VAREX IMAGING CORPORATION 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 endedSeptember 27, 2019 . Forward-Looking Statements This Quarterly Report on Form 10-Q (this "Quarterly Report") contains "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995, which provides a "safe harbor" for statements about future events, products and future financial performance that are based on the beliefs of, estimates made by, and information currently available to the management ofVarex Imaging Corporation ("we," "our," "us," the "Company," "Varex," or "Varex Imaging"). The outcome of the events described in these forward-looking statements are subject to risks and uncertainties (including the risks and uncertainties contained in Part II, Item 1A - Risk Factors of this Quarterly Report), and actual results and the outcome or timing of certain events may differ significantly from those projected in these forward-looking statements or management's current expectations. Statements concerning: the impact of the ongoing COVID-19 pandemic on the global economy or the Company; industry or market segment outlook; market acceptance of or transition to new products or technology such as advanced X-ray tube and digital flat panel detector products; growth drivers; future orders, revenues, backlog, earnings or other financial results; liquidity and any statements using the terms "believe," "expect," "anticipate," "can," "should," "would," "could," "estimate," "may," "intended," "potential," and "possible" or similar statements are forward-looking statements that involve risks and uncertainties that could cause our actual results and the outcome and timing of certain events to differ materially from those projected or management's current expectations. Any forward-looking statement made in this Quarterly Report (including in any exhibits or documents incorporated by reference) is based only on information currently available to Varex and its management and speaks only as of the date on which it is made. By making forward-looking statements, we have not assumed any obligation to, and you should not expect us to, update or revise those statements because of new information, future events or otherwise, including the impact of the COVID-19 pandemic and the responses to it. OverviewVarex Imaging Corporation is a leading innovator, designer and manufacturer of X-ray imaging components including X-ray tubes, digital detectors, linear accelerators and other image processing solutions, which are key components of X-ray imaging systems. Our components are used in medical imaging as well as in industrial and security imaging applications. Global original equipment manufacturers ("OEM") incorporate our X-ray imaging components in their systems to detect, diagnose, protect and inspect. Varex has approximately 2,000 full-time equivalents employees, located at manufacturing and service center sites inNorth America ,Europe , andAsia . Our products are sold in three geographic regions: theAmericas , EMEA, and APAC. TheAmericas includesNorth America (primarilythe United States ) andLatin America . EMEA includesEurope ,Russia , theMiddle East ,India andAfrica . APAC includesAsia andAustralia . Revenues by region are based on the known final destination of products sold. Our success depends, among other things, on our ability to anticipate and respond to changes in our markets, the direction of technological innovation and the demands of our customers. We continue to invest in research and development and employ over 500 engineers. Combining this focus on innovation and product performance with strong long-term customer relationships allows us to partner with our customers to bring industry-leading products to the X-ray imaging market. We continue to work to improve the life and quality of our imaging components and leverage our scale as the largest X-ray imaging component supplier to provide cost-effective solutions for our customers. Demand for our products can also be impacted by geo-political factors, including the COVID-19 pandemic as well as tariffs on key imported materials used in manufacturing our products and on X-ray imaging products we sell to customers outsidethe United States . Trade conflicts betweenthe United States andChina has negatively impacted our business and are expected to continue.
Impact of COVID-19
The unprecedented nature of the COVID-19 pandemic and its impact on the global
economy has created a disruption to Varex's business which includes increased
uncertainty in demand for certain products for medical and industrial
applications, as well as increased variability in our supply chain and
manufacturing productivity. The economic downturn triggered by COVID-19 has led
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to significantly lower demand from our customers and delays in equipment
installations. In conjunction with this reduced forecast and uncertainty beyond
the forecast horizon, we evaluated our product offering and decided to
discontinue certain low margin, low demand products. As a result, we took
approximately $16 million in reserves related to the write-down of the value of
all associated inventory and any other associated assets.
The COVID-19 pandemic has had a significant effect on hospitals, clinics and
outpatient imaging centers as they have encountered declines in surgeries and
other elective procedures. Subsequently, they have reduced their capital
purchases of imaging equipment from OEM's which has led to lower demand for
x-ray imaging components. Additionally, equipment installations were delayed,
due to reduced access to healthcare institutions. Partially offsetting this has
been increased demand for imaging equipment used to diagnose respiratory
diseases, such as radiographic x-ray imaging systems and CT imaging systems. We
expect uncertainty related to the COVID-19 pandemic to continue for at least the
remainder of the current calendar year. The Company expects uncertainty in
demand to continue for at least the remainder of the current calendar year.
While we have implemented safeguards and procedures to counter the impact of the
COVID-19 pandemic, the full extent to which the COVID-19 pandemic has and will
directly or indirectly impact us, including our business, financial condition,
and results of operations, will depend on future developments that are highly
uncertain and cannot be estimated with certainty, including the further
mitigation efforts taken to contain it or treat its impact and the economic
impact on local, regional, national and international markets. We will continue
to actively monitor the situation and may take further actions that alter our
business operations as may be required by federal, state, or local authorities
or that we determine are in the best interests of our employees, customers,
suppliers, and stockholders.
Subsequent Measurement of
Goodwill is not amortized but is tested annually, or more often if impairment indicators are present, for impairment at a reporting unit level, based on a comparison of the fair value of the reporting unit with its carrying amount.Goodwill is tested for impairment via a one-step process by comparing the fair value of goodwill with its carrying amount. We recognize an impairment for the amount by which the carrying amount exceeds the fair value. We generally use both an income approach utilizing the discounted cash flow method ("DCF") and a market approach utilizing the public company market multiple method, when testing for impairment. In the third quarter of 2020, changes in facts and circumstances and general market declines from COVID-19 resulted in reduced operating results. We considered these circumstances and the potential long-term impact on cash flows associated with our reporting units and determined that an indicator of possible impairment existed within our Medical and Industrial reporting units. Accordingly, we performed a quantitative impairment analysis to determine the fair values of those reporting units. We used both an income approach utilizing the discounted cash flow method ("DCF") and a market approach utilizing the public company market multiple method. We developed multiple forecasted future cash flow scenarios for the reporting units with varied recovery timing and sales impact assumptions. Based on the output of the analysis, we determined that the fair values of both the Medical and Industrial reporting units exceeded their carrying amounts. Accordingly, no impairment charges were required as ofJuly 3, 2020 . However, an impairment charge was required for the Company's in-process R&D. The Company's Industrial reporting unit's fair value exceeded its carrying value by more than 20% and the Company's Medical reporting unit's fair value exceeded its carrying value by more than 30%. The carrying amount of goodwill for the Medical and Industrial reporting units was$173.0 million and$117.8 million , respectively. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated future annual net cash flows, income tax rates, discount rates, growth rates, market multiples, terminal value and other market factors. This fair value measurement was based on significant inputs not observable in the market and thus represents a Level 3 fair value measurement. If current expectations of future growth rates and margins, both in size and timing, are not met, if market factors outside of our control, such as discount rates, change, if market multiples decline, or if management's expectations or plans otherwise change, including as a result of the development of our global five-year operating plan, then one or more of our reporting units might become impaired in the future. The Company will continue to monitor the financial performance of and assumptions for its reporting units. A future impairment charge for goodwill could have a material effect on the Company's consolidated financial position and results of operations. Refer to Note 10,Goodwill and Intangible Assets for more information regarding goodwill. Operating Segments and Products Our Chief Executive Officer, who is our Chief Operating Decision Maker ("CODM"), evaluates our product groupings and measures our business performance in two reportable operating segments: Medical and Industrial. The segments align our products and service offerings with customer use in medical and industrial markets and are consistent with how the CODM evaluates the business for the allocation of resources. The CODM allocates resources to and evaluates the financial performance of each operating segment primarily based on revenues and gross margin. 32 -------------------------------------------------------------------------------- Table of Contents Medical In our Medical business segment, we design, manufacture, sell and service X-ray imaging components for use in a range of radiographic or fluoroscopic imaging applications including, computed tomography ("CT"), mammography, oncology, cardiac, surgery, dental, and computer-aided detection. We provide a broad range of X-ray imaging components for Medical customers, including X-ray tubes, digital detectors, high voltage connectors, image-processing software and workstations, computer-aided diagnostic software, collimators, automatic exposure control devices, generators, heat exchangers, ionization chambers and buckys. A significant portion of our revenues come from the sales of high-end X-ray tubes used in CT imaging and high-end dynamic digital detectors used in fluoroscopic and 3D dental imaging applications. These upper-tier imaging components are characterized by increased levels of technological complexity, engineering and intellectual property that typically allow these products to have a higher sales price and gross margin. The digital detector market has matured from initial product introductions that were made over 15 years ago. For the past few years, we have experienced price erosion for these products, predominantly in the highly-competitive market for radiographic detectors. We anticipate this trend will continue in the foreseeable future. Our X-ray imaging components are primarily sold to OEM customers that incorporate our products into their X-ray imaging systems for a variety of medical modalities and industrial applications. To a much lesser extent, we also sell our X-ray imaging components to independent service companies, distributors and directly to end-users for replacement purposes. The COVID-19 pandemic has had a significant effect on hospitals, clinics and outpatient imaging centers as they have encountered declines in surgeries and other elective procedures. Subsequently, they have reduced their capital purchases of imaging equipment from OEM's which has led to lower demand for x-ray imaging components. Additionally, equipment installations were delayed, due to reduced access to healthcare institutions. Partially offsetting this has been increased demand for imaging equipment used to diagnose respiratory diseases, such as radiographic x-ray imaging systems and CT imaging systems. The Company expects uncertainty in demand to continue for at least the remainder of the current calendar year. InChina , 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 inChina . Over the long-term, we anticipate thatChina -based revenues will increase as a percentage of our revenues. To help mitigate the impact of trade war conflicts betweenthe United States andChina , we have implemented changes to secure more non-China sources of supply of parts and materials used to manufacture our X-ray imaging products. We continue to expand manufacturing capabilities at our facilities inChina ,Germany andthe Philippines . Industrial In our Industrial business segment, we design, manufacture, sell and service X-ray imaging products for use in a number of markets, including security applications, such as cargo screening at ports and borders and baggage screening at airports, as well as nondestructive testing and inspection applications used in a number of other markets. Our industrial products include Linatron® X-ray linear accelerators, X-ray tubes, digital detectors and high voltage connectors. In addition, we provide proprietary image-processing and detection software designed to work with these other Varex products to provide package solutions to our Industrial customers. The security market primarily consists of airport security for carry-on baggage, checked baggage and palletized cargo, as well as cargo security for the screening of trucks, trains and cargo containers at ports and borders. The-end customers for border protection systems are typically government agencies, many of which are in oil-based economies and war zones where there has been significant year-over-year variation in buying patterns. The non-destructive testing market utilizes X-ray imaging to scan items for inspection of manufacturing defects and product integrity in a wide range of industries including the aerospace, automotive, oil and gas, food packaging, metal castings and 3D printing industries. We provide X-ray sources, digital detectors, high voltage connectors and image processing software to OEM customers, system integrators and manufacturers. In addition, new applications for X-ray sources are being developed, such as sterilization of food and its packaging. 33 -------------------------------------------------------------------------------- Table of Contents The economic downturn triggered by the COVID-19 pandemic has reduced the demand for x-ray imaging equipment utilized in the non-destructive testing market as manufacturers have focused on cash preservation which includes reduced spending for capital equipment. Additionally, the unprecedented decrease in passenger air traffic has led to decrease in demand in the security market. The Company expects uncertainty in demand to continue for at least the remainder of the current calendar year. Critical Accounting Policies and Estimates The preparation of our condensed consolidated financial statements and related disclosures in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on historical experience and on various other factors that we believe are reasonable under the circumstances. Our critical accounting policies that are affected by accounting estimates require us to use judgments, often as a result of the need to make estimates and assumptions regarding matters that are inherently uncertain, and actual results could differ materially from these estimates. We periodically review our accounting policies, estimates and assumptions and make adjustments when facts and circumstances dictate. Refer to our Annual Report on Form 10-K for the fiscal year endedSeptember 27, 2019 filed with theSEC onDecember 20, 2019 and Note 1 "Summary of Significant Accounting Policies" of the notes to the condensed consolidated financial statements of this report for further details. Our critical accounting policies that are affected by accounting estimates include revenue recognition, impairment of investments, assessment of recoverability of goodwill and intangible assets, valuation of derivative instruments, valuation of warranty obligations, and taxes on earnings. Such accounting policies require us to use judgments, often as a result of the need to make estimates and assumptions regarding matters that are inherently uncertain, and actual results could differ materially from these estimates. There have been no material changes to our critical accounting policies, estimates and assumptions or the judgments affecting the application of those estimates and assumptions since the filing of our Annual Report on Form 10-K for year endedSeptember 27, 2019 , except for the adoption of Accounting Standards Update ("ASU") 2016-02, Leases ("Topic 842"), referred to as ASC 842, effectiveSeptember 28, 2019 , and the adoptions of ASU 2017-04, Intangibles -Goodwill and Other, which simplifies the test for goodwill impairment, effectiveApril 4, 2020 . Fiscal Year Our fiscal year is a 52 or 53-week period ending on the Friday nearestSeptember 30 . Fiscal year 2020 is the 53-week period endingOctober 2, 2020 . Fiscal year 2019 was a 52-week period that ended onSeptember 27, 2019 . The fiscal quarters endedJuly 3, 2020 andJune 28, 2019 were both 13-week periods. Discussion of Results of Operations for the Three Months EndedJuly 3, 2020 Compared to the Three Months EndedJune 28, 2019 Revenues Three Months Ended (In millions) July 3, 2020 June 28, 2019 $ Change % Change Medical$ 137.6 $ 151.6 $ (14.0) (9.2) % Industrial 33.6 45.1 (11.5) (25.5) % Total revenues$ 171.2 $ 196.7 $ (25.5) (13.0) % Medical as a percentage of total revenues 80.4 % 77.1 % Industrial as a percentage of total revenues 19.6 % 22.9 % Medical revenues decreased by$14.0 million primarily due to decreased sales of digital detectors for dynamic imaging applications, partially offset by increased sales ofCT X -ray tubes and digital detectors for radiographic X-ray imaging applications.
Industrial revenues decreased
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Gross Margin
Three Months Ended
(In millions) July 3, 2020 June 28, 2019 $ Change % Change
Medical $ 18.0 $ 44.2 $ (26.2) (59.3) %
Industrial 8.3 16.5 (8.2) (49.7) %
Total gross margin $ 26.3 $ 60.7 $ (34.4) (56.7) %
Medical gross margin % 13.1 % 29.2 %
Industrial gross margin % 24.7 % 36.6 %
Total gross margin % 15.4 % 30.9 %
The decrease in total gross margin percentage was due to the decrease in
both medical and industrial gross margin percentages. The decrease in medical
gross margin percentage was primarily due to an unfavorable mix of lower margin
products and an approximate $13 million charge for the write-down of inventory
associated with discontinued products and restructuring activity. The industrial
gross margin percentage decreased due to an unfavorable mix of lower margin
products and an approximate $3 million charge for the write-down of inventory
associated with discontinued products and restructuring activity.
Operating Expenses
Three Months Ended
(In millions) July 3, 2020 June 28, 2019 $ Change % Change
Research and development $ 19.0 $ 20.9 $ (1.9) (9.1) %
As a percentage of total revenues 11.1 % 10.6 %
Selling, general and administrative
0.6 %
As a percentage of total revenues 18.3 % 15.9 %
Impairment of intangible assets
1.6 % 2.0 %
Operating expenses $ 53.1 $ 56.1 $ (3.0) (5.3) %
As a percentage of total revenues 31.0 % 28.5 %
Research and Development
We are committed to investing in the business to support long-term growth
and believe long-term research and development expenses of approximately 8% to
10% of annual revenues is the appropriate range that will allow us to innovate
and bring new products to market for our global OEM customers. On a dollar
basis, research and development costs decreased for the third quarter, but
because revenue declined, increased to 11.1% of revenues for the third quarter
of 2020.
Selling, General and Administrative
Selling, general and administrative expenses for the third quarter of 2020
increased to 18.3% of total revenues primarily due to lower revenues during the
three months ended July 3, 2020 .
Interest and Other Expense, Net
The following table summarizes the Company's interest and other expense,
net:
Three Months Ended
(In millions) July 3, 2020 June 28, 2019 $ Change
Interest income $ - $ - $ -
Interest expense (6.9) (5.1) (1.8)
Other expense, net (6.1) (0.1) (6.0)
Interest and other expense, net
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Interest and other expense, net increased during the three months ended July
3, 2020 . Interest expense increased due to the interest related to our
Convertible Notes issued during June 2020 and an increase in our interest rate
margin during the three months ended July 3, 2020 . Other expense, net increased
during the third quarter of 2020, due to the impairment of certain investments
in privately-held companies, an increase in the fair value of the deferred
consideration related to the Direct Conversion acquisition and a decrease in our
income from investments in privately-held companies.
Taxes on (Loss) Earnings
For the three months ended July 3, 2020 , we recognized an income tax benefit
of $11.6 million on a $39.8 million pre-tax loss. For the three months ended
June 28, 2019 , we recognized an income tax benefit of $0.7 million on $0.6
million of pre-tax loss.
Discussion of Results of Operations for the Nine Months Ended July 3, 2020
Compared to the Nine Months Ended June 28, 2019
Revenues
Nine Months Ended
(In millions) July 3, 2020 June 28, 2019 $ Change % Change
Medical $ 448.6 $ 444.4 $ 4.2 0.9 %
Industrial 119.7 133.8 (14.1) (10.5) %
Total revenues $ 568.3 $ 578.2 $ (9.9) (1.7) %
Medical as a percentage of
total revenues 78.9 % 76.9 %
Industrial as a percentage of
total revenues 21.1 % 23.1 %
Medical revenues increased by
Industrial revenues decreased $14.1 million due to decreased sales of linear
accelerators for cargo inspection and other non-destructive inspection
applications.
Gross Margin
Nine Months Ended
(In millions) July 3, 2020 June 28, 2019 $ Change % Change
Medical $ 105.2 $ 135.4 $ (30.2) (22.3) %
Industrial 39.8 49.7 (9.9) (19.9) %
Total gross margin $ 145.0 $ 185.1 $ (40.1) (21.7) %
Medical gross margin % 23.5 % 30.5 %
Industrial gross margin % 33.2 % 37.1 %
Total gross margin % 25.5 % 32.0 %
The decrease in total gross margin percentage was due to the decrease in
both medical and industrial gross margin percentage. The decrease in medical
gross margin percentage was primarily due to an unfavorable mix of lower margin
products, additional reserves for the settlement of a German customs audit,
higher warranty and slow-moving inventory reserves, the write-down of inventory
associated with discontinued products, and customer price decreases for digital
detectors. The industrial gross margin percentage decreased due to an
unfavorable mix of lower margin products and the write-down of inventory
associated with discontinued products..
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Operating Expenses
Nine Months Ended
(In millions) July 3, 2020 June 28, 2019 $ Change % Change
Research and development $ 61.6 $ 58.5 $ 3.1 5.3 %
As a percentage of total revenues 10.8 % 10.1 %
Selling, general and administrative
17.9 % 16.0 %
Impairment of intangible assets
0.5 % 0.8 %
Operating expenses $ 163.1 $ 155.6 $ 7.5 4.8 %
As a percentage of total revenues 28.7 % 26.9 %
Research and Development
We are committed to investing in the business to support long-term growth
and believe long-term research and development expenses of approximately 8% to
10% of annual revenues is the appropriate range that will allow us to innovate
and bring new products to market for our global OEM customers. Research and
development costs increased to 10.8% of revenues due to the addition of Direct
Conversion for the nine months ended July 3, 2020 .
Selling, General and Administrative
Selling, general and administrative expenses for the nine months ended July
3, 2020 , increased to 17.9% primarily due to higher audit and consulting fees,
an extra week of expenses in the period and the addition of Direct Conversion.
Interest and Other Income (Expense), Net
The following table summarizes the Company's interest and other income
(expense), net:
Nine Months Ended
(In millions) July 3, 2020 June 28, 2019 $ Change
Interest income $ 0.1 $ 0.1 $ -
Interest expense (16.9) (15.7) (1.2)
Other expense, net (4.5) (2.6) (1.9)
Interest and other expense, net
Interest and other expense, net increased during the nine months ended July
3, 2020 . Interest expense increased due to the interest related to our
Convertible Notes issued during June 2020 . Other expense, net increased during
the nine months ended July 3, 2020 due to the impairment of certain investments
in privately-held companies and a decrease in the fair value of the deferred
consideration related to the Direct Conversion acquisition.
Taxes on (Loss) Earnings
For the nine months ended July 3, 2020 , we recognized an income tax benefit
of $(10.9) million on $42.1 million of pre-tax loss before tax. For the nine
months ended June 28, 2019 , the Company recognized income tax expense of $3.7
million on $11.3 million of pre-tax income.
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate cash to fund our
operating and investing activities. As part of a series of measures to better
enable the Company to weather the extraordinary business challenges associated
with the COVID-19 global pandemic, we have taken additional measures to manage
our cash. These measures include temporary reductions to employee compensation
and matching retirement contributions, as well as furloughs, mandatory unpaid
leave for U.S. employees that are not directly related to the production of our
products and a reduction of the Company's workforce by approximately 94
employees. We
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continue to evaluate additional cash preserving actions and other sources of
capital as needed to secure liquidity in a rapidly changing environment.
The Company's Credit Agreement, as defined in Note 11, Borrowings, contains
financial covenants, including certain leverage ratio covenants. The Company was
in compliance with all financial covenants as of July 3, 2020 . However, the
adverse effects of the COVID-19 pandemic on the Company's financial condition
and results of operations are expected to be more persistent and have been more
severe than previously estimated in the prior quarter forecasted financial
results. Specifically, in conjunction with analyzing the results for the
Company's third quarter, the Company now believes that reduced demand in the
Company's industrial segment and for certain higher end medical products will
continue to negatively impact revenues, gross margin and the other items used to
calculate the Company's financial covenants contained in its Credit Agreement.
Based on the Company's current forecasts, it is probable that the Company will
be in violation of certain leverage ratio covenants contained in its Credit
Agreement within the twelve-month period following the issuance of these
financial statements, including as early as the end of the Company's fiscal year
end 2020. Failure to comply with the covenants, if not amended or waived, would
result in an event of default under the Credit Agreement and the acceleration of
the outstanding balance of the loans thereunder. If an event of default under
the Credit Agreement occurs, then pursuant to cross default and/or cross
acceleration clauses, substantially all of the Company's other outstanding debt
and derivative contract payables would become due, and all debt and derivative
contracts could be terminated, which would have a material adverse impact to the
Company's operations and liquidity as the Company currently does not have the
financial resources to satisfy such obligations if they were to become due and
payable. These events and conditions raise substantial doubt about the Company's
ability to continue as a going concern within the twelve-month period following
the issuance of these financial statements.
The Company is actively pursuing various options to prevent an event of default
from occurring under the Credit Agreement. The Company is implementing actions
to improve its financial results and other items used to calculate the financial
covenants,, such as accelerating the closure of its Santa Clara facility, the
previously announced reduction in force, austerity programs related to outside
services, and other appropriate actions. The Company is also taking actions to
improve cash flow such as working capital reductions and reduced spending for
property, plant and equipment, as well as pursuing potential additional
fundraising to modify, supplement, or replace its Credit Agreement. While the
Company has and continues to take actions to mitigate the risk of an event of
default under the Credit Agreement, there is no assurance that it will be
successful in doing so. The Company's unaudited condensed consolidated financial
statements have been prepared on a going concern basis and do not reflect any
adjustments that might result if the Company is unable to continue as a going
concern.
Cash and Cash Equivalents
The following table summarizes our cash and cash equivalents:
(In millions) July 3, 2020 September 27, 2019 $ Change
Cash and cash equivalents $ 87.4 $ 29.9 $ 57.5 Borrowings
The following table summarizes the changes in our debt outstanding: (In millions)
July 3, 2020 September 27, 2019 $ Change
Current portion of Term Facility $ 26.8 $ 29.4 $ (2.6)
Current portion of other long-term debt 0.8 1.3 (0.5)
Revolving Credit Facility - 59.0 (59.0)
Long-term portion of Term Facility 238.7 308.6 (69.9)
Convertible Notes 200.0 - 200.0
Long-term portion of other debt 8.2 2.5 5.7
Total debt outstanding, gross 474.5 400.8 73.7
Debt issuance costs - Credit Agreement (5.0) (5.7) 0.7
Unamortized discount - Convertible Notes (52.4) - (52.4)
Total debt outstanding, net $ 417.1 $ 395.1 $ 22.0
Cash Flows
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Nine Months Ended
(In millions) July 3, 2020 June 28, 2019
Net cash flow provided by (used in):
Operating activities $ 25.0 $ 49.0
Investing activities (23.2) (86.4)
Financing activities 56.7 14.7Effects of exchange rate changes on cash and cash equivalents and restricted cash
(1.0) (0.7)
Net increase in cash and cash equivalents and restricted cash
Net Cash Provided by Operating Activities. Cash from operating activities
consists primarily of the net (loss) earnings adjusted for certain non-cash
items, including share-based compensation, depreciation, amortization of
intangible assets, deferred income taxes, income from equity investments and the
effect of changes in operating assets and liabilities.
For the nine months ended July 3, 2020 , compared to the nine months ended
June 28, 2019 , cash provided by operating activities were as follows:
•Net (loss) earnings were $(31.2) million compared to $7.6 million
•Non-cash adjustments to net earnings of $50.8 million compared to $44.5 million
•Operating assets and liabilities activity:
•Accounts receivable decreased by $31.6 million compared to $25.1 million ,
•Inventories increased by $50.1 million compared to $26.2 million ,
•Prepaid expenses and other assets decreased by $7.7 million compared to an
increase of $4.7 million ,
•Accounts payable increased by $21.7 million compared to a decrease of $4.3
million , and
•Accrued liabilities and other current and long-term operating liabilities
decreased by $11.0 million compared to $0.5 million .
Net Cash Used in Investing Activities. Net cash used in investing activities
was $23.2 million and $86.4 million for the nine months ended July 3, 2020 and
June 28, 2019 , respectively. The decrease in cash used in investing activities
was primarily due to a business acquisition during the nine months ended June
28, 2019 .
Net Cash Provided by Financing Activities. Financing activities for the nine
months ended July 3, 2020 consisted of the issuance of $200.0 million in
aggregate principal amount of 4.00% unsecured convertible senior notes due 2025
("Convertible Notes"). The net proceeds from the issuance of the Convertible
Notes, after deducting transaction fees, were approximately $193.1 million . In
connection with offering the Convertible Notes, we separately entered into
privately negotiated convertible note hedge transactions (collectively, the
"Hedge Transactions"). The Hedge Transactions cover, subject to customary
anti-dilution adjustments, the number of shares of our common stock that
initially underlie the Convertible Notes. We also entered into warrant
transactions (collectively, the "Warrant Transactions" and, together with the
Hedge Transactions, the "Call Spread Transactions"), whereby we sold warrants at
a higher strike price relating to the same number of shares of our common stock
that initially underlie the Convertible Notes, subject to customary
anti-dilution adjustments. We used $11.2 million of the net proceeds from the
issuance of the Convertible Notes to pay the cost of the Call Spread
Transactions.
Additionally, during the nine months ended July 3, 2020 , we had borrowings under
our credit agreement of $91.7 million and repayments of borrowings of $218.0
million . Financing activities for the nine months ended June 28, 2019 consisted
of borrowings under our credit agreement of $79.0 million , and repayments of
borrowings of $65.7 million .
Days Sales Outstanding
Trade accounts receivable days sales outstanding ("DSO") was 58 days at
July 3, 2020 and 63 days at September 27, 2019 . Our accounts receivable and DSO
are impacted by a number of factors, primarily including the timing of product
shipments, collections performance, payment terms, the mix of revenues from
different regions and the effects of economic instability.
Contractual Obligations
In October 2013 , we entered into an amended agreement with dpiX and other
parties that, among other things, provides us with the right to 50% of dpiX's
total manufacturing capacity produced after January 1, 2014 . The amended
agreement requires us to pay for 50% of the fixed costs (as defined in the
amended agreement), as determined at the beginning of each calendar year. In
January 2020 , the fixed cost commitment was determined and approved by the dpiX
board of directors to be $12.7 million for calendar year 2020. As of July 3,
2020 , the Company had $6.4 million fixed cost commitments related to this
agreement remaining for calendar
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year 2020. The amended agreement will continue unless the ownership structure of
dpiX changes (as defined in the amended agreement).
In October 2015 , we committed to grant the noncontrolling shareholders of
MeVis: (1) an annual recurring net compensation of €0.95 per MeVis share; and
(2) a put right for their MeVis shares at €19.77 per MeVis share. As of July 3,
2020 , noncontrolling shareholders together held approximately 0.5 million shares
of MeVis, representing 26.5% of the outstanding shares. See Note 12, "Redeemable
Noncontrolling Interests" of the notes to the condensed consolidated financial
statements for more information.
Contingencies
From time to time, we are a party to or otherwise involved in legal
proceedings, claims and government inspections or investigations, customs and
duties audits and other loss contingency matters, both inside and outside the
United States , arising in the ordinary course of our business or otherwise. Such
matters are subject to many uncertainties and outcomes are not predictable with
assurance.
Off-Balance Sheet Arrangements
In conjunction with the sale of our products in the ordinary course of
business, we provide standard indemnification of business partners and customers
for losses suffered or incurred for property damages, death and injury and for
patent, copyright or any other intellectual property infringement claims by any
third parties with respect to our products. The terms of these indemnification
arrangements are generally perpetual. Except for losses related to property
damages, the maximum potential amount of future payments we could be required to
make under these arrangements is unlimited. As of July 3, 2020 , we have not
incurred any material costs to defend lawsuits or settle claims related to these
indemnification arrangements. As a result, we believe the estimated fair value
of these arrangements is minimal.
We have indemnification obligations to our directors and officers and
certain of our employees that serve as officers or directors of our foreign
subsidiaries that may require us to indemnify our directors and officers and
those certain employees against liabilities that may arise by reason of their
status or service as directors or officers, and to advance their expenses
incurred as a result of any legal proceeding against them as to which they could
be indemnified. There is no maximum limit on the indemnification that may be
required under these obligations. As of July 3, 2020 , we have not incurred any
material costs related to these indemnification obligations. As a result, we
believe the estimated fair value of these obligations is minimal.
Recent Accounting Standards or Updates Not Yet Effective
See Note 1, "Summary of Significant Accounting Policies" of the notes to the
condensed consolidated financial statements for a description of recent
accounting standards, including the expected dates of adoption and the estimated
effects on our condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
We are exposed to four primary types of market risks: foreign currency exchange rate risk, credit and counterparty risk, interest rate risk and commodity price risk. Foreign Currency Exchange Rate Risk
A significant portion of our customers are outside the United States and our
products are generally priced in U.S. Dollars. A strong U.S. Dollar may result
in pricing pressure for our customers that are located outside the United States
and that conduct their businesses in currencies other than the U.S. Dollar. Such
pricing pressure has caused, and could continue to cause, some of our customers
to ask for discounted prices, delay purchasing decisions, consider moving to
in-sourcing supply of components or migrate to lower cost alternatives. In
addition, because our business is global and some payments may be made in local
currency, fluctuations in foreign currency exchange rates can impact our
revenues and expenses and the profitability in U.S. Dollars of products and
services that we provide in foreign markets.
We may enter into foreign currency forward and option contracts with
financial institutions to protect against foreign exchange risks associated with
certain existing assets and liabilities, and net investments in foreign
subsidiaries. We generally hedge portions of foreign currency exposure on the
balance sheet, typically for one month. In addition, we hold a cross-currency
swap between the Euro and U.S. Dollar as a net investment hedge of our
acquisition of Direct Conversion. Depending on the spot rate between the Euro
and U.S. Dollar at the time of settlement and whether we have sufficient Euros
available, we may have to borrow incrementally in U.S. Dollars to settle this
obligation. However, we may choose not to hedge certain foreign exchange
exposures for a
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variety of reasons including, but not limited to, accounting considerations or
the prohibitive economic cost of hedging particular exposures.
Credit and Counterparty Risk
We use a centralized approach to manage substantially all of our cash and to finance our operations. Our cash and cash equivalents may be exposed to a concentration of credit risk and we may also be exposed to credit risk and interest rate risk to the extent that we enter into credit facilities.
We perform ongoing credit evaluations of our customers and we maintain what
we believe to be strong credit controls in evaluating and granting customer
credit, including performing ongoing evaluations of our customers' financial
condition and creditworthiness and often using letters of credit and requiring
industrial customers to provide a down payment.
Interest Rate Risk
In June 2020 , we issued the Convertible Notes with an aggregate principal amount
of $200 million . We carry the Convertible Notes at face value less the
unamortized debt discount and issuance costs on our consolidated balance sheet.
The Convertible Notes have a fixed interest rate; therefore, we have no
financial statement risk associated with changes in interest rates with respect
to the Convertible Notes. The fair value of the Convertible Notes changes when
certain factors such as the market price of our stock or market interest rates
change.
At July 3, 2020 , we had total borrowings under our Credit Agreement of $260.5
million (net of deferred loan costs). Borrowings under our Credit Agreement bear
interest at floating interest rates. As a result, we are exposed to fluctuations
in interest rates to the extent of our borrowings under the Credit Agreement. As
part of our overall risk management program, we entered into several interest
rate swaps designed as cash flow hedges, to hedge the floating LIBOR components
of our interest rate which represented a notional value of $241.9 million of our
debt as of July 3, 2020 . See Note 7, "Financial Derivatives and Hedging
Activities" for further information on hedging activities. Excluding the amount
of our borrowings that is subject to fixed interest rates under our interest
rate swaps and Convertible Notes, and assuming the current level of borrowings
remained the same, we estimate that our interest expense would change by
approximately $0.2 million annually for each one percentage point change in the
average interest rate under our borrowings.
Commodity Price Risk
We are exposed to market risks related to volatility in the prices of raw
materials used in our products. The prices of these raw materials fluctuate in
response to changes in supply and demand fundamentals and our product margins
and level of profitability tend to fluctuate with changes in these raw materials
prices. We try to protect against such volatility through various business
strategies. During the three months ended July 3, 2020 , we did not have any
commodity derivative instruments in place to manage our exposure to price
changes.
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