Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis contain forward-looking statements relating to future events or our future financial or operating performance that involve risks and uncertainties, as set forth above under "Forward-Looking Statements." Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors described in this Annual Report on Form 10-K.
Our Business
Varex Imaging Corporation is a leading innovator, designer and manufacturer of X-ray imaging components including X-ray tubes, flat panel and photon counting detectors and accessories, linear accelerators, and image software processing solutions, which
30
Table of Contents
are critical components of a variety of X-ray based imaging equipment, and stand-alone X-ray based systems in select application areas. Our success depends, among other things, on our ability to anticipate and respond to changes in our business, the direction of technological innovation, and the demand from our customers. For additional information on our business, see Item 1 "Business".
Impact of General Economic Environment
We remain cautious about the general economic environment as many factors remain dynamic and unpredictable. The uncertain economic and geopolitical environment, supply chain and logistic challenges, and geopolitical tensions and local conflicts have contributed to, and may continue to contribute to, inflation, higher interest rates and capital costs, increased shipping costs, supply shortages, increased costs of labor and materials, exchange rate volatility, increased tariffs, and other similar effects.
We experienced fewer supply chain, manufacturing, and logistics challenges in fiscal year 2024 than in fiscal year 2023. However, shortages of certain materials and delivery delays from some suppliers caused, and may in the future cause, delays in manufacturing products, as well as operational and customer order fulfillment challenges. In addition, since late 2023 our Medical business has been negatively impacted by the Chinese government's anti-corruption campaign related to the healthcare industry, which we expect to continue at some level through fiscal year 2025. We continue to observe cautious purchasing behaviors by our customers, which we expect to subside by calendar year-end 2024. The impact to our business from potential changes to tariffs as a result of the outcome of the recent United States presidential and congressional elections is unknown at this time. We continue to monitor developments in this area.
For additional information on risks related to supply chain and logistics challenges, cost increases, changes in U.S. and worldwide economic conditions, geopolitical tensions, and other risks that could impact our results, see Item 1A "Risk Factors".
Fiscal Year
Our fiscal year is the 52- or 53-week period ending on the Friday nearest September 30. Fiscal year 2024 was the 52-week period that ended September 27, 2024, fiscal year 2023 was the 52-week period that ended September 29, 2023, and fiscal year 2022 was the 52-week period that ended September 30, 2022.
Results of Operations
For a discussion and analysis of our year-over-year changes, financial condition, and results of operations for the fiscal years ended September 29, 2023 and September 30, 2022 refer to Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our annual report on Form 10-K for the fiscal year ended September 29, 2023, filed with the SEC on November 16, 2023. Our year-over-year changes, financial condition, and results of operations for the fiscal years ended September 27, 2024 and September 29, 2023 are set forth below.
Comparison of Results of Operations for Fiscal Years 2024 and 2023
Revenues, net
Medical as a percentage of total revenues 71.7 % 75.4 % 78.5 %
Industrial as a percentage of total revenues 28.3 % 24.6 % 21.5 %
Medical revenues decreased $91.6 million in fiscal year 2024 compared to 2023 primarily due to lower sales in our China business, as well as decreased sales of fluoroscopy, oncology, and dental applications.
Industrial revenues increased $9.2 million due to increased sales of security inspection products and industrial tubes.
Revenues by Region
31
Table of Contents
Americas as a percentage of total revenues 32.9 % 31.5 % 31.8 %
EMEA as a percentage of total revenues 34.6 % 32.5 % 32.7 %
APAC as a percentage of total revenues 32.6 % 35.9 % 35.5 %
The Americas revenues decreased $15.3 million in fiscal year 2024 compared to 2023 primarily due to decreased sales of digital detectors. EMEA revenues decreased $10.4 million primarily due to decreased sales of digital detectors, partially offset by increased sales in security inspection products. APAC revenues decreased $56.7 million primarily due to decreased sales of X-ray tubes and digital detectors.
Gross Profit
The Medical segment gross profit decreased $28.8 million in fiscal year 2024 compared to 2023 primarily due to lower volumes of X-ray tubes and digital detectors.
The Industrial segment gross profit decreased $4.6 million in fiscal year 2024 compared to 2023 primarily as a result of decreased volumes of digital detectors, partially offset by an increase in the sale of security inspection products.
Operating Expenses
As a percentage of total revenues 10.7 % 9.5 % 9.0 %
As a percentage of total revenues 17.0 % 14.4 % 13.8 %
As a percentage of total revenues 27.7 % 23.9 % 22.7 %
Research and Development
Research and development costs for fiscal year 2024 increased to 10.7% of revenues primarily due to increased spending on material costs supporting research, partially offset by decreased development initiatives costs in the current fiscal year when compared to the prior fiscal year. We are committed to investing in research and development efforts to support long-term growth objectives by bringing new and innovative products to market for our customers.
Selling, General and Administrative
Selling, general and administrative expenses as a percentage of total revenues increased to 17.0% for fiscal year 2024 from 14.4% for fiscal year 2023 primarily due to decreased revenue, increased fixed cost commitments to a supplier, increased litigation costs, and increased severance costs, partially offset by lower intangible asset amortization expense.
Interest and Other Expense, Net
The following table summarizes our interest and other expense, net:
32
Table of Contents
Interest and other expenses, net $ (27.1) (41)% $ (45.8) 5% $ (43.7)
Interest income increased in fiscal year 2024 compared to fiscal year 2023 primarily due to an increase in the average balance of investments in marketable debt securities during fiscal year 2024 when compared to the average balance during fiscal year 2023.
Interest expense increased in fiscal year 2024 compared to fiscal year 2023 primarily due to the termination of the ABL facility which resulted in the recognition of $0.6 million of the remaining unamortized deferred issuance costs.
Other expense, net decreased in fiscal year 2024 compared to fiscal year 2023 primarily due to a gain on business acquisition and decreased losses in certain investments in privately-held companies and equity investments, partially offset by increased foreign exchange expense.
Taxes on Income
Fiscal Years
We had an income tax expense of $52.2 million and an income tax benefit of $17.4 million, resulting in effective rates of 1,044.0% and (55.6)%, for fiscal years 2024 and 2023, respectively.
During fiscal year 2024, our effective tax rate varied from the U.S. federal statutory rate of 21% primarily due to the unfavorable impact of U.S. deferred tax attributes and losses in certain foreign jurisdictions for which a valuation allowance is provided as well as profit in foreign jurisdictions with statutory tax rates greater than 21%. These unfavorable items were partially offset by the favorable impact of U.S. tax reform regarding international provisions, R&D credits, and return to provision adjustments.
During fiscal year 2023, our effective tax rate varied from the U.S. federal statutory rate of 21% primarily due to the favorable impact of the release of the U.S. valuation allowance, U.S. tax reform regarding international provisions, R&D credits, and return to provision adjustments. These favorable items were partially offset by the unfavorable impact of profit in foreign jurisdictions with statutory tax rates greater than 21%.
We estimated the fiscal year 2024 GILTI (global intangible low-taxed income), BEAT (base-erosion anti-abuse tax), FDII (foreign-derived intangible income), limitations on interest expense deductions, and other components of U.S. tax reform, and have included these amounts in the calculation of the fiscal year 2024 tax provision. We made an accounting policy election, as allowed by the SEC and FASB, to recognize the impact of GILTI as a period cost if and when incurred.
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate cash to fund our operations, including working capital and investing activities. We believe that our operating cash flow, cash on our balance sheet, availability under our Revolving Credit Facility and Equipment Credit Facility, and our ability to access the credit and capital markets are sufficient to meet our anticipated operating activities and cash commitments for at least the next 12 months and 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-term and long-term basis. We are currently not aware of any trends or demands, commitments, events, or uncertainties that will result in or that are reasonably likely to result in a material change to our liquidity needs during or beyond the next 12 months, except for $200.0 million of our Convertible Notes that become due in June 2025 that we currently anticipate refinancing using some combination of future borrowings under our Revolving Credit Facility and cash. The availability under our Revolving Credit Facility and Equipment Credit Facility is $155.0 million and $20.0 million, respectively. As of September 27, 2024, our Revolving Credit Facility and Equipment Credit Facility remain undrawn. At September 27, 2024 we had total debt of $443.4 million, net of discounts and deferred issuance costs of $3.2 million.
33
Table of Contents
Cash and Cash Equivalents, Certificates of Deposit, and Marketable Debt Securities
The following table summarizes our cash and cash equivalents, certificates of deposit, and marketable debt securities:
(In millions) September 27, 2024 September 29, 2023 $ Change % Change
Borrowings
The following table summarizes the changes in our debt outstanding:
Current maturities of long-term debt
Current portion of Convertible Senior Unsecured Notes $ 45.0 $ — $ 45.0 — %
Other debt 1.5 1.5 — — %
Total current maturities of long-term debt: $ 46.5 $ 1.5 $ 45.0 3,000.0 %
Non-current maturities of long-term debt:
Unamortized issuance costs and debt discounts
Unamortized issuance costs - Convertible Notes $ (1.0) $ (2.5) $ 1.5 (60.0) %
Debt issuance costs - Senior Secured Notes (2.2) (2.9) 0.7 (24.1) %
Cash Flows
Fiscal Years
Net cash flow provided by (used in):
Financing activities (3.3) (0.2) (23.8)
Net cash provided by operating activities. Net cash provided by operating activities was $47.3 million and $108.4 million for the fiscal years 2024 and 2023, respectively. The decrease in cash provided by operating activities was primarily due to a decrease in net income and a decrease in cash inflows for inventory and prepaid expenses and other assets, partially offset by decreased payments for accounts payable during fiscal year 2024.
Net cash used in investing activities.Cash used in investing activities was $27.5 million and $44.9 million for the fiscal years 2024 and 2023, respectively. The decrease in cash used in investing activities was primarily due to increased proceeds from the
34
Table of Contents
maturities of marketable debt securities, partially offset by increased purchases of marketable securities, increased purchases of property, plant, and equipment, and the settlement of net investment hedges in the prior year.
Net cash used in financing activities. Net cash used in financing activities was $3.3 million and $0.2 million for the fiscal years 2024 and 2023, respectively. The decrease in cash used in financing activities was primarily due to increased cash payments related to debt issuance costs and taxes for net share settlement of equity awards, partially offset by reduced repayments of borrowings when compared to fiscal year 2023.
Days Sales Outstanding
Trade accounts receivable days sales outstanding (“DSO”) was 70 days and 65 days at September 27, 2024 and September 29, 2023, respectively. Our accounts receivable and DSO are impacted by a number of factors, including the timing of product shipments, collections performance, payment terms, the mix of revenues from different regions and the effects of economic instability.
Material Contractual Obligations
The following table summarizes, as of September 27, 2024, the total amount of future payments due in various future periods:
Payments Due by Period
dpiX fixed cost commitment 3.1 3.1 — — —
Dividends to MeVis noncontrolling interest 2.5 0.5 1.0 1.0 —
Development and share purchase commitments 1.0 1.0 — — —
Non-cancellable supplier purchase obligations 6.7 5.5 1.2 — —
We lease office space under non-cancelable operating leases. For further information on our operating leases, see Note 3,Leases, included in the accompanying Notes to the Consolidated Financial Statements.
For further discussion regarding our borrowings, see Note 9, Borrowings, included in the accompanying Notes to the Consolidated Financial Statements.
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. For the remainder of calendar year 2024, we estimate that we have fixed cost commitments of $3.1 million related to this amended agreement. The fixed cost commitment for future periods will be determined and approved by the dpiX board of directors at the beginning of each calendar year. The amended agreement will continue unless the ownership structure of dpiX changes (as defined in the amended agreement).
In October 2015, pursuant to a Domination and Profit and Loss Transfer Agreement (the “MeVis Agreement”), 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. The annual net payment will continue for the life of the MeVis Agreement, which we anticipate will continue for as long as we remain as the controlling shareholder of MeVis. As of September 27, 2024, noncontrolling shareholders together held approximately 0.5 million shares of MeVis, representing 26.3% of the outstanding shares.
In the fourth quarter of fiscal year 2022, we entered into a development agreement and a share purchase agreement with a third-party company. For more information about these agreements, see Note 13, Commitments and Contingencies, included in the accompanying Notes to the Consolidated Financial Statements.
The Company enters into purchase agreements with its suppliers in the ordinary course of its business for the purchase of goods and services. Some of these purchase agreements are non-cancellable and thus contractually obligate us to future cash payments.
35
Table of Contents
Our operations and facilities, past and present, are subject to environmental laws, including laws that regulate the handling, storage, transport and disposal of hazardous substances. Certain of those laws impose cleanup liabilities under certain circumstances. In connection with those laws and certain of our past and present operations and facilities, we are obligated to indemnify Varian for the cleanup liabilities related to prior corporate restructuring activities. As of September 27, 2024, our estimated environmental liability for these sites is $3.9 million, net of expected insurance proceeds. For further discussion regarding our environmental obligation, see Note 1, Summary of Significant Accounting Policies, included in the accompanying Notes to the Consolidated Financial Statements.
Contingencies
From time to time, we are a party to or otherwise involved in legal proceedings, government inspections, investigations, customs and duty audits, and other claims and contingency matters, both inside and outside the United States, arising in the ordinary course of our business or otherwise. We accrue amounts for probable losses, to the extent they can be reasonably estimated, that we believe are adequate to address any liabilities related to legal proceedings as well as other loss contingencies that we believe will result in a probable loss (including, among other things, probable settlement value). A loss or a range of loss is disclosed when it is reasonably possible that a material loss will be incurred and can be estimated or when it is reasonably possible that the amount of a loss, when material, will exceed the recorded provision. We did not have any material contingent liabilities as of September 27, 2024 and September 29, 2023. Legal expenses are expensed as incurred.
See Item 3 "Legal Proceedings" of this Annual Report for additional information regarding legal proceedings and Note 13, Commitments and Contingencies, in the Notes to the Consolidated Financial Statements for further information regarding certain of our contractual obligations and contingencies, which discussion is incorporated herein by reference.
Critical Accounting Estimates
The preparation of our 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. 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. Our critical accounting policies that are affected by accounting estimates include valuation of inventories, assessment of recoverability of goodwill and intangible assets, and income taxes. Note 1, Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements, Item 8 "Financial Statements and Supplementary Data" describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. For a discussion of how these estimates and other factors may affect our business, see Item 1A. “Risk Factors.”
Inventories, net
Inventory is valued at the lower of cost or net realizable value. Costs include materials, labor, external service and manufacturing overhead and is computed using standard cost, which approximates actual cost, on a first-in-first-out basis. We review inventory quantities on hand and record provisions for estimated excess, slow moving, and obsolete inventory. The evaluation of the carrying value of our inventories takes into consideration such factors as historical and anticipated future sales compared to quantities on hand and the prices we expect to obtain for products in our various businesses. 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. See Note 1, Summary of Significant Accounting Policies, "Inventories, net" for further details.
Goodwill and Intangible Assets
Goodwill is initially recorded when the purchase price paid for a business acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. Our future operating performance will be impacted by the future amortization of these acquired intangible assets and potential impairment charges related to these intangibles or to goodwill if indicators of impairment exist. The allocation of the purchase price from business acquisitions to goodwill and intangible assets could have a material impact on our future operating results. In addition, the allocation of the purchase price of the acquired businesses to goodwill and intangible assets requires us to make significant estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets and the appropriate discount rate for those cash flows. Should conditions differ from management’s estimates at the
36
Table of Contents
time of the acquisition, material write-downs of intangible assets and/or goodwill may be required, which would adversely affect our operating results.
We evaluate goodwill for impairment at least annually or whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The evaluation includes consideration of qualitative factors including industry and market considerations, overall financial performance, and other relevant events and factors affecting the reporting unit. If we determine that a quantitative analysis is necessary, we perform a quantitative analysis that consists of a comparison of the fair value of a reporting unit against its carrying amount, including the goodwill allocated to each reporting unit.
In fiscal years 2023 and 2022, we performed the annual goodwill qualitative impairment test for our two reporting units and determined that, at those times, it was not more likely than not that the fair values of the reporting units were less than their carrying amounts and accordingly recorded no impairment. We performed the annual goodwill analysis as of the first day of the fourth quarter of each fiscal year (using balances as of the end of the third quarter of that fiscal year). Significant changes in our projections of our operating results or other factors could cause us to make interim assessments of impairment in any quarter that could result in some or all of the goodwill being impaired. A future impairment charge for goodwill could have a material effect on the Company's consolidated financial position and results of operations.
In the fourth quarter of 2024, changes in facts and circumstances related to reduced demand of the Company's medical products, coupled with a sustained decrease in the Company's stock price, resulted in the Company determining that an indicator of possible impairment existed within its reporting units. Accordingly, the Company performed a quantitative impairment analysis to determine the fair values of those reporting units, using both an income approach utilizing the discounted cash flow method and market approach utilizing the public company market multiple method. Based on the output of the analysis, the Company determined that the fair values of both the Medical and Industrial reporting units exceeded their carrying amounts. Accordingly, no impairment charges were recorded during the year ended September 27, 2024.
Taxes on Income
We calculate income taxes based on the tax statutes, regulations, and case law of the various jurisdictions in which we operate. Significant judgment is required in determining the timing and amounts of deductible and creditable items. The benefits of uncertain tax positions are recorded in our financial statements only after determining it is more likely than not that the uncertain tax positions would withstand challenge by taxing authorities. We periodically reassess our positions and record any changes in the financial statements as appropriate. Gross uncertain tax positions, exclusive of interest and penalties, were $1.6 million and $1.4 million as of September 27, 2024, and September 29, 2023, respectively. We believe the resolution of these matters will not materially affect our consolidated financial statements. Income taxes are described further in Note 16, Taxes on Income, in our Notes to the Consolidated Financial Statements.
The assessment regarding whether a valuation allowance is required or should be adjusted is based on an evaluation of possible sources of taxable income and also considers all available positive and negative evidence factors. Our accounting for the valuation of deferred tax assets represents our best estimate of future events. Changes in our current estimates, due to unanticipated business conditions, governmental legislative actions or events, could have a material effect on our ability to utilize deferred tax assets. The valuation allowance balances were $74.7 million and $18.7 million as of September 27, 2024 and September 29, 2023, respectively. Refer to Note 16, Taxes on Income, of our consolidated financial statements for additional information on the composition of valuation allowances.
Recent Accounting Standards or Updates Not Yet Effective
See Note 1, Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements for a description of recent accounting standards, including the expected dates of adoption and the estimated effects on our consolidated financial statements.
Backlog
Backlog is the accumulation of all orders for which revenues have not been recognized and are still considered valid. Backlog also includes a small portion of billed service contracts that are included in deferred revenue. Our estimated total backlog at September 27, 2024 was approximately $299 million.
Orders may be revised or canceled, either according to their terms or as customers' needs change. Consequently, it is difficult to predict with certainty the amount of backlog that will result in revenues. We perform a quarterly review to verify that outstanding orders in the backlog remain valid. Aged orders that are not expected to be converted to revenues are deemed dormant and are reflected as a reduction in the backlog amounts in the period identified.
37
Table of Contents
In addition to orders for which revenues have not been recognized and are still considered valid, we have pricing agreements with many of our established customers that span multi-year periods. These pricing agreements include volume ranges under which orders are placed.
Item 7A. 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. These risks, as discussed below, have not changed materially versus the prior reporting period. In addition, we are not aware of any facts or circumstances that would significantly impact such exposures in the near term.
Risks
Foreign Currency Exchange Rate Risk
A significant portion of our customers are outside the United States, while our financial statements are denominated, 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, or consider moving to in-sourcing supply of components or migrating 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/or the profitability in U.S. Dollars of products and services that we provide or purchase 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, net investments in foreign subsidiaries, and forecast purchases denominated in foreign currencies. We may hedge portions of forecasted foreign currency exposure, typically for one to three months. In addition, we hold cross-currency swaps 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. Additionally, we may choose not to hedge certain foreign exchange exposures for a variety of reasons including, but not limited to, accounting considerations, the prohibitive economic cost of hedging particular exposures, or due to natural offsets among the different exposures. See Note 8, Financial Derivatives and Hedging Activities, of the Notes to the Consolidated Financial Statements for further information.
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 and marketable securities 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 or requiring certain customers to provide a down payment.
Interest Rate Risk
Borrowings under our Revolving Credit Facility and Equipment Credit Facility bear interest at floating interest rates. At September 27, 2024, we had no borrowings subject to floating interest rates. See Note 9, Borrowings, of the Notes to the Consolidated Financial Statements for further information.
Our exposure to interest rate risk also relates to our interest-bearing assets, primarily our cash and cash equivalents and marketable securities. Fixed rate securities may have their market value adversely affected due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fluctuate due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates.
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
38
Table of Contents
strategies. During the fiscal year ended September 27, 2024, we did not have any commodity derivative instruments in place to manage our exposure to price changes.
Sensitivity Analysis
The following table sets forth the potential loss in future earnings, fair value, or cash flows resulting from hypothetical changes in relevant market rates or prices as of September 27, 2024. The actual impact of the respective underlying rates and price changes on the financial instruments may differ significantly from those shown in the sensitivity analysis.
Commodity Price 10% increase in commodity prices $ 3.7 Earnings
Item 8. Financial Statements and Supplementary Data.
The Consolidated Financial Statements and Schedules listed in the Index to Consolidated Financial Statements, Schedules and Exhibits on page F-1 are filed as part of this Annual Report and incorporated in this Item 8 by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act are designed to provide reasonable assurance that information required to be disclosed in our periodic reports that we file or submit under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed, and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") have concluded that our disclosure controls and procedures were effective as of September 27, 2024.
Management's Annual Report on Internal Control Over Financial Reporting
Management, under the supervision of our CEO and CFO, is responsible for establishing and maintaining adequate internal control over our financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed 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. Our management evaluated the design and operating effectiveness of our internal control over financial reporting based on the criteria established in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the "COSO framework" (2013)). All internal control systems, no matter how well designed, have inherent limitations. Accordingly, even effective internal controls and procedures can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 27, 2024. Based on this evaluation, our management concluded that we maintained effective internal control over financial reporting as of September 27, 2024.
The effectiveness of our internal control over financial reporting as of September 27, 2024 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their attestation report, which appears below in this Item 9A.
39
Table of Contents
Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting during the quarter ended September 27, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) under the Exchange Act).
40
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Varex Imaging Corporation
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Varex Imaging Corporation and subsidiaries (the “Company”) as of September 27, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 27, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended September 27, 2024, of the Company and our report dated November 19, 2024, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Salt Lake City, Utah
November 19, 2024
41
Table of Contents
Item 9B. Other Information
During the three months ended September 27, 2024, none of our directors or officers informed us of the adoption or termination of a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as those terms are defined in Regulation S-K, Item 408, except as follows:
On August 9, 2024, Sunny Sanyal, our President, CEO, and member of our Board of Directors, modified the Rule 10b5-1 trading arrangement he adopted on March 5, 2024. As initially adopted, the 10b5-1 trading arrangement (the “10b5-1 Plan”) provided for (i) the sale of shares of Company common stock owned by Mr. Sanyal once per quarter in an amount not to exceed $100,000 in any single quarter, and not to exceed $300,000 in the aggregate during the term of the 10b5-1 Plan, with the aggregate number of shares to be sold during such term not to exceed 23,009 shares; and (ii) the exercise, subject to pricing triggers, of up to 720,585 stock options (which includes options to be withheld by the Company in payment of the exercise prices and applicable taxes), that have vested or may vest to Mr. Sanyal pursuant to previous awards, some of which expire in February 2025. The August 9, 2024 modification removes the sale of shares of Company common stock described above from the 10b5-1 Plan, but continues to include the exercise of 720,585 stock options. Mr. Sanyal does not presently intend to sell the net shares he acquires pursuant to exercise of these options. The 10b5-1 Plan, as modified, is intended to satisfy the affirmative defense of Rule 10b5-1(c).
Item 9C. Disclosures Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
PART III
Except as otherwise disclosed below, the information required by Items 10, 11, 12, 13 and 14 is incorporated by reference from our definitive proxy statement for the 2025 Annual Meeting of Stockholders. Our definitive proxy statement for the 2025 Annual Meeting of Stockholders ("Proxy Statement") will be filed with the SEC no later than 120 days after September 27, 2024.
Item 10. Directors, Executive Officers and Corporate Governance.
Directors and Executive Officers
The information required by this Item 10 with respect to our executive officers is set forth in Item 1 "Business" of this Annual Report on Form 10-K and information relating to the availability of our code of conduct for executive officers and directors is set out below.
Code of Conduct
We have adopted a Code of Conduct that applies to all our executive officers and directors. The Code of Conduct is available on our website at http://www.vareximaging.com.
We intend to comply with the disclosure requirements of Item 5.05(c) of Form 8-K regarding an amendment to, or waiver from, a provision of the Code of Conduct that applies to our principal executive officer, principal financial officer, principal accounting officer or persons performing similar functions by posting such information on our website, specified above.
We will provide disclosure of delinquent Section 16(a) reports, if any, in our Proxy Statement, and such disclosure, if any, is incorporated herein by reference.
Insider Trading Policy
We have an Insider Trading Policy applicable to our directors, officers, employees and certain persons and entities that we believe is reasonably designed to promote compliance with insider trading laws, rules and regulations, and Nasdaq listing standards applicable to our Company. The foregoing summary of our Insider Trading Policy is not complete and is qualified in its entirety by reference to the full text of our Insider Trading Policy attached hereto as Exhibit 19.1.
Item 11. Executive Compensation
The information required by this Item 11 is incorporated by reference from our Proxy Statement under the caption “Executive Compensation.”
42
Table of Contents
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Equity Compensation Plan Information
The following table provides information as of September 27, 2024 with respect to the shares of our common stock that may be issued under our existing equity compensation plans.
Equity compensation plans approved by security holders 3,767 $ 26.79 5,276
Equity compensation plans not approved by security holders — — —
(1) Consists of stock options, restricted stock units ("RSUs"), and deferred stock units ("DSUs") granted under the Varex Imaging Corporation 2017 Omnibus Stock Plan and the 2020 Omnibus Stock Plan, as Amended and Restated (the "2020 Stock Plan"). Excludes purchase rights under the ESPP.
(2) The weighted average exercise price does not take into account the shares issuable upon vesting of outstanding RSUs and DSUs, which have no exercise price.
(3) Includes 5,017 thousand shares available for future issuance under the 2020 Stock Plan, and also includes 259 thousand shares available for future issuance under the ESPP. Shares available for issuance under the ESPP, including shares subject to purchase during the current purchase period, which commenced on September 3, 2024 (the exact number of which will not be known until the purchase date on February 28, 2025). Subject to the number of shares remaining in the share reserve, the maximum number of shares purchasable by any participant on any one purchase date for any purchase period, including the current purchase period, may not exceed 2,000 shares.
The information required by this Item 12 with respect to the security ownership of certain beneficial owners and the security ownership of directors and executive officers is incorporated by reference from our Proxy Statement under the caption “Stock Ownership—Beneficial Ownership of Certain Stockholders, Directors and Executive Officers.”
Item 13. Certain Relationships and Related Transactions and Director Independence.
The information required by this Item 13 with respect to certain relationships and related transactions is incorporated by reference from our Proxy Statement under the caption “Certain Relationships and Related Transactions.” The information required by this item with respect to director and committee member independence is incorporated by reference from our Proxy Statement under the caption “Proposal - Election of Directors.”
Item 14. Principal Accountant Fees and Services.
The information required by this Item 14 is incorporated by reference from our Proxy Statement under the caption “Proposal - Ratification of the Appointment of Our Independent Registered Public Accounting Firm.”
43
Table of Contents
PART IV
Item 15. Exhibits and Financial Statement Schedules.
Documents filed as part of this annual report include:
Exhibit Number Description
10.8*† Varex Imaging Corporation Management Incentive Plan
44
Table of Contents
19.1 Varex Imaging Corporation Insider Trading Policy
21.1 List of Subsidiaries as of September 27, 2024
24.1 Power of Attorney (included on signature page)
45
Table of Contents
97.1 Varex Imaging Corporation Compensation Recovery Policy
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
* Incorporated herein by reference
† Management contract or compensatory agreement.
Item 16. Form 10-K Summary
None
46
Table of Contents
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: November 19, 2024 By: /s/ Shubham Maheshwari
Shubham Maheshwari
Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Capacity Date
Sunny S. Sanyal
Shubham Maheshwari
/s/ WALTER M ROSEBROUGH, JR. Chairman of the Board November 19, 2024
Walter M Rosebrough, Jr.
/s/ KATHLEEN L. BARDWELL Director November 19, 2024
Kathleen L. Bardwell
/s/ JOCELYN D. CHERTOFF Director November 19, 2024
Jocelyn D. Chertoff
/s/ TIMOTHY E. GUERTIN Director November 19, 2024
Timothy E. Guertin
/s/ JAY K. KUNKEL Director November 19, 2024
Jay K. Kunkel
/s/ CHRISTINE A. TSINGOS Director November 19, 2024
Christine A. Tsingos
47
Table of Contents
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34) F-1
Consolidated Balance Sheets as of the end of fiscal years 2024 and 2023 F-5
Notes to the Consolidated Financial Statements F-8
48
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Varex Imaging Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Varex Imaging Corporation and subsidiaries (the "Company") as of September 27, 2024 and September 29, 2023, the related consolidated statements of operations, comprehensive (loss) income, stockholders' equity, and cash flows, for each of the three years in the period ended September 27, 2024, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 27, 2024 and September 29, 2023, and the results of its operations and its cash flows for each of the three years in the period ended September 27, 2024, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 27, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 19, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company changed its method of accounting for Convertible Notes effective October 1, 2022, due to the adoption of Accounting Standards Update, 2020-06, Debt — Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, using the modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Inventories – Valuation of Excess and Obsolete Inventories — Refer to Note 1 to the financial statements
Critical Audit Matter Description
Inventories are valued at the lower of cost or net realizable value. The Company evaluates the carrying value of its inventories taking into consideration such factors as historical sales and anticipated future sales compared to quantities on hand and the prices the Company expects to obtain for products in its various markets. The Company adjusts 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. Estimating the amount of excess and obsolete inventories involves significant judgment and estimates.
We identified the valuation of excess and obsolete inventories as a critical audit matter because of management’s significant judgment related to its estimates of anticipated future sales in determining the valuation of excess and obsolete inventories. This required a high degree of auditor judgment and an increased extent of effort.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s estimates of the valuation of excess and obsolete inventories included the following, among others:
F-1
Table of Contents
•We tested the effectiveness of controls over the valuation of excess and obsolete inventories. The controls we tested included those over the calculation, accuracy and completeness of underlying data used in the calculation, including historical sales and anticipated future sales by product, product quantities on hand, and applicable prices.
•We evaluated management’s ability to accurately estimate the valuation of excess and obsolete inventories by comparing actual inventory write-downs to management’s historical estimates.
•We performed procedures to evaluate the reasonableness of management’s methods, assumptions, and judgments used in developing their estimate of the valuation of excess and obsolete inventories, which included consideration of historical sales, anticipated future sales, and information obtained from production planning and supply chain employees.
•We tested the accuracy and completeness of the underlying data used in the Company’s calculations of the valuation of excess and obsolete inventories, including historical usage, anticipated future sales, quantities on hand, and pricing.
•We assessed the reasonableness of the assumptions used in estimating the valuation of excess and obsolete inventories by considering the anticipated future sales information obtained from production planning and supply chain employees, and developing an independent expectation which was then compared to the results of the Company’s calculations.
•We tested the mathematical accuracy of the Company’s calculations of excess and obsolete inventories.
Goodwill – Medical Reporting Unit – Refer to Notes 1 and 12 of the financial statements
Critical Audit Matter Description
The Company evaluates goodwill for impairment at least annually or whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The evaluation includes consideration of qualitative factors including industry and market considerations, overall financial performance, and other relevant events and factors affecting the reporting unit. In the fourth quarter of 2024, the Company performed a quantitative impairment analysis to determine the fair values of its reporting units. The Company used both an income approach utilizing the discounted cash flow method and a market approach utilizing the public company market multiple method. No impairment was recognized for any reporting unit, as the fair value of each reporting unit exceeded its carrying value as of the measurement date.
We identified the valuation of the Medical reporting unit as a critical audit matter because of the significant judgments and estimates management made to determine the fair value of the reporting unit. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to selection of the discount rate and forecasts of future revenues used in determining the fair value of the Medical reporting unit, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s estimates and assumptions for selection of the discount rate and forecasts of future revenues in determining the fair value of the Medical reporting unit included the following, among others:
•We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the Medical reporting unit, such as controls related to management’s estimates and assumptions for the selection of the discount rate and forecasts of future revenues.
•We evaluated the reasonableness of management’s revenue forecast estimates by comparing key assumptions to historical results, current industry and peer trends, and information from sales and marketing personnel of the Company.
•With the assistance of fair value specialists, we evaluated the reasonableness of the discount rate by:
◦Testing the source information underlying the determination of the discount rate and testing the mathematical accuracy of the calculation.
◦Developing a range of independent estimates for the discount rate and comparing those to the discount rate selected by management.
•We evaluated whether the revenue forecast estimates were consistent with evidence obtained in other areas of the audit.
/s/ Deloitte & Touche LLP
Salt Lake City, Utah
November 19, 2024
We have served as the Company’s auditor since 2021.
F-2
Table of Contents
VAREX IMAGING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years
Operating expenses:
Other expense, net (4.2) (20.2) (4.3)
Interest and other expense, net (27.1) (45.8) (43.7)
Less: Net income attributable to noncontrolling interests 0.5 0.5 0.5
Net (loss) income attributable to Varex $ (47.7) $ 48.2 $ 30.3
Net (loss) income per common share attributable to Varex
Weighted average common shares outstanding
See accompanying Notes to the Consolidated Financial Statements.
F-3
VAREX IMAGING CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
Fiscal Years
Other comprehensive (loss) income, net of tax
Unrealized gain (loss) on defined benefit obligations — (1.0) 1.4
Income (loss) on forward contracts 0.1 0.1 (0.6)
Unrealized income (loss) on available-for-sale securities 0.1 0.1 (0.1)
Foreign currency translation adjustments (1.9) (0.5) (0.6)
Total comprehensive (loss) income (48.9) 47.4 30.9
Less: Comprehensive income attributable to noncontrolling interests 0.5 0.5 0.5
Comprehensive (loss) income attributable to Varex $ (49.4) $ 46.9 $ 30.4
See accompanying Notes to the Consolidated Financial Statements.
F-4
Table of Contents
VAREX IMAGING CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts) September 27, 2024 September 29, 2023
Assets
Current assets:
Cash and cash equivalents $ 168.7 $ 152.6
Marketable securities 31.8 41.3
Prepaid expenses and other current assets 26.9 23.3
Property, plant and equipment, net 153.4 143.6
Intangible assets, net 16.1 22.4
Investments in privately-held companies 26.8 29.0
Deferred tax assets 4.7 41.3
Operating lease assets 28.3 29.0
Liabilities and stockholders' equity
Current liabilities:
Accrued liabilities and other current liabilities 78.6 82.6
Current operating lease liabilities 4.0 3.8
Current maturities of long-term debt, net 46.3 1.5
Deferred revenues 7.9 10.2
Deferred tax liabilities 1.4 —
Operating lease liabilities 23.0 23.1
Other long-term liabilities 50.4 41.6
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock, $0.01 par value: 20,000,000 shares authorized, none issued — —
Accumulated other comprehensive loss (2.9) (1.2)
Total Varex stockholders' equity 535.1 567.7
Noncontrolling interests 14.1 13.3
Total liabilities and stockholders' equity $ 1,217.0 $ 1,249.6
See accompanying Notes to the Consolidated Financial Statements.
F-5
Table of Contents
VAREX IMAGING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions) Shares Amount
Exercise of stock options 0.1 — 3.8 — — 3.8 — 3.8
Common stock issued upon vesting of restricted shares 0.4 — — — — — — —
Shares withheld on vesting of restricted shares (0.1) — (2.8) — — (2.8) — (2.8)
Common stock issued under employee stock purchase plan 0.3 — 4.9 — — 4.9 — 4.9
Share-based compensation — — 14.0 — — 14.0 — 14.0
Unrealized loss on forward contracts — — — (0.6) — (0.6) — (0.6)
Unrealized gain on defined benefit obligations, net of tax — — — 1.4 — 1.4 — 1.4
Foreign currency translation adjustments — — — (0.6) — (0.6) — (0.6)
Cumulative effect of accounting change — — (34.6) — 6.1 (28.5) — (28.5)
Exercise of stock options — — 0.2 — — 0.2 — 0.2
Common stock issued upon vesting of restricted shares 0.2 — — — — — — —
Shares withheld on vesting of restricted shares (0.1) — (1.4) — — (1.4) — (1.4)
Common stock issued under employee stock purchase plan 0.3 — 3.9 — — 3.9 — 3.9
Share-based compensation — — 13.5 — — 13.5 — 13.5
Realized gain on forward contracts — — — 0.1 — 0.1 — 0.1
Foreign currency translation adjustments — — — (0.5) — (0.5) — (0.5)
Common stock issued upon vesting of restricted shares 0.4 — — — — — — —
Shares withheld on vesting of restricted shares (0.1) — (2.2) — — (2.2) — (2.2)
Common stock issued under employee stock purchase plan 0.3 — 3.8 — — 3.8 — 3.8
Share-based compensation — — 15.2 — — 15.2 — 15.2
Realized gain on forward contracts — — — 0.1 — 0.1 — 0.1
Business acquisitions — — — — — — 0.7 0.7
Foreign currency translation adjustments — — — (1.9) — (1.9) — (1.9)
Other — — — — — — (0.4) (0.4)
See accompanying Notes to the Consolidated Financial Statements.
F-6
Table of Contents
VAREX IMAGING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years
Cash flows from operating activities:
Share-based compensation expense 15.3 13.5 14.0
Amortization of intangible assets 9.9 13.7 14.6
Loss from equity method investments 2.0 1.6 2.6
Impairment of equity method investment — 16.4 —
Amortization of deferred loan costs 2.8 2.6 10.9
Gain on purchase of business (2.1) — —
Inventory write-down 4.9 5.6 6.4
Loss on operating lease abandonment — — 1.9
Changes in assets and liabilities:
Prepaid expenses and other assets 3.3 7.0 10.3
Deferred revenues (2.3) 2.3 —
Net cash provided by operating activities 47.3 108.4 16.9
Cash flows from investing activities:
Purchases of property, plant and equipment (26.9) (20.7) (21.3)
Loss on settlement of cash flow hedge — (0.2) (0.5)
Proceeds from maturities of marketable debt securities 58.8 28.3 2.0
Purchase of marketable debt securities (56.6) (52.2) (18.7)
Purchase of marketable equity securities (0.2) (2.7) (2.4)
Purchase of certificates of deposit (4.2) (1.0) (7.2)
Proceeds from maturities of certificates of deposit 1.8 — —
Acquisitions of businesses, net of cash acquired 0.9 (1.0) —
Settlement of net investment hedge — 7.0 —
Proceeds from sales of business and assets — — 1.7
Investments in and loans to privately-held companies — — (0.6)
Net cash used in investing activities (27.5) (44.9) (48.4)
Cash flows from financing activities:
Repayments of borrowings (1.6) (2.4) (29.4)
Payment of debt issuance costs (2.3) — —
Proceeds from shares issued under employee stock purchase plan 3.8 3.9 4.9
Proceeds from exercise of stock options — 0.2 3.8
Taxes related to net share settlement of equity awards (2.2) (1.4) (2.8)
Other financing activities (1.0) (0.5) (0.3)
Net cash used in financing activities (3.3) (0.2) (23.8)
Supplemental cash flow information:
Cash paid for income tax, net of refunds 20.2 16.7 2.2
Supplemental non-cash activities:
See accompanying Notes to the Consolidated Financial Statements.
F-7
Table of Contents
VAREX IMAGING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Varex Imaging Corporation (the “Company” or “Varex”) designs, manufactures, sells, and services a broad range of medical products, which include X-ray imaging components including X-ray tubes, flat panel and photon counting detectors and accessories, ionization chambers, high voltage connectors, image processing software and workstations, 3D reconstruction software, computer-aided diagnostic software, collimators, automatic exposure control devices, generators, and heat exchangers. The Company sells its products to imaging system original equipment manufacturer (“OEM”) customers for incorporation into new medical diagnostic, radiation therapy, dental, and veterinary equipment, as well as to independent service companies and distributors, and directly to end-users for replacement purposes.
The Company also designs, manufactures, sells and services industrial products, which include Linatron® X-ray linear accelerators, X-ray tubes, digital detectors, high voltage connectors, coolers, 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 or irradiation systems and processes. The Company conducts an active research and development program to focus on new technologies and applications in both medical and industrial X-ray imaging.
Basis of Presentation
The accompanying consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and in accordance with accounting principles generally accepted in the United States ("GAAP"). The Company has consolidated all its majority owned subsidiaries and entities over which it has control. All intercompany balances and transactions have been eliminated in consolidation.
Reclassification of Prior Period Presentation
Certain prior period amounts in the Financial Statements and the Notes to the Consolidated Financial Statements have had a change in presentation to conform to current period presentation. This change does not affect previously reported results.
Segment Reporting
The Company has two reportable operating segments; (i) Medical and (ii) Industrial. See Note 17, Segment Information, included in this report, 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 2024 was the 52-week period that ended September 27, 2024, fiscal year 2023 was the 52-week period that ended September 29, 2023, and fiscal year 2022 was the 52-week period that ended September 30, 2022.
Variable Interest Entities
For entities in which the Company has variable interests, the Company focuses on identifying 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 residual returns 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 will be included in the Company’s consolidated financial statements. As of September 27, 2024, the Company had variable interests in two entities, neither of which were consolidated by the Company.
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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates include the valuation of inventories, valuation of goodwill and intangible assets, receivables, warranties, refund liabilities, long-lived
F-8
Table of Contents
asset valuations, impairment of investments, valuation of financial instruments, and taxes on income. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers unrestricted 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 lease and inventory arrangements. Restricted cash is included in other assets on the Company's Consolidated Balance Sheets.Cash and cash equivalents and restricted cash as reported within the Consolidated Statements of Cash Flows consisted of the following:
Twelve Months Ended September 27, 2024 Twelve Months Ended September 29, 2023
FairValue
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.
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 Consolidated Balance Sheets at fair value as of the reporting date. For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative is reported as a component of other comprehensive income or loss and reclassified from accumulated other comprehensive loss ("OCI") into earnings when the hedged transaction affects earnings. For derivatives that are designated and qualify as net investment hedges, the gain or loss on the derivative is reported as a component of other comprehensive income or loss until the hedged item is sold. The portion of the change in fair value of the Company's net investment hedges (or cross currency swaps) related to the cross-currency basis spread is an excluded component in the assessment of the effectiveness of these net investment hedges (or cross currency swaps). A qualitative assessment of hedge effectiveness is performed on a quarterly basis, unless facts and circumstances indicate the hedge may no longer be highly effective, in which case, a quantitative assessment of hedge effectiveness is performed.
Concentration of Risk
Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of cash, cash equivalents, marketable securities, certificates of deposit, and trade accounts receivable. Cash held with financial institutions may exceed the Federal Deposit Insurance Corporation insurance limits or similar limits in foreign jurisdictions. To date, the Company has not realized 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 credit losses 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. When these suppliers are unable to meet the Company's supply needs, the Company's production is negatively impacted.
F-9
Table of Contents
Credit is extended to customers based on an evaluation of the customer’s financial condition, and collateral is not required. In certain circumstances, a customer may be required to prepay all or a portion of the contract price prior to transfer of control. During the periods presented, one of the Company's customers accounted for a significant portion of revenues, as set forth below:
Fiscal Years
Canon Medical Systems Corporation 17.6 % 16.5 % 17.2 %
Canon Medical Systems Corporation accounted for 9.5% and 13.8% of the Company’s accounts receivable as of September 27, 2024 and September 29, 2023, respectively.
Inventories, net
Inventory is valued at the lower of cost or net realizable value. Costs include materials, labor, external service, and manufacturing overhead and is computed on a first-in-first-out basis. The Company evaluates the carrying value of its inventories taking into consideration such factors as historical and anticipated future sales compared to quantities on hand and the prices the Company expects to obtain for products. The Company adjusts 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.
The following table summarizes the Company’s inventories, net:
The Company recorded inventory write-downs of $4.9 million, $5.6 million and $6.4 million for the twelve months ended September 27, 2024, September 29, 2023, and September 30, 2022, respectively.
Property, Plant and Equipment, net
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 is computed using the straight-line method over the estimated useful lives of the assets or remaining lease term. Land is not subject to depreciation, but land improvements are depreciated over fifteen years. Land leasehold rights and leasehold improvements are depreciated over the lesser of their estimated useful lives or remaining lease terms. Buildings are depreciated up to thirty years. Machinery and equipment are depreciated over a range from three to seven years. Assets subject to lease are depreciated 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 recoverability of the carrying amounts. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are removed from the accounts.
The following table summarizes the Company’s property, plant and equipment, net:
Buildings and leasehold improvements 165.5 159.1
Construction in progress 25.0 20.8
Gross property, plant and equipment 405.6 383.1
Accumulated depreciation and amortization (252.2) (239.5)
Total property, plant and equipment, net $ 153.4 $ 143.6
F-10
Table of Contents
The Company recorded depreciation expense of $21.2 million, $19.5 million, and $19.0 million in fiscal years 2024, 2023 and 2022, respectively.
Equity Method Investments
The Company accounts for its equity investments in privately-held companies under the equity method of accounting if the Company has the ability to exercise significant influence in, but not control, these investments. The Company records impairment losses on its equity method investments if an impairment exists and is deemed to be other-than-temporary, which is based on various factors, including but not limited to, the length of time the fair value of the investment is below the carrying value, the absence of an ability to recover the carrying amount of the investment, and the inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment. During fiscal year 2023, the Company recorded a before-tax impairment charge totaling $16.4 million, which is included in other expense, net in the Company's Consolidated Statements of Operations. There was no impairment recorded during fiscal years 2024 and 2022.
Marketable Securities
The Company's marketable securities consist primarily of financial instruments such as United States treasury securities, United States agency obligations, corporate bonds, commercial paper, money market funds, and equity securities.
Marketable Debt Securities
The Company's marketable debt securities are classified as available-for-sale. Classification of marketable debt securities is determined at the time of purchase, and the Company reevaluates such classification as of each balance sheet date. Marketable debt securities are recorded at estimated fair value and included in cash and cash equivalents, prepaid expenses and other current assets, and other assets within the Consolidated Balance Sheets. Any unrealized gains or losses are included in accumulated other comprehensive loss within the Consolidated Balance Sheets. When the fair value of a marketable debt security declines below its amortized cost basis, any portion of that decline attributable to credit losses, to the extent expected to be nonrecoverable before the sale of the security, is recognized in the Consolidated Statements of Operations. When the fair value of a marketable debt security declines below its amortized cost basis due to changes in interest rates, such amounts are recorded in accumulated other comprehensive loss, and are recognized in the Consolidated Statements of Operations only if the Company sells or intends to sell the security before recovery of its cost basis. There were no impairments related to marketable debt securities recorded during the twelve months ended September 27, 2024.
Marketable Equity Securities
Marketable equity securities are stated at fair value as determined by the most recently traded price of each security at the balance sheet date and included in other assets within the Consolidated Balance Sheets. All unrealized gains and losses on marketable equity securities are recorded as part of other expense, net in the Company's Consolidated Statements of Operations. See Note 11, Fair Value, for further details.
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, and are included in intangible assets, net in the Company's Consolidated Balance Sheets. Intangible assets with finite lives are amortized over their estimated useful lives of primarily two to seven years using the straight-line method.
Impairment of Long-lived Assets, Intangible Assets, and Goodwill
The Company reviews long-lived assets and identifiable intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The Company assesses these assets for impairment based on their estimated undiscounted future cash flows. If the carrying value of the assets exceeds the estimated future undiscounted cash flows, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets.
The Company evaluates goodwill for impairment at least annually at the beginning of the fourth quarter of each fiscal year or whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The evaluation includes consideration of qualitative factors including industry and market considerations, overall financial performance, and other relevant events and factors affecting the reporting unit. If the Company determines that a quantitative analysis is necessary, the Company performs a step one analysis, which consists of a comparison of the fair value of a reporting unit against its carrying amount, including the goodwill allocated to each reporting unit. In fiscal years 2023 and 2022 the Company
F-11
Table of Contents
performed the annual goodwill qualitative impairment test for our two reporting units and determined that, at those dates, it was not more likely than not that the fair values of the reporting units were less than their carrying amount and accordingly recorded no impairment.
In the fourth quarter of 2024, changes in facts and circumstances related to reduced demand of the Company's medical products, coupled with a sustained decrease in the Company's stock price, resulted in the Company determining that an indicator of possible impairment existed within its reporting units. Accordingly, the Company performed a quantitative impairment analysis to determine the fair values of those reporting units, using both an income approach utilizing the discounted cash flow method and market approach utilizing the public company market multiple method. Based on the output of the analysis, the Company determined that the fair values of both the Medical and Industrial reporting units exceeded their carrying amounts. Accordingly, no impairment charges were recorded during the year ended September 27, 2024.
Loss Contingencies
From time to time, the Company is involved in legal proceedings, claims and government inspections or investigations, customs and duties audits, and other contingency matters, both inside and outside the United States, arising in the ordinary course of its business or otherwise. The Company accrues amounts for probable losses, 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 the Company believes will result in a probable loss (including, among other things, probable settlement value). A loss or a range of loss is disclosed when it is reasonably possible that a material loss will be incurred and can be estimated or when it is reasonably possible that the amount of a loss, when material, will exceed the recorded provision. When a loss contingency is probable but not reasonably estimable the nature of the contingency and the fact that an estimate cannot be made is disclosed. See Note 13, Commitments and Contingencies, for further information regarding certain of our contractual obligations and contingencies.
Supplier Finance Programs
The Company participates in voluntary supply chain finance programs with a financial intermediary which provide participating suppliers the option to be paid by the intermediary earlier than the original invoice due date. The Company’s responsibility is limited to making payments on the terms originally negotiated with the suppliers, regardless of whether the intermediary pays the supplier in advance of the original due date. As part of participating in these arrangements, the Company generally receives more favorable payment terms from its suppliers. The Company does not receive fees, payments, extended payment terms, or other direct economic benefits from the intermediary.
The following table presents the change in the direct supplier financing obligation:
Fiscal Years Ended
Confirmed obligations outstanding at the beginning of the period $ 4.2 $ 5.1
Invoices confirmed during the period 31.3 42.9
Confirmed invoices paid during the period (32.9) (43.8)
Confirmed obligations outstanding at the end of the period $ 2.6 $ 4.2
Environmental Obligations
The Company's operations and facilities, past and present, are subject to environmental laws, including laws that regulate the handling, storage, transport, and disposal of hazardous substances. Certain of those laws impose cleanup liabilities under certain circumstances. In connection with those laws and certain of our past and present operations and facilities, the Company is obligated to indemnify Varian for the cleanup liabilities related to prior corporate restructuring activities. The Company anticipates that it will be obligated to reimburse Varian for 20% of the liabilities of Varian related to these sites (after adjusting for any insurance proceeds or tax benefits received by Varian). As of September 27, 2024 and September 29, 2023, the Company's estimated liability for these sites was $3.9 million and $2.8 million, net of expected insurance proceeds, respectively.
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.
F-12
Table of Contents
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, estimates include the historical experience of similar products, as well as 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:
Fiscal Years Ended
Accrued product warranty, at beginning of period $ 7.7 $ 7.9
New accruals charged to cost of revenues 21.0 12.7
Product warranty expenditures (17.9) (12.9)
Accrued product warranty, at end of period $ 10.8 $ 7.7
Leases
The Company determines if an arrangement is or contains a lease at the inception of an arrangement. The Company's operating lease right-of-use ("ROU") assets represent the right to use an underlying asset over the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. ROU assets may also include initial direct costs incurred and prepaid lease payments, less lease incentives. Lease liabilities and their corresponding ROU assets are recognized based on the present value of lease payments over the lease term, discounted using the Company's incremental borrowing rate. The Company recognizes operating leases with lease terms of more than twelve months in operating lease assets, current operating lease liabilities, and operating lease liabilities on its Consolidated Balance Sheets. The Company recognizes finance leases with lease terms of more than twelve months in property, plant and equipment, net, accrued liabilities and other current liabilities, and other long-term liabilities on its Consolidated Balance Sheets. For purposes of calculating lease liabilities and the corresponding ROU assets, the Company's lease term may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option.
Revenue Recognition
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 imaging components including X-ray tubes, digital detectors and image-processing tools, and security and inspection products are generally sold on a stand-alone basis. However, the 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 linear accelerators together with its image processing software and image detection products to OEM customers that incorporate them into their inspection or irradiation systems and processes. 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
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.
F-13
Table of Contents
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 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. For sales with a right of return, revenue is reduced and 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 refund liability and right of return 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 could be sold separately.
Recognition of Revenue
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 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. Refer to Note 17, Segment Information, included in this report, for the disaggregation of the Company’s revenue based on reportable operating segments and disaggregated by geographic region.
Contract Balances
Contract liabilities are included within the deferred revenues, and other long-term liabilities balances in the Consolidated Balance Sheets. The Company does not have any material contract assets.
Deferred revenue represents the Company's obligation to transfer goods or services to its customers for which it has already received consideration (or the amount is due) from the customer. The Company's deferred revenue balance primarily relates to contract advances and billings for warranty contracts.
Deferred revenue that is estimated to be recognized during the following twelve-month period is recorded as deferred revenues and the remaining portion is recorded as other long-term liabilities in the Consolidated Balance Sheets.
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.
F-14
Table of Contents
Allowance for Credit Losses
The Company evaluates the creditworthiness of customers prior to authorizing shipment for all major sale transactions. On a quarterly basis, the Company considers historical trends, current information and any reasonable and supportable forecasts to determine if an amount should be included in the allowance for credit losses. The Company had an allowance for credit losses of $1.0 million and $0.6 million as of September 27, 2024 and September 29, 2023, respectively.
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 performance stock units to directors, officers, and other employees. The Company also permits employees to purchase shares under the Varex employee stock purchase plan.
The Company values stock options granted and the option component of the shares of common stock purchased under the equity-based incentive plans and stock purchased under the employee stock purchase plan using the Black-Scholes option-pricing model. Share-based compensation expense for restricted 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 Consolidated Statements of Operations 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 Company records forfeitures as they occur. 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.
Vesting of certain performance stock units is linked to the achievement of performance goals based on Adjusted EBITDA margin. Share-based compensation expense for these performance stock units are recognized over the performance period based on the probability of achieving the performance targets. Certain performance stock units include a market condition based on our relative total shareholder return over the performance period compared to a predetermined peer group. The fair value of these awards is determined using a Monte Carlo simulation as of the date of the grant and share-based compensation expense will not be adjusted should the target awards vary from actual awards. For additional information, see Note 15, Employee Stock Plans, included in this report.
Software Development Costs
Costs for the development of new software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized. No costs associated with the development of software have been capitalized as the Company believes its current software development process is essentially completed concurrent with the establishment of technological feasibility.
Research and Development
Research and development costs are expensed as incurred. These costs primarily include employees’ compensation, consulting fees, and material costs.
Taxes on Income
Current income tax expense or benefit is the amount of income taxes expected to be payable or receivable 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. Future changes in tax regulation can have a material impact, including tax rate changes or the realization of deferred tax assets. In addition, we provide 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. A portion of the U.S. general business tax credits for research outside of the financial statement line for research and development ("R&D") have a small degree of uncertainty. A reasonable reserve is maintained on the uncertain portion until either the Internal Revenue Service chooses to audit or the statute of limitation expires. A reserve for R&D is typical for companies that calculate and utilize this general business credit. 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.
F-15
Table of Contents
We regularly evaluate the realizability of our deferred tax assets based on the weight of all available evidence, both positive and negative, including the history of recent earnings and expected future taxable income on a jurisdictional basis and our ability to generate sufficient taxable income in the future to realize the net deferred tax assets.
The 2017 Tax Cuts and Jobs Act ("TCJA") included a provision requiring research and development expenditures to be capitalized for tax years beginning after December 31, 2021, which was effective for the Company starting in fiscal year 2023. Because the Company has a significant amount of research and development expenditures, U.S. taxable income and cash taxes are expected to be significantly higher over the next several years.
Foreign Currency Remeasurement and Translation
The Company uses the U.S. Dollar predominately 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 Consolidated Statements of Operations in other expense, net. For the foreign subsidiaries where the local currency is the functional currency, translation adjustments of foreign currency financial statements into U.S. Dollars are recorded to a separate component of accumulated other comprehensive loss.
Recently Adopted Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The standard removed certain separation models in ASC 470-20 for convertible instruments, and, as a result, embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under ASC 815. These convertible debt instruments are accounted for as a single liability measured at amortized cost. This results in the interest expense recognized for convertible debt instruments to be typically closer to the coupon interest rate. Further, the ASU made amendments to the earnings per share (“EPS”) guidance in Topic 260 for convertible instruments, the most significant impact of which was requiring the use of the if-converted method for diluted EPS calculation, and no longer allowing the net share settlement method. The Company adopted this ASU on October 1, 2022, using the modified retrospective method. On the date of adoption, the Company recorded an entry to reduce additional paid-in capital by $34.6 million, increase long-term debt, net by $28.0 million, decrease deferred tax assets by $0.5 million, and increase retained earnings by $6.1 million for the after-tax impact of previously recognized amortization of the debt discount associated with the Company’s Convertible Notes (as defined herein). The unamortized discount on the Company's Convertible Notes was derecognized in the first quarter of fiscal year 2023, which removed the amortization of the debt discount, and brought the effective interest rate closer to the coupon rate of 4.00%. The impact that the adoption of ASU 2020-06 has on the Company's net income per diluted share will depend on the amount of earnings in each period and could result in additional dilution.
In September 2022, the FASB issued ASU 2022-04, Liabilities—Supplier Finance Programs, which requires entities to provide qualitative and quantitative disclosures about their supplier finance programs, including a rollforward of related obligations. The adoption of ASU 2022-04 did not affect the Company’s financial condition, results of operations, or cash flows as the guidance only requires additional disclosures. We adopted this ASU effective September 30, 2023 on a retrospective basis, except for the amendment on rollforward information, which has been adopted on a prospective basis.
Recent Accounting Standards and Updates Not Yet Effective
In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures. ASU 2023-07 requires disclosure of significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and included within the segment measure of profit or loss, an amount and description of its composition for other segment items to reconcile to segment profit or loss, and the title and position of the entity’s CODM. ASU 2023-07 will be applied retrospectively and is effective for annual reporting periods in fiscal years beginning after December 15, 2023, and interim reporting periods in fiscal years beginning after December 31, 2024. The Company is currently reviewing the impact that the adoption of ASU 2023-07 may have on its consolidated financial statements and disclosures.
In December 2023, the FASB issued ASU 2023-09 Income Taxes (Topic 740): Improvements to Income Tax Disclosures. ASU 2023-09 requires public companies to annually (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income or loss by the applicable statutory income tax rate). ASU 2023-09 will be effective for the annual reporting periods in fiscal years beginning after December 15, 2024. The Company is currently evaluating ASU 2023-09 and does not expect it to have a material effect on its consolidated financial statements.
F-16
Table of Contents
2. REVENUE RECOGNITION