminated pursuant to clause 5.3(a), then each Party's further rights, obligations and liabilities under this Agreement shall cease immediately on termination, except for:
(a)
each Party's accrued rights (including the right to claim any remedy for breach or non‑performance), obligations and liabilities as at the date of termination; and
(b)
each Party's continuing rights, obligations and liabilities under this clause 5.4 and the Surviving Sections.
6.    WARRANTIES OF SELLERS
6.1
Purchaser and its advisors have conducted a due diligence investigation of the Group Companies between 1 November, 2018 and 18 March 2019, during which Purchaser and its advisors have reviewed the Data Room Documents and had discussions with the Key Persons, Sellers’ Representative, and Sellers’ advisors (with respect to commercial, accounting, financial and legal information or matters relating to the Group Companies), as well as attended management presentations, discussions and site visits (“ Due Diligence ”).
6.2
Sellers hereby, unless otherwise indicated below, jointly and severally make the following Warranties, all of which are made as of the Signing Date and repeated immediately prior to Completion, unless otherwise indicated.
6.3
Corporate Existence and Power
(a)
The Group Companies are duly incorporated and validly existing under the laws of the jurisdictions in which they were incorporated, and Sellers have the requisite power and authority to enter into and perform this




Agreement and the other Transaction Documents to which they are parties. The certificates of registration and articles of association of each Group Company have been provided to Purchaser.
(b)
None of the Group Companies has filed (or have had filed against them) any petition for their winding-up, are not insolvent within the meaning of applicable laws, rules or regulations or similar requirements, and have not made any assignment in favour of their creditors, nor has any petition for receivership or any administration order been presented in respect of any of the Group Companies. None of the Group Companies has initiated any proceedings with respect to a compromise or arrangement with their creditors or for the dissolution, liquidation or reorganisation of any of the Group Companies or the winding-up or cessation of the Business. No receiver or administrative receiver or liquidator has been appointed in respect of any of the Group Companies or any of their material assets.
(c)
The execution of this Agreement, the Transaction Documents, and any other document or instrument in connection therewith, and the Completion of the Transaction do not result in a breach of applicable laws applicable to any Group Company or of the articles of association of any Group Company or of any agreement to which any Group Company is a party or by which any Group Company is bound.
6.4
Authorisation and non-contravention
(a)
Each Seller, being a legal entity, individually warrants that it is duly incorporated and validly existing under the laws of the jurisdiction of formation set forth in Appendix A.
(b)
Each Seller individually warrants that it has not filed (or has had filed against it) any petition for its winding-up, is not insolvent within the meaning of applicable laws or similar requirements, has not made any assignment in favour of their creditors, nor has any petition for receivership or any administration order been presented in respect of such Seller. No assets of such Seller have been subject to any seizure or other enforcement proceedings by any governmental authority and such Seller has not initiated any proceedings with respect to a compromise or arrangement with its creditors or for the dissolution, liquidation or reorganisation of such Seller or the winding-up or cessation of the business of such Seller. No receiver or administrative receiver or liquidator has been appointed in respect of Sellers or any of its material assets.
(c)
each Seller warrants individually, that this Agreement and the performance by Sellers of their obligations under it have been duly authorised by all necessary corporate action on the part of such Seller, and this Agreement will, when executed, constitute valid and binding obligations of such Seller in accordance with its terms.
(d)
Each Seller, being a legal entity, individually warrants that the execution and performance by Sellers of this Agreement does not and will not result in a breach of any provision of the articles of association of such Seller.
6.5
Ownership of the Shares and capitalisation of the Group Companies
(a)
Each Seller warrants individually that they own the Shares set out next to the relevant Seller’s name in Appendix A.
(b)
The Shares constitute 95.31 percent of the issued share capital of the Company. All of the Shares are registered with Euroclear Sweden AB.
(c)
The Company has an issued share capital of SEK 81,512,260 divided into 16,302,452 shares. Appendix 6.5(c) sets forth a true and correct copy of the share registry of the Company as of 15 March 2019. The Shares have been duly authorised and validly issued and are fully paid. There are no arrangements or commitments which call for the issue or transfer of any shares, warrants, convertible debentures or other securities of the Company. The Shares are not subject to any Encumbrance.
6.6
Ownership of the Group Companies
(a)
The Subsidiaries are directly 100 percent owned by the Company and the details in Appendix B regarding the shares of the Subsidiaries are correct and all such shares are fully paid.




(b)
There are no arrangements or commitments which call for the issue or transfer of any shares, warrants, convertible debentures or other securities of the Subsidiaries. The Company's shares in the Subsidiaries are not subject to any Encumbrance.
(c)
All share certificates representing the shares of the Subsidiaries are in the possession of the Company or a Group Company (as the case may be) and they are the only share certificates issued in relation to such shares.
6.7
Accounts, accounting records and Statutory Books
(a)
The Accounts give a true and fair view (Sw. rättvisande bild ) (as defined in the Swedish Annual Report Act (Sw. Årsredovisningslagen )) of the financial position and the results of the operations of the Group Companies on a consolidated basis and they have been prepared in accordance with the Accounting Principles.
(b)
The accounting records of the Group Companies are up-to-date and contain, in all material respects, complete and accurate details of the business activities of the Group Companies to the extent required by law to be included in such records.
(c)
The Statutory Books of the Group Companies are up-to-date and contain, in all material respects, complete and accurate records of the matters which should be included in such books.
(d)
The Accounting Principles have been applied by the Group Companies for the preparation of the Accounts on a consistent basis during the three (3) financial years preceding the current financial year.
(e)
The Group Companies have no material liabilities or obligations of any nature (whether known or unknown and whether absolute, accrued, contingent or otherwise) except for liabilities or obligations reflected or reserved against in the Accounts and current liabilities incurred in the Ordinary Course of Business of the Group Companies since the Accounts Date.
(f)
None of the Group Companies has pledged any assets or has any obligations, commitments or liabilities, liquidated or non-liquidated, contingent or otherwise, whether for Taxes or otherwise, in excess of what is shown in the Accounts.
(g)
All inventory of the Group Companies has been subject to physical stock-taking as at the Accounts Date and adequate reserves have been made in the Accounts for slow moving items, excessive inventory levels and commercial or technical obsolescence in accordance with the Accounting Principles.
(h)
None of the Group Companies has:
(i)
received any unlawful distribution or other unlawful value transfer (Sw.  värdeöverföring ); or
(ii)
made any forbidden payment to their shareholders or any other person or granted forbidden loans or furnished forbidden securities in contravention of the Swedish Companies Act (Sw.  Aktiebolagslagen (2005:551) ) or the equivalent legislation in any relevant jurisdiction.
(i)
Adequate provisions for bad debts have been made in the Accounts in accordance with the Accounting Principles.
(j)
Each of the Group Companies is the owner of the assets, tangible and intangible, that are reflected in the Accounts, plus any assets, tangible and intangible, the title to which is acquired since the Accounts Date, and less any assets, tangible and intangible, disposed of since the Accounts Date in accordance with the provisions in clause 6.19, free and clear from any Encumbrance.
(k)
Each of the Group Companies owns or leases all properties and assets, tangible and intangible, necessary for it to carry on the Business as presently conducted and such properties and assets, tangible and intangible, are in good operating condition, ordinary wear and tear excepted, and fully maintained and serviced on a timely basis.




(l)
There are no loans or other financial facilities available to the Group Companies other than as set forth in appendix 6.7(l).
(m)
There is no event which gives, or after notice or lapse of time, or both, would give any third party the right to call for repayment from any of the Group Companies prior to normal maturity of any loan or other financial facility.
6.8
Arrangements between Sellers and the Group Companies
(a)
No agreement or arrangement other than at arm’s length terms between any Seller or an Affiliate to a Seller, on the one hand, and any of the Group Companies, on the other hand, will be outstanding immediately after Completion.
(b)
None of Sellers or any Affiliate of a Seller has any claims of any kind against any of the Group Companies and none of the Group Companies is indebted in any way towards any Sellers or any Affiliate to a Seller.
6.9
Material Agreements
(a)
Other than the Material Agreements, there are no agreements to which any of the Group Companies is a party, receives any benefits or is otherwise bound that are material for the operation of the Business. No Group Company has received or given notice of termination of any Material Agreement and each Material Agreement is in full force and effect, valid and enforceable against each party to it in accordance with its terms. The documentation relating to the Material Agreements is disclosed in the Data Room accurately and fully reflects the contents of the agreements between the relevant parties.
(b)
None of the Group Companies is in any default, nor is to Sellers’ Knowledge any counter party to any of the Material Agreements in default, of any Material Agreement. To Sellers’ Knowledge there are no facts or circumstances that might reasonably be expected to prevent any counter party to any Material Agreement from performing its material obligations under the relevant Material Agreement in compliance with its terms. The completion of the Transaction will not result in the breach of, or constitute a default under, or result in the terminations, cancellation or acceleration (whether after the filing of notice or the lapse of time or both) or amendment of any right of any of the Group Companies under, or a loss of any benefit to which any of the Group Companies is entitled under, or the imposition of any obligation under, or Encumbrance on, any of the Material Agreements.
(c)
No Group Company is:
(i)
a party to any agreement containing provisions for material price re-determination or price revision except for compensation for inflation, movements in exchange rates, and discounts for bulk buying;
(ii)
or has been a party to any agreement or arrangement which is or could be contravening applicable laws; or
(iii)
a party to any agreement containing any terms or conditions not consistent with fair market terms, conditions and prices.
(d)
None of the Group Companies has sold any company, business, shares or properties where there are outstanding obligations or warranty undertakings (express or implied) on the part of any of the Group Companies.
6.10
Intellectual Property Rights
(a)
Appendix 6.10(a) sets out a true and complete list of all:
(i)
patent registrations and patent applications, trademarks, trademark registrations, trademark applications, designs, design registrations, design applications, copyrights (including software and mask works), invention disclosures, know-how and domain names owned by any of the Group Companies; and




(ii)
all material Intellectual Property licensed to any of the Group Companies.
(b)
The owned and licensed Intellectual Property listed in appendix  6.10(a) include all of the material Intellectual Property used in the ordinary conduct of the Business as currently conducted or intended to be conducted and each of the Group Companies is the exclusive owner of, or has valid and enforceable license to use, with full right of disposition, such Intellectual Property and there are no other items of Intellectual Property that are necessary for the ordinary conduct of the Business or for the Business contemplated to be conducted. All Intellectual Property that is not exclusively owned by the Group Companies is indicated along with the name of the co-owner, government entity providing funding, or the licensor.
(c)
The Intellectual Property owned or licensed by the Group Companies are subsisting, valid, enforceable and not withdrawn, cancelled or abandoned and is not subject to any Encumbrances. All application fees and renewal fees for such Intellectual Property have been paid in full and the registrations and applications are in all other respects being maintained and asserted. None of the Group Companies is in violation of any license for Intellectual Property licensed by any of the Group Companies.
(d)
There is no infringement, misuse or other violation by any third party of any Intellectual Property that are owned by or licensed to the Group Companies, and no Group Company has made or intends to make any claim, whether for infringement, damages or otherwise, against any third party regarding the use of Intellectual Property.
(e)
There has been no, and there is no, infringement, misuse or other violation by any Group Company of any Intellectual Property of any third party, and there has been no, and there are no litigation, proceedings, claims or actions pending or, to Sellers’ Knowledge, threatened against any Group Company relating to Intellectual Property of any third party which relates to the operation of the Business as formerly or currently conducted or as contemplated to be conducted or the use of Intellectual Property by any Group Company.
(f)
None of the Intellectual Property owned or used by any Group Company has been, is or is expected to become, subject to any outstanding consents, settlements or judgments restricting the use of such Intellectual Property or adversely affecting the commercial value of such Intellectual Property, or any of the Group Companies' right to such Intellectual Property or that would impair the validity or enforceability of such Intellectual Property and none of the Group Companies has granted, or is obliged to grant, any licence, assignment or other right in respect of any Intellectual Property, or is obliged to disclose any Intellectual Property to any person.
(g)
The completion of the Transaction will not cause any impairment of any Intellectual Property, or any termination of any license agreement for Intellectual Property used in the Business, or otherwise effect any change in such agreement adverse to Purchaser or any of the Group Companies. All applications with pending office actions are listed in appendix 6.10(a). No Intellectual Property rights will be lost due to any bar dates or disclosures of new products necessitating imminent patent filings within three (3) months following the execution of the Agreement.
(h)
All employees and consultants who contributed to the discovery or development of any of the Intellectual Property owned by any of the Group Companies have fully and finally (without any compensation remaining to be paid) assigned all rights to such Intellectual Property to the respective Group Company and the assignments are recorded with the proper government entity.
6.11
Insurance
(a)
All material insurance policies in respect of the Group Companies have been disclosed to Purchaser in the Data Room and all such policies are in full force and effect until the Completion Date and are listed in appendix 6.11(a).
(b)
No claims have been made during the last three (3) years, no claim is outstanding and no fact or circumstance exists which may give rise to a claim under any of the Group Companies' insurance policies.




(c)
The Group Companies are in compliance with all terms and conditions contained in the insurance policies and nothing has been done or omitted to be done which would make any policy or insurance void or voidable or which could result in a reduction of the compensation payable under any policy.
6.12
Employment, pension agreements and labour matters
(a)
As of the Signing Date, none of the Key Persons have given or received notice of termination of his employment or engagement with the Company, and no such Key Person has, to Sellers’ Knowledge, any current intention of giving such notice.
(b)
No employee of any of the Group Companies is entitled to severance pay or similar termination payments or indemnities in excess of six months of salary.
(c)
As of the Signing Date, there are no, and have not been during the last two years, disputes between any of the Group Companies and any of its employees, and there are no unresolved labour union grievances, unfair labour practices or labour arbitration proceedings pending or, to Sellers’ Knowledge, threatened relating to any of the Group Companies.
(d)
Each Group Company has complied with mandatory employment laws and from time to time applicable collective bargaining agreements relating to the employment of labour, including any provisions relating to wages, holiday pay, hours, collective bargaining, the payment of social security and similar Taxes, other payments, equal employment opportunity, employment discrimination and employment safety, and no Group Company has received notice of any claim in relation any of such things.
(e)
Each Group Company has complied with, and fulfilled, all its obligations under, all pension arrangements by which the Group Companies are bound, whether pursuant to collective bargaining agreements, individual agreements or otherwise.
(f)
No employee or director of any Group Company will be entitled to any termination payment, bonus or similar benefit (monetary or non-monetary) payable by any Group Company as a result of the Transaction.
(g)
None of the Group Companies is liable to make any outstanding payment to an employee, director or former employee by way of damages or compensation for loss of office or employment, redundancy or unfair or wrongful dismissal, or pursuant to any agreement on termination of employment, early retirement or any other agreement.
(h)
There are no consultants that have performed or are performing services to any Group Company that under any applicable law could be deemed to be an employee of a Group Company.
6.13
IT and data protection
(a)
Each of the Group Companies has sufficient rights, either by ownership or under valid and enforceable licenses on market terms as per execution of the relevant agreement(s), to use all of the software and hardware currently used in the Business.
(b)
Sellers nor any of the Group Companies has received any notice that any of the Group Companies are in default under any provision of any of the agreements which are necessary for the Group Companies' use of the network or the software used in the Business or maintenance of it, and none of the Group Companies has received or given notice of termination of any such agreement.
(c)
The Group Companies independently control the operation of the network and the software used in the Business as well as the storage, handling and access to all data contained therein. The Group Companies have sufficient back-up-procedures and contingency plans in place for proper protection against loss of data.
(d)
The Group Companies have not developed or modified any software used in their Business that is licensed according to license terms which allow users to copy, distribute, and/or modify the software, and which require any modifications and/or source code of the software to be made publicly available, so-called open source.




Appendix 6.13(d) sets out a true and complete list of all software and the license type that is freeware or that is subject to an open source or general public license.
(e)
The Group Companies:
(i)
comply with and conduct their Business in accordance with applicable data protection and privacy legislation and regulation; and
(ii)
have taken all reasonable measures, directly or indirectly, to ensure the confidentiality, privacy and security of customer, employee and other confidential and personal information.
6.14
Real property
The Group Companies do not own, and have not owned, any real properties.
6.15
Properties
(a)
Appendix 6.15(a) contains a complete and accurate list of all lease agreements for all properties leased by any of the Group Companies, and there are no lease agreements for real properties used in the Business of any of the Group Companies other than those listed therein. No Group Company has received or given notice of termination of any lease agreements for real properties that is material to the Business of the relevant Group Company.
(b)
All premises are being leased by the Group Companies under valid and enforceable leases, subject only to such Encumbrances which may follow from law and there is no default or event which after notice or lapse of time, or both, would constitute a default by any party under any lease agreement.
6.16
Taxes
(a)
All Tax returns and Tax reports required to be filed by any Group Company have been duly and timely filed with the appropriate tax authority and such filings are in all material respects true, correct and complete and all information required for a correct assessment of Tax has been provided.
(b)
All Tax that has become due by any Group Company has been timely and fully paid to the relevant tax authority, or will be fully reserved for in the Accounts, and all Tax not due by any Group Company has been fully reserved for in the Accounts, and the Group Companies will not be liable for any additional Tax pertaining to the period before the Completion Date.
(c)
To the extent applicable, all Tax returns of the Group Companies have been assessed and approved by the appropriate tax authority through the tax years up to and including the years for which such assessment and approval is required.
(d)
There are no tax audits (Sw. skatterevision ), disputes or litigation currently pending with respect to the Group Companies, and there is no basis for assessment of any deficiency in any Tax against any of the Group Companies which have not been paid or fully provided for in the Accounts.
(e)
To Sellers’ Knowledge, no Group Company has been involved in any transactions that could be considered as tax avoidance.
(f)
All transactions and agreements entered into by any of the Group Companies with any other Group Company or Sellers or Sellers' Affiliate have in all material respects been made in accordance with applicable laws regarding transfer pricing and on terms and conditions which do not in any way deviate from what would have been agreed between independent parties (i.e. on an arm's length basis).
6.17
Compliance with law and permits
(a)
Each Group Company is, and has during the past three (3) years been, in all material respects in compliance with applicable laws and regulations, including (i) terms and conditions in any material permit, approval or




authorization granted to the Group Companies, (ii) anti-corruption laws and regulations, including the Foreign Corrupt Practices Act of 1977 (FCPA), and (iii) import, export and other trade compliance laws and regulations.
(b)
Each Group Company has obtained all material licenses (including import and export licenses), permits and authorizations necessary for the Group Companies to carry on the Business as conducted at the Signing Date.
(c)
No Group Company has received notice from any authority that a Group Company is in violation of any laws of regulations or any permit, approval or authorization, or that any authority is intending to revoke, suspend, vary of limit any permit, approval or authorization or that any amendment to any permit, approval or authorization is required to enable the continued operation of the Business, and to Sellers’ Knowledge, no such notice is threatened or expected.
6.18
Litigation
(a)
Except as set forth on appendix 6.18(a), the Group Companies are as of the Signing Date not engaged in any pending or threatened litigation or arbitration proceedings whether as plaintiffs, defendants or otherwise.
(b)
As of the Signing Date, no investigation or enquiry is being or has been conducted by any governmental authority in respect of the affairs of any of the Group Companies, and to Sellers’ Knowledge no such investigation is pending or threatened or expected.
6.19
Absence of certain events
During the period between the Accounts Date and the Signing Date:
(a)
the Business has been carried on in the Ordinary Course;
(b)
no dividends or other distributions have been declared, paid or made by any of the Group Companies to any Seller or Seller's Affiliate;
(c)
none of the Group Companies has sold, pledged or otherwise encumbered, any material asset, other than in the Ordinary Course of Business;
(d)
none of the Group Companies has borrowed any additional funds exceeding EUR 100,000 from banks or other external sources;
(e)
none of the Group Companies has repaid any of their loans existing as at the Accounts Date, other than as required in the agreements governing such loans or in the Ordinary Course of Business; and
(f)
none of the Group Companies has entered into an agreement or arrangement to do any of the foregoing.
6.20
Condition of the Assets
The buildings, plants, structures, furniture, fixtures, machinery, equipment and other items of tangible personal property of the Company are structurally sound, are in good operating condition and repair, and are adequate for the uses to which they are being put, and none of such buildings, plants, structures, furniture, fixtures, machinery, equipment, vehicles and other items of tangible personal property is in need of maintenance or repairs except for ordinary, routine maintenance and repairs that are not material in nature or cost. The buildings, plants, structures, furniture, fixtures, machinery, equipment and other items of tangible personal property currently owned or leased by the Company, together with all other properties and assets of the Company, are sufficient for the continued conduct of the Company's business after Completion in substantially the same manner as conducted prior to the Completion and constitute all of the rights, property and assets necessary to conduct the business of the Company as currently conducted.
6.21
Information
(a)
The Data Room Documents have been compiled in good faith with a view to create in all material respects a true and fair view of the Group Companies.




(b)
All information provided during Due Diligence is in all material respects true and correct and no such information contains any untrue statement of a relevant fact or omits to state a relevant fact necessary not to make the statements contained in the document misleading.
(c)
There are no material facts or circumstances relating to the affairs of any of the Group Companies which have not been disclosed to Purchaser and which, if disclosed, might reasonably have been expected to influence the decision of a prudent purchaser to purchase the Shares on the terms of this Agreement.
6.22
Intermediaries
Except as set forth on appendix 6.22, no broker, finder, advisor or intermediary will be entitled to any fee, commission or other payment of any nature from any Group Company in connection with the Transaction or the completion of it.
7.    Purchaser warranties
Purchaser makes the following warranties (Sw. garantier ) to Sellers, all of which are made as of the Signing Date and as of the Completion Date.
7.1
Corporate existence and power
(a)
Purchaser is duly incorporated and validly existing under the laws of the jurisdiction in which Purchaser was incorporated, as well as duly qualified to conduct business as conducted as at the Signing Date and has the requisite power and authority, and the necessary funds, to enter into and perform this Agreement and any other undertaking to be executed by Purchaser pursuant to this Agreement.
(b)
Purchaser has not filed (or has had filed against it) any petition for its winding up, is not insolvent within the meaning of applicable laws, rules or regulations or similar requirements, and has not made any assignment in favour of its creditors or any class of them, nor has any petition for receivership or any administration order been presented in respect of Purchaser. Purchaser has not initiated any proceedings for a compromise or arrangement with its creditors or for the dissolution, liquidation or reorganisation of Purchaser or the winding-up or cessation of the business of Purchaser. No receiver or administrative receiver or liquidator has been appointed in respect of Purchaser or any of its material assets and no execution have been levied upon any of its material assets.
7.2
Corporate authorisation and non-contravention
This Agreement and any other documents or instruments to be executed by Purchaser pursuant to this Agreement and the performance by Purchaser of its obligations under them, have been duly authorised by all necessary corporate action on the part of Purchaser, and this Agreement, and any other documents or instruments to be executed by Purchaser pursuant to this Agreement, will, when executed, constitute valid and binding obligations of Purchaser in accordance with their respective terms.
8.    COVENANTS
8.1
Competition Authority Filing
(a)
Purchaser shall (at its own cost), as promptly as possible, prepare and file the notification of the Transaction to the German competition authority (De. Bundeskartellamt ).
(b)
Sellers shall (at its own cost), as promptly as possible, furnish all information and assistance to Purchaser that is necessary in connection with Purchaser’s filing with the German competition authority (De. Bundeskartellamt ).
(c)
Each Party shall cooperate fully with the other Parties and shall not wilfully take any action that will have the effect of delaying, impairing or impeding the receipt of any required consents, authorizations, orders and approvals. Notwithstanding the foregoing, nothing in this Agreement shall require, or be construed to require, Purchaser or any of its Affiliates to agree to (i) sell, hold, divest, or limit any assets, businesses or interests of




Purchaser, the Group Companies or any of their respective Affiliates or (ii) make any material conditions relating to, or changes or restrictions in, the operations of any such assets, businesses or interests.
8.2
Discharge of Director Liability
Subject to there being no opposition from respective auditors of the Group Companies, at the next annual shareholders' meeting of each of the Group Companies, Purchaser undertakes to procure that those board members of the Group Companies who have resigned on or before the Completion Date are granted discharge from liability for their administration until the Completion Date (or the earlier date of their resignation).
8.3
Conduct of Business
(a)
Between the Signing Date and Completion, Sellers shall procure that the Group Companies' Business is carried out in the Ordinary Course of Business and consistent with past practice with a view to maintaining it as a going concern and, except with the prior written consent of Purchaser, such consent not to be unreasonably withheld or delayed, shall procure that:
(i)
no dividends or other distributions are declared, paid or made by any of the Group Companies to any Seller or Seller's Affiliate;
(ii)
none of the Group Companies sell, pledge or otherwise encumber any material asset;
(iii)
none of the Group Companies borrows any additional funds from banks or other external sources;
(iv)
none of the Group Companies repays any of their loans existing as at the Accounts Date, other than as required in the agreements governing such loans or in the Ordinary Course of Business;
(v)
no changes are made to the share capital or the articles of association of the Group Companies;
(vi)
no changes of accounting methods, principles, practices, Working Capital principles or practices are made, including any agreement to defer any payments to creditors beyond the agreed date of payment and amendments of any principles for debt collection to the effect that payments from debtors are accelerated;
(vii)
there is no termination, cancellation or rescindment or material amendment or extension of any of the Material Agreements;
(viii)
there is no borrowing of any funds from banks or other external sources except for use of existing facilities in the Ordinary Course of Business;
(ix)
there is no repayment of any of its loans existing as at the Signing Date, other than as required in the agreements governing such loans or pursuant to this Agreement; and
(x)
none of the Group Companies enters into an agreement or arrangement to do any of the foregoing.
(b)
Clause 8.3(a) shall not operate as to restrict or prevent any matter undertaken at the written request or with the written consent of Purchaser.
8.4
Repayment of the Visuray Loan
In the event that the Visuray Loan is not repaid by Visuray to the Company on or before Completion, the Sellers shall cause Black Horse Holdings Ltd. (“ Blackhorse ”) to, by a separate agreement with the Company, pursuant to which (a) Blackhorse will purchase the Visuray Loan at Completion for the nominal value plus accrued interest and (b) the Company shall assign its rights under the Visuray Loan to Blackhorse.
8.5
Pre-Completion Undertaking
Sellers shall cause the board of directors of the Company to give the shareholders of the Company notice of a shareholders’ meeting to be held on the Completion Date. Prior to the notice of the meeting Purchaser shall




inform Sellers Representative of the names of the new board members to be appointed to the board of the Company.
8.6
Access and Assistance
(a)
Subject to Applicable Laws, during the period between the Signing Date and the Completion Date, Sellers shall furnish, or cause to be furnished, to Purchaser, its affiliates and accountants, counsel and other representatives access to such information, personnel and assistance relating to the Group Companies (and the directors and employees of each Group Company shall be instructed to give all such information and explanations as Purchaser or any person acting on Purchaser's behalf may request) as may be reasonably necessary for Purchaser and its affiliates' preparation for Completion.
(b)
After the Completion, upon reasonable notice, Sellers shall furnish, or cause to be furnished, to Purchaser, its affiliates and accountants, counsel and other representatives access to such information, personnel and assistance relating to Sellers or their Affiliates as may be reasonably necessary for Purchaser and its Affiliates' financial reporting and accounting matters, or the defence or prosecution thereof, or response required under or pursuant to, any lawsuit, action or proceeding or for the purposes of enabling Purchaser to assess or determine any amount under clause 3.
8.7
Non Solicitation and Non-Competition
(a)
For the purpose of assuring to Purchaser the full benefit of the Group Companies and in consideration of Purchaser agreeing to purchase the Shares on the terms of this Agreement, Sellers covenants and undertakes, severally but not jointly, that they shall not, and shall procure that all persons within any Seller or Seller's Affiliate shall not, without the prior written consent of Purchaser, whether directly or indirectly and whether alone or in conjunction with or on behalf of any other person and whether as principal, agent, director, officer, shareholder, debenture holder, partner, joint venture, consultant or otherwise:
(i)
for a period of two (2) years immediately following the Completion Date solicit or endeavour to entice away from the Group Companies any persons employed at the Signing Date and/or at the Completion Date whether as employee or as consultant nor employ any such person during such period, save that this undertaking shall not apply to any recruitment as a result of a bona fide general solicitation activity; and
(ii)
for a period of two (2) years immediately after Completion, directly or indirectly conduct or otherwise be engaged or invest in any business which, directly or indirectly, competes with the Business or otherwise make use of any technology and/or know-how used, or intended to be used, in the Business at the Completion Date in a way which, directly or indirectly, competes with the Business (shall not be interpreted as precluding any Seller from, directly or indirectly, holding up to 10 percent of shares in any company listed or traded on any securities exchange or a non-listed company where such holding is a passive ownership/financial investment).
(b)
If Sellers or any person within any Seller or Seller's Affiliate breaches any of the provisions in clause 8.7(a), Purchaser shall notify Sellers in writing of the breach and if Sellers have not have remedied the breach, or procured that the relevant Person within the any Seller or Seller's Affiliate has remedied the breach, within 30 days after receipt of such notification, Sellers shall, at Purchaser's request, pay liquidated damages in an amount equal to EUR 200,000 per breach, or, if a breach is on-going, the same amount for each week as the breach continues. If the actual damages are higher than the liquidated damages set out in this clause 8.7(b), Purchaser shall be entitled to claim damages corresponding to the actual damage (less the liquidated damages). The payment of liquidated damages or other damages does not affect the rights of Purchaser to take other action in relation to a breach of clause 8.7(a).
(c)
Notwithstanding the undertaking in clauses 8.7(a)(ii)and 8.7(b) above, the Parties recognise and approve, that a consultant of the Company, Tancredi Botti, currently employed on a short contract by the Company, shall upon the expiration of the contract, assume employment with Visuray and furthermore that Alex Stewart, also consultant of the Company, may continue to serve Visuray although he may be employed by the Company




following the signing of this Agreement upon terms acceptable to both Visuray and the Company. Furthermore, Visuray shall be entitled to employ all employees or consultants whose agreements with the Company are terminated by the Company.
8.8
Further Assurances
Subject to the terms and conditions of this Agreement, each Party will use its best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary under applicable laws to complete the Transaction, including without limitation executing and delivering such other documents, certificates, agreements and other writings and to take such other actions as may be necessary in order to complete or implement expeditiously or gain necessary approvals for the Transaction.
9.    INDEMNIFICATION
9.1
Purchaser Indemnification
(a)
Subject to the other terms and conditions of this clause 9, Sellers shall jointly and severally indemnify each of Purchaser, Parent and their Affiliates (including the Company) and their respective representatives (collectively, the “ Purchaser Indemnitees ”) against, and shall hold each of them harmless from and against, and shall pay and reimburse each of them for, any and all Losses incurred or sustained by, or imposed upon, the Purchaser Indemnitees based upon, arising out of, with respect to or by reason of:
(i)
any inaccuracy in or breach of any of the warranties contained in this Agreement or in any certificate or instrument delivered by or on behalf of Sellers pursuant to this Agreement, as of the date such representation or warranty was made or as if such representation or warranty was made on and as of the Completion Date (except for representations and warranties that expressly relate to a specified date, the inaccuracy in or breach of which will be determined with reference to such specified date);
(ii)
any breach or non-fulfilment of any Covenant, agreement or obligation to be performed by Sellers pursuant to this Agreement;
(iii)
any Transaction Expenses outstanding as of Completion to the extent not deducted from the Consideration in accordance with clause 3.3(b); or
Notwithstanding the foregoing, where indemnification cannot be satisfied pursuant to clauses 9.3(f)(i) or 9.3(f)(ii), Sellers shall indemnify the Purchaser Indemnitees severally and not jointly, except in the case of a breach of the warranties contained in clauses 6.3 and 6.6, in which case Sellers shall jointly and severally indemnify the Purchaser Indemnitees regardless of whether a claim can be satisfied pursuant to clauses 9.3(f)(i) or 9.3(f)(ii).
(b)
It is specifically agreed that the Sellers’ liability in relation to the Purchaser is exclusively governed by this Agreement and thus no remedy whatsoever under the Sale of Goods Act (Sw.  Köplagen (1990:931) ) or under any other statute, law or legal principle, including (but not limited to) the right to rescind this Agreement, shall be available to the Purchaser.
(c)
It is also specifically agreed that the Sellers shall not be liable for any Claim relating to write-down of the book value resulting from the sale of the Visuray Shares.
9.2
Seller Indemnification
(a)
Subject to the other terms and conditions of this clause 9, Purchaser shall indemnify and defend each Seller and their Affiliates and their respective representatives (collectively, the “Seller Indemnitees”) against, and shall hold each of them harmless from and against, and shall pay and reimburse each of them for, any and all Losses incurred or sustained by, or imposed upon, the Seller Indemnitees based upon, arising out of, with respect to or by reason of:




(i)
any inaccuracy in or breach of any of the warranties of Purchaser contained in this Agreement or in any certificate or instrument delivered by or on behalf of Purchaser pursuant to this Agreement, as of the date such representation or warranty was made or as if such representation or warranty was made on and as of the Completion Date (except for representations and warranties that expressly relate to a specified date, the inaccuracy in or breach of which will be determined with reference to such specified date); or
(ii)
any breach or non-fulfilment of any covenant, agreement or obligation to be performed by Purchaser or Parent pursuant to this Agreement.
9.3
Limitations of Indemnification
Sellers’ liability to indemnify the Purchaser Indemnities and Purchaser’s liability to indemnify the Seller Indemnitees are subject to the following limitations:
(a)
If the Purchaser or, following Completion, any Group Company becomes aware of any matter or circumstance which give rise to a Claim against the Sellers under this Agreement, the Purchaser shall within 40 Business Days from the date when the Purchaser or the relevant Group Company became aware, or reasonably should have become aware of the circumstances giving rise to the Claim give notice in writing to the Sellers. The written notice shall specify the legal and factual basis of the Claim and the evidence on which the Purchaser relies and, if practicable, an estimate of the amount of losses which are, or are to be, subject of the Claim (including any losses which are contingent on the occurrence of any future event). Should Purchaser notify later than as required by this clause 9.3(a), this shall not operate to restrict Purchaser from presenting a Claim, but Sellers shall not be liable for any additional Loss attributable to the fact that the notice was sent out later than as stipulated in this clause 9.3(a).
(b)
No Claim for a breach of representations and warranties shall entitle an Indemnified Party to indemnification unless notice in writing of any such Claim, accompanied by reasonable particulars of the Claim specifying the nature of the Claim and, as far as reasonably practicable, an estimation of the amount of the Claim, has been given to Indemnifying Party:
(i)
in relation to Warranties relating to Taxes, within three (3) months from the date when the Taxes in question have been subject to a final and non-appealable decision by the relevant tax authority/court; or
(ii)
in relation to Fundamental Warranties no later than on the tenth anniversary of the Completion Date; and
(iii)
in relation to any other warranties, within twenty-four (24) months after the Completion Date.
(c)
Liability in respect of a Loss shall survive the time at which liability would otherwise terminate pursuant to clause 9.3(a) if notice of the Claim was delivered prior to such time.
(d)
if the Indemnified Party has notified the Indemnifying Party of a Claim pursuant to clause 9.3(a), and the Indemnifying Party does not dispute such Claim (or does not reserve the right to dispute the Claim if and when it receives further details on the Claim) by delivering a written notice to the Indemnified Party, accompanied by reasonable particulars of the Claim specifying the Indemnified Party’s rationale for disputing the Claim, within 60 days following receipt by the Indemnifying Party of such notice in accordance with this Agreement, the Indemnifying Party shall be deemed to have finally and irrevocably accepted the Claim as well as the Indemnified Party’s calculation of the amount of the Claim.
(e)
The Indemnified Party shall be entitled to indemnification in relation to a Claim for breach of any of the Business Warranties once such Claim meets the following requirements:
(i)
in respect of individual Claims (or series of Claims arising from substantially identical facts and circumstances) for Loss that is equal to or exceeds an amount in EUR corresponding to 50,000; and




(ii)
only the aggregate amount of the Loss recoverable under such Claims is equal to or exceeds an amount in EUR corresponding to 400,000, but if such Losses exceed the said amount the Indemnified Party shall be compensated for the full amount of the Claim.
(f)
Sellers’ total liability to the Purchaser Indemnitees for a Loss under this Agreement, other than a Loss due to a breach of the Fundamental Warranties (which shall not exceed the total Consideration received by the Sellers), fraud or wilful misconduct, shall not exceed EUR 16,000,000. Claims for indemnification will be satisfied as follows:
(i)
From the Completion Date up until the first anniversary of the Completion Date, Purchaser is entitled to make a pro rata reduction (in relation to each Sellers’ share of the total Stock Based Consideration) of each Sellers’ share of the Stock Based Consideration with an amount corresponding to the Loss suffered by the Purchaser Indemnitees; and
(ii)
From the Completion Date up until the second anniversary of the Completion Date, Purchaser is entitled to coverage from the Insurer under the R&W Policy for any Loss. The premium for the R&W Policy shall be paid by Sellers at Completion and the R&W Policy shall not exceed EUR 8,000,000.
Purchaser shall first seek compensation in the reduction of the Stock Based Compensation in accordance with clause 9.3(f)(i) above, and secondly seek compensation from the Insurer under the R&W Insurance in accordance with clause 9.3(f)(ii) above. For the avoidance of doubt, the above limitation on liability shall not apply with respect to any breach of the Fundamental Warranties (which shall not exceed the total Consideration received by the Sellers) or in the case of fraud or wilful misconduct by Sellers.
(g)
Purchaser’s total liability to the Seller Indemnitees for a Loss under this Agreement, other than a Loss due to a breach of the Fundamental Warranties (which shall not exceed the total Consideration received by the Sellers), fraud or wilful misconduct, shall not exceed EUR 10,000,000.
(h)
For purposes of this clause 9, any inaccuracy in or breach of any representation or warranty shall be determined without regard to any materiality, Material Adverse Effect or similar qualification contained in or otherwise applicable to such representation or warranty.
(i)
Purchaser shall not be entitled to make a Claim for breach of the Business Warranties to the extent:`
(i)
such Claim is based on facts or circumstances which have been fairly and specifically disclosed in the Data Room Documents in an orderly and discernible manner so that a prudent purchaser could:
(A)
understand the content and impact of such disclosure; and
(B)
to identify the facts or circumstances causing the Loss and to evaluate the extent of the Loss;
(ii)
a full specific provision or allowance for the matter of the Loss, has been made for such matter in the Accounts or the Completion Statements; or
(iii)
such Claim occurs as a result of the passing of any legislation not in force at the Completion Date, or which takes effect retroactively, or occurs as a result of any increase in the tax rate in force on the Completion.
9.4
Other limitations of indemnification
(a)
If any Loss is a tax deductible item, or relates to an untaxed reserve, Sellers’ indemnification for such Loss shall be reduced by the actual tax savings actually made by that Group Company.
(b)
Purchaser shall take reasonable actions to mitigate any indemnifiable Loss in respect of which a Claim for breach of the Warranties could be made under this Agreement.




10.    SPECIFIC INDEMNITY BY THE SELLERS
10.1
The Sellers shall indemnify, defend and hold harmless the Purchaser from and against any Loss as a result of
(a)
Spencer Gunn’s and Innovative Pivotal Application Ltd's relationship with any of the Group Companies prior to the Closing Date, and
(b)
the dispute involving Madame Bouquet, Space Dental, and Oy Ajat Ltd. related to an Oy Ajat Ltd. product sold by Space Dental in France to the extent not already included in Debt.
10.2
Except for the limitations set forth in clause 9.3(f) the limitations set forth in clause 9.3 shall not apply to indemnifications under this clause 10.
11.    Third Party Claims and Recovery
11.1
In case Purchaser after the Completion Date becomes aware of any Third Party Claim for which Sellers may be liable, Purchaser shall, in order to preserve its right to bring a Claim against Sellers, either itself, or shall procure that the relevant Group Company shall:
(a)
as soon as reasonably practicable, but in no event later than 40 Business Days after Purchaser became aware of the Third Party Claim, give notice of it in writing to Sellers; and
(b)
not make any admission of liability and not agree to settle or compromise with any person, body or authority in relation to it, without obtaining the prior written consent of Sellers.
11.2
Should Purchaser notify later than as required by clause 11.1, this shall not operate to restrict Purchaser from presenting a Claim, but Sellers shall not be liable for any additional Loss attributable to the fact that the notice was sent out later than as stipulated in clause 11.1.
11.3
Provided that Sellers has confirmed to Purchaser, in writing within 10 Business Days after Purchaser gave notice of the Third Party Claim pursuant to clause 11.1, that the Third Party Claim constitutes a breach of this Agreement for which Sellers is liable to indemnify Purchaser in full, Sellers shall be entitled, at its own cost and expense, and after proper notification to Purchaser to assume the defence of any Third Party Claim and take such actions as it deems necessary in the name of any Group Company. Sellers shall diligently conduct the defence of the Third Party Claim and when defending a claim Sellers shall take due consideration to the relevant Group Company's commercial interest in particular if the third party is a customer of or supplier to a Group Company. In such event, Purchaser shall give, and/or ensure that the relevant Group Company will give, to Sellers all authorisations and all assistance necessary to enable Sellers to dispute and defend any such claim.
11.4
If Purchaser has been indemnified in full by Sellers as a complete settlement of a Claim, and Purchaser or a Group Company subsequently has the right to recover any amount in respect of the claim from any third party, then such right shall, on request by Sellers and to the extent permissible under applicable laws and always subject to the commercial interests of Purchaser and the Group Companies as deemed by Purchaser, be assigned to Sellers, or as applicable, any amount received from such third party shall be paid to Sellers (less any reasonable cost incurred in such recovery).
11.5
This clause 11 shall in no way restrict Purchaser when seeking to fulfil its obligations pursuant to clause 9.4(b).
12.    SETTLEMENT OF CLAIMS
12.1
Payment
(a)
If Purchaser has asserted a Claim pursuant to clause 9 by delivering a written notice to Sellers, and Sellers have not disputed the Claim in accordance with clause 9.3(d), Purchaser shall make a pro rata reduction (in relation to each Sellers’ share of the total Stock Based Consideration) of each Sellers’ share of the Stock Based Consideration, in an amount corresponding to the amount of such Claim and shall provide Sellers’ Representative with notice of such reduction.




(b)
If Seller has asserted a Claim pursuant to clause 10 by delivering a written notice to Purchaser and Purchaser has not disputed the Claim in accordance with clause 10.3(c), Purchaser shall deposit the amount of such Claim into the Transaction Account and instruct the Bank to distribute the amount of such Claim to Sellers within seven Business Days.
(c)
If clause 9.3(f)(ii) is applicable, Purchaser and Sellers shall within three (3) Business Days following the Adjustment Date jointly instruct the Insurer to pay the amount of such adjustment to Purchaser.
12.2
No double recovery
Any payment made in respect of any Claim shall satisfy and discharge any other Claim which is capable of being made against the Sellers in respect of the same matter, but only to the extent of the payment made.
12.3
Disputes
Except in respect of a dispute in relation to the Completion Statements which shall be finally resolved and determined in accordance with the procedures in clause 3.5, if any dispute regarding a breach of this Agreement arises, such dispute shall be finally resolved and determined by arbitration pursuant to clause 22.
13.    CONFIDENTIALITY
13.1
Each Party undertakes not to use or disclose any Confidential Information relating to the other Party unless:
(a)
required to do so by law or pursuant to any order of court or other competent authority or tribunal;
(b)
required to do so by any applicable stock exchange regulations or the regulations of any other recognised market place;
(c)
such disclosure has been consented to by the other Party in writing (such consent not to be unreasonably withheld or delayed); or
(d)
to its professional advisers who are bound to such party by a duty of confidence which applies to any information disclosed. If a Party becomes required, in circumstances contemplated by clause 13.1(a) or 13.1(b) to disclose any information, the disclosing Party shall, to the extent lawful, use its reasonable endeavours to consult with the other Party prior to any such disclosure.
13.2
If this Agreement is terminated, irrespective of the cause of such termination, Purchaser shall, and shall procure that its advisors shall, upon a request in writing from Sellers, return or destroy any document containing Confidential Information, and any copy of it. Notwithstanding the above, Purchaser shall be entitled to retain one copy solely for archival purposes and Purchaser's advisors shall be entitled to retain copies to the extent required by applicable law.
14.
ANNOUNCEMENTS
All press releases, public announcements and public relations activities by the Parties with regard to this Agreement or the transaction contemplated by it shall be mutually approved by the Parties in advance of such release or announcement. A Party shall, however, not be prevented from disclosing such information which is required under applicable law or stock exchange regulations provided that (unless such consultation is prohibited) such disclosure occurs after consultation as to timing and content of such disclosure with the other Party.




15.
SELLERS' REPRESENTATIVE
15.1
Each Seller hereby unconditionally and irrevocably appoints the Sellers’ Representative as its representative in respect of all matters relating to the Transaction Documents and otherwise in relation to the Transactions. The Sellers’ Representative is thereby, as of the Signing Date, duly authorized by each Seller, on its behalf, to inter alia:
(a)
receive, deliver, order or make any payment relating to the Transaction Documents or any other agreement or document relating to the Transactions;
(b)
enter into any Transaction Documents or any other agreement or document relating to the Transactions;
(c)
deliver and accept receipt of any notice, request, or other communication relating to the Transaction Documents or any other agreement or document relating to the Transactions;
(d)
agree to amend the Transaction Documents or any other agreement or document relating to the Transactions;
(e)
assert, negotiate, enter into settlements, consent or agree to arbitration and comply with any orders of courts or awards of arbitrators with respect to any claim under the Transaction Documents (including with any third parties with respect to any Third Party Claims and Recovery as contemplated in clause 11 or any other agreement or document relating to the Transactions; and
(f)
take all actions necessary or appropriate, in the sole judgement of the Sellers’ Representative, for the accomplishment of any of the foregoing or otherwise to represent each Seller in any other matter under the Transaction Documents or otherwise in relation hereto.
16.
COSTS AND EXPENSES
Each Party shall bear its own costs, charges and expenses incurred in relation to the preparation, negotiation, execution and implementation of this Agreement.
17.
ENTIRE AGREEMENT
This Agreement, together with the other Transaction Documents, represent the entire understanding and agreement between the Parties with respect to the subject matter hereof and supersedes all prior negotiations, understandings and agreements with respect to the subject matter hereof.
18.
AMENDMENTS AND WAIVERS
This Agreement may only be amended by an instrument in writing duly executed by the Parties. No change, termination, modification or waiver of any provision, term or condition of this Agreement shall be binding on the Parties, unless it is made in writing.
19.
NOTICES
19.1
All notices, requests, demands, approvals, waivers and other communications required or permitted under this Agreement must be in writing in the English language and shall be deemed to have been received by a Party when:
(a)
delivered by post, unless actually received earlier, on the third Business Day after posting, if posted within Sweden, or the fifth Business Day, if posted to or from a place outside Sweden;
(b)
delivered by hand, on the day of delivery;
(c)
delivered by fax, on the day of dispatch if supported by a written confirmation from the sender's fax machine that the message has been properly transmitted;
(d)
if delivered by e-mail, upon confirmation by the receiving Party.




19.2
All such notices and communications shall be addressed as set out below or to such other addresses as a party may notify to the others for this purpose in accordance with this clause 19. Notice of any change shall be effective five (5) Business Days after the date on which it is deemed to have been given in accordance with this clause 19, or such later date as may be specified in the notice.
Sellers:
 
For the attention of:
Jean-Philippe Flament                
Address:
8 Boulevard Rainier III, MC 98000, Monaco              
Email:
jp.flament@jflament.com        
 
 
With a copy to:
Hannes Snellman Attorneys Ltd
For the attention of:
Richard Åkerman    
Address:
Kungsträdgårdsgatan 20, P.O. Box 7801, SE-103 96 Stockholm Sweden
Email:
richard.akerman@hannessnellman.com
 
 
Purchaser:
Varex Imaging Corporation 
For the attention of:
Vice President - Business Development               
Address:
1678 South Pioneer Road, Salt Lake City, Utah 84104           
Email:
matthew.lowell@vareximaging.com                 
 
 
With a copy to:
Advokatfirma DLA Piper Sweden KB              
For the attention of:
Emma Norburg                
Address:
Kungsgatan 9, P.O. Box 7315, SE-103 90 Stockholm Sweden              
Email:
emma.norburg@dlapiper.com                    
19.3
For the purposes of this Agreement, “writing” or “written” shall not include e-mails (except for as explicitly expressed above).
20.
ASSIGNMENTS
No person may assign, delegate, sub-contract, or otherwise transfer or pledge or grant any other security interest in or over any of its rights or obligations under this Agreement without the prior written consent of the other Party, except that Purchaser may transfer or assign, in whole or in part, its rights and/or obligations under this Agreement to any company directly or indirectly controlling, controlled by or under common control of Purchaser.
21.
PARTIAL INVALIDITY
If any provision of this Agreement or the application of it shall be declared or deemed void, invalid or unenforceable in whole or in part for any reason, the remaining provisions of this Agreement shall continue in full force and effect. The Parties shall seek to amend such void, invalid or unenforceable provisions and thereby this Agreement in order to give effect to, so far as is possible, the spirit of this Agreement and to achieve the purposes intended by the Parties.
22.
GOVERNING LAW AND DISPUTES
22.1
This Agreement shall be governed by and construed in accordance with the substantive laws of Sweden.
22.2
Any dispute, controversy or claim arising out of or in connection with this Agreement, or the breach, termination or invalidity of it, shall be finally settled by arbitration administered by the Arbitration Institute of the Stockholm Chamber of Commerce ( “SCC” ). The Rules for Expedited Arbitrations shall apply, unless the SCC in its discretion determines, taking into account the complexity of the case, the amount in dispute and other




circumstances, that the Arbitration Rules shall apply. In the latter case, the SCC shall also decide whether the Arbitral Tribunal shall be composed of one (1) or three (3) arbitrators.
22.3
The place of arbitration shall be Stockholm.
22.4
The language to be used in the arbitral proceedings shall be English.
22.5
The Parties undertake and agree that all arbitral proceedings conducted with reference to this arbitration clause will be kept strictly confidential. This confidentiality undertaking shall cover all information disclosed in the course of such arbitral proceedings, as well as any decision or award that is made or declared during the proceedings. Information covered by this confidentiality undertaking may not, in any form, be disclosed to a third party without the written consent of all Parties.
______________________________
(Signature pages follow




EXECUTION PAGES

This Agreement has been duly executed as of the date first written above in two original copies, of which Purchaser and Sellers have each taken one copy. This Agreement may be executed in counterparts.
SELLERS:

Bernard Invest and
Finance Holding SAL


/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney

Black Horse Holdings Ltd



/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament

Matrix Technologies Holding GmbH


/s/ Marc Sperschneider
Marc Sperschneider



Oro Management Ltd


/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney

Whitehorse Investing Ltd


/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney


Dorsay Finance Corp


/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney


Alta Invest SA
 

/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney


Jean-Philippe S. Flament


/s/ Jean-Philippe S. Flament




Franck Biancheri


/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney


Thor Kristian Haugnaess


/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney

Roy Mosvold


/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney


Innovative Pivotal
Applications Ltd

/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney




Praline Consulting Corp


/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney
TONGA INVEST AS


/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney

John Bruce


/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney

Christer Ullberg


/s/ Christer Ullberg


Jouni Pyyhtia


/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney

Mattias Urech


/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney

Niclas Weber


/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney

York Haemisch


/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney

Rasmus Ljungwe


/s/ Rasmus Ljungwe



Hamdan Amin


/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney



Tuomas Pantsar


/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney

Per Ullberg


/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney
Atukem Nabina


/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney
Susan Kings


/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney

Roland Neal


/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney

Isak Larsson


/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney





Samuel Arcini


/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney

Pasi Laukka


/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney

Charlotte Eriksson


/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney

Johan Rydberg


/s/ Jean-Philippe S. Flament
Jean-Philippe S. Flament
by power of attorney








PURCHASER:
VAREX IMAGING INVESTMENTS B.V


/s/ Clarence R. Verhoef

By: Clarence R Verhoef

Title: Director
PARENT:
VAREX IMAGING CORPORATION


/s/Sunny S. Sanyal

By: Sunny S. Sanyal

Title: President and Chief Executive Officer








AMENDMENT NO. 3 TO CREDIT AGREEMENT
THIS AMENDMENT NO. 3 TO CREDIT AGREEMENT (this “ Amendment ”), dated as of March 21, 2019, is made between Varex Imaging Corporation (the “ Borrower ”), certain of the Borrower’s subsidiaries listed on the signature pages hereof under the heading “GUARANTORS” (each a “ Guarantor ”, and, collectively, the “ Guarantors ”), the Lenders listed on the signature pages hereof under the heading “LENDERS”, and Bank of America, N.A., as administrative agent for the Lenders (in such capacity, the “ Administrative Agent ”).
WHEREAS, the Borrower, the Lenders and the Administrative Agent are parties to a Credit Agreement, dated as of May 1, 2017 (as amended, modified and supplemented prior to the date hereof, the “ Credit Agreement ”);
WHEREAS, the Borrower has requested that the Administrative Agent and the Lenders amend certain provisions of the Credit Agreement; and
WHEREAS, the Lenders party hereto are willing to do so on the terms and conditions hereof.
NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties hereto hereby agree as follows:
SECTION 1 Definitions; Interpretation.
(a) Terms Defined in Credit Agreement . All capitalized terms used in this Amendment (including in the recitals hereof) and not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement.
(b) Interpretation . The rules of interpretation set forth in Section 1.2 of the Credit Agreement shall be applicable to this Amendment and are incorporated herein.
SECTION 2 Amendments to the Credit Agreement. Effective as of the Third Amendment Effective Date (as defined below), the Credit Agreement is amended as follows:
(a) The following new definition is added to Section 1.1 of the Credit Agreement in alphabetical order:
“ Specified Incremental Equivalent Debt ” means subordinated debt in an aggregate principal amount of up to $25,000,000, the subordination terms of which are reasonably satisfactory to the Administrative Agent.
(b) Section 9.1(m)(iv) of the Credit Agreement is hereby amended and restated in its entirety to read as follows:
(iv)    if such Incremental Equivalent Debt is secured by a second lien (or other junior basis) or is unsecured, such Incremental Equivalent Debt shall satisfy the Permitted Junior Debt Conditions; provided that the provisions of this subsection (iv) shall not apply to the Specified Incremental Equivalent Debt;
(c) Section 9.15(a) of the Credit Agreement is hereby amended and restated in its entirety to read as follows:




(a)     Consolidated Total Leverage Ratio . As of the last day of any fiscal quarter of the Borrower, permit the Consolidated Total Leverage Ratio to be greater than the amount set forth below for such fiscal quarter:
Applicable Period
Maximum Consolidated Total Leverage Ratio
From the Closing Date through the fiscal quarter ended June 30, 2019
4.50 to 1.00
From the fiscal quarter ended September 30, 2019 through the fiscal quarter ended December 31, 2019
4.25 to 1.00
From the fiscal quarter ended March 31, 2020 through the fiscal quarter ended September 30, 2020
4.00 to 1.00
From the fiscal quarter ended December 31, 2020 and thereafter
3.75 to 1.00

provided that, notwithstanding the foregoing table, from the fiscal quarter ended March 31, 2020 and thereafter, following a Material Permitted Acquisition, the applicable maximum Consolidated Total Leverage Ratio shall increase to 4.25 to 1.00 for four consecutive fiscal quarters following the fiscal quarter in which such Material Permitted Acquisition is consummated.
(d) Section 9.15(b) of the Credit Agreement is hereby amended and restated in its entirety to read as follows:
(b)     Consolidated Senior Secured Leverage Ratio . As of the last day of any fiscal quarter of the Borrower, permit the Consolidated Senior Secured Leverage Ratio to be greater than the amount set forth below for such fiscal quarter:
Applicable Period
Maximum Consolidated Senior Secured Leverage Ratio
From the Closing Date through the fiscal quarter ended March 31, 2019
4.50 to 1.00
Fiscal quarter ended June 30, 2019
4.25 to 1.00
Fiscal quarter ended September 30, 2019
4.00 to 1.00
Fiscal quarter ended December 31, 2019
3.75 to 1.00
Fiscal quarter ended March 31, 2020
3.50 to 1.00
Fiscal quarter ended June 30, 2020
3.25 to 1.00
Fiscal quarter ended September 30, 2020
3.25 to 1.00
From the fiscal quarter ended December 31, 2020 and thereafter
3.00 to 1.00

provided that, notwithstanding the foregoing table the foregoing table, from the fiscal quarter ended June 30, 2020 and thereafter, following a Material Permitted Acquisition, the applicable maximum Consolidated Senior Secured Leverage Ratio shall increase to 3.50 to 1.00 for four consecutive fiscal quarters following the fiscal quarter in which such Material Permitted Acquisition is consummated.





SECTION 3 Conditions of Effectiveness. This Amendment shall become effective upon the satisfaction of each of the following conditions precedent (the “ Third Amendment Effective Date ”):
(a) Executed Counterparts . The Borrower, the Guarantors, the Administrative Agent and the Required Lenders shall have indicated their consent to this Amendment by the execution and delivery of the signature pages hereto to the Administrative Agent.
(b) Representations and Warranties . Both immediately before and after giving effect to this Amendment:
(i) the representations and warranties contained in Section 4 hereof shall be true and correct; and
(ii) no Default or Event of Default shall have occurred and be continuing.
(c) Fees, Costs and Expenses . The Administrative Agent shall have received, on behalf of Merrill Lynch, Pierce, Fenner & Smith Incorporated and the Lenders party hereto, the fees set forth in the letter dated as of March 21, 2019 among the Borrower, the Administrative Agent and Merrill Lynch, Pierce, Fenner & Smith Incorporated and the Administrative Agent shall have received all reasonable and documented out-of-pocket expenses for which invoices have been presented (including the reasonable fees and expenses of legal counsel) that are due and payable in connection with this Amendment.
(d) Purchase Agreement . The Borrower shall have (i) notified the Administrative Agent that it has entered into the Share Purchase Agreement between the Borrower and certain shareholders (the “ Sellers ”) of Direct Conversion AB (publ) (the “ Purchase Agreement ”), (x) the terms and provisions of which are reasonably satisfactory to the Administrative Agent and (y) pursuant to which the Borrower will purchase the Equity Interests of Direct Conversion AB (publ) owned by the Sellers; and (ii) delivered an executed copy of the Purchase Agreement to the Administrative Agent.
SECTION 4 Representations and Warranties. To induce the Administrative Agent and the Lenders to enter into this Amendment, each Credit Party hereby represents and warrants to the Administrative Agent and the Lenders that the following statements are true and correct:
(a) Each Credit Party has the right, power and authority and has taken all necessary corporate and other action to authorize the execution and delivery of this Amendment and the performance of this Amendment and the Credit Agreement as amended hereby. This Amendment has been duly executed and delivered by the duly authorized officers of each Credit Party, and this Amendment and the Credit Agreement as amended hereby each constitutes the legal, valid and binding obligation of each Credit Party party thereto, enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar state or federal Debtor Relief Laws from time to time in effect which affect the enforcement of creditors’ rights in general and the availability of equitable remedies.
(b) The representations and warranties contained in the Loan Documents are true and correct in all material respects on and as of the date hereof, except to the extent any such representation and warranty is qualified by materiality or reference to Material Adverse Effect, in which case, such representation and warranty is true and correct in all respects (except for any such representation and warranty that by its terms is made only as of an earlier date, which representation and warranty remains true and correct in all material respects as of such earlier date, except to the extent any such representation and warranty is qualified by materiality or reference to Material Adverse Effect, in which case, such representation and warranty is true and correct in all respects as of such earlier date).
(c) The execution and delivery of this Amendment, and the performance of this Amendment and the Credit Agreement as amended hereby, by each Credit Party does not and will not, by the passage of time,




the giving of notice or otherwise, (i) require any Governmental Approval or violate any Applicable Law relating to any Credit Party or any Subsidiary thereof, (ii) conflict with, result in a breach of or constitute a default under the articles of incorporation, bylaws or other organizational documents of any Credit Party or any Subsidiary thereof, (iii) conflict with, result in a breach of or constitute a default under any Material Contract to which such Person is a party or by which any of its properties may be bound or any Governmental Approval relating to such Person, (iv) result in or require the creation or imposition of any Lien upon or with respect to any property now owned or hereafter acquired by such Person other than Permitted Liens or (v) require any consent or authorization of, filing with, or other act in respect of, an arbitrator or Governmental Authority and no consent of any other Person is required in connection with the execution and delivery of this Amendment, and the performance, validity or enforceability of this Amendment and the Credit Agreement as amended hereby.
(d) No Default or Event of Default has occurred and is continuing.
SECTION 5 Acknowledgement, Agreement and Consent.
(a) Each Credit Party confirms and agrees that, notwithstanding the effectiveness of this Amendment, the obligations of such Credit Party under the Loan Documents to which such Credit Party is a party shall not be impaired and the Loan Documents to which such Credit Party is a party is, and shall continue to be, in full force and effect and is hereby confirmed and ratified in all respects.
(b) Each Guarantor hereby acknowledges and agrees that (i) notwithstanding the conditions to effectiveness set forth in this Amendment, such Guarantor is not required by the terms of the Credit Agreement or any other Loan Document to consent to the amendments to the Credit Agreement effected pursuant to this Amendment and (ii) nothing in the Credit Agreement, this Amendment or any other Loan Document shall be deemed to require the consent of such Guarantor to any future amendments to the Credit Agreement.
(c) Each Guarantor hereby acknowledges and agrees that the Secured Obligations guaranteed under the Guaranty Agreement will include all Secured Obligations, as amended by this Amendment.
(d) Each Credit Party hereby acknowledges and agrees that (i) to the extent any Loan Document purports to grant, assign or pledge to the Administrative Agent or any other Person a security interest or Lien on any Collateral as security for the Secured Obligations, such grant, assignment or pledge is hereby ratified and confirmed in all respects and (ii) the Secured Obligations secured under the Security Documents will include all Secured Obligations, as amended by this Amendment.
SECTION 6 Miscellaneous.
(a) Credit Agreement Otherwise Not Affected, Etc . Except as expressly amended pursuant hereto, each Loan Document shall remain unchanged and in full force and effect and is hereby ratified and confirmed in all respects. The Administrative Agent’s and the Lenders’ execution and delivery of, or acceptance of, this Amendment shall not be deemed to create a course of dealing or otherwise create any express or implied duty by any of them to provide any other or further amendments, consents or waivers in the future. Nothing contained herein shall be deemed a waiver or consent in respect of (or otherwise affect any Secured Party’s ability to enforce) any Default. On and after the Third Amendment Effective Date, each reference in any Loan Document to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended by this Amendment.
(b) No Reliance . Each Credit Party hereby acknowledges and confirms to each Secured Party that the Borrower is executing this Amendment on the basis of its own investigation and for its own reasons without reliance upon any agreement, representation, understanding or communication by or on behalf of any other Person.




(c) Governing Law . This Amendment and any claim, controversy, dispute or cause of action (whether in contract or tort or otherwise) based upon, arising out of or relating to this Amendment and the transactions contemplated hereby shall be governed by, and construed in accordance with, the law of the State of New York.
(d) Complete Agreement; Amendments . This Amendment, together with the other Loan Documents, contains the entire and exclusive agreement of the parties hereto and thereto with reference to the matters discussed herein and therein. This Amendment supersedes all prior commitments, drafts, communications, discussions and understandings, oral or written, with respect thereto. This Amendment may not be modified, amended or otherwise altered except in accordance with the terms of Section 12.2 of the Credit Agreement.
(e) Counterparts . This Amendment may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract.
(f) Loan Documents . This Amendment shall constitute a Loan Document.
[ Signature pages follow ]





IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment, as of the date first above written.
THE BORROWER

VAREX IMAGING CORPORATION



By:      /s/ Matt Lowell
Name: Matt Lowell
Title:      VP. Finance - Treasury & Business Development




THE GUARANTORS

VAREX IMAGING WEST HOLDINGS, INC.


By:      /s/ Matt Lowell
Name: Matt Lowell
Title:      Tresurer



VAREX IMAGING WEST, LLC


By:      /s/ Matt Lowell
Name: Matt Lowell
Title:      Tresurer






BANK OF AMERICA, N.A.



By:      /s/ Kevin L Ahart     
Name:     Kevin L. Ahart
Title:    Vice President




THE LENDERS

BANK OF AMERICA, N.A., as Swingline Lender, Issuing Lender and Lender
By:      /s/ Sebastian Lurie
Name:     Sabastian Lurie
Title:    SVP


DNB CAPITAL LLC, as Issuing Lender and Lender

By: /s/     Kristie Li
Name:     Kristie Li
Title:    Sevior Vice President


By: /s/     Kristi Birkeland Sorensen
Name:     Kristi Birkeland Sorensen
Title:    Sevior Vice President
Head of Corporate Banking


JPMORGAN CHASE BANK, N.A., as Issuing Lender and Lender

By:      /s/ Ling Li        
Name:     Ling Li        
Title:    Executive Director    


WELLS FARGO BANK, NATIONAL ASSOCIATION, as Issuing Lender and Lender

By:      /s/ Darin Mullis    
Name:     Darin Mullis        
Title:    Managing Director


Citibank, N.A, as Lender

By:      /s/ Michael Chen    
Name:     Michael Chen        
Title:    Authorized Signatory






Fifth Third Bank, as Lender

By:      /s/ Thomas Avery    
Name:     Thomas Avery        
Title:    Director


PNC BANK, NATIONAL ASSOCIATION, as Lender

By:      /s/ Philip K. Liebscher    
Name:     Philip K. Liebscher        
Title:    Senior Vice President


SUMITIMO MITSUI BANKING CORPORATION, as Lender

By:      /s/ Katsuyuki Kubo    
Name:     Katsuyuki Kubo        
Title:    Managing Director


ZIONS BANKCORPORATION, N.A. dba
ZIONS FIRST NATIONAL BANK, as Lender

By:      /s/ Jennifer S. Christopulos
Name:     Jennifer S. Christopulos        
Title:    Senior Vice President
Zions First National Bank Division





Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Sunny S. Sanyal, certify that:

1.    I have reviewed this Quarterly Report on Form 10-Q of Varex Imaging Corporation (the “registrant”);
2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;    
4.    The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:    
a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)    Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)    Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.    The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Dated:
May 8, 2019
By:
/s/ Sunny S. Sanyal
 
 
 
Sunny S. Sanyal
 
 
 
President, Chief Executive Officer
 
 
 
 





Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Clarence R. Verhoef, certify that:

1.    I have reviewed this Quarterly Report on Form 10-Q of Varex Imaging Corporation (the “registrant”);
2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;    
4.    The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:    
a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)    Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)    Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.    The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Dated:
May 8, 2019
By:
/s/ Clarence R. Verhoef
 
 
 
Clarence R. Verhoef
 
 
 
Senior Vice President, Chief Financial Officer
 
 
 
 





Exhibit 32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Quarterly Report of Varex Imaging Corporation (the “Company”), on Form 10-Q for the quarter ended March 29, 2019 (the “Report”), I, Sunny S. Sanyal, President and Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002 that:

1.
the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Dated:
May 8, 2019
By:
/s/ Sunny S. Sanyal
 
 
 
Sunny S. Sanyal
 
 
 
President, Chief Executive Officer
 
 
 
 










Exhibit 32.2
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Quarterly Report of Varex Imaging Corporation (the “Company”), on Form 10-Q for the quarter ended March 29, 2019 (the “Report”), I, Clarence R. Verhoef, Senior Vice President and Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002 that:

1.
the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Dated:
May 8, 2019
By:
/s/ Clarence R. Verhoef
 
 
 
Clarence R. Verhoef
 
 
 
Senior Vice President, Chief Financial Officer