Business Context and Reporting Period
This Form 8-K filing by Varex Imaging Corporation (VREX) reports events occurring on September 30, 2020. The filing details a significant capital restructuring involving the completion of a private debt offering and the establishment of a new credit facility to replace prior indebtedness.
Key Financial Metrics and Capital Structure
- Debt Issuance: Completed a private offering of $300 million aggregate principal amount of 7.875% Senior Secured Notes due 2027 (the "2027 Notes").
- Interest Terms: The 2027 Notes bear interest at 7.875% per annum, payable semi-annually starting April 15, 2021.
- New Credit Facility: Entered into a senior secured asset-based revolving credit agreement (ABL Credit Facility) with an initial aggregate principal amount of up to $100 million.
- Debt Repayment: Used approximately $265.5 million of net proceeds from the 2027 Notes offering to pay in full all amounts outstanding under the Previous Credit Facility (dated May 1, 2017).
- Liquidity and Availability: The ABL Credit Facility provides availability based on accounts receivable, inventory, and specific real property. It includes an accordion feature allowing for an additional $75 million increase subject to conditions.
Material Changes Versus Prior Period
The most significant change is the termination of the Previous Credit Facility, which previously contained financial covenants (including leverage ratios) that the Company forecasted it would likely violate. This potential violation had previously raised substantial doubt about the Company's ability to continue as a going concern in its Form 10-Q for the quarter ended July 3, 2020. The new capital structure mitigates this risk as the 2027 Notes contain no financial covenants, and the ABL Credit Facility's financial covenant is a "springing" fixed charge coverage ratio that only applies when excess availability falls below a specified threshold.
Outlook, Risks, and Management Commentary
- Going Concern Status: Management indicates that the specific events and conditions giving rise to substantial doubt about the Company's ability to continue as a going concern have been mitigated by the completion of these transactions.
- Covenants and Restrictions: The new Indenture and ABL Credit Agreement impose customary covenants limiting the ability to incur additional indebtedness, grant liens, sell assets, or make restricted payments. The 2027 Notes are secured by a first priority lien on certain assets and a second priority lien on assets securing the ABL facility.
- Redemption Terms: The Company may redeem the 2027 Notes at a premium prior to October 15, 2023, including a "make-whole" premium or specific percentages based on equity offering proceeds. Mandatory redemption may be triggered by asset sales or change of control events.
- Events of Default: Both agreements include standard events of default, including payment failures, bankruptcy, and cross-default provisions if other material indebtedness defaults.
Investor Verification Checklist
- Verify the exact amount of net proceeds received from the $300 million offering after deducting underwriting discounts and expenses.
- Confirm the current utilization level of the new $100 million ABL Credit Facility and the resulting excess availability.
- Review the full text of the Indenture and ABL Credit Agreement (to be filed as exhibits to the Form 10-K) for specific definitions of "excess availability" and the threshold triggering the springing financial covenant.
- Assess the impact of the 7.875% interest rate on future cash flow requirements compared to the previous credit facility terms.
- Monitor compliance with the new covenants regarding asset sales and restricted payments to ensure no immediate events of default are triggered.