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Item 7. Management’s Discussion and Analysis

2020-11-30 compared with 2019-12-20 · 241 added, 237 removed, 159 unchanged (75% of the section changed)

1 unchanged sentence

Basis of Presentation

We became an independent publicly-traded company in January 2017 following our separation from Varian and subsequent distribution of shares of our common stock to Varian shareholders.

Prior to the spin-off, we operated as a division of Varian.

Accordingly, for part of fiscal year 2017, certain shared costs have been allocated to us and are reflected as expenses in the accompanying financial statements.

Management considers the allocation methodologies used to be reasonable and appropriate reflections of the related expenses attributable to us for purposes of the carve-out financial statements;

however, the expenses reflected in these financial statements may not be indicative of the actual expenses that would have been incurred during the periods presented if we had operated as a separate stand-alone entity.

The allocation methods include revenue, headcount, actual usage of services, and others.

In addition, the expenses reflected in the financial statements may not be indicative of expenses that will be incurred by us in the future.

Varex Imaging Corporation is a leading innovator, designer and manufacturer of X-ray imaging components including X-ray tubes, digital detectors, linear accelerators and other image processing solutions, which are key components of X-ray imaging systems.

Our components are used in medical imaging as well as in industrial and security imaging applications.

Global original equipment manufacturers (“OEM”) incorporate our X‑ray imaging components in their systems to detect, diagnose, protect and inspect.

As of September 27, 2019 , we had approximately 2,000 full-time equivalents employees, located at manufacturing and service center sites in North America, Europe, and Asia.

We became an independent publicly-traded company in January 2017 following our separation from Varian and subsequent distribution of shares of our common stock to Varian stockholders.

The following discussion and analysis contains 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.

Varex Imaging Corporation is a leading innovator, designer and manufacturer of X-ray tubes, digital detectors, linear accelerators and other image software processing solutions, which are mission critical components of a variety of X-ray based diagnostic imaging equipment.

These products are used in medical imaging as well as in industrial and security imaging applications such as general X-ray, computed tomography (“CT”), C-arms, angiography, fluoroscopy, mammography, and dental.

In addition, our components are also used in security and quality inspection systems, as well as for analysis and measurement applications in industrial manufacturing applications.

Global original equipment manufacturers (“OEMs”) incorporate our X-ray imaging components in their systems to detect, diagnose, protect and inspect.

As of October 2, 2020, we had approximately 2,000 full-time equivalent employees, located at manufacturing and service center sites in North America, Europe, and Asia.

Our products are sold in three geographic regions:

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Our success depends, among other things, on our ability to anticipate and respond to changes in our markets, the direction of technological innovation and the demands of our customers.

We continue to invest in research and development and employ over 500 engineers.

Combining this focus on innovation and product performance with strong long-term customer relationships allows us to partner with our customers to bring industry-leading products to the X-ray imaging market.

We continue to work to improve the life and quality of our imaging components and leverage our scale as the largest X-ray imaging component supplier to provide cost-effective solutions for our customers.

Demand for our products can also be impacted by geo-political factors, including tariffs on key imported materials used in manufacturing our products and also on X-ray imaging products we sell to customers outside the United States.

The escalation of trade conflicts between the United States and China has negatively impacted our business and are expected to continue.

We continue to invest in research and development and employ approximately 500 individuals in product development.

Combining this focus on innovation and product performance with strong long-term customer relationships allows us to collaborate with our customers to bring industry-leading products to the X-ray imaging market.

We continue to work to improve the life and quality of our imaging components and leverage our scale as one of the largest independent X-ray imaging component suppliers to provide cost-effective solutions for our customers.

Impact of COVID-19

The unprecedented nature of the COVID-19 pandemic and its impact on the global economy has created a disruption to our business that includes increased uncertainty in demand for certain products for medical and industrial applications, as well as increased variability in our supply chain and manufacturing productivity.

The economic downturn triggered by COVID-19 has led to significantly lower demand from our customers and delays in equipment installations.

In conjunction with this reduced forecast and uncertainty beyond the forecast horizon, we evaluated our product offering and decided to discontinue certain low margin, low demand products.

As a result, during the third quarter of fiscal year 2020 we took an approximately $15.8 million pre-tax non-cash charge for the write-down of associated inventory and restructuring activity, impaired $2.8 million of intangible assets and wrote off a $2.7 million cost investment in a privately-held company.

The COVID-19 pandemic has had a significant effect on hospitals, clinics and outpatient imaging centers as they have encountered declines in surgeries and other non-emergency procedures.

In some cases, certain healthcare facilities have been closed and non-emergency procedures have been deferred.

As a result, many hospitals, clinics and outpatient imaging centers have reduced their capital purchases of imaging equipment from OEMs which has led to lower demand for X-ray imaging components.

In addition, reduced usage of certain X-ray equipment has resulted in less demand for replacement components that wear-out with use.

Additionally, equipment installations were delayed, due to reduced access to healthcare institutions.

Partially offsetting this has been increased demand for CT and certain radiographic diagnostic imaging equipment used to screen for or assist in the treatment of respiratory diseases (such as COVID-19).

While healthcare systems and economies around the world have begun to reopen, customer demand has not returned to pre-pandemic levels, and the adverse effects of COVID-19 on our financial statements and results of operations have been significant.

While we believe that the fundamentals driving long-term demand in both our medical and industrial segments remain intact, we believe that in the near-term, reduced demand in our industrial segment and for certain higher end medical products will continue to

depress our results of operations.

While our manufacturing sites are currently up and running, COVID-19 and associated economic disruptions have had an adverse impact on our manufacturing capacity, supply chains and distribution systems, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments are taking.

Supply chain logistics have also become more challenging and while we have had success in localizing our supply chain through our “local-for-local” initiative, supply chain logistics could remain challenging.

The actions taken to combat COVID-19 have had, and we believe will continue to have, a negative impact on our operating results, cash flows and financial condition.

We expect uncertainty related to the COVID-19 pandemic to continue into the beginning of calendar year 2021.

While we have implemented safeguards and procedures and taken other measures to counter the impact of the COVID-19 pandemic, the full extent to which the COVID-19 pandemic has and will directly or indirectly impact us, including our business, financial condition, and results of operations, will depend on future developments that are highly uncertain and cannot be accurately predicted.

We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, suppliers, and stockholders.

Subsequent Measurement of Goodwill

Goodwill is not amortized but is tested annually, or more often if impairment indicators are present, for impairment at a reporting unit level, based on a comparison of the fair value of the reporting unit with its carrying amount.

Goodwill is tested for impairment via a one-step process by comparing the fair value of goodwill with its carrying amount.

We recognize an impairment for the amount by which the carrying amount exceeds the fair value.

We generally use both an income approach utilizing the discounted cash flow method ("DCF") and a market approach utilizing the public company market multiple method, when testing for impairment.

In the third quarter of 2020, changes in facts and circumstances and general market declines from COVID-19 resulted in reduced operating results.

We considered these circumstances and the potential long-term impact on cash flows associated with our reporting units and determined that an indicator of possible impairment existed within our Medical and Industrial reporting units.

Accordingly, we performed a quantitative impairment analysis to determine the fair values of those reporting units.

We used both an income approach utilizing the discounted cash flow method ("DCF") and a market approach utilizing the public company market multiple method.

We developed multiple forecasted future cash flow scenarios for the reporting units with varied recovery timing and sales impact assumptions.

Based on the output of the analysis, we determined that the fair values of both the Medical and Industrial reporting units exceeded their carrying amounts.

Accordingly, no impairment charges were required as of July 3, 2020.

However, an impairment charge was required for the Company's in-process R&D.

Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors.

Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions.

These assumptions and estimates include estimated future annual net cash flows, income tax rates, discount rates, revenue growth rates, forecasted gross margins, market multiples, terminal value and other market factors.

This fair value measurement was based on significant inputs not observable in the market and thus represents a Level 3 fair value measurement.

If current expectations of future revenue growth rates and forecasted gross margins, both in size and timing, are not met, if market factors outside of our control, such as discount rates, change, if market multiples decline, or if management’s expectations or plans otherwise change, including as a result of the development of our global five-year operating plan, then one or more of our reporting units might become impaired in the future.

The Company will continue to monitor the financial performance of and assumptions for its reporting units.

A future impairment charge for goodwill could have a material effect on the Company's consolidated financial position and results of operations.

Refer to Note 12.

Goodwill and Intangible Assets, in the accompanying notes to the consolidated financial statements for more information regarding goodwill.

Operating Segments and Products

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The segments align our products and service offerings with customer use in medical and industrial markets and are consistent with how the CODM evaluates the business for the allocation of resources.

The CODM allocates resources to and evaluates the financial performance of each operating segment primarily based on revenues and gross margin.

In our Medical business segment, we design, manufacture, sell and service X-ray imaging components for use in a range of radiographic or fluoroscopic imaging applications including, computed tomography (“CT”), mammography, oncology, cardiac, surgery, dental, and computer-aided detection.

We provide a broad range of X-ray imaging components for Medical customers, including X-ray tubes, digital detectors, high voltage connectors, image-processing software and workstations, computer-aided diagnostic software, collimators, automatic exposure control devices, generators, heat exchangers, ionization chambers and buckys.

A significant portion of our revenues come from the sales of high-end X-ray tubes used in CT imaging and high-end dynamic digital detectors used in fluoroscopic and 3D dental imaging applications.

These upper-tier imaging components are characterized by increased levels of technological complexity, engineering and intellectual property that typically allow these products to have a higher sales price and gross margin.

The digital detector market continues to mature from initial product introductions that were made approximately 15 years ago.

For the past few years, we have experienced price erosion for these products, predominantly in the highly-competitive market for radiographic detectors.

We anticipate this trend will continue in the foreseeable future.

Our X-ray imaging components are primarily sold to OEM customers that incorporate our products into their X-ray imaging systems for a variety of medical modalities and industrial applications.

To a much lesser extent, we also sell our X-ray imaging components to independent service companies, distributors and directly to end-users for replacement purposes.

In China, the government is broadening the availability of healthcare services throughout the country.

As a result, the number of diagnostic X-ray imaging systems, including CT, has grown significantly.

We are developing CT tubes and related subsystems for Chinese OEMs as they introduce new CT imaging systems in China.

Over the long-term, we anticipate that China-based revenues will increase as a percentage of our revenues.

For fiscal year 2019, revenues from X-ray imaging components shipped to China-based OEMs and distributors declined to approximately 8% of total company revenues from 10% in the prior year.

This decrease reflects a tariff-related decline in sales of radiographic digital detectors in China as well as lower non-OEM aftermarket sales, which more than offset an increase in sales of CT tubes to OEM customers.

We have taken certain actions to help us mitigate the impact of the trade war between the United States and China.

We have implemented changes to secure more non-China sources of supply of parts and materials used to manufacture our X-ray imaging products, and in September 2019, we received from the United States Trade Representative a temporary exclusion from Section 301 tariffs on certain parts and components imported from China into the United States.

We continue to expand manufacturing capabilities at our facilities in China, Germany and the Philippines.

In our Industrial business segment, we design, manufacture, sell and service X-ray imaging products for use a number of markets, including security applications, such as cargo screening at ports and borders and baggage screening at airports, as well as nondestructive testing and inspection applications used in a number of other markets.

The CODM allocates resources to and evaluates the financial performance of each operating segment primarily based on revenues and gross profit.

In our Medical segment, we design, develop, manufacture, sell and service X-ray imaging components, including X-ray tubes, digital detectors, high voltage connectors, image-processing software and workstations, 3D reconstruction software, computer-aided diagnostic software, collimators, automatic exposure control devices, generators, heat exchangers, ionization chambers and buckys.

These components are used in a range of medical imaging applications, including CT, mammography, oncology, cardiac, surgery, dental, and for other diagnostic radiography uses.

Our X-ray imaging components are sold primarily to OEM customers.

These OEM customers then design-in our products into their X-ray imaging systems for a variety of medical modalities.

A substantial majority of medical X-ray imaging OEMs globally are our customers, and many of these have been customers for over 25 years.

We believe one of the reasons for customer loyalty is that our hardware and software products are tightly integrated with our customers’ systems.

We work very closely with our customers to create custom built components for their systems based on technology platforms that we have developed.

Because our products are often customized for our customers’ specific equipment, it can be costly and complex for our customers to switch to another provider.

Once our components are designed into our customer’s equipment, our customers will typically continue to use us to supply any replacement components and for service and support for that equipment.

Some of our products are also included in product registrations for our customer’s equipment that require regulatory approval to change.

In addition to sales directly to OEM customers, we also sell our products to independent service companies and distributors and directly to end-users for replacement purposes.

We are one of the largest global manufacturers of X-ray components and each year we produce over 27,000 X-ray tubes and 20,000 X-ray detectors.

We estimate that our worldwide installed base of products is over 150,000 X-ray tubes, 150,000 X-ray detectors, 300,000 connect and control components and 15,000 software instances.

Replacement and service of our existing installed base makes up a significant portion of our revenue.

Many of our components need to be replaced regularly.

For example, CT X-ray tubes generally need to be replaced every 2 to 4 years.

In China, the replacement cycle for CT X-ray tubes can be as frequent as every 6 to 12 months due to high utilization of imaging equipment.

Other products such as X-ray Detectors have a useful life of as much as 7 years, but can require service and repairs during their useful life.

In addition, our detector customers often elect to upgrade products to newer technology before the end of a current product’s useful life.

X-ray imaging software is a relatively small part of our business with room to grow and includes consistent maintenance revenue on software licenses.

In China, the government is broadening the availability of healthcare services.

As a result, the number of diagnostic X-ray imaging systems, including CT imaging systems, has grown significantly.

We are developing CT X-ray tubes and related subsystems for Chinese OEMs as they introduce new systems in China.

We presently have multi-year pricing agreements for CT tubes with 8 medical X-ray imaging OEMs in China.

Over the long-term, our objective is to become the partner of choice both for OEMs and in the replacement market as CT systems become more widely adopted throughout the Chinese market.

In China, despite a COVID-19 related slowdown in the beginning of the year, demand for our products has returned, and full year fiscal 2020 results for China exceeded our pre-pandemic expectations.

In recent years our growth in China has been impacted by the trade war with the United States.

Our business has been impacted in two principal ways:

(1) imports of raw materials from China have become more expensive and (2) importing finished U.S.

manufactured products into China has also become more difficult and more expensive.

In order to mitigate the impact of tariffs on materials imported from China, we have implemented changes to secure more non-China sources of materials used to manufacture our X-ray imaging products.

With respect to imports into China, the additional tariffs imposed by the Chinese government have led to a decrease in sales of radiographic detectors manufactured outside of China.

To help address these issues, as well as to be closer to our global customer base, we continue to expand manufacturing capabilities at our facilities in China, Germany and the Philippines and also implemented local sourcing strategies to lower our costs and offer local content.

This local-for-local strategy has been well received by both our local customers as well as global OEMs, and acts as a natural hedge against trade wars and other potential supply chain disruptions.

In our Industrial segment, we design, develop, manufacture, sell and service X-ray imaging products for use in a number of markets, including security applications for cargo screening at ports and borders and also baggage screening at airports, and nondestructive testing and inspection applications used in a number of other vertical markets.

Our Industrial products include Linatron® X-ray linear accelerators, X-ray tubes, digital detectors and high voltage connectors.

In addition, we provide proprietary image-processing and detection software designed to work with these other Varex products to provide package solutions to our Industrial customers.

In addition, we license proprietary image-processing and detection software designed to work with other Varex products to provide packaged sub-assembly solutions to our Industrial customers.

Our Industrial business benefits from the research and development investment as well as manufacturing economies of scale on the Medical side of our business, as we continue to find new applications for our technology.

Along with more favorable pricing dynamics, this allows us to generally achieve higher gross profit for Industrial products relative to our Medical business.

In addition, our Industrial business benefits from our long-term service agreements for our Linatron® products.

The security market primarily consists of airport security for carry-on baggage, checked baggage and palletized cargo, as well as cargo security for the screening of trucks, trains and cargo containers at ports and borders.

The end customers for border protection systems are typically government agencies, many of which are in oil-based economies and war zones where there has been significant year over year variation in buying patterns.

The non-destructive testing market utilizes X-ray imaging to scan items for inspection of manufacturing defects and product integrity in a wide range of industries including the aerospace, automotive, oil and gas, food packaging, metal castings and 3D printing industries.

We provide X-ray sources, digital detectors, high voltage connectors and image processing software to OEM customers, system integrators and manufacturers.

Non-destructive testing and inspection verticals utilize X-ray imaging to scan items for inspection of manufacturing defects and product integrity in a wide range of industries including the aerospace, automotive, electronics, oil and gas, food packaging, metal castings and 3D printing industries.

In addition, new applications for X-ray sources are being developed, such as sterilization of food and its packaging.

We provide X-ray sources, digital detectors, high voltage connectors and image processing software to OEM customers, system integrators and manufacturers in a variety of these verticals.

We believe that the non-destructive testing market represents a significant growth opportunity for our business and we are actively pursuing new potential applications for our products.

The economic downturn triggered by the COVID-19 pandemic has reduced the demand for X-ray imaging equipment utilized in the non-destructive testing market as manufacturers have focused on cash preservation and have reduced spending for capital equipment.

Additionally, the unprecedented decrease in passenger air traffic has led to decrease in demand in the security market.

The Company expects uncertainty in demand to continue for at least the remainder of the current calendar year.

Our fiscal year is the 52- or 53-week period ending on the Friday nearest September 30.

Fiscal year 2019 was the 52-week period that ended September 27, 2019 , fiscal year 2018 was the 52-week period that ended September 28, 2018 , and fiscal year 2017 was the 52-week period ended September 29, 2017.

Fiscal year 2020 was the 53-week period that ended October 2, 2020, fiscal year 2019 was the 52-week period that ended September 27, 2019, and fiscal year 2018 was the 52-week period ended September 28, 2018.

Set forth below is a discussion of our results of operations for fiscal years 2020, 2019 and 2018.

Discussion of Results of Operations for Fiscal Year 2019 and 2018

Comparison of Results of Operations for Fiscal Year 2020 and 2019

Our annual report on Form 10-K for the fiscal year ended September 27, 2019, filed December 20, 2019, includes a discussion and analysis of our year-over-year changes, financial condition, and results of operations for the fiscal years ended September 27, 2019 and September 28, 2018 in Item 7 of Part II therein.

Revenues, net

(In millions)

(In millions) 2020 % Change 2019 % Change 2018

Medical $ 584.5 (2)% $ 596.8 (1)% $ 602.0

Industrial 153.8 (16)% 183.8 7% 171.4

Total revenues, net $ 738.3 (5)% $ 780.6 1% $ 773.4

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Industrial as a percentage of total revenues 21 % 24 % 22 %

Medical revenues decreased $5.2 million primarily due to decreased sales of radiographic digital detectors in China and non-OEM aftermarket X-ray tubes, partially offset by increased sales of digital detectors and X-ray tubes for oncology applications, OEM X-ray tubes for CT applications and the addition of revenues from the acquisition of Direct Conversion AB (publ) (“Direct Conversion”).

Industrial revenues increased $12.4 million due to increased sales of X-ray tubes for airport security, digital detectors for

inspection applications and the addition of revenues with the acquisition of Direct Conversion.

Medical revenues decreased $12.3 million primarily due to decreased sales of X-ray tubes and digital detectors for oncology, dental, mammography and fluoroscopic applications, offset by increase in sales of OEM X-ray tubes for CT applications and full year impact of revenues related to the acquisition of Direct Conversion in April of 2019.

Industrial revenues decreased $30.0 million due to decreased sales of X-ray tubes for airport security, digital detectors for

inspection applications and were partially offset by the full year impact of revenues related to the acquisition of Direct Conversion in April of 2019.

Revenues by Region

(In millions)

(In millions) 2020 % Change 2019 % Change 2018

$ 255.0 (10) % $ 282.6 2 % $ 275.8

231.5 (14) % 269.0 6 % 254.5

251.8 10 % 229.0 (6) % 243.1

Total revenues, net $ 738.3 (5) % $ 780.6 1 % $ 773.4

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APAC as a percentage of total revenues 34 % 29 % 31 %

The Americas revenues increased $6.8 million primarily due to increased sales of X-ray tubes partially offset by lower sales of digital detectors and computer-aided detection software.

EMEA revenues increased $14.5 million primarily due to increased sales of digital detectors, the addition of revenues from the acquisition of Direct Conversion in April of 2019 and higher sales of high voltage cables partially offset by lower sales of X-ray tubes.

APAC revenues decreased $14.1 million primarily due to decreased sales of radiographic digital detectors in China partially offset by the addition of revenues with the acquisition of Direct Conversion.

(In millions)

Total gross margin

The Americas revenues decreased $27.6 million primarily due to decreased sales of X-ray tubes, lower sales of digital detectors and computer-aided detection software as a result of the COVID-19 pandemic.

EMEA revenues were also impacted by COVID-19, and decreased $37.5 million primarily due to decreased sales of digital detectors, lower sales of high voltage cables, and lower sales of X-ray tubes partially offset by the full year impact of revenues from the acquisition of Direct Conversion in April of 2019.

APAC revenues increased $22.8 million primarily due to increased sales of OEM X-ray tubes in China and the full year impact of revenues from the acquisition of Direct Conversion.

(In millions) 2020 % Change 2019 % Change 2018

$ 136.4 (28) % $ 188.9 (1) % $ 190.5

53.8 (21) % 67.8 7 % 63.4

Total gross profit $ 190.2 (26) % $ 256.7 1 % $ 253.9

Medical gross margin 23 % 32 % 32 %

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Total gross margin 26 % 33 % 33 %

Gross margin percentage increased for fiscal year 2019 compared to 2018 .

The gross margin for fiscal year 2019 included $9.4 million of restructuring charges and purchase price accounting adjustments and the gross margin for fiscal year 2018 included

$7.3 million of restructuring charges.

The industrial gross margin percentage decreased primarily due to higher manufacturing costs and unfavorable product mix.

Gross margin decreased for fiscal year 2020 compared to 2019.

The gross profit for fiscal year 2020 included $22.2 million of restructuring and product discontinuation charges and purchase price accounting adjustments.

The gross profit for fiscal year 2019 included $9.4 million of restructuring charges and purchase price accounting adjustments.

The medical segment gross margin in 2020 decreased primarily due to restructuring and product discontinuation charges, higher manufacturing costs, and unfavorable product mix.

The industrial segment gross margin in 2020 decreased primarily due to lower sales volume and higher manufacturing costs.

Operating Expenses

(In millions)

(In millions) 2020 % Change 2019 % Change 2018

Research and development $ 78.9 1 % $ 78.1 (6) % $ 83.0

As a percentage of total revenues

10.7 % 10.0 % 10.7 %

Selling, general and administrative $ 142.2 11 % $ 128.1 4 % $ 123.4

As a percentage of total revenues

19.3 % 16.4 % 16.0 %

Impairment of intangible assets

$ 2.8 (42) % $ 4.8 60 % $ 3.0

As a percentage of total revenues

0.4 % 0.6 % 0.4 %

Operating expenses

$ 223.9 6 % $ 211.0 1 % $ 209.4

As a percentage of total revenues

30.3 % 27.0 % 27.1 %

Research and Development

Research and development costs for fiscal year 2019 decreased to 10% of revenues due to lower personnel costs and prototype material costs.

We are committed to investing in the business to support long-term growth and believe long-term research and development expenses of approximately 8% to 10% of annual revenues is the appropriate range that will allow us to innovate and bring new products to market for our global OEM customers.

Research and development costs for fiscal year 2020 increased to 10.7% of revenues due to higher prototype material costs.

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 19.3% for fiscal year 2020 from 16.4% for fiscal year 2019 due to higher audit and consulting fees associated with the remediation of internal control deficiencies and increased legal fees for patent litigation.

These were offset by reductions in personnel costs and other consulting fees.

These were partially offset by reductions in personnel and travel related expenses.

Impairment of intangible assets

Impairment of intangible assets increased for fiscal year 2019 to $4.8 million as compared to $3.0 million for fiscal year 2018 .

In connection with the July 2019 announcement of the Santa Clara facility shut down we made the decision to discontinue further efforts on certain in-process research and development intangible assets.

Impairment of intangible assets decreased for fiscal year 2020 to $2.8 million as compared to $4.8 million for fiscal year 2019.

In connection with the July 2019 announcement of the Santa Clara facility shut down we discontinued further efforts on certain in-process research and development intangible assets.

As a result, we recorded a corresponding impairment charge of $4.8 million in fiscal year 2019.

Restructuring included in the notes to our consolidated financial statements for further information.

Interest and Other Income (Expense), Net

The following table summarizes our interest and other income (expense), net:

(In millions)

Restructuring, included in the accompanying notes to our consolidated financial statements for further information.

Interest and Other Expense, Net

The following table summarizes our interest and other expense, net:

(In millions) 2020 % Change 2019 % Change 2018

Interest income

$ 0.1 — % $ 0.1 (50) % $ 0.2

Interest expense

(31.4) 49 % (21.1) (3) % (21.7)

Other income (expense), net

(7.6) 138 % (3.2) (219) % 2.7

Interest and other expenses, net $ (38.9) 61 % $ (24.2) 29 % $ (18.8)

Interest and other expense, net increased in fiscal year 2019 compared to fiscal year 2018, primarily due to a other expense from equity method investments compared to other income from equity method investments in the prior fiscal year.

A new joint venture investment was established in fiscal year 2019.

Interest and other expense, net increased in fiscal year 2020 compared to fiscal year 2019, primarily due to increased interest expense related the issuance of the Convertible Notes in June 2020, early extinguishment of debt and interest rate hedges in September 2020, and increased losses related to equity method investments compared to the prior fiscal year.

Taxes on Earnings

Effective tax rate 20.9 % 26.5 %

We had an income tax expense of $5.7 million and an income tax benefit of $2.6 million , for effective rates of 26.5% and (10.1)% , for fiscal years 2019 and 2018 , respectively.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (U.S.

Tax Reform) was enacted in the U.S.

which significantly revised the U.S.

corporate income tax structure.

Among the revisions impacting our effective tax rate are a lower U.S.

corporate statutory rate going from 35% to 21% effective January 1, 2018 and changes to the way foreign earnings are taxed.

As a September fiscal year filer, the lower corporate income tax rate was phased in with a U.S.

statutory federal rate of 24.5% in fiscal year ended September 28, 2018, and a rate of 21% for the fiscal year ended September 27, 2019.

We had an income tax benefit of $15.2 million and an income tax expense of $5.7 million, for effective rates of 20.9% and 26.5%, for fiscal years 2020 and 2019, respectively.

During fiscal year 2020, our effective tax rate varied from the U.S.

federal statutory rate of 21% primarily because of the favorable impact of U.S.

net operating losses to be carried back to tax years with greater U.S.

federal statutory rates.

These favorable tax items are mostly offset by the unfavorable impact of additional losses in certain foreign jurisdictions, limitations on interest expense, and R&D credits for which no benefit is recognized.

During fiscal year 2019, our effective tax rate varied from the U.S.

federal statutory rate of 21% primarily because of the favorable impact of changes to the U.S.

corporate tax structure resulting from U.S.

Tax Reform, U.S.

research and development tax credits, and tax windfalls for share-based compensation.

Tax Reform, and U.S.

research and development tax credits.

These favorable U.S.

tax items are offset by increases resulting from losses in certain foreign jurisdictions for which no benefit is recognized and earnings in other foreign jurisdictions that are taxed at higher rates.

During fiscal year 2018, our effective tax rate varied from the U.S.

federal statutory rate primarily because of the favorable impact of changes to the U.S.

corporate tax structure resulting from U.S.

The effective tax rate also differs from the U.S.

federal statutory rate due to increases resulting from U.S.

state income tax expense, losses in certain foreign jurisdictions for which no benefit is recognized, earnings in other foreign jurisdictions that are taxed at higher rates, and limitations on the deductibility of officers' compensation.

These are offset by decreases due to U.S.

research and development credits, tax windfalls for share-based compensation, and the release of a valuation allowance against loss carryforwards in certain foreign jurisdictions.

The SEC issued guidance under Staff Accounting Bulletin No.

118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) that allows for reasonable estimated amounts to be recorded and a measurement period of up to one year from the date of enactment to revise these provisional amounts as new information is obtained and additional guidance is issued.

During the three months ended December 28, 2018, the Company completed its analysis of U.S.

Tax Reform, and the accounting for the income tax effects has been finalized for the measurement period under SAB 118, with no significant adjustments from the provisional amounts.

During fiscal year 2019, additional U.S.

Tax Reform provisions, including GILTI (global intangible low-taxed income), BEAT (base-erosion anti-abuse tax), FDII (foreign-derived intangible income), limitations on interest expense deductions (if certain conditions apply), and other components became effective for us and, if applicable, have been included in the calculation of our fiscal year 2019 tax provision.

tax items were offset by losses in certain foreign jurisdictions for which no benefit is recognized as well as earnings in certain other foreign jurisdictions that are taxed at higher rates.

During fiscal year 2020, U.S.

Tax Reform provisions, including GILTI (global intangible low-taxed income), BEAT (base-erosion anti-abuse tax), FDII (foreign-derived intangible income), limitations on interest expense deductions, and other components, if applicable, have been included in the calculation of the fiscal year 2020 tax provision.

The determination of the tax effects of U.S.

Tax Reform may change following future legislation or further interpretation of U.S.

Tax Reform from various U.S.

Tax Reform from U.S.

Federal and state tax authorities.

These provisions became effective for us during fiscal year 2019.

The guidance for accounting for U.S.

Tax Reform requires taxpayers to make an election regarding the accounting for GILTI.

required taxpayers to make an election regarding the accounting for GILTI.

This policy election is to either:

(1) treat GILTI as a period cost if and when incurred, or (2) recognize deferred taxes for basis differences that are expected to reverse as GILTI in future years.

During fiscal year 2019, we made the accounting policy election to account for GILTI under the period cost method.

Discussion of Results of Operations for Fiscal Year 2018 and 2017

Revenues, net

(In millions)

Total revenues, net

Medical as a percentage of total revenues

Industrial as a percentage of total revenues

Medical revenues increased $45.1 million primarily due to an increase in sales of high-end radiographic digital detectors with the addition of revenues from the acquisition of the medical imaging business (“Acquired Detector Business”) of PerkinElmer, Inc., and from increased sales of X-ray tubes, including CT tubes to our OEM customers in China, and high voltage cables.

These increases in medical revenues were partially offset by a decrease in sales of 3-D dental digital detectors and low-end radiographic.

Industrial revenues increased $30.2 million due to increased sales of digital detectors from the addition of the Acquired Detector Business, and from increased sales of high-voltage industrial cables.

These increases were partially offset by a decrease of industrial digital detectors.

Revenues by Region

(In millions)

Total revenues, net

Americas as a percentage of total revenues

EMEA as a percentage of total revenues

APAC as a percentage of total revenues

The Americas revenues increased $36.0 million primarily due to increased sales of digital detectors from the addition of the Acquired Detector Business.

EMEA revenues increased $35.0 million primarily due to increased sales of digital detectors from the addition of the Acquired Detector Business partially offset by lower sales of security and inspection products and digital detectors.

APAC revenues increased $4.3 million due to increased sales of digital detectors from the addition of the Acquired Detector Business and higher sales of X-ray tubes, partially offset by lower sales of digital detectors.

(In millions)

Total gross margin

Medical gross margin %

Industrial gross margin %

Total gross margin %

The decrease in total gross margin percentage was due primarily to a product mix shift to lower margin products, restructuring charges of $7.3 million , including inventory markdowns of $3.1 million, higher digital detector product and indirect costs in our Santa Clara facility and the impact of tariffs in the fourth quarter.

The decrease in medical gross margin percentage were primarily due to product mix shifts towards lower margin X-ray tubes and higher digital detector unit products costs in our Santa Clara facility.

The decrease in industrial gross margin percentage were primarily due to product mix shifts towards lower margin cargo scanning products and price erosion in this same product category.

Operating Expenses

(In millions)

Research and development

As a percentage of total revenues

Selling, general and administrative (1)

As a percentage of total revenues

Impairment of intangible assets

As a percentage of total revenues

Operating expenses

As a percentage of total revenues

Selling, general and administrative expenses include $12.4 million of corporate costs allocated to us by Varian in fiscal year 2017.

Research and Development

The increase in research and development expenses as a percentage of revenue was due to the continued acceleration and development of digital detector projects and prototype materials costs for CT X-ray tubes.

Selling, General and Administrative

Selling, general and administrative expenses as a percentage of total revenues increased primarily as a result of restructuring and impairment charges related to the Acquired Detector Business, increased amortization of intangible assets, increased share-based compensation expense and an increase in costs related to implementation of certain productivity initiatives.

Impairment of intangible assets

Impairment of intangible assets for fiscal year 2018 were $3.0 million , while there was no impairment of intangible assets for fiscal year 2017 .

In connection with the restructuring plan that was announced in July 2018 we recorded an impairment charge of $3.0 million related to certain intangible assets.

Restructuring included in the notes to our consolidated financial statements for further information.

Interest and Other Income (Expense), Net

The following table summarizes our interest and other income (expense), net:

(In millions)

Interest income

Interest expense

Other income (expense), net

Interest and other expenses, net

The increase in interest and other income (expense), net was primarily due to higher interest expense as a result of higher weighted average interest rates and higher weighted average outstanding borrowings under our credit agreement and foreign currency translation losses, partially offset by income from equity method investments.

Taxes on Earnings

Effective tax rate

We had an income tax benefit of $2.6 million and an income tax expense of $22.8 million for the year ended September 28, 2018 and September 29, 2017, respectively, for effective rates of (10.1)% and 30.5% , respectively.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“U.S.

Tax Reform”) was enacted in the U.S.

which significantly revised the U.S.

corporate income tax structure.

Among the revisions impacting our effective tax rate are a lower U.S.

corporate statutory rate going from 35% to 21% effective January 1, 2018 and changes to the way foreign earnings are taxed.

As a September fiscal year filer, the lower corporate income tax rate has been phased in resulting in a U.S.

statutory federal rate of 24.5% for the fiscal year ended September 28, 2018.

During fiscal year 2018, our effective tax rate varied from the U.S.

federal statutory rate of 24.5% primarily because of the favorable impact of changes to the U.S.

corporate tax structure resulting from U.S.

The effective tax rate also differs from the U.S.

federal statutory rate due to increases resulting from U.S.

These are offset by decreases due to U.S.

research and development credits, tax windfalls for share-based compensation, and the release of a valuation allowance against loss carryforwards in certain foreign jurisdictions.

During fiscal year 2017, our effective tax rate varied from the U.S.

federal statutory rate of 35% primarily because of a difference in the mix of earnings by jurisdiction, and overall global tax structure for Varex as a stand-alone company compared to the prior year when it was part of Varian.

It was also impacted by the benefit of adjustments to certain deferred tax assets and the release of valuation allowances in jurisdictions where increased earnings allowed for the utilization of net operating loss carryforwards.

During fiscal year 2018, as a result of U.S.

Tax Reform, we recorded income tax expense of $3.7 million for the tax on the deemed repatriation of deferred foreign earnings offset by a tax benefit of $10.9 million due to the revaluation of net deferred taxes.

We made the accounting policy election to account for GILTI under the period cost method.

Liquidity and Capital Resources

We assess our liquidity in terms of our ability to generate cash to fund our operating, including working capital and investing activities.

We continue to generate sufficient cash from operating activities and believe that our operating cash flow, availability under our existing credit facility, current working capital and other sources of liquidity will be sufficient to allow us to continue to invest in our existing businesses, consummate strategic acquisitions and manage our capital structure on a short and long-term basis.

Availability under our credit facility was $91.0 million as of September 27, 2019 , although on October 8, 2019 , we permanently reduced the revolving credit commitment under the credit facility by $25.0 million to $125.0 million .

Although we believe that our future cash from operations, together with our access to banking and capital markets, will provide adequate resources to fund our operating and financing needs, our access to, and the availability of, financing on acceptable terms in the future will be affected by many factors, including:

(i) the liquidity of the overall capital markets and (ii) the current state of the economy.

There can be no assurances that we will continue to have access to these markets on terms acceptable to us.

See “Risk Factors” for a further discussion.

Subsequent to fiscal year 2019 we did not comply with the covenant under the Credit Agreement to timely deliver our fiscal year 2019 annual financial statements.

However, upon the filing of this Annual Report with the SEC, we will be able to deliver the fiscal year 2019 annual financial statements within the 30-day cure period set forth in the Credit Agreement and consequently no event of default will occur.

At September 27, 2019 we had $364.4 million in long-term debt and $30.7 million of current maturities of long-term debt, net of deferred issuance costs of $5.7 million .

Borrowings in the notes to our consolidated financial statements for more information regarding our existing credit facility.

We assess our liquidity in terms of our ability to generate cash to fund our operations, including working capital and investing activities.

We continue to generate cash from operating activities and believe that our operating cash flow, cash on our balance sheet and availability under our new ABL Facility will be sufficient to allow us to continue to invest in our existing businesses, consummate strategic acquisitions and manage our capital structure on a short and long-term basis, and are sufficient to meet our anticipated operating cash need for at least the next 12 months.

The maximum availability under our ABL Facility was $100.0 million as of October 2, 2020, however, the borrowing base under the ABL Facility fluctuates from month-to-month depending on the amount of eligible accounts receivable and inventory.

“Risk Factors” for a further discussion.

At October 2, 2020 we had $452.8 million in long-term debt and $2.5 million of current maturities of long-term debt, net of deferred issuance costs of $56.0 million.

Borrowings, in the accompanying notes to our consolidated financial statements for more information regarding our indebtedness.

Cash and Cash Equivalents

The following table summarizes our cash and cash equivalents:

(In millions)

September 27, 2019

September 28, 2018

(In millions) October 2, 2020 September 27, 2019 $ Change % Change

Cash and cash equivalents $ 100.6 $ 29.9 $ 70.7 236.5 %

The following table summarizes the changes in our debt outstanding:

(In millions)

September 27, 2019

September 28, 2018

(In millions) October 2, 2020 September 27, 2019 $ Change % Change

Current portion of Term Facility $ — $ 29.4 $ (29.4) (100.0) %

Current portion of other long-term debt

Current portion of Other debt 2.5 1.3 1.2 92.3 %

Revolving Credit Facility — 59.0 (59.0) (100.0) %

Long-Term portion of Term Facility

Long-term portion of other debt

Asset-Based Loan — — — N/A

Term Facility — 308.6 (308.6) (100.0) %

Convertible Senior Unsecured Notes 200.0 — 200.0 N/A

Senior Secured Notes 300.0 — 300.0 N/A

Other debt 8.8 2.5 6.3 252.0 %

Total debt outstanding, gross 511.3 400.8 110.5 27.6 %

Debt issuance costs

Debt issuance costs - Credit Agreement — (5.7) 5.7 (100.0) %

Unamortized discount and issuance costs - Convertible Notes (50.4) — (50.4) N/A

Debt issuance costs - Senior Secured Notes (5.6) — (5.6) N/A

Total debt outstanding, net $ 455.3 $ 395.1 $ 60.2 15.2 %

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For fiscal year 2020, compared to fiscal year 2019, net cash provided by operating activities were as follows:

Net earnings were $15.8 million compared to $28.3 million ,

Non-cash adjustments to net earnings of $51.4 million compared to $51.0 million ,

• Net losses were $(57.4) million compared to net earnings of $15.8 million,

• Non-cash adjustments to net earnings were $84.5 million compared to $51.4 million,

• Operating assets and liabilities activity:

Accounts receivable decreased by $14.8 million compared to $9.0 million ,

Inventories increased by $11.1 million compared to $2.4 million ,

Prepaid expenses and other assets decreased $4.3 million compared to $2.0 million ,

Accounts payable decreased by $9.0 million compared to an increase of $5.2 million ,

Accrued liabilities and other long-term operating liabilities increased by $10.9 million compared to a decrease of $10.2 million , and

Deferred revenues decreased by $5.2 million compared to an increase of $2.4 million .

For fiscal year 2017, net cash provided by operating activities was $75.2 million and consisted of net earnings of $52.0 million , increases from non-cash items of $29.2 million and decreases from operating assets and liabilities activities of $6.0 million .

◦ Accounts receivable decreased by $17.7 million compared to a decrease of $14.8 million,

◦ Inventories increased by $42.7 million compared to an increase of $11.1 million,

◦ Prepaid expenses and other assets increased $9.3 million compared to a decrease of $4.3 million,

◦ Accounts payable increased by $14.3 million compared to a decrease of $9.0 million,

◦ Accrued liabilities and other long-term operating liabilities increased by $8.1 million compared to an increase of $10.9 million, and

◦ Deferred revenues decreased by $2.0 million compared to a decrease of $5.2 million.

Net cash used in investing activities.

Cash used in investing activities was $93.2 million , $25.2 million , and $292.0 million for the fiscal years 2019 , 2018 and 2017 , respectively.

Net cash used in investing activities for fiscal year 2019 related primarily to the April 2019, acquisition of 98.2% of the outstanding shares of common stock of Direct Conversion for $ 69.5 million in cash, net of cash acquired, and capital expenditures for property plant and equipment of $19.8 million .

Net cash used in investing activities for fiscal year 2018 related primarily to an acquisition of an industrial imaging solutions provider for $4.8 million , and capital expenditures for property plant and equipment of $20.4 million .

Net cash used in investing activities for fiscal year 2017 related to the Acquired Detector Business for $271.8 million (net of cash acquired) and capital expenditures for property plant and equipment of $20.2 million .

Cash used in investing activities was $26.9 million and $93.2 million for the fiscal years 2020 and 2019, respectively.

Net cash used in investing activities for fiscal year 2020 related primarily to the building of our facility in the Netherlands as well as capital expenditures in our sources and detectors businesses.

Net cash used in investing activities for fiscal year 2019 related primarily to the acquisition of 98.2% of the outstanding shares of common stock of Direct Conversion for $69.5 million in cash, net of cash acquired, and capital expenditures for property plant and equipment of $19.8 million.

Net Cash Provided by (Used in) Financing Activities.

Financing activities for the fiscal year 2019 primarily consisted of borrowings under our credit agreements of $85.4 million , repayments of borrowings of $87.0 million , and net proceeds from equity plans of $2.5 million .

Financing activities for the fiscal year 2020 consisted of the issuance of $200.0 million in aggregate principal amount of 4.00% unsecured convertible senior notes due 2025 (“Convertible Notes”).

The net proceeds from the issuance of the Convertible Notes, after deducting transaction fees, were approximately $193.1 million.

In connection with offering the Convertible Notes, we separately entered into privately negotiated convertible note hedge transactions.

We used $11.2 million of the net proceeds from the issuance of the Convertible Notes to pay the cost of the convertible note hedge transactions.

Additionally, during fiscal year 2020 we issued $300.0 million aggregate principal amount of 7.875% Senior Secured Notes due 2027 (the "Senior Secured Notes").

The net proceeds from the Senior Secured Notes after initial purchasers’ discount, commissions and estimated fees and expenses of $5.6 million, were approximately $294.4 million.

We used $267.5 million of the proceeds from the offering to terminate and repay our previously existing credit agreement.

Financing activities for the fiscal year 2019 primarily consisted of borrowings under our credit agreements of $85.4 million, repayments of borrowings of $87.0 million, and net proceeds from equity plans of $2.5 million.

Financing activities for the fiscal years 2017 primarily consisted of borrowings under our credit agreements of $749.0 million and net transfers from Varian of $5.0 million , partially offset by distributions to Varian of $227.1 million , repayments of borrowings of $255.0 million and payment of debt issuance costs of $11.9 million .

Days Sales Outstanding

Trade accounts receivable days sales outstanding (“DSO”) was 63 days and 68 days at September 27, 2019 and September 28, 2018 , respectively.

Trade accounts receivable days sales outstanding (“DSO”) was 66 days and 63 days at October 2, 2020 and September 27, 2019, respectively.

Our accounts receivable and DSO are impacted by a number of factors, primarily including the timing of product shipments, collections performance, payment terms, the mix of revenues from different regions and the effects of economic instability.

Contractual Obligations

The following table summarizes, as of September 27, 2019 , the total amount of future payments due in various future periods:

The following table summarizes, as of October 2, 2020, the total amount of future payments due in various future periods:

Payments Due by Period

(In millions)

Fiscal Year 2020

Fiscal Years 2021-2022

Fiscal Years 2023-2024

(In millions) Total Fiscal Year 2021 Fiscal Years 2022-2023 Fiscal Years 2024-2025 Beyond

Operating lease obligations $ 34.1 $ 7.1 $ 10.8 $ 6.8 $ 9.4

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dpiX fixed cost commitment 3.2 3.2 — — —

Dividends to redeemable interest

Dividends to MeVis noncontrolling interest 3.8 0.5 1.1 1.1 1.1

Supplier equipment acquisition 10.4 6.3 4.1 — —

Total $ 562.8 $ 19.6 $ 21.0 $ 210.8 $ 311.4

We lease office space under non-cancelable operating leases.

2 unchanged sentences

For further discussion regarding our borrowings, see Note 10.

Borrowings included in the notes to our consolidated financial statements.

Borrowings, included in the accompanying notes to our 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.

3 unchanged sentences

The amended agreement will continue unless the ownership structure of dpiX changes (as defined in the amended agreement).

In October 2015, we committed to grant the noncontrolling shareholders of MeVis:

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.

As of September 27, 2019 , noncontrolling shareholders together held approximately 0.5 million shares of MeVis, representing 26.3% of the outstanding shares.

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.

The put right for the MeVis shares expired in September 2020.

As of October 2, 2020, noncontrolling shareholders together held approximately 0.5 million shares of MeVis, representing 26.3% of the outstanding shares.

Contingencies

1 unchanged sentence

Such matters are subject to many uncertainties and outcomes are not predictable with assurance.

See Part 1, Item 3 of this Annual Report for additional information regarding legal proceedings and Note 11 , Commitments and Contingencies in the notes to our consolidated financial statements for further information regarding certain of our contractual obligations and contingencies, which discussion is incorporated herein by reference.

See Part 1, Item 3 of this Annual Report for additional information regarding legal proceedings and Note 13.

Commitments and Contingencies, in the notes to our consolidated financial statements for further information regarding certain of our contractual obligations and contingencies, which discussion is incorporated herein by reference.

Off-Balance Sheet Arrangements

2 unchanged sentences

Except for losses related to property damages, the maximum potential amount of future payments we could be required to make under these arrangements is unlimited.

As of September 27, 2019 , we have not incurred any material costs to defend lawsuits or settle claims related to these indemnification arrangements.

As of October 2, 2020, we have not incurred any material costs to defend lawsuits or settle claims related to these indemnification arrangements.

As a result, we believe the estimated fair value of these arrangements is minimal.

4 unchanged sentences

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.

For a discussion of how these estimates and other factors may affect our business, see “Risk Factors.”

For a discussion of how these estimates and other factors may affect our business, see Item 1A.

“Risk Factors.”

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.

For a discussion of how these estimates and other factors may affect our business, see Item 1A, “Risk Factors.”

For a discussion of how these estimates and other factors may affect our business, see Item 1A.

“Risk Factors.”

Inventories are valued at the lower of cost or net realizable value.

13 unchanged sentences

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, the impairment test for goodwill is a two-step process.

Step one consists of a comparison of the fair value of a reporting unit against its carrying amount, including the goodwill allocated to each reporting unit.

If we determine that a quantitative analysis is necessary, we perform a quantitative 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.

We determine the fair value of our reporting units based on a combination of income and market approaches.

The income approach is based on the present value of estimated future cash flows of the reporting units and the market approach is based on a market multiple calculated for each reporting unit based on market data of other companies engaged in similar business.

If the carrying amount of the reporting unit is in excess of its fair value, step two requires the comparison of the implied fair value of the reporting unit’s goodwill against the carrying amount of the reporting unit’s goodwill.

Any excess of the carrying value of the reporting unit’s goodwill over the implied fair value of the reporting unit’s goodwill is recorded as an impairment loss.

If the carrying amount of the reporting unit is in excess of its fair value, the difference between the fair value and carrying amount is recorded as an impairment loss.

The impairment test for intangible assets with indefinite useful lives, if any, consists of a comparison of fair value to carrying value, with any excess of carrying value over fair value being recorded as an impairment loss.

In fiscal years 2020, 2019 and 2018, we performed the annual goodwill impairment test for our two reporting units and found 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).

For both reporting units, based upon the annual goodwill analysis that we performed as of the first day of the fourth quarter of the respective fiscal years, either step one of the impairment test was not completed based on evaluation of qualitative factors or, if step one was completed, the fair value was substantially in excess of carrying value.

For both reporting units, based upon the annual goodwill analysis that we performed as of the first day of the fourth quarter of the respective fiscal years, either a quantitative analysis of the impairment test was not completed based on evaluation of qualitative factors or, if quantitative analysis was completed, the fair value was substantially in excess of carrying value.

However, significant changes in our projections about our operating results or other factors could cause us to make interim assessments of impairments in any quarter that could result in some or all of the goodwill being impaired.

In the third quarter of 2020, changes in facts and circumstances and general market declines from COVID-19 resulted in reduced operating results.

Accordingly, we performed a quantitative impairment analysis to determine the fair values of those reporting units.

We used both an income approach utilizing the discounted cash flow method ("DCF") and a market approach utilizing the public company market multiple method.

We developed multiple forecasted future cash flow scenarios for the reporting units with varied recovery timing and sales impact assumptions.

Based on the output of the analysis, we determined that the fair values of both the Medical and Industrial reporting units substantially exceeded their carrying amounts.

Accordingly, no impairment charges were required as of July 3, 2020.

Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors.

Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions.

This fair value measurement was based on significant inputs not observable in the market and thus represents a Level 3 fair value measurement.

The Company will continue to monitor the financial performance of and assumptions for its reporting units.

A future impairment charge for goodwill could have a material effect on the Company's consolidated financial position and results of operations.

We will continue to make assessments of impairment on an annual basis or more frequently if indicators of potential impairment arise.

Impairment of Investments

We have investments in privately held companies that are accounted for under the equity method of accounting as we hold at least a 20% ownership interest or have the ability to exercise significant influence in these investments.

We monitor these investments for events or circumstances indicative of potential impairment, and we make appropriate reductions in carrying values if we determine that an impairment charge is required, based primarily on the financial condition, near-term prospects and recent financing activities of the investee.

Taxes on Earnings

Current income tax expense is the amount of income taxes expected to be payable for the current year.

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.

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On December 22, 2017, the U.S.

Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (“U.

Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (“U.S.

Tax Reform”).

4 unchanged sentences

Tax Reform to the extent they are effective during the current reporting period.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic.

The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021.

In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes.

On July 2, 2020, the US Treasury Department issued a regulation providing an election to waive NOL carryback to a former consolidated group.

We have evaluated the impact of the CARES Act and concluded the NOL carryback provision of the CARES Act will result in a material cash tax benefit.

The CARES Act retroactively clarified treatment of qualified improvement property as 15-year property instead of 39-year property as defined under U.S.

Certain qualified improvement property is also eligible for bonus depreciation.

Recent Accounting Standards or Updates Not Yet Effective

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 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 total backlog at September 27, 2019 was $265.2 million , a decrease of 13.9% from the backlog of $308.1 million at September 28, 2018 .

Our total backlog at October 2, 2020 was $207.6 million, a decrease of 21.7% from the backlog of $265.2 million at September 27, 2019.

Orders may be revised or canceled, either according to their terms or as customers’ needs change.

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These pricing agreements include volume ranges under which orders are placed.

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis