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Item 9A. Controls and Procedures

2020-11-30 compared with 2019-12-20 · 933 added, 795 removed, 772 unchanged (69% of the section changed)

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Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that such information required to be disclosed is accumulated and communicated to management, including

our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

The Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), with assistance from other members of management, have evaluated the effectiveness of our disclosure controls and procedures as of September 27, 2019 and, based on their evaluation, the CEO and CFO have concluded that the disclosure controls and procedures were not effective as of such date due to the material weaknesses in internal control over financial reporting described below.

To address the material weaknesses described below, and prior to filing this Annual Report on Form 10-K, we performed additional analysis and other post-closing procedures to determine our consolidated financial statements are prepared in accordance with generally accepted accounting principles.

Based on these procedures, management has concluded that our consolidated financial statements included in this Form 10-K have been prepared in accordance with generally accepted accounting principles and our CEO and CFO have certified that, based on their knowledge, the consolidated financial statements, and other financial information included in this Form 10-K, fairly present in all material respects the financial condition, results of operations and cash flows for the periods presented.

PricewaterhouseCoopers LLP, an independent registered public accounting firm, has issued an unqualified opinion on our consolidated financial statements, which appears herein.

The Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), with assistance from other members of management, have evaluated the effectiveness of our disclosure controls and procedures as of October 2, 2020 and, based on their evaluation, the CEO and CFO have concluded that the disclosure controls and procedure s were not effective as of such date due to the material weaknesses in internal control over financial reporting described in "Management's Annual Report on Internal Control Over Financial Reporting" below.

Management's Annual Report on Internal Control Over Financial Reporting

Our management 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.

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 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 and includes those policies and procedures that:

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(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Our management, including the CEO and CFO, believes that any disclosure controls and procedures or internal control over financial reporting, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of internal controls are met.

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.

Under the supervision and with the participation of our management, we assessed the effectiveness of our internal control over financial reporting as of September 27, 2019, using the criteria described in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Under the supervision and with the participation of our management, we assessed the effectiveness of our internal control over financial reporting as of October 2, 2020, using the criteria described in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

As a result of that evaluation, our management concluded that the Company's internal control over financial reporting was not effective as of October 2, 2020, the end of the period covered by this Form 10-K, because of the material weaknesses in our internal control over financial reporting.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

We have identified the following control deficiencies that constituted material weaknesses in our internal control over financial reporting as of September 27, 2019:

We did not design and maintain an effective risk assessment process to identify and assess the risks in our business processes, specifically, we did not adequately identify new and evolving risks of material misstatement and design and implement controls to address those risks as a result of changes to our business operating environment including adoption of new accounting principles.

We also did not maintain an effective control environment as we had an insufficient complement of resources with the requisite knowledge and experience to create the proper environment for effective internal control over financial reporting such that corrective activities to our internal control over financial reporting are appropriately applied, prioritized, and implemented in a timely manner.

Although these deficiencies did not result in adjustments to our consolidated financial statements, until remediated, they could result in material misstatements potentially impacting all financial statement accounts and disclosures in our annual or interim consolidated financial statements that would not be prevented or detected.

These material weaknesses contributed to the following control deficiencies, which are also considered to be material weaknesses:

We did not design and maintain effective controls related to accounting for revenue, deferred revenue and related accounts receivable, including maintaining effective business process controls to prevent or detect misstatements in the processing of customer transactions.

We have identified the following control deficiencies that constituted material weaknesses in our internal control over financial reporting as of October 2, 2020:

• Control Environment:

We did not maintain an effective control environment as we had an insufficient complement of resources with the requisite knowledge and experience to create the proper environment for effective internal control over financial reporting such that corrective activities to our internal control over financial reporting are appropriately applied, prioritized, and implemented in a timely manner.

• Risk Assessment :

We did not design and maintain an effective risk assessment process to identify and assess the risks in our business processes.

Specifically, we did not adequately identify new and evolving risks of material misstatement and design and implement controls to address those risks as a result of changes to our business operating environment.

These material weaknesses contributed to the following material weaknesses:

• Inventory and cost of revenues:

We did not design and maintain effective controls related to accounting for inventory and cost of revenues, including maintaining effective business process controls to prevent or detect misstatements in the existence, accuracy, and presentation and disclosure of inventory.

Specifically we did not maintain effective controls related to the verification of inventory at third party vendor locations and the presentation and disclosure of inventory classification.

• Financial Reporting:

We did not design and maintain effective controls over our financial reporting close process to prevent or detect material misstatements in our financial statements.

Specifically, we did not design and maintain effective controls related to the completeness, accuracy and elimination of intercompany balances and ensuring appropriate segregation of duties as it relates to the preparation and review of journal entries.

The deficiencies relating to inventory and financial reporting resulted in immaterial audit adjustments and out of period adjustments to the Company's consolidated financial statements for the fiscal year ended and as of October 2, 2020.

Additionally, these control deficiencies could result in misstatements impacting the aforementioned accounts or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

The effectiveness of the Company’s internal control over financial reporting as of October 2,2020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included in “Item 8.

Financial Statements and Supplementary Data.”

Remediation of Previously Reported Material Weaknesses in Fiscal Year 2019 Form 10-K

We previously identified and disclosed in our Annual Report on Form 10-K for the year ended September 27, 2019, the following material weaknesses in our internal control over financial reporting, of which certain aspects have been remediated:

• We did not design and maintain effective controls related to accounting for revenue, deferred revenue and related accounts receivable, including maintaining business process controls to prevent or detect misstatements in the processing of customer transactions.

Specifically, we did not design and maintain effective controls related to the review of the completeness and accuracy of customer order entry, quantity and pricing.

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• We did not design and maintain effective controls related to accounting for inventory and cost of revenues, including maintaining effective business process controls to prevent or detect misstatements in the accuracy and valuation of inventory.

Specifically, we did not maintain effective controls related to inventory count procedures, the valuation of inventory at lower of cost and net realizable value and presentation and disclosure of inventory classifications .

Specifically, we did not maintain effective controls related to inventory count procedures and the valuation of inventory at lower of cost and net realizable value.

• We did not design and maintain effective controls over our financial reporting close process to prevent or detect material misstatements in our financial statements.

Specifically, we did not maintain an effective business performance monitoring review control at our international entities, maintain effective controls related to the elimination of intercompany balances, design and maintain controls to identify post-close events which occur before the financial statements are available to be issued and design and maintain effective control over the review of the statement of cash flows.

The deficiencies in revenue, inventory and financial reporting close process resulted in immaterial audit adjustments and out of period adjustments to the Company’s consolidated financial statements for the fiscal years ended and as of September 27, 2019 and September 28, 2018 and respective interim periods.

Additionally, until remediated, these deficiencies could result in a material misstatement impacting the aforementioned accounts and disclosures in our annual or interim consolidated financial statements that would not be prevented or detected.

Accordingly, our management has determined these deficiencies constitute material weaknesses.

Because of the material weaknesses described above, management concluded that we did not maintain effective internal control over financial reporting as of September 27, 2019.

A subsidiary of Varex acquired Direct Conversion AB on April 29, 2019.

Management has excluded Direct Conversion AB from its evaluation of the effectiveness of internal control over financial reporting as of September 27, 2019.

The total assets and total revenues of Direct Conversion represent approximately 0.8% and 0.8%, respectively, of the related consolidated financial statements amounts as of and for the fiscal year ended September 27, 2019.

Our independent registered public accounting firm, PricewaterhouseCoopers LLP, has issued an adverse audit report on the effectiveness of our internal control over financial reporting as of September 27, 2019, which appears herein.

Status of Remediation Efforts

Remediation of Material Weaknesses Reported in Fiscal Year 2018 Form 10-K

We have devoted substantial effort to remediating the areas of material weakness identified in fiscal year 2018 and continue to perform a risk assessment process to identify, design, implement, and re-evaluate the control activities.

While we continue to enhance our risk assessment process to ensure that it is comprehensive, management concluded that certain material weaknesses identified in fiscal year 2018 and reported in our Annual Report on Form 10-K as of September 28, 2018, were remediated in fiscal year 2019.

Specifically, material weaknesses were remediated in the areas of:

information technology general controls (ITGCs) around user access and program change controls;

accounting for our operations in Germany, including maintaining effective business process controls and segregation of duties related to the authorization of transactions and journal entries, and the cutoff, completeness and accuracy of transactions.

Implementation of improvements in ITGCs around user access and program change controls included the following:

Performance of Control Environment Review - As part of the overall risk assessment process, we identified relevant applications and tools to enhance overall controls compliance.

Implementation of Control Design Review - We made significant changes to the control environment by redesigning certain controls to be aligned with the Control Objectives for Information and Related Technology (COBIT) framework and designing additional controls to ensure all identified risks were addressed.

The result is effectively designed information technology general controls in the areas of change management, computer operations, backup and recovery, and security were subject to review.

Security controls were reviewed by application.

Performance of Deficiency Specific Remediation Plans - We implemented remediation plans for each of the deficiencies, categorized by remediation actions, process implementation, and control rationalization.

Our remediation plans were focused on identifying and mitigating the risk, and our design effectiveness and operational testing were performed.

S ensitive access identified as being inappropriate was removed from our users of in-scope systems.

Implemented real time monitoring in the form of reports and e-mail notifications.

This monitoring acts as an alert whenever sensitive access has been executed.

Sensitive access can now only be used through a specific defined process and requires a service ticket in advance.

We review sensitive access for appropriateness quarterly.

Implemented a specific segregation of duties rule-set, ensuring conflict-free roles are maintained, and user level segregation of duty conflicts are identified for remediation or mapping to certified mitigating controls.

Enhanced the provisioning process by adding a preventative control for new and updated user access by incorporating our specific segregation of duties rule-set to ensure on-going compliance is maintained, and sensitive access and segregation of duty conflicts are not re-introduced into the environment.

Completed a user access review for all accounts within our ERP system.

Change Management:

We implemented an updated change management process and policy, including documented pre-approvals, testing procedures, and post approvals, as needed.

Appropriate segregation of duties were implemented over making source code changes and migrating changes to the production environment.

Our users with developer access do not have access to push code to production.

Improved Germany Control Environment - We engaged outside consultants in Germany to perform a detailed review of business process control documentation, including segregation of duties, authorization of transactions, journal entries, cutoff, completeness and accuracy of transactions, key controls to execute remediation activities, and to implement appropriate controls, assess design and test operating effectiveness, and formalize our corporate-level review and approval.

Ongoing Remediation Efforts

Management has been implementing, and continues to implement, measures designed to ensure (a) that control deficiencies contributing to the remaining material weaknesses in the areas of risk assessment, control environment, revenue, inventory, and financial reporting close are remediated, and (b) that these controls are designed, implemented, and operating effectively.

Specifically, we are implementing the following changes:

Risk Assessment Process - We are devoting substantial effort in performing a comprehensive risk assessment process to identify, design, implement, and re-evaluate our control activities related to the above mentioned material weakness in our internal control over financial reporting, including monitoring controls related to the design and operating effectiveness of certain control activities pertaining to our business process environment, as more fully discussed below.

Control Environment - We are committed to and are developing plans to attract, develop, and retain additional competent individuals in alignment with our objectives to remediate areas of material weakness, and to create the proper environment for effective internal control over financial reporting such that corrective activities to our internal control over financial reporting are appropriately applied, prioritized, and implemented in a timely manner.

In addition, we are reviewing our oversight and supervision of our outside consultants that assist in our evaluation of internal controls and improving project management over internal controls

Revenue Processes - We are implementing controls over (i) standard contract reviews, (ii) customer invoice reviews, (iii) review of monthly sales order changes and (iv) an addition of a management review control that reviews and approves the summary of service billings for the period.

We revised the revenue recognition controls due to the transition to ASC 606 and will continue to improve our review controls around the completeness and accuracy of customer order entry, quantity and pricing, and the continuing accounting for ASC 606.

Inventory Processes - We are implementing controls over (i) review of inventory adjustments and approvals and (ii) review over variance analysis.

We continue to improve our inventory count procedures, review and valuation controls over inventory.

Financial Close Processes - To be consistent with our consolidated monthly closing financial statement review meetings, we continue to enhance controls over international business performance reviews to include improved documentation of items for follow-up and resolution, expand our review over completeness and accuracy of intercompany balances, design controls

to identify post-close events which occur before the financial statements are available to be issued and enhance controls over the review of the statement of cash flows.

The following represent ongoing remediation efforts related to implemented enhancements to our control environment that we believe will support our ongoing remediation efforts of any remaining material weaknesses:

Formal ICOFR Function - We are enhancing our control environment to include a formal internal control over financial reporting (ICOFR) compliance project management office (PMO) and ICOFR execution function.

The roles and responsibilities of the PMO include the management of overall ICOFR timelines, coordination and communication with external and internal audit, process owner working sessions and related follow-up activities, coordination with international operations, and oversight of Company's remediation efforts.

The Company has supplemented its internal resources with outside consultants recognized as experts in ICOFR program execution and have augmented process owner awareness and accountability with various training protocols as well as an ICOFR execution and monitoring program application.

Risk Management Committee - We formed an executive Risk Management Committee, which meets regularly, to review risk management and internal audit status updates, ICOFR status, and other compliance areas of focus.

A detailed remediation and compliance plan, related timeline and critical milestones were developed, and reviewed with the committee on a regular basis.

Monthly / Quarterly Financial Process - We are implementing an improved financial close process and reporting process that includes;

Monthly closing calendar supplementing the existing quarterly close calendar.

Monthly closing financial statement review meetings with process owners and financial reporting leadership.

Disclosure committee meetings, which include formal documented quarterly meetings with relevant business unit heads and other corporate functions to ensure all potential issues are escalated and resolved prior to finalizing the financial statements.

The financial statements are reviewed and approved by the disclosure committee, key financial management, legal department, the audit committee and other relevant process owners prior to filing.

We have implemented controls to ensure the appropriate foreign currency rates are utilized in the financial reporting close process.

Quarterly, account reconciliations are reviewed and approved in accordance with our Account Reconciliation Policy.

We have implemented controls to ensure the segment and geographic reporting is correct.

We believe that these actions will remediate the remaining material weaknesses, although additional changes and improvements may be identified and adopted as we continue to evaluate and implement our remediation plans.

The material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that the controls are operating effectively.

In particular, the material weakness for risk assessment and control environment will not be considered remediated until the material weaknesses within revenue, inventory and financial reporting close have been remediated.

As a result, until remediated, these material weaknesses could result in material misstatements potentially impacting all financial statement accounts and disclosures in our annual or interim consolidated financial statements that would not be prevented or detected.

Specifically, we did not maintain an effective business performance monitoring review control at our international entities, design and maintain controls to identify post-close events which occur before the

financial statements are available to be issued and design and maintain effective control over the review of the statement of cash flows.

During the first three quarters of fiscal 2020, we substantially completed our plans to remediate certain of these material weaknesses by performing the following:

• Implementing or enhancing controls in the revenue business process over (i) standard contract reviews, (ii) customer invoice reviews, (iii) review of monthly sales order changes and (iv) an addition of a control that reviews and approves the summary of service billings for the period, and (v) improved our controls for the continuing accounting of ASC 606.

• Implementing or enhancing controls in the inventory business process over (i) inventory count procedures, (ii) review of inventory adjustments and approvals, (iii) review over variance analysis, and (iv) review of the valuation of inventory at lower of cost and net realizable value.

• Implementing or enhancing controls in the financial reporting close process over (i) international business performance reviews to include improved documentation of items for follow-up and resolution, (ii) identification of post-close events which occur before the financial statements are available to be issued and (iii) the review of the statement of cash flows.

During the quarter ended October 2, 2020, we completed the testing and evaluation of the operating effectiveness of the newly designed and implemented and enhanced controls and concluded these material weaknesses have been remediated as of October 2, 2020.

Ongoing Remediation Efforts and Status of Remaining Material Weaknesses

We continue to devote substantial effort to remediating the identified material weaknesses.

We are continuing to enhance our overall control environment through the following:

• Control Environment:

During fiscal year 2020, management invested significantly in the quality of our accounting talent including management, technical, process improvement and financial system roles.

Additionally, we implemented programs to:

improve our talent acquisition and retention platforms;

enhance technical, transactional and control knowledge of our accounting teams;

and create a culture of accountability and control.

These programs have significantly improved the stability of our global accounting organization.

While significant progress has been made in response to the material weakness, additional time is needed to demonstrate sustainability as it relates to our internal control over financial reporting and improvements made to our complement of resources.

• Risk Assessment:

We continue to enhance our comprehensive risk assessment process to identify, design, implement, and re-evaluate our control activities, including monitoring controls related to the design and operating effectiveness of certain control activities pertaining to our business process environment.

• Inventory and cost of revenues:

We continue to enhance controls related to the verification of inventory at third party vendor locations as well as our controls over presentation and disclosure of inventory classification.

• Financial Reporting :

We continue to enhance controls related to the monitoring of journal entry posting rights and responsibilities.

To the extent certain conflicts remain, we will implement controls to review the remaining conflicts and permissions and document the appropriate control that effectively mitigates the risk associated with the conflicts and/or permissions.

We also continue to enhance the design of controls over the completeness, accuracy and elimination of intercompany balances.

Changes in Internal Control Over Financial Reporting

During the quarter ended September 27, 2019, we determined that there was an additional material weakness related to our control environment, as well as additions to the material weakness in the financial reporting close process, as described above.

The remediation activities described below are changes in internal control over financial reporting during the quarter ended September 27, 2019 that have materially affected, or are reasonably likely to materially affect, our ICOFR.

Improvements to Entity Level Controls - We operated entity and corporate-level controls to support the overall control environment over financial reporting, including enhanced training and development activities around control ownership and operation, improved technologies to facilitate certifications, ongoing documentation and testing efforts, and increased accountability and overall communication.

Specific Analysis of Deficiencies and Identification of Remediation Activities - We implemented a systematic risk-based approach for identifying and implementing remediation efforts to address the six (6) material weaknesses disclosed in fiscal year 2018.

We performed a detailed review of all deficiencies that were previously disclosed as material weaknesses:

risk assessment, ITGC / user access, revenue, inventory, Germany operations, and the financial reporting close process.

There have been no changes in internal control over financial reporting during the quarter ended October 2, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Other Information

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The information required by this item with respect to our executive officers is set forth in Part I 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.

The other information required by this item is incorporated by reference from our definitive proxy statement for the 2020 Annual Meeting of Stockholders under the captions “Proposal One — Election of Directors.” and “Stock Ownership-Section 16(a) Beneficial Ownership Reporting Compliance.” Our definitive proxy statement for the 2020 Annual Meeting of Stockholders will be filed with the SEC no later than 120 days after September 27, 2019 .

The other information required by this item is incorporated by reference from our definitive proxy statement for the 2021 Annual Meeting of Stockholders under the captions “Proposal One — Election of Directors.” and “Stock Ownership-Section 16(a) Beneficial Ownership Reporting Compliance.” Our definitive proxy statement for the 2021 Annual Meeting of Stockholders will be filed with the SEC no later than 120 days after October 2, 2020.

Code of Conduct

We have adopted a Code of Conduct that applies to all of our executive officers and directors.

The Code of Conduct is available on our website at http://www.vareximaging.com, and may be found as follows:

From our main web page, first click “Investors.”

Next click on “Governance Highlights” under “Corporate Governance” in the drop-down menu.

Finally, click on “Code of Conduct.”

The Code of Conduct is available on our website at http://www.vareximaging.com.

We intend to satisfy the disclosure requirements under 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 controller or persons performing similar functions by posting such information on our website, specified above.

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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this item is incorporated by reference from our definitive proxy statement for the 2020 Annual Meeting of Stockholders under the caption “Stock Ownership” and “Executive Compensation.”

Equity Compensation Plan Information

The following table provides information as of October 2, 2020 with respect to the shares of our common stock that may be issued under our existing equity compensation plans.

Plan Category (amounts in thousands except per share data) Number of securities to be issued upon exercise of outstanding options, warrants and rights (2) (a)

Weighted average exercise price of outstanding options, warrants, and rights (1) (b)

Number of securities remaining available for future issuance under equity compensation plans (3) (excluding securities reflected in columns (a) and (b))

Equity compensation plans approved by security holders 3,677 $ 29.23 5,328

Equity compensation plans not approved by security holders — — —

Total 3,677 $ 29.23 5,328

(1) 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.

(2) Consists of stock options, RSUs, and DSUs granted under the Varex Imaging Corporation 2017 Omnibus Stock Plan and the 2020 Stock Plan.

Excludes purchase rights under the ESPP.

(3) Includes 4,786 thousand shares available for future issuance under the 2020 Stock Plan.

Also includes 542 thousand shares available for future issuance under the ESPP, including shares subject to purchase during the current purchase period, which commenced on November 2, 2020 (the exact number of which will not be known until the purchase date on April 30, 2021).

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 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 definitive proxy statement for the 2021 Annual Meeting of Stockholders under the caption “Stock Ownership—Beneficial Ownership of Certain Stockholders, Directors and Executive Officers.”

Certain Relationships and Related Transactions and Director Independence.

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The exhibits listed below are filed as part of this annual report on Form 10-K.

Exhibit Number

Separation and Distribution Agreement, dated as of January 27, 2017, by and between Varian and (incorporated by reference to Exhibit 2.1 to Company’s Current Report on Form 8-K filed January 30, 2017, SEC File No.

Exhibit Number Description

2.1* Separation and Distribution Agreement, dated as of January 27, 2017, by and between Varian and (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed January 30, 2017 ).

2.2* Master Purchase and Sale Agreement, dated as of December 21, 2016, by and between Varian Medical Systems, Inc.

and PerkinElmer, Inc.

(incorporated by reference to Exhibit 2.2 to Company’s Amendment No.

3 to the Registration Statement on Form 10 filed December 30, 2016, SEC File No.

(incorporated by reference to Exhibit 2.2 to the Company’s Amendment No.

3 to the Registration Statement on Form 10 filed December 30, 2016 ).

2.3* Amendment No.1 to Master Purchase and Sale Agreement, entered into as of January 17, 2017, by and between PerkinElmer, Inc.

and Varian Medical Systems, Inc.

(incorporated by reference to Exhibit 2.2 to Company’s Quarterly Report on Form 10-Q filed May 12, 2017, SEC File No.

Assignment and Assumption Agreement, dated January 27, 2017, by and between Varian Medical Systems, Inc.

and Varex Imaging Corporation (incorporated by reference to Exhibit 2.3 to Company’s Quarterly Report on Form 10-Q filed May 12, 2017, SEC File No.

(incorporated by reference to Exhibit 2.2 to the Company’s Quarterly Report on Form 10-Q filed May 12, 2017 ).

2.4* Amendment No.2 to Master Purchase and Sale Agreement, entered into as of April 28, 2017, by and between PerkinElmer, Inc.

and Varex Imaging Corporation (incorporated by reference to Exhibit 2.4 to Company’s Quarterly Report on Form 10-Q filed May 12, 2017, SEC File No.

Amended and Restated Certificate of Incorporation, dated January 27, 2017 (as corrected December 11, 2017) (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed November 27, 2018, SEC File No.

Amended and Restated Bylaws of Company, as amended January 27, 2017 (incorporated by reference to Exhibit 3.2 to Company’s Current Report on Form 8-K filed January 30, 2017, SEC File No.

and Varex Imaging Corporation (incorporated by reference to Exhibit 2.4 to the Company’s Quarterly Report on Form 10-Q filed May 12, 2017).

2.5* Assignment and Assumption Agreement, dated January 27, 2017, by and between Varian Medical Systems, Inc.

and Varex Imaging Corporation (incorporated by reference to Exhibit 2.3 to the Company’s Quarterly Report on Form 10-Q filed May 12, 2017 ).

3.1* Amended and Restated Certificate of Incorporation, dated January 27, 2017 (as corrected December 11, 2017) (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed November 27, 2018 ).

3.2* Amended and Restated Bylaws of Company, as amended January 27, 2017 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed January 30, 2 017 ).

4.1 Information required by Item 202(a) through (d) and (f) of Regulation S-K for each class of Company securities that is registered under Section 12 of the Exchange Act .

Transition Services Agreement, dated as of January 27, 2017, by and between Varian and Company (incorporated by reference to Exhibit 10.1 to Company’s Current Report on Form 8-K filed January 30, 2017, SEC File No.

Tax Matters Agreement, dated as of January 27, 2017 by and between Varian and Company (incorporated by reference to Exhibit 10.2 to Company’s Current Report on Form 8-K filed January 30, 2017, SEC File No.

Employee Matters Agreement, dated as of January 27, 2017, by and between Varian and Company (incorporated by reference to Exhibit 10.3 to Company’s Current Report on Form 8-K filed January 30, 2017, SEC File No.

Intellectual Property Matters Agreement, dated as of January 27, 2017, by and between Varian and Company (incorporated by reference to Exhibit 10.4 to Company’s Current Report on Form 8-K filed January 30, 2017, SEC File No.

Trademark License Agreement, dated as of January 27, 2017, by and between Varian and Company (incorporated by reference to Exhibit 10.5 to Company’s Current Report on Form 8-K filed January 30, 2017, SEC File No.

Credit Agreement, dated as of May 1, 2017, by and among Company as Borrower, the Lenders referred to therein, as Lenders, and Bank of America, N.A., as Administrative Agent, Swingline Lender and Issuing Lender (incorporated by reference to Exhibit 10.1 to Company’s Quarterly Report on Form 10-Q filed August 14, 2017, SEC File No.

Credit Agreement, dated as of January 25, 2017, by and among Varex Imaging Corporation as Borrower, the Lenders referred to herein, as Lenders, and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender and Issuing Lender, Wells Fargo Securities, LLC, as Sole Lead Arranger and Sole Bookrunner (incorporated by reference to Exhibit 10.6 to Company’s Current Report on Form 8-K filed January 30, 2017, SEC File No.

Varex Imaging Corporation 2017 Omnibus Stock Plan (incorporated by reference to Exhibit 99.1 to the Company’s Form S-8, filed January 27, 2017, SEC File No.

Form of Nonqualified Stock Option Agreement under the 2017 Omnibus Stock Plan (incorporated by reference to Exhibit 10.1 to Company’s Current Report on Form 8-K filed February 16, 2017, SEC File No.

Form of Restricted Stock Unit Award Agreement under the 2017 Omnibus Stock Plan (incorporated by reference to Exhibit 10.2 to Company’s Current Report on Form 8-K filed February 16, 2017, SEC File No.

Varex Imaging Corporation 2017 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 99.2 to the Company’s Form S-8, filed January 27, 2017, SEC File No.

Varex Imaging Corporation Management Incentive Plan (incorporated by reference to Exhibit 10.9 to Company’s Current Report on Form 8-K filed January 30, 2017, SEC File No.

Form of Change in Control Agreement (incorporated by reference to Exhibit 10.10 to Company’s Current Report on Form 8-K filed January 30, 2017, SEC File No.

Form of Indemnification Agreement (incorporated by reference to Exhibit 10.11 to Company’s Current Report on Form 8-K filed January 30, 2017, SEC File No.

4.2* Indenture, dated June 9, 2020, by and among Varex Imaging Corporation and Wells Fargo Bank, National Association, as Trustee, including form of 4.00% Convertible Senior Notes due 2025 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed June 9, 2020).

4.3 Indenture, dated as of September 30, 2020, by and among Varex Imaging Corporation, the Guarantors party thereto and Wells Fargo Bank, National Association, as trustee and collateral agent , including the form of 7.875% Senior Secured Notes due 2027 as Exhibit A.

10.1* Transition Services Agreement, dated as of January 27, 2017, by and between Varian and Company (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 30, 2017 ).

10.2* Tax Matters Agreement, dated as of January 27, 2017 by and between Varian and Company (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed January 30, 2017 ).

10.3* Employee Matters Agreement, dated as of January 27, 2017, by and between Varian and Company (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed January 30, 2017 ).

10.4* Intellectual Property Matters Agreement, dated as of January 27, 2017, by and between Varian and Company (incorporated by reference to Exhibit 10.4 to t he Company’s Current Report on Form 8-K filed January 30, 2017 ).

10.5* Trademark License Agreement, dated as of January 27, 2017, by and between Varian and Company (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed January 30, 2017 ).

10.6*† Varex Imaging Corporation 2017 Omnibus Stock Plan (incorporated by reference to Exhibit 99.1 to the Company’s Form S-8, filed January 27, 2017 ).

10.7*† Form of Nonqualified Stock Option Agreement under the 2017 Omnibus Stock Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 16, 2017 ).

10.8*† Form of Restricted Stock Unit Award Agreement under the 2017 Omnibus Stock Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed February 16, 2017 ).

10.9*† Varex Imaging Corporation 2017 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 99.2 to the Company’s Form S-8, filed January 27, 2017 ).

10.10*† Varex Imaging Corporation Management Incentive Plan (incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed January 30, 2017 ).

10.11*† Form of Change in Control Agreement (incorporated by reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K filed January 30, 2017 ).

10.12*† Form of Indemnification Agreement (incorporated by reference to Exhibit 10.11 to the Company’s Current Report on Form 8-K filed January 30, 2017 ).

10.13*† Varex Imaging Corporation 2016 Deferred Compensation Plan (incorporated by reference to Exhibit 10.6 to Amendment No.

2 to Form 10 filed by Company on December 8, 2016, SEC File No.

2 to Form 10 filed by the Company on December 8, 2016 ).

10.14*† Varex Imaging Corporation Frozen Deferred Compensation Plan (incorporated by reference to Exhibit 10.7 to Amendment No.

2 to Form 10 filed by the Registrant on December 8, 2016, SEC File No.

Form of Grant Agreement for Deferred Stock Units under the 2017 Omnibus Stock Plan (incorporated by reference to Exhibit 10.17 to Company's Annual Report on Form 10-K filed Dec.

13, 2017, SEC File No.

Form of Grant Agreement for Deferred Stock Units under the 2017 Omnibus Stock Plan.

Amendment to Credit Agreement dated September 28, 2018 (incorporated by reference to Exhibit 10.1 to Company's Current Report on Form 8-K filed on October 3, 2018.

SEC File 001-37860)

Amendment No.

2 to Credit Agreement, dated September 28, 2018 with Bank of America, N.A., as administrative agent, and the other lender parties thereto (incorporated by reference to Exhibit 10.1 to Company’s Current Report on Form 8-K filed on October 3, 2018, SEC File 001-37860).

Amendment No.

3 dated March 21, 2019 to Credit Agreement with Bank of America, N.A., as administrative agent, and the other lender parties thereto (incorporated by reference to Exhibit 10.2 to Company's Quarterly Report on Form 10-Q filed on May 8, 2019, SEC File 001-37860).

Amendment No.

4 to Credit Agreement dated September 26, 2019 between Varex Imaging Corporation, Bank of America, N.A., as administrative agent and the lenders and guarantors party thereto (incorporated by reference to Exhibit 10.1 to Company's Current Report on Form 8-K filed on October 2, 2019, SEC File 001-37860).

2 to Form 10 filed by the Company on December 8, 2016 ).

10.15*† Form of Grant Agreement for Deferred Stock Units under the 2017 Omnibus Stock Plan (incorporated by reference to Exhibit 10.17 to t he Company's Annual Report on Form 10-K filed Dec ember 13, 2017 .

10.16*† Form of Grant Agreement for Deferred Stock Units under the 2017 Omnibus Stock Plan (incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K filed December 20, 2019) .

10.17*† Varex Imaging Corporation 2020 Omnibus Stock Plan, including the Form of Nonqualified Stock Option Agreement, the Form of Restricted Stock Unit Agreement and the Form of Grant Agreement – Deferred Stock Units (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 14, 2020).

10.18 Credit Agreement dated as of September 30, 2020, by and among Varex Imaging Corporation, Varex Imaging West, LLC, Varex Imaging Deutschland AG, the Guarantors party thereto and Bank of America N.A., as administrative and collateral agent, and the lenders party thereto.

10.19* Form of Base Convertible Bond Hedge Confirmation, dated June 4, 2020, between Varex Imaging Corporation and each of the counterparties thereto (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed June 9, 2020).

10.20* Form of Base Warrant Confirmation, dated June 4, 2020, between Varex Imaging Corporation and each of the counterparties thereto (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed June 9, 2020).

10.21* Form of Additional Convertible Bond Hedge Confirmation, dated June 5, 2020, between Varex Imaging Corporation and each of the counterparties thereto (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed June 9, 2020).

10.22* Form of Additional Warrant Confirmation, dated June 5, 2020, between Varex Imaging Corporation and each of the Counterparties (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed June 9, 2020).

10.23* Share Purchase Agreement dated March 21, 2019 between Varex Imaging Corporation, Varex Imaging Investments, B.V.

and certain shareholders of Direct Conversions AB (publ) (incorporated by reference to Exhibit 10.1 to Company's Quarterly Report on Form 10-Q filed on May 8, 2019, SEC File 001-37860).

and certain shareholders of Direct Conversions AB (publ) (incorporated by reference to Exhibit 10.1 to Company's Quarterly Report on Form 10-Q filed on May 8, 2019 ).

10.24*† Transition Agreement dated February 11, 2020 between Clarence Verhoef and Varex Imaging Corporation (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on May 13, 2020).

10.25† Offer Letter dated June 8, 2020 by Varex Imaging Corporation to Shubham Maheshwari .

21.1 List of Subsidiaries as of November 3, 2020

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Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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* Incorporated herein by reference

Filed herewith

† Management contract or compensatory agreement.

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VAREX IMAGING CORPORATION

December 20, 2019

/s/ CLARENCE R.

Senior Vice President and Chief Financial Officer

November 30, 2020 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.

President and Chief Executive Officer and Director (Principal Executive Officer)

December 20, 2019

/s/ CLARENCE R.

Senior Vice President and Chief Financial Officer (Principal Financial Officer)

December 20, 2019

Corporate Controller and Chief Accounting Officer (Principal Accounting Officer)

December 20, 2019

/s/ RUEDIGER NAUMANN-ETIENNE

Chairman of the Board

December 20, 2019

Signature Capacity Date

SANYAL President and Chief Executive Officer and Director (Principal Executive Officer)

November 30, 2020

/s/ SHUBHAM MAHESHWARI Chief Financial Officer

(Principal Financial Officer)

November 30, 2020

Shubham Maheshwari

YANKTON Corporate Controller and Chief Accounting Officer (Principal Accounting Officer)

November 30, 2020

/s/ RUEDIGER NAUMANN-ETIENNE Chairman of the Board November 30, 2020

Ruediger Naumann-Etienne

/s/ JOCELYN D.

December 20, 2019

/s/ CHRISTINE A.

December 20, 2019

CHERTOFF Director November 30, 2020

/s/ TIMOTHY E.

GUERTIN Director November 30, 2020

KUNKEL Director November 30, 2020

/s/ WALTER M ROSEBROUGH, JR.

December 20, 2019

Director November 30, 2020

Walter M Rosebrough, Jr.

/s/ CHRISTINE A.

TSINGOS Director November 30, 2020

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Earnings for the fiscal years ended 2019, 2018 and 2017

Consolidated Statements of Comprehensive Earnings for the fiscal years ended 2019, 2018 and 2017

Consolidated Balance Sheets as of the end of fiscal years 2019 and 2018

Consolidated Statements of (Loss) Earnings for the fiscal years ended 2020, 2019 and 2018

Consolidated Statements of Comprehensive (Loss) Earnings for the fiscal years ended 2020, 2019 and 2018

Consolidated Balance Sheets as of the en d of fiscal y ears 20 20 a nd 201 9

Consolidated Statements of Cash Flows for the fiscal years ended 2020, 2019 and 2018

Consolidated Statements of Equity for the fiscal years 2019, 2018 and 2017

Consolidated Statements of S tockholders' Equity for the fiscal years 2020, 2019 and 2018

Notes to the Consolidated Financial Statements

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Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Varex Imaging Corporation and its subsidiaries (the “Company”) as of September 27, 2019 and September 28, 2018, and the related consolidated statements of earnings, of comprehensive earnings, of equity and of cash flows for each of the three years in the period ended September 27, 2019, including the related notes (collectively referred to as the “consolidated financial statements”).

We also have audited the Company's internal control over financial reporting as of September 27, 2019, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 27, 2019 and September 28, 2018, and the results of its operations and its cash flows for each of the three years in the period ended September 27, 2019 in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of September 27, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because material weaknesses in internal control over financial reporting existed as of that date related to (i) ineffective risk assessment process to identify and assess the risks in the Company’s business processes, (ii) ineffective control environment as the Company had an insufficient complement of resources with the requisite knowledge and experience to create the proper environment for effective internal control over financial reporting such that corrective activities to the Company’s internal control over financial reporting are appropriately applied, prioritized, and implemented in a timely manner, (iii) ineffective controls related to accounting for revenue, deferred revenue and related accounts receivable, including maintaining effective business process controls to prevent or detect misstatements in the processing of customer transactions, and the effect of the adoption of and continuous accounting for Revenue from Contracts with Customers, (iv) ineffective controls related to accounting for inventory and cost of revenues, including maintaining effective business process controls to prevent or detect misstatements in the accuracy, valuation, presentation and disclosure of inventory, and (v) ineffective controls over the Company’s financial reporting close process to prevent or detect misstatements in the financial statements, including ineffective business performance monitoring review control over the Company’s international entities, ineffective controls related to elimination of intercompany balances, ineffective controls to identify post-close events which occur before the financial statements are available to be issued, and ineffective controls over the review of the statement of cash flows.

We have audited the accompanying consolidated balance sheets of Varex Imaging Corporation and its subsidiaries (the “Company”) as of October 2, 2020 and September 27, 2019, and the related consolidated statements of (loss) earnings, of comprehensive (loss) earnings, of stockholders’ equity, and of cash flows for each of the three years in the period ended October 2, 2020, including the related notes (collectively referred to as the “consolidated financial statements”).

We also have audited the Company's internal control over financial reporting as of October 2, 2020, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of October 2, 2020 and September 27, 2019, and the results of its operations and its cash flows for each of the three years in the period ended October 2, 2020 in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of October 2, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because material weaknesses in internal control over financial reporting existed as of that date related to (i) ineffective control environment as the Company had an insufficient complement of resources with the requisite knowledge and experience to create the proper environment for effective internal control over financial reporting such that corrective activities to the Company’s internal control over financial reporting are appropriately applied, prioritized, and implemented in a timely manner, (ii) ineffective risk assessment process to identify and assess the risks in the Company’s business processes, (iii) ineffective controls related to the accounting for inventory and cost of revenues, including controls related to the existence, accuracy, and presentation and disclosure of inventory, and (iv) ineffective controls over the Company’s financial reporting close process to prevent or detect misstatements in the financial statements, including controls related to the elimination of intercompany balances and to ensure appropriate segregation of duties over the preparation and review of journal entries.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

The material weaknesses referred to above are described in Management's Annual Report on Internal Control Over Financial Reporting appearing under Item 9A.

We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the September 27, 2019 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

Change in Accounting Principle

As discussed in Note 18 to the consolidated financial statements, the Company changed the manner in which it accounts for revenue effective September 29, 2018.

We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the October 2, 2020 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

Changes in Accounting Principles

As discussed in Notes 1, 2 and 3 to the consolidated financial statements, the Company changed the manner in which it accounts for leases as of September 28, 2019 and the manner in which it accounts for revenues as of September 29, 2018.

Basis for Opinions

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We believe that our audits provide a reasonable basis for our opinions.

As described in Management’s Annual Report on Internal Control Over Financial Reporting, management has excluded Direct Conversion AB from its assessment of internal control over financial reporting as of September 27, 2019 because it was acquired by the Company in a purchase business combination during the fiscal year ended September 27, 2019.

We have also excluded Direct Conversion AB from our audit of internal control over financial reporting.

Direct Conversion AB is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 0.8% and 0.8%, respectively, of the related consolidated financial statement amounts as of and for the year ended September 27, 2019.

Definition and Limitations of Internal Control over Financial Reporting

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Consolidated Financial Statements - Impact of Resources and Controls Related to Risk Assessment and Financial Reporting

The completeness and accuracy of the consolidated financial statements, including the financial condition, results of operations and cash flows, is dependent on, in part, (i) designing and maintaining monitoring controls related to the identification and assessment of risk in the business process environment, (ii) designing and maintaining financial reporting controls, including information technology general controls, and financial reporting close controls related to review of international operations, intercompany balances, post-close events and the statement of cash flows, and (iii) maintaining sufficient resources to create the proper environment for effective internal control over financial reporting.

The principal considerations for our determination that performing procedures relating to the consolidated financial statements - impact of resources and controls related to risk assessment and financial reporting is a critical matter are there was a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to information systems and businesses processes, which affect substantially all financial statement account balances and disclosures.

As described above in the “Opinions on the Financial Statements and Internal Control over Financial Reporting” section, material weaknesses were identified as of September 27, 2019 related to (i) ineffective risk assessment, (ii) ineffective control environment, and (iii) the financial reporting close process.

Additionally, as previously disclosed by management, material weaknesses related to (i) information technology general controls and (ii) accounting for the Company’s operations in Germany existed during the year ended September 27, 2019.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements.

These procedures included, among others, evaluating the nature and extent of audit procedures performed and evidence obtained.

These procedures also included manually testing the completeness and accuracy of system reports or other information generated by the Company's Information Technology (IT) systems.

Revenue Recognition, including Adoption of the New Revenue Accounting Standard

As described in Notes 1 and 18 to the consolidated financial statements, the Company’s consolidated revenue was $780.6 million for the year ended September 27, 2019.

Effective September 29, 2018, the Company adopted the new revenue accounting standard.

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, and recognition of revenue when, or as, a performance obligation is satisfied.

The Company’s revenues are derived primarily from the sale of hardware and services and are recognized net of any value-added or sales tax and net of sales discounts.

The principal considerations for our determination that performing procedures relating to revenue recognition, including adoption of the new revenue accounting standard, is a critical audit matter are there was a high degree of auditor judgment, subjectivity and effort in performing procedures and in evaluating the audit evidence obtained related to revenue recognition, including the adoption of the new revenue accounting standard.

As described above in the “Opinions on the Financial Statements and Internal Control over Financial Reporting” section, a material weakness was identified as of September 27, 2019 related to the accounting for revenue, deferred revenue and related accounts receivable, specifically including the review of the completeness and accuracy of customer order entry, quantity and pricing, and the effect of the adoption of and continuous accounting for revenue from contracts with customers.

The completeness and accuracy of the consolidated financial statements, including the financial condition, results of operations and cash flows, is dependent on, in part, (i) maintaining sufficient resources to create the proper environment for effective internal control over financial reporting, (ii) designing and maintaining monitoring controls related to the identification and assessment of risk in the business process environment, and (iii) designing and maintaining financial reporting controls, including controls related to the elimination of intercompany balances and segregation of duties over the preparation and review of journal entries.

The principal considerations for our determination that performing procedures relating to the consolidated financial statements - impact of resources and controls related to risk assessment and financial reporting is a critical matter are the high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to businesses processes which affect substantially all financial statement account balances and disclosures.

As described above in the “Opinions on the Financial Statements and Internal Control over Financial Reporting” section, material weaknesses were identified as of October 2, 2020 related to (i) ineffective control environment, (ii) ineffective risk assessment component of internal control, and (iii) the financial reporting close process.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included, among others, evaluating management’s process for determining the application of the new revenue accounting standard to the Company’s revenue, evaluating the reasonableness of management’s judgments, and evaluating the impacts of adoption identified by management.

Testing management’s application of the new revenue accounting standard included examining revenue arrangements on a test basis, including assessing the terms and conditions of the arrangement and performing procedures to test the adjustments recorded upon adoption.

These procedures also included (i) manually testing the completeness and accuracy of system reports or other information generated by the Company’s IT systems and (ii) evaluating the nature and extent of audit procedures performed and evidence obtained.

As described in Note 1 to the consolidated financial statements, the Company’s consolidated inventory balance was $248.2 million as of September 27, 2019.

The Company values inventories at the lower of cost or net realizable value.

Costs include materials, labor and manufacturing overhead and is computed using standard cost (which approximates actual cost) on a first-in-first-out basis.

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 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.

The principal considerations for our determination that performing procedures relating to inventories is a critical audit matter are there was a high degree of auditor judgment, subjectivity and effort in performing procedures and in evaluating audit evidence related to the existence and valuation of inventory.

cost of revenue, specifically including maintaining effective controls related to inventory count procedures, the valuation of inventory at lower of cost and net realizable value, and presentation and disclosure of inventory classifications.

These procedures included, among others, evaluating and determining the nature and extent of audit procedures performed and evidence obtained that are responsive to the material weaknesses identified.

These procedures also included testing the completeness and accuracy and the elimination of intercompany balances, testing manual journal entries, and evaluating whether segregation of duties was maintained over the recording of entries.

As described in Note 1 to the consolidated financial statements, the Company’s consolidated inventory balance was $271.9 million as of October 2, 2020.

Management values inventories at the lower of cost or net realizable value.

Costs include materials, labor and manufacturing overhead and is computed on a first-in-first-out basis.

Management 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 management expects to obtain for products in its various markets.

Management 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 principal considerations for our determination that performing procedures relating to inventories is a critical audit matter are the high degree of auditor judgment, subjectivity and effort in performing procedures and in evaluating audit evidence related to the existence and valuation of inventory.

As described above in the “Opinions on the Financial Statements and Internal Control over Financial Reporting” section, material weaknesses were identified as of October 2, 2020 related to the Company’s control environment, the risk assessment component of internal control, and the accounting for inventory, including maintaining effective controls related to the verification of inventory at third party vendor locations and presentation and disclosure of inventory classification.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included, among others, performing procedures to test the existence of inventories and evaluating and testing management’s process for determining the valuation of inventories.

Acquisition of Direct Conversion AB - Intangible Assets

As described in Note 2 to the consolidated financial statements, the Company completed the acquisition of Direct Conversion AB for net consideration of $79.4 million in 2019, which resulted in $32.9 million of intangible assets being recorded.

Those intangible assets were comprised primarily of developed technology of $18.4 million and customer relationships of $9.0 million .

Intangibles were valued primarily using a discounted cash flow, which included estimated revenue growth and discount rate.

The principal considerations for our determination that performing procedures relating to the intangible assets recorded with the acquisition of Direct Conversion AB is a critical audit matter are there was a high degree of auditor judgment and subjectivity in applying procedures relating to the fair value measurement of intangible assets acquired due to the significant judgment by management when developing the fair value of the intangible assets.

Significant audit effort was required in performing procedures to evaluate the discounted cash flow, the estimated revenue growth, and the discount rate.

The audit effort also involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements.

These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of intangible assets and controls over development of the assumptions related to the valuation of intangible assets, including discounted cash flow, estimated revenue growth, and the discount rate.

These procedures also included, among others (i) reading the purchase agreement, (ii) testing management’s process for estimating the fair value of intangible assets, and (iii) testing the completeness and accuracy of the data used in the discounted cash flow and evaluating the reasonableness of significant assumptions, including the discounted cash flow, the estimated revenue growth and the discount rate.

Evaluating the reasonableness of the discounted cash flow, including the revenue growth, involved considering the past performance of the acquired business, as well as economic and industry forecasts, and considering whether they were consistent with evidence obtained in other areas of the audit.

Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the valuation methods and evaluating significant assumptions, including the discount rate.

These procedures included, among others, performing procedures to test the existence of inventory, including inventory maintained at third party vendor locations, evaluating and testing management’s process for determining the valuation of inventory, and testing the classification of inventory.

Goodwill Impairment Assessment

As described in Notes 1 and 12 to the consolidated financial statements, the Company’s consolidated goodwill balance was $293.1 million as of October 2, 2020.

Management 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.

Management determines the fair value of its 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.

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.

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

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

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

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

The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment is a critical audit matter are the significant judgment by management when determining the fair value measurement of the reporting units;

this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions related to the discount rates, revenue growth rates, forecasted gross margins, and market multiples.

In addition, the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to management’s quantitative goodwill impairment assessment, including controls over the determination of the fair value of the Company’s reporting units.

These procedures also included, among others, testing management’s process for determining the fair value estimate of the reporting units;

evaluating the appropriateness of the income and market approaches;

testing the completeness, accuracy, and relevance of underlying data used in the estimates;

and evaluating the significant assumptions used by management, including the discount rates, revenue growth rates, forecasted gross margins, and market multiples.

Evaluating management’s assumptions related to revenue growth rates and forecasted gross margins involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market and industry data, and (iii) whether the assumptions were consistent with evidence obtained in other areas of the audit.

Professionals with specialized skill and knowledge were used to assist in the evaluation of the income and market approaches and the discount rates and market multiples assumptions.

/s/ PricewaterhouseCoopers LLP

Salt Lake City, Utah

December 20, 2019

November 30, 2020

We have served as the Company’s auditor since 2016.

VAREX IMAGING CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS

CONSOLIDATED STATEMENTS OF (LOSS) EARNINGS

(In millions, except per share amounts) 2020 2019 2018

Revenues, net

$ 738.3 $ 780.6 $ 773.4

Cost of revenues

548.1 523.9 519.5

Gross profit 190.2 256.7 253.9

Operating expenses:

Research and development

78.9 78.1 83.0

Selling, general and administrative

142.2 128.1 123.4

Impairment of intangible assets

Total operating expenses

Operating earnings

223.9 211.0 209.4

Operating (loss) earnings ( 33.7 ) 45.7 44.5

Interest income

Interest expense

( 31.4 ) ( 21.1 ) ( 21.7 )

Other (expense) income, net

Interest and other expenses, net

Earnings before taxes

( 7.6 ) ( 3.2 ) 2.7

Interest and other expense, net ( 38.9 ) ( 24.2 ) ( 18.8 )

(Loss) earnings before taxes ( 72.6 ) 21.5 25.7

Taxes (benefit) on earnings

( 15.2 ) 5.7 ( 2.6 )

Net (loss) earnings ( 57.4 ) 15.8 28.3

Net earnings attributable to noncontrolling interests

Net earnings attributable to Varex

Net earnings per common share attributable to Varex

Net (loss) earnings attributable to Varex $ ( 57.9 ) $ 15.5 $ 27.5

(Loss) earnings per common share attributable to Varex

Basic $ ( 1.49 ) $ 0.41 $ 0.73

Diluted $ ( 1.49 ) $ 0.40 $ 0.72

Weighted average common shares outstanding

Basic 38.8 38.2 37.9

Diluted 38.8 38.6 38.4

See accompanying notes to the consolidated financial statements.

VAREX IMAGING CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) EARNINGS

(In millions) 2020 2019 2018

Other comprehensive (loss) earnings, net of tax:

Unrealized (loss) gain on interest rate swap contracts

Unrealized (loss) gain on defined benefit obligations

Net (loss) earnings $ ( 57.4 ) $ 15.8 $ 28.3

Other comprehensive (loss) earnings, net of tax:

Comprehensive earnings

Unrealized gain (loss) on interest rate swap contracts 0.4 ( 6.2 ) 5.2

Unrealized gain (loss) on defined benefit obligations 0.6 ( 1.3 ) ( 0.2 )

Foreign currency translation adjustments 1.5 — —

2.5 ( 7.5 ) 5.0

Comprehensive (loss) earnings ( 54.9 ) 8.3 33.3

Comprehensive earnings attributable to noncontrolling interests 0.5 0.3 0.8

Comprehensive earnings attributable to Varex

Comprehensive (loss) earnings attributable to Varex $ ( 55.4 ) $ 8.0 $ 32.5

See accompanying notes to the consolidated financial statements.

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(In millions, except share amounts)

September 27, 2019

September 28, 2018

October 2, 2020 September 27, 2019

Current assets:

Cash and cash equivalents

Accounts receivable, net of allowance for doubtful accounts of $1.0 and $0.6 at September 27, 2019 and September 28, 2018, respectively

$ 100.6 $ 29.9

Accounts receivable, net of allowance for doubtful accounts of $ 0.3 million and $ 1.0 million at October 2, 2020 and September 27, 2019, respectively

Prepaid expenses and other current assets

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Property, plant and equipment, net

Intangibles assets, net

Intangible assets, net

Investments in privately-held companies

Deferred tax assets

Operating lease assets

$ 1,139.5 $ 1,038.9

Liabilities, redeemable noncontrolling interests and stockholders' equity

1 unchanged sentence

Accounts payable

Accrued liabilities

$ 72.9 $ 58.2

Accrued liabilities and other current liabilities

Current operating lease liabilities

Current maturities of long-term debt

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Deferred tax liabilities

Operating lease liabilities

Other long-term liabilities

2 unchanged sentences

Redeemable noncontrolling interests

Stockholders' Equity:

Preferred stock, $ 0.01 par value:

3 unchanged sentences

Shares issued and outstanding:

38,371,305 and 38,026,597 at September 27, 2019 and September 28, 2018, respectively

39,059,094 and 38,371,305 at October 2, 2020 and September 27, 2019, respectively

Additional paid-in capital

Accumulated other comprehensive (loss) income

Accumulated other comprehensive loss

Retained earnings

3 unchanged sentences

Total liabilities, redeemable noncontrolling interests and stockholders' equity

$ 1,139.5 $ 1,038.9

See accompanying notes to the consolidated financial statements.

VAREX IMAGING CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Varex Equity Noncontrolling Interests Total Stockholders' Equity

(In millions) Shares Amount

September 29, 2017 37.6 0.4 342.7 0.8 35.1 379.0 — 379.0

Net earnings — — — — 27.5 27.5 0.3 27.8

Exercise of stock options 0.2 — 3.8 — — 3.8 — 3.8

Common stock issued upon vesting of restricted shares 0.2 — — — — — — —

Shares withheld on vesting of restricted stock ( 0.1 ) — ( 2.2 ) — — ( 2.2 ) — ( 2.2 )

Common stock issued under employee stock purchase plan 0.1 3.3 — — 3.3 — 3.3

Share-based compensation — — 10.0 — — 10.0 — 10.0

Unrealized gain on interest rate swap contracts, net of tax — — — 5.2 — 5.2 — 5.2

Unrealized loss on defined benefit obligations, net of tax — — — ( 0.2 ) — ( 0.2 ) — ( 0.2 )

Capital contribution by noncontrolling interest — — — — — — 1.8 1.8

Other — — — — ( 0.2 ) ( 0.2 ) — ( 0.2 )

September 28, 2018 38.0 $ 0.4 $ 357.6 $ 5.8 $ 62.4 $ 426.2 $ 2.1 $ 428.3

Effect of adoption of ASC 606

— — — — ( 3.5 ) ( 3.5 ) — ( 3.5 )

Net earnings — — — — 15.5 15.5 ( 0.2 ) 15.3

Exercise of stock options — — 0.8 — — 0.8 — 0.8

Common stock issued upon vesting of restricted shares 0.2 — — — — — — —

Shares withheld on vesting of restricted stock — — ( 2.1 ) — — ( 2.1 ) — ( 2.1 )

Common stock issued under employee stock purchase plan 0.2 — 3.8 — — 3.8 — 3.8

Share-based compensation — — 11.7 — — 11.7 — 11.7

Unrealized loss on interest rate swap contracts, net of tax — — — ( 6.2 ) — ( 6.2 ) — ( 6.2 )

Unrealized loss on defined benefit obligations, net of tax — — — ( 1.3 ) — ( 1.3 ) — ( 1.3 )

Noncontrolling interest acquired/consolidated — — — — — — 1.4 1.4

September 27, 2019 38.4 $ 0.4 $ 371.8 $ ( 1.7 ) $ 74.4 $ 444.9 $ 3.3 $ 448.2

Cumulative effect of accounting change — — — — ( 0.3 ) ( 0.3 ) — ( 0.3 )

Net loss — — — — ( 57.9 ) ( 57.9 ) — ( 57.9 )

Exercise of stock options 0.1 — 1.5 — — 1.5 — 1.5

Common stock issued upon vesting of restricted shares 0.2 — — — — — — —

Shares withheld on vesting of restricted stock ( 0.1 ) — ( 1.8 ) — — ( 1.8 ) — ( 1.8 )

Common stock issued under employee stock purchase plan 0.2 — 3.6 — — 3.6 — 3.6

Share-based compensation — — 13.4 — — 13.4 — 13.4

Unrealized gain on interest rate swap contracts, net of tax — — — 0.4 — 0.4 — 0.4

Unrealized gain on defined benefit obligations, net of tax — — — 0.6 — 0.6 — 0.6

Conversion feature of Convertible Notes, net of issuance costs — — 49.7 — — 49.7 — 49.7

Purchase of hedges — — ( 61.0 ) — — ( 61.0 ) — ( 61.0 )

Issuance of warrants — — 49.8 — — 49.8 — 49.8

Currency translation adjustments — — — 1.5 — 1.5 — 1.5

Shares issued to settle deferred consideration 0.3 — 7.4 — — 7.4 — 7.4

Reclassification from mezzanine equity to equity for noncontrolling interest in MeVis Medical Solutions, AG — — — — — — 11.3 11.3

Other — — — — ( 0.1 ) ( 0.1 ) ( 0.5 ) ( 0.6 )

October 2, 2020 39.1 $ 0.4 $ 434.4 $ 0.8 $ 16.1 $ 451.7 $ 14.1 $ 465.8

See accompanying notes to the consolidated financial statements.

VAREX IMAGING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

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Cash flows from operating activities:

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

Net (loss) earnings $ ( 57.4 ) $ 15.8 $ 28.3

Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:

Share-based compensation expense 13.4 11.7 10.0

Depreciation 22.3 23.5 26.0

Amortization of intangible assets 17.2 15.7 16.2

5 unchanged sentences

Loss (gain) from equity method investments, net of dividends received 1.3 2.3 ( 3.9 )

Other, net 4.7 0.8 0.7

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

Accounts receivable 17.7 14.8 9.0

Inventories ( 42.7 ) ( 11.1 ) ( 2.4 )

Prepaid expenses and other assets ( 9.3 ) 4.3 2.0

9 unchanged sentences

Cash flows from financing activities:

Net transfers from parent

Distributions to Varian Medical Systems, Inc.

Taxes related to net share settlement of equity awards

Borrowings under credit agreements

Repayments of borrowing under credit agreements

Proceeds from exercise of stock options

Proceeds from shares issued under employee stock purchase plan

Excess tax benefits from share-based compensation

Proceeds from issuance of debt 593.8 85.4 10.0

Repayments of borrowings ( 483.9 ) ( 87.0 ) ( 106.0 )

Payment of debt issuance costs ( 16.7 ) ( 0.5 ) ( 0.4 )

Proceeds from issuance of warrant 49.8 — —

Purchases of hedges ( 61.0 ) — —

Proceeds from shares issued under employee stock purchase plan 3.6 3.8 3.3

Proceeds from exercise of stock options 1.5 0.8 3.8

Taxes related to net share settlement of equity awards ( 1.8 ) ( 2.1 ) ( 2.3 )

Contributions from noncontrolling partner — — 1.8

Dividends paid to redeemable noncontrolling interest

Net cash (used in) provided by financing activities

Other financing activities ( 1.7 ) ( 0.5 ) ( 0.6 )

Net cash provided by (used in) financing activities 83.6 ( 0.1 ) ( 90.4 )

Effects of exchange rate changes on cash and cash equivalents and restricted cash 0.9 ( 0.7 ) ( 0.5 )

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

Net increase (decrease) in cash and cash equivalents and restricted cash 70.8 ( 22.1 ) ( 30.8 )

Cash and cash equivalents and restricted cash at beginning of period 31.3 53.4 84.2

2 unchanged sentences

Cash paid for interest $ 16.7 $ 19.9 $ 19.3

Cash paid for income tax

Cash paid for income tax, net of refunds 4.2 8.2 13.8

Supplemental non-cash activities:

Purchases of property, plant and equipment financed through accounts payable $ 1.6 $ 1.8 $ 2.0

Transfers of property, plant and equipment from Varian Medical Systems, Inc.

Other non-cash transfers to Varian Medical Systems, Inc.

See accompanying notes to the consolidated financial statements.

VAREX IMAGING CORPORATION

CONSOLIDATED STATEMENTS OF EQUITY

Additional Paid-in Capital

Net Parent Investment

Accumulated Other Comprehensive Income (Loss)

Retained Earnings

Total Varex Equity

Noncontrolling Interests

Total Stockholders' Equity

(In millions)

September 30, 2016

Net transfers from parent

Distribution to Varian Medical Systems

Conversion of net parent investment into common stock

Exercise of stock options

Common stock issued upon vesting of restricted shares

Shares withheld on vesting of restricted stock

Share-based compensation

Unrealized gain on interest rate swap contracts, net of tax

Unrealized gain on defined benefit obligations, net of tax

Tax impacts to APIC related to share-based award activity

September 29, 2017

Exercise of stock options

Common stock issued upon vesting of restricted shares

Shares withheld on vesting of restricted stock

Common stock issued under employee stock purchase plan

Share-based compensation

Unrealized gain on interest rate swap contracts, net of tax

Unrealized loss on defined benefit obligations, net of tax

Capital contribution by noncontrolling interest

September 28, 2018

Effect of adoption of ASC 606

Exercise of stock options

Common stock issued upon vesting of restricted shares

Shares withheld on vesting of restricted stock

Common stock issued under employee stock purchase plan

Share-based compensation

Unrealized loss on interest rate swap contracts, net of tax

Unrealized loss on defined benefit obligations, net of tax

Noncontrolling interest acquired/consolidated

September 27, 2019

See accompanying notes to the consolidated financial statements.

VAREX IMAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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Description of Business

Varex Imaging Corporation (the “Company,” “Varex” or “Varex Imaging”) designs, manufactures, sells and services a broad range of Medical products, which include X-ray imaging components, including X-ray tubes, digital detectors and accessories, high voltage connectors, image processing software and workstations, computer-aided diagnostic software, collimators, automatic exposure control devices, generators, ionization chambers and buckys, for use in a range of applications, including radiographic or fluoroscopic imaging, mammography, computed tomography, oncology and computer-aided detection.

Varex Imaging Corporation (the “Company,” “Varex” or “Varex Imaging”) designs, manufactures, sells and services a broad range of Medical products, which include X-ray tubes, digital detectors and accessories, high voltage connectors, image processing software and workstations, computer-aided diagnostic software, collimators, automatic exposure control devices, generators, ionization chambers and buckys, for use in a range of applications, including radiographic or fluoroscopic imaging, mammography, computed tomography, oncology and computer-aided detection.

The Company sells its products to imaging system original equipment manufacturer (“OEM”) customers for incorporation into new medical diagnostic, radiation therapy, dental, and veterinary, to independent service companies, distributors and directly to end-users for replacement purposes.

2 unchanged sentences

The Company conducts an active research and development program to focus on new technology and applications in both the medical and industrial X-ray imaging markets.

Varex Imaging Corporation was incorporated in Delaware on July 18, 2016 for the purpose of holding the assets and liabilities associated with the Company's business and separated from Varian Medical Systems, Inc.

(“Varian”) on January 28, 2017, upon which Varian completed the distribution of 100 % of the outstanding common stock of Varex to Varian stockholders.

Following the separation and distribution, Varex became an independent publicly-traded company and is listed on the NASDAQ Global Select Market under the ticker “VREX.”

Basis of Presentation and Principle of Consolidation

The accompanying consolidated financial statements are audited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).

Prior to January 28 2017, the date of separation and distribution, the financial statements were prepared on a stand-alone basis and were derived from Varian’s consolidated financial statements and records as it operated as part of Varian prior to the distribution, in conformity with GAAP.

Prior to the separation and distribution, the consolidated financial statements included allocations of certain Varian corporate expenses these costs were allocated to the Company on the basis of direct usage when identifiable or other systematic measures that reflect utilization of services provided to or benefits received by the Company.

All transactions between the Company and Varian prior to the separation have been included in the accompanying consolidated financial statements.

All intercompany transactions while the Company operated as part of Varian were considered to be effectively settled for cash and are reflected as a component of financing activities as net transfers from (to) Varian in the consolidated statements of cash flows at the time the transactions were recorded.

Prior to the separation, the Company was dependent upon Varian for its working capital and financing requirements, as Varian uses a centralized approach to cash management and financing of its operations.

Financial transactions relating to the Company were accounted for through the net parent investment account.

Cash and cash equivalents held by Varian were not allocated to the Company.

Net parent investment in the consolidated statements of equity represents Varian’s historical investment in the Company, the net effect of transactions with and allocations from Varian and the Company’s accumulated earnings.

Reclassification

The Company has reclassified $ 3.0 million from selling, general and administrative expense to impairment of intangible assets for the year ended September 28, 2018, to conform to the current year's presentation.

Such reclassifications had no impact on net earnings as previously reported.

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 prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).

Segment Reporting

The Company has two reportable operating segments;

(i) Medical and (ii) Industrial, which aligns with how its CEO, who is the Company's Chief Operating Decision Maker (“CODM”), reviews the Company’s performance.

See Note 15 .

(i) Medical and (ii) Industrial, which aligns with how its Chief Executive Officer ("CEO"), who is the Company's Chief Operating Decision Maker (“CODM”), reviews the Company’s performance.

Segment Information, included in this report, for further information on the Company’s segments.

The fiscal years of the Company as reported are the 52 or 53-week period ending on the Friday nearest September 30.

Fiscal year 2019 was the 52-week period that ended on September 27, 2019.

Fiscal year 2018 was the 52-week period that ended on September 28, 2018.

Fiscal year 2017 was the 52-week period that ended on 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.

Variable Interest Entities

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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, 2019 , the Company had two variable interest entities neither of which were consolidated.

As of October 2, 2020, the Company had two variable interest entities neither of which were consolidated.

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, goodwill and intangible assets, impairment on investments, and taxes on earnings.

Such estimates include the valuation of inventories, goodwill and intangible assets, warranties, contract liabilities, long-lived asset valuations, impairment on investments, financial instruments, and taxes on earnings.

Actual results could differ from these estimates.

Impact of COVID-19

The coronavirus (“COVID-19”) pandemic and the mitigation efforts by governments to attempt to control its spread created uncertainties and disruptions in the economic and financial markets.

The extent to which COVID-19 will continue to impact the Company’s business and financial results will depend on numerous evolving factors including, but not limited to:

the magnitude and duration of COVID-19, the extent to which it will impact worldwide macroeconomic conditions including interest rates, unemployment rates, the speed of the anticipated recovery, and governmental and business reactions to the pandemic.

During the 2020 fiscal year, as a result of the economic downturn resulting from COVID-19, the Company experienced reduced demand in the Company’s industrial segment and for certain higher end medical products that negatively impacted revenues and gross margin.

The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the currently estimated future impacts of COVID-19 as of October 2, 2020 and through the date of filing this report.

The accounting matters assessed included, but were not limited to, the Company’s carrying value of goodwill, intangibles, long-lived assets, equity method investments, inventory and related reserves, and allowance for doubtful accounts.

The Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material negative impacts to the Company’s consolidated financial statements in future reporting periods.

These future developments are highly uncertain and the outcomes cannot be estimated with certainty.

Actual results may differ from those estimates, and such differences may be material to the financial statements.

As described in Note 1 to the Company’s consolidated financial statements for the year ended September 27, 2019, as reissued on September 22, 2020 in our Current Report on Form 8-K, the Company concluded that there was substantial doubt about its ability to continue as a going concern.

This assessment was based on the Company’s financial projections, which included the anticipated adverse effects of the COVID-19 pandemic on the Company’s financial condition and results of operations, and which indicated that it was probable that the Company would be in violation of certain leverage ratio covenants contained in its previously existing credit agreement.

As described more fully in Note 10.

Borrowings , on September 30, 2020, the Company issued $ 300.0 million aggregate principal amount of 7.875 % Senior Secured Notes due in 2027, the proceeds from which were used to repay the principal amounts outstanding under the Company’s previously existing credit agreement (which was then terminated), and entered into a new revolving credit agreement consisting of a $ 100.0 million asset-based loan revolving credit facility.

The Senior Secured Notes do not contain any financial covenants and the asset-based loan revolving credit facility’s financial covenant is limited to when excess availability falls below a specified threshold.

Management has concluded that the replacement of the Company's previously existing credit agreement with the Senior Secured Notes, combined with our current and anticipated future cash flows, has alleviated the substantial doubt about the Company's ability to continue as a going concern and the Company has sufficient liquidity to satisfy our obligations over the twelve-month period from the issuance date of these consolidated financial statements.

Cash and Cash Equivalents

6 unchanged sentences

the consolidated statements of cash flows consisted of the following:

Twelve Months Ended September 27, 2019

Twelve Months Ended September 28, 2018

Beginning of Period

End of Period

Beginning of Period

End of Period

Twelve Months Ended October 2, 2020 Twelve Months Ended September 27, 2019

(In millions) Beginning of Period End of Period Beginning of Period End of Period

Cash and cash equivalents $ 29.9 $ 100.6 $ 51.9 $ 29.9

11 unchanged sentences

Derivative instruments and hedging activities

The Company records all derivatives on the balance sheet at fair value.

Derivatives designated as a hedge are recorded on the Consolidated Balance Sheets at fair value as of the reporting date.

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 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.

Time value is excluded and the cash payments are recognized as an adjustment to interest expense.

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.

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).

These changes in fair value are recognized as an adjustment to interest expense.

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

8 unchanged sentences

During the periods presented, one of the Company's Medical segment customers accounted for a significant portion of revenues, which is as follows:

2020 2019 2018

Canon Medical Systems Corporation

Canon Medical Systems Corporation accounted for 10.1 % and 9.8 % of the Company’s accounts receivable as of September 27, 2019 and September 28, 2018 , respectively.

20.5 % 17.3 % 18.1 %

Canon Medical Systems Corporation accounted for 12.0 % and 10.1 % of the Company’s accounts receivable as of October 2, 2020 and September 27, 2019, respectively.

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

Costs include materials, labor and manufacturing overhead

and is computed using standard cost (which approximates actual cost) on a first-in-first-out basis.

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 in its various markets.

The Company 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.

and is computed on a first-in-first-out basis.

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:

(In millions)

September 27, 2019

September 28, 2018

(In millions) October 2, 2020 September 27, 2019

Raw materials and parts

$ 184.6 $ 160.1

Work-in-process

1 unchanged sentence

Total inventories

$ 271.9 $ 248.2

As a result of the economic downturn resulting from COVID-19, during the three months ended July 3, 2020, the Company discontinued certain products and wrote-down approximately $ 15.8 million of inventory associated with discontinued products and restructuring activity.

Property, Plant and Equipment, net

1 unchanged sentence

Major improvements are capitalized, while repairs and maintenance are expensed as incurred.

Depreciation are computed using the straight-line method over the estimated useful lives of the assets.

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 .

1 unchanged sentence

Buildings are depreciated over twenty years .

Machinery and equipment are depreciated over their estimated useful lives, which range from three years to seven 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.

3 unchanged sentences

The following table summarizes the Company’s property, plant and equipment, net:

(In millions)

September 27, 2019

September 28, 2018

(In millions) October 2, 2020 September 27, 2019

Buildings and leasehold improvements

Machinery and equipment 175.5 170.7

Construction in progress

$ 356.4 $ 341.9

Accumulated depreciation and amortization

( 211.2 ) ( 199.6 )

Property, plant, and equipment, net

$ 145.2 $ 142.3

The Company recorded depreciation expense of $ 22.3 million, $ 23.5 million and $ 26.0 million, in fiscal years 2020, 2019 and 2018, respectively.

During fiscal year 2019 the company recorded accelerated depreciation of $ 4.5 million on the machinery and equipment used in the fabrication of amorphous silicon glass at its facility in Santa Clara, CA.

Restructuring, included in this report, for further information.

During fiscal year 2018 the company recorded accelerated depreciation of $ 4.2 million on the machinery and equipment used in the fabrication of amorphous silicon glass at its facility in Santa Clara, CA.

Restructuring, included in this report, for further information.

During fiscal years 2020, 2019 and 2018 the Company recorded accelerated depreciation of $ 2.9 million, $ 4.5 million and $ 4.2 million, respectively, which primarily related to the machinery and equipment used at the Santa Clara, CA facility.

Restructu ring, included in this report, for further information.

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 these investments.

2 unchanged sentences

The Company monitors these equity investments for impairment and makes appropriate reductions in carrying values if the Company determines that impairment charges are required based primarily on the financial condition and near-term prospects of these companies.

During the three months ended July 3, 2020, the Company wrote off a $ 2.7 million cost investment in a privately-held company, the related expense is included as part of other expenses, net in the Company's consolidated financial statements.

Goodwill and Intangible Assets

1 unchanged sentence

Purchased intangible assets are carried at cost, net of accumulated amortization, and are included in intangible assets in the Company's consolidated balance sheets.

Intangible assets with finite lives are amortized over their estimated useful lives of primarily two years to seven years using the straight-line method.

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

3 unchanged sentences

The Company evaluates goodwill and indefinite lived intangible assets 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 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.

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 determine 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.

The Company determines the fair value of its reporting units based on a combination of income and market approaches.

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.

During the fiscal year ended September 27, 2019 and 2018 , the Company recognized $ 4.8 million and $ 3.0 million of impairments of intangible assets related to the restructuring activities see Note 4 .

Restructuring , included in this report.

No goodwill impairment charges were recognized for any of the prior periods presented.

No impairment charges were recognized in fiscal year 2017 .

In fiscal years 2020, 2019 and 2018, the Company performed the annual goodwill impairment test for our two reporting units and found no impairment.

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

The Company considered these circumstances and the potential long-term impact on cash flows associated with its reporting units and indefinite-lived intangible assets and determined that an indicator of possible impairment existed within its Medical and Industrial reporting units and indefinite-lived intangible assets.

Accordingly, the Company performed a quantitative impairment analysis to determine the fair values of those reporting units and indefinite-lived intangible assets.

Based on the output of the analysis, the Company 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 related to Goodwill.

However, an impairment charge of $ 2.8 million was required for the Company's in-process R&D.

Goodwill and Intangible Assets for more information.

During the fiscal years ended October 2, 2020, September 27, 2019 and September 28, 2018, the Company recognized $ 2.8 million, $ 4.8 million, and $ 3.0 million of impairments of intangible assets, respectively.

No goodwill impairment charges were recognized for any of the periods presented.

Loss Contingencies

From time to time, the Company is a party to or otherwise involved in legal proceedings, claims and government inspections or investigations, customs and duties audits and other loss contingency matters, both inside and outside the United States, arising in the ordinary course of its business or otherwise.

The Company accrues amounts, to the extent an unfavorable outcome is determined to be probable and the losses can be reasonably estimated, that it believes are adequate to address any liabilities related to legal proceedings and other loss contingencies that it believes will result in a probable loss.

From time to time, the Company is involved in legal proceedings, claims and government inspections or investigations, customs and duties audits, 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.

Commitments and Contingencies, for further information regarding certain of our contractual obligations and contingencies.

Product Warranty

11 unchanged sentences

Accrued product warranty, at end of period $ 8.1 $ 8.1

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 ("IBR").

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

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

See “Recently Adopted Accounting Pronouncements” below.

The Company’s revenues are derived primarily from the sale of hardware and services.

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X-ray tubes, digital detectors and image-processing tools and security and inspection products are generally sold on a stand-alone basis.

Company occasionally sells its digital detectors, X-ray tubes and imaging processing tools as a package that is optimized for digital X ray imaging and sells its Linatron ® X-ray accelerators together with its imaging processing software and image detection products to OEM customers that incorporate them into their inspection systems.

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 accelerators together with its imaging processing software and image detection products to OEM customers that incorporate them into their inspection systems.

Service contracts are often sold with certain security and inspection products and computer-aided detection products.

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• Recognition of revenue when, or as, a performance obligation is satisfied

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.

ASC 606-10-55-23 requires that for sales with a right of return, revenue is reduced for expected returns, a liability is recorded for expected returns, and an asset is recorded for the right to recover products from customers on settling the liability.

The Company recognizes a reduction to revenue and cost of sales at the time of sale and a corresponding contract liability and contract asset.

The Company records this estimate based on the historical volume of product returns and adjusts the estimate on a quarterly basis based on the current quarter sales and current quarter returns.

If a contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation.

Contracts that contain multiple performance obligations require an allocation of the transaction price based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation.

The Company determines standalone selling prices based on the price at which the performance obligation is sold separately.

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.

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 time as the services are rendered to the customer based on the extent of progress towards completion of the performance obligation.

The Company recognizes service revenue over the term of the service contract.

Services are expected to be transferred to the customer throughout the term of the contract and the Company believes recognizing revenue ratably over the term of the contract best depicts the transfer of value to the customer.

Disaggregation of Revenue

Revenue is disaggregated from contracts between geography and by reportable operating segment, which the Company believes best depicts how the nature, amount, timing, and uncertainty of revenues and cash flows are affected by economic factors.

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 assets are included within the prepaid expenses and other current assets, and other assets balances in the consolidated balance sheets.

Contract liabilities, which also includes refund obligations, are included within the accrued liabilities and other current liabilities, deferred revenues, and other long-term liabilities balances 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.

Deferred Revenues

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The Company evaluates the creditworthiness of customers prior to authorizing shipment for all major sale transactions.

On a quarterly basis, the Company evaluates aged items in the accounts receivable aging report and provide an allowance in an amount deemed adequate for doubtful accounts.

On a quarterly basis, the Company evaluates aged items in the accounts receivable aging report and provides an allowance in an amount deemed adequate for doubtful accounts.

If the evaluation of customers’ financial conditions does not reflect a future ability to collect outstanding receivables, additional provisions may be needed.

We had an allowance for doubtful accounts of $ 1.0 million and $ 0.6 million as of September 27, 2019 and September 28, 2018 , respectively.

The Company had an allowance for doubtful accounts of $ 0.3 million and $ 1.0 million as of October 2, 2020 and September 27, 2019, respectively.

Share-Based Compensation Expense

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The Company also permits employees to purchase shares under the Varex employee stock purchase plan.

Prior to the separation, the Company’s employees historically participated in Varian’s equity-based incentive plans.

Share-based compensation expense through the date of separation included allocations to the Company based on the awards and terms previously granted to its employees as well as an allocation of Varian’s corporate and shared functional employee expenses.

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.

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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 earnings includes compensation expense for the share-based payment awards based on the grant date fair value estimated in accordance with the guidance on share-based compensation.

Share-based compensation expense recognized is based on the value of the portion of share-based payment awards that is ultimately expected to vest.

Share-based compensation expense recognized in the consolidated statements of (loss) earnings includes compensation expense for the share-based payment awards based on the grant date fair value estimated in accordance with the guidance on share-based compensation.

The Company records forfeitures as they occur.

The Company attributes the value of share-based compensation to expense using the straight-line method.

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Shipping and handling costs are included as a component of cost of revenues.

Research and Development

Research and development costs have been expensed as incurred.

These costs primarily include employees’ compensation, consulting fees and material costs.

Software Development Costs

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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 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”).

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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.

The Company has evaluated the impact of the CARES Act and concludes 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.

Foreign Currency Translation

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Gains and losses from remeasurement of foreign currency balances into U.S.

Dollars are included in the consolidated statements of earnings.

For the foreign subsidiary 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) earnings.

Accounting Standards Recently Adopted

In November 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-18, Statement of Cash Flows (Topic 230):

Restricted Cash (“ASU 2016-18”), which requires that the statement of cash flows explain the change in the total amount of restricted cash during the period and other additional disclosures.

The Company adopted ASU 2016-18 in the first quarter of 2019 using the retrospective transition method and the Company's consolidated statements of cash flows have been retrospectively adjusted to reflect restricted cash balances.

Net cash flows for fiscal years 2019, 2018 and 2017 did not change as a result of adopting ASU 2016-18.

The Company adopted ASU 2016-15, Statement of Cash Flows (Topic 230):

Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which was issued to reduce the diversity in practice in how certain transactions are classified in the statement of cash flows.

The Company adopted ASU 2016-15 in the first quarter of 2019 retrospectively.

Net cash flows for fiscal years 2019, 2018 and 2017 did not change as a result of adopting ASU 2016-15.

The Company adopted ASC 606 as of September 29, 2018, using the modified retrospective transition method applied to those contracts which were not completed as of that date.

The Company recorded a net reduction to retained earnings of $ 4.1 million , net of tax, as of September 29, 2018 due to the impact of adopting ASC 606.

During the second quarter of 2019 the Company recorded an increase to retained earnings of $ 0.6 million , net of tax, to correct an error that was not quantitatively or qualitatively material to the current period, related to the adoption of ASC 606.

The net cumulative impact of adopting ASC 606 was $ 3.5 million , net of tax.

Dollars are included in the consolidated statements of (loss) earnings.

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 February 2016, the FASB issued Accounting Standards Update ASU No.

2016-02 , Leases, referred to as ASC 842.

The purpose of ASC 842 is to increase the transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet, including those previously classified as operating leases under U.S.

GAAP, and disclosing key information about leasing arrangements.

ASC 842, as amended, is effective for public entities for annual periods beginning after December 15, 2018, including interim periods within those annual periods and was effective for the Company beginning in fiscal year 2020.

The Company adopted the standard using the transition method provided by ASU No.

2018-11, Leases ("Topic 842"):

Targeted Improvements.

Under this method, the Company applied the new leasing rules on September 28, 2019, rather than at the earliest comparative period presented in the financial statements.

Prior periods were presented in accordance with the previously existing lease guidance under ASC Topic 840.

Upon transition, the Company applied the package of practical expedients permitted under ASC 842 transition guidance to its entire lease portfolio at September 28, 2019.

As a result, the Company was not required to reassess (i) whether any expired or existing contracts are or contain leases, (ii) the classification of any expired or existing leases, and (iii) initial direct costs for any existing leases.

Also, the Company applied the hindsight practical expedient.

Furthermore, as a lessee the Company elected to combine lease and non-lease components for the majority of its leases, which means that the Company accounted for each separate lease component and the non-lease components associated with that lease component as a single lease component.

The only asset class that did not combine lease and non-lease components were vehicle leases.

The most significant impact of the standards for the Company relate to the recognition of the right-of-use assets and lease liabilities for the operating leases in the balance sheet.

Upon adoption of the new lease standard, the Company recognized operating lease right-of-use assets and finance lease right-of-use assets of $ 26.8 million and $ 0.6 million, respectively, and corresponding operating lease liabilities and finance lease liabilities of $ 27.5 million and $ 0.6 million, respectively.

This includes the recording of the Company’s existing capital leases as finance leases at transition.

The cumulative impact of adoption was a $ 0.3 million decrease to retained earnings.

Refer to Note 3.

Revenue Recognition , included in this report report for the detailed impact of adopting ASC 606.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815):

Targeted Improvements to Accounting for Hedging Activities, which amends the application of hedge accounting and improves financial reporting of hedging relationships to more accurately present the economic effects of risk management activities in the financial statements.

The ASU is effective for public companies for annual reporting periods beginning after December 15, 2018, with early adoption permitted.

The Company early adopted the provisions of ASU 2017-12 during the quarter ended September 27, 2019, using the modified retrospective method.

The adoption did not have an impact on the consolidated financial statements.

Leases, for a detailed description of the impact of adopting this standard and its impact on the consolidated financial statements and related disclosures.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which provides the option to reclassify certain income tax effects related to the Tax Cuts and Jobs Act passed in December of 2017 between accumulated other comprehensive income and retained earnings and also requires additional disclosures.

The amendments in this ASU were effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.

Effective September 28, 2019, the Company adopted ASU 2018-02 and it did not have a material effect on the Company’s financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other, Simplifying the Test for Goodwill Impairment, which simplified the testing required for the impairment of goodwill by removing Step 2 from the goodwill impairment test.

Step 2 of the goodwill impairment test measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill.

ASU 2017-04 allows an entity to measure the impairment based off Step 1 of the impairment test, which calculates the impairment as the difference between the carrying amount of the reporting unit and its fair value.

Adoption of this ASU was required for the Company in the first quarter of fiscal year 2021.

The Company elected to early adopt this standard effective April 4, 2020.

This adoption was made on a prospective basis, as required by the standard.

Recent Accounting Standards Updates Not Yet Effective

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from U.S.

federal tax legislation commonly referred to as the Tax Cuts and Jobs Act, which was enacted in December 2017 (the “2017 Tax Act”).

ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.

In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to address issues identified as a result of the complexity associated with applying GAAP for certain financial instruments with characteristics of liabilities and equity.

In addressing the complexity, this ASU is focused on amending the guidance for convertible instruments and the derivatives scope exception for contracts in an entity’s own equity.

The Company is evaluating the impact of adopting this guidance to its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, to provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting.

The Company is currently evaluating the impact from the replacement of the London Interbank Offered Rate (LIBOR) and whether the Company will elect the adoption of the optional guidance.

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the current guidance, and improving the consistent application of and simplification of other areas of the guidance.

The standard is effective for the Company beginning in the first quarter of fiscal year 2022.

Early adoption is permitted.

The Company does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04 which clarified its guidance to simplify the measurement of goodwill by eliminating the Step 2 impairment test.

The new guidance requires companies to perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.

The amendment will be effective for the Company beginning in its first quarter of fiscal year 2021.

The amendment is required to be adopted prospectively.

The Company is evaluating the impact of adopting this amendment to its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." This ASU replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

The Company is evaluating the impact of adopting this guidance to its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments.

This ASU replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

In addition, the ASU requires new disclosures.

This standard will be effective for the Company's interim and annual periods beginning with the first quarter of fiscal 2021 and must be applied on a modified retrospective basis.

The Company is currently evaluating the potential impact of this standard.

In February 2016, the FASB issued ASU 2016-02 on accounting for leases.

The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet.

The new standard will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statement of earnings.

The new standard is required to be adopted using a modified retrospective method to each prior reporting period presented with various optional practical expedients.

The new standard will be effective for the Company beginning in its first quarter of fiscal year 2020 with early adoption permitted.

The Company has not completed its assessment of the new standard, but anticipate that the most substantial change to its consolidated financial statements will be a gross-up of its total assets and liabilities.

The adoption is not expected to materially impact our results of operations in the upcoming fiscal years and interim periods.

The Company will continue to monitor the overall impact of adoption and update our disclosures as appropriate.

This standard will not materially impact the Company's consolidated financial statements.

REVENUE RECOGNITION

The Company adopted ASC 606 on September 29, 2018, using the modified retrospective method for all contracts not completed as of the date of adoption.

The reported results for fiscal year 2020 and 2019 reflect the application of ASC 606 guidance while the reported results for fiscal year 2018 were prepared under the guidance of ASC 605, Revenue Recognition.

The following tables summarize the changes in the contract assets and refund liabilities for the twelve months ended October 2, 2020 and September 27, 2019:

(In millions) Contract Assets

Balance at September 28, 2018 $ 24.4

Costs recovered from product returns during the period ( 6.4 )

Contract asset from shipments of products, subject to return during the period 5.7

Balance at September 27, 2019 $ 23.7

Costs recovered from product returns during the period ( 5.6 )

Contract asset from shipments of products, subject to return during the period 6.5

Balance at October 2, 2020 $ 24.6

(In millions) Refund Liabilities

Balance at September 28, 2018 $ 27.1

Release of refund liability included in beginning of year refund liability ( 7.0 )

Additions to refund liabilities 6.3

Balance at September 27, 2019 $ 26.4

Release of refund liability included in beginning of year refund liability ( 6.2 )

Additions to refund liabilities 7.2

Balance at October 2, 2020 $ 27.4

During fiscal year 2020, the Company recognized revenue of $ 8.4 million related to deferred revenue which existed at September 27, 2019.

During fiscal year 2019, the Company recognized revenue of $ 10.5 million related to deferred revenue which existed at September 28, 2018.

Remaining Performance Obligations

Remaining performance obligations represent the transaction price of firm orders for which revenue has not yet been recognized, which are primarily related to contracts where control will be transferred to customers over the next 12 months.

Summary of Significant Accounting Policies, for details on the nature of the remaining performance obligations within these contracts and how they will be resolved.

On September 28, 2019, the Company adopted ASC 842, which amends the guidance for the accounting and reporting of leases.

The determination of whether an arrangement is, or contains, a lease is performed at the inception of the arrangement.

The Company has operating and finance leases for office space, warehouse and manufacturing space, vehicles and certain equipment.

The Company's lease agreements do not contain any material residual value guarantees, variable lease costs, bargain purchase options or restrictive covenants.

The Company does not have any lease transactions with related parties.

Leases with an initial term of 12 months or less are generally not recorded on the balance sheet and expense for these leases is recognized on a straight-line basis over the lease term.

The Company's leases have remaining lease terms of one year to approximately seven years , some of which may include options to extend the leases for up to six years and some include options to terminate early.

These options have been included in the determination of the lease liability when it is reasonably certain that the option will be exercised.

Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease contract.

Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of fixed lease payments over the expected lease term.

The interest rate implicit in lease contracts is typically not readily determinable.

As such, the Company's incremental borrowing rate is based on a credit-adjusted risk-free rate, which best approximates a secured rate over a similar term of lease.

The following table presents supplemental balance sheet information related to the Company's operating and finance leases:

October 2, 2020

(In millions) Balance Sheet Location Operating Leases Finance Leases

Operating lease right-of-use assets Operating lease assets $ 27.7 $ —

Finance lease right-of-use assets Property, plant and equipment, net $ — $ 0.5

Operating lease liabilities (current) Current operating lease liabilities $ 6.1 $ —

Finance lease liabilities (current) Accrued liabilities and other current liabilities $ — $ 0.2

Operating lease liabilities (non-current) Operating lease liabilities $ 23.1 $ —

Finance lease liabilities (non-current) Other long-term liabilities $ — $ 0.4

The following table presents the weighted average remaining lease term and discount rate information related to the Company's operating and finance leases:

October 2, 2020

Operating Leases Finance Leases

Weighted average remaining lease term (in years) 6.6 3.3

Weighted average discount rate 4.5 % 4.1 %

The following table provides information related to the Company’s operating and finance leases:

(In millions) Fiscal Year 2020

Total operating lease costs (a) $ 8.4

Total finance lease costs $ 0.3

Operating cash flows from operating leases $ 8.0

Financing cash flows from finance leases 0.3

Total cash paid for amounts included in the measurement of lease liabilities $ 8.3

Noncash operating right-of-use assets obtained in exchange for new lease liabilities (b) $ 10.6

Noncash finance right-of-use assets obtained in exchange for new lease liabilities (b) 0.2

Total right-of-use assets obtained in exchange for new lease liabilities (b) $ 10.8

(a) Includes variable and short-term lease expense, which were immaterial for fiscal year 2020.

(b) Excludes the impact of adopting the new leases standard in the first quarter of 2020.

For fiscal year 2019 and 2018 the Company's lease expense was $ 5.1 million and $ 5.3 million, respectively.

As of October 2, 2020, maturities of operating lease and finance lease liabilities for each of the following five years and a total thereafter were as follows:

(In millions)

Fiscal years:

Operating Leases Finance Leases

2021 $ 7.1 $ 0.2

Thereafter 9.4 —

Total future lease payments $ 34.1 $ 0.6

imputed interest ( 4.9 ) —

Present value of lease liabilities $ 29.2 $ 0.6

As of October 2, 2020 , the Company had not entered into any material leases that have not yet commenced.

At September 27, 2019, the Company was committed to minimum rentals under non-cancelable operating leases (including rent escalation clauses) for fiscal years 2020 through 2024 and therea fter, as follows:

$ 7.5 million, $ 5.4 million, $ 4.7 million, $ 1.8 million, $ 0.9 million, and $ 0.2 million, respectively.

BUSINESS COMBINATIONS

Acquisition of Direct Conversion AB (publ)

On April 29, 2019 , Varex completed the acquisition of 98.2 % of the outstanding shares of common stock of Direct Conversion AB (publ) (“Direct Conversion”) for $ 69.5 million in cash, net of cash acquired, the assumption of Direct Conversion's debt of $ 4.5 million and deferred consideration equal to $ 9.9 million or 0.3 million shares of the Company’s common stock (subject to reduction to settle indemnity claims) to be paid on the first anniversary of the closing with a mixture of cash and shares of Varex common stock.

The acquisition of Direct Conversion expands our detector product portfolio to include photon counting technology.

Acquisition of Direct Conversion AB

In April 2019, Varex completed the acquisition of 98.2 % of the outstanding shares of common stock of Direct Conversion AB (publ) (“Direct Conversion”) for $ 69.5 million in cash, net of cash acquired, the assumption of Direct Conversion's debt of $ 4.5 million and deferred consideration equal to $ 9.9 million or 0.3 million shares of the Company’s common stock.

The acquisition of Direct Conversion expanded our detector product portfolio to include photon counting technology.

This technology will allow Varex to expand its range of imaging applications and offer new solutions to both Medical and Industrial customers.

The following table summarizes the preliminary purchase price allocation:

(In millions)

To settle the deferred consideration, in April 2020, the Company issued the 0.3 million shares of its common stock valued at $ 7.4 million to certain shareholders of Direct Conversion.

The following table summarizes the purchase price allocation for Direct Conversion:

(In millions) Fair Value

Allocation of the purchase consideration:

Accounts receivable $ 2.4

Inventories 5.7

Prepaid expenses and other current assets 0.7

Property, plant, and equipment 0.9

Goodwill 47.2

Intangible assets 32.9

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Total consideration $ 79.4

The Company recorded the assets acquired and liabilities assumed at their preliminary estimated fair values.

The Company recorded the assets acquired and liabilities assumed at their fair values.

Intangibles were valued primarily using a discounted cash flow, which included estimated revenue growth and discount rate.

Due to the complexity of this transaction as of September 27, 2019, the Company had not finalized the determination of the fair values allocated to various assets and liabilities, including, but not limited to, inventory;

deferred tax assets and liabilities;

intangible assets and the residual amount allocated to goodwill.

The fair value assigned to goodwill is primarily attributable to expected synergies.

The goodwill related to the Direct Conversion acquisition is not tax deductible.

The following amounts represent the determination of the fair value and estimated weighted average useful lives of identifiable intangible assets for the Direct Conversion, which are amortized straight-line:

(In millions)

Estimated Weighted Average

Fair Value Estimated Weighted Average

Developed technology

In-process research and development

2.8 indefinite

Customer relationships

Total intangible assets acquired

During the third quarter of 2020, the in-process research and development assets from the Direct Conversion acquisition were determined to be impaired.

Refer to Note 12.

Goodwill and Intangible Assets, for more information.

The following amounts represent revenues by reporting segment from Direct Conversion from the acquisition date of April 29, 2019, through September 27, 2019:

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Total Direct Conversion revenues

The acquisition of Direct Conversion did not have a significant impact on our consolidated results of operations on a pro forma basis for the current or prior years.

Acquisition of Virtual Media Integration

On August 31, 2018, the Company completed the acquisition of Virtual Media Integration, Ltd.

(“VMI”) from MISTRAS Group, Inc for $ 4.8 million .

VMI is a provider of computed and digital radiography and X-ray film digitizer systems for industrial non-destructive testing.

The acquired assets and liabilities of the VMI business were allocated to the Industrial reporting segment.

The acquisition related costs were included in the consolidated statements of earnings under selling, general and administrative expenses.

The following table summarizes the purchase price allocation:

(In millions)

Allocation of the purchase consideration:

Accounts Receivable

Other liabilities

Net assets acquired

Post-closing adjustments

Total cash consideration

Acquisition of PerkinElmer’s Medical Imaging Business

On May 1, 2017, the Company completed the acquisition of the medical imaging business (“Acquired Detector Business”) of PerkinElmer, Inc.

(“PKI”) for $ 277.4 million , or $ 273.2 million after post-closing working capital adjustments.

The acquisition consisted of PerkinElmer Medical Holdings, Inc.

and Dexela Limited, together with certain assets of PKI and its direct and indirect subsidiaries relating to digital flat panel X-ray detectors that serve as components for industrial, medical, dental and veterinary X-ray imaging systems.

The Acquired Detector Business included about 280 employees, with operations in Santa Clara, California as well as operations in Germany, the Netherlands, China and the United Kingdom.

The acquisition of the Acquired Detector Business was pursuant to the Master Purchase and Sale Agreement, dated December 21, 2016 (the “Purchase Agreement”), by and between PKI and Varian and the subsequent Assignment and Assumption Agreement, dated January 27, 2017, by and between Varian and Varex, pursuant to which Varian assigned and conveyed all of its rights, obligations, title and interest in the Purchase Agreement to Varex.

The following amounts represent the determination of the fair value of identifiable assets acquired and liabilities for the Acquired Detector Business:

(In millions)

Total cash consideration

Allocation of the purchase consideration:

Accounts Receivable

Prepaids and other current assets

Property, plant, and equipment

Other assets, non-current

Total assets acquired

Current liabilities

Other liabilities, non-current

Total liabilities assumed

Net assets acquired

The fair value assigned to goodwill is attributable to expected cost synergy opportunities.

Included in the goodwill recorded for the Acquired Detector Business is approximately $ 35 million that will be deductible for income tax purposes in Germany, China and the Netherlands.

The remaining goodwill related to the stock acquisition in the United States is not tax deductible.

Also, as a result of the acquisition, non-current deferred income tax liability increased by approximately $ 31 million related to basis differences for both tangible and intangible assets acquired as part of the stock purchases in the United States and the United Kingdom, and asset purchases in Germany, the Netherlands and China.

The following amounts represent the determination of the fair value of identifiable intangible assets for the Acquired Detector Business, which are amortized straight-line:

(In millions)

Favorable leasehold interests

Developed technology

In-process research and development

Customer relationships

Total intangible assets acquired

The following amounts represent revenues by reporting segment from the Acquired Detector Business from the acquisition date of May 1, 2017 through September 29, 2017:

(In millions)

May 1, 2017 through September 29, 2017

Acquired Detector Business

Total Acquired Detector Business revenues

Unaudited Pro Forma Information

The unaudited pro-forma amounts presented below for the fiscal year 2017 are presented for informational purposes only.

In addition to the Company's results for the periods presented, the amounts below also include effects of the Acquired Detector Business as if it had been consummated on October 1, 2016.

These unaudited pro-forma results include effects that are directly attributable to the acquisition which include the amortization of intangible assets, interest expense, and other adjustments, including estimated tax effects.

The unaudited pro-forma results do not reflect any operating efficiencies or potential cost savings which may result from the consolidation of the Acquired Detector Business and are not necessarily indicative of what the actual results of operations of the combined company would have been if the acquisition had occurred at the beginning of the period presented nor are they indicative of future results of operations or results that might have been achieved had the acquisition been consummated as of October 3, 2015.

(In millions)

Operating earnings

Net earnings per share, basic

Net earnings per share, diluted

The acquisition of Direct Conversion did not have a significant impact on the Company's consolidated results of operations on a pro forma basis for the current or prior years.

RELATED-PARTY TRANSACTIONS

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In fiscal years 2020, 2019 and 2018, the Company recorded (loss) and income on the equity investment in dpiX Holding of $( 0.8 ) million, $( 1.1 ) million and $ 3.4 million, respectively.

Income and loss on the equity investment in dpiX Holding is included in other (expense) income, net in the consolidated statements of earnings.

The carrying value of the equity investment in dpiX Holding, which was included in investments in privately-held companies on the consolidated balance sheets, was $ 48.1 million and $ 48.9 million at September 27, 2019 and September 28, 2018 , respectively.

Income and loss on the equity investment in dpiX Holding is included in other (expense) income, net in the consolidated statements of (loss) earnings.

The carrying value of the equity investment in dpiX Holding, which was included in investments in privately-held companies on the consolidated balance sheets, was $ 47.3 million and $ 48.1 million at October 2, 2020 and September 27, 2019, respectively.

In fiscal years 2020, 2019 and 2018, the Company purchased glass transistor arrays from dpiX totaling $ 20.4 million, $ 23.5 million and $ 19.3 million, respectively.

These purchases of glass transistor arrays are included as a component of inventories on the consolidated balance sheets or cost of revenues in the consolidated statements of earnings for these fiscal years.

As of September 27, 2019 and September 28, 2018 , the Company had accounts payable to dpiX totaling $ 3.6 million and $ 3.7 million , respectively.

These purchases of glass transistor arrays are included as a component of inventories on the consolidated balance sheets or cost of revenues in the consolidated statements of (loss) earnings for these fiscal years.

As of October 2, 2020 and September 27, 2019, the Company had accounts payable to dpiX totaling $ 4.6 million and $ 3.6 million, respectively.

In October 2013, the Company entered into an amended agreement with dpiX and other parties that, among other things, provides the Company with the right to 50 % of dpiX’s total manufacturing capacity produced after January 1, 2014.

The amended agreement requires the Company to pay for 50 % of the fixed costs (as defined in the amended agreement), as determined at the beginning of each calendar year.

As of September 27, 2019 , the Company estimated it has fixed cost commitments of $ 3.7 million related to this amended agreement through the remainder of calendar year 2019 .

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.

In addition, the amended agreement requires the Company to pay for 50 % of the fixed costs (as defined in the amended agreement), as determined at the beginning of each calendar year.

In January 2020, the fixed cost commitment was determined and approved by the dpiX board of directors to be $ 12.7 million for calendar year 2020.

As of October 2, 2020, the Company estimated it has fixed cost commitments of $ 3.2 million related to this amended agreement through the remainder of calendar year 2020.

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

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The Company does not have majority voting rights and no power to direct the activities of dpiX and therefore is not the primary beneficiary of dpiX.

The Company’s exposure to loss as a result of its involvement with dpiX is limited to the carrying value of the Company’s investment of $ 48.1 million and fixed cost commitments of $ 3.7 million .

In November 2018, the Company and CETTEEN GmbH (“CETTEEN”), formed a German limited liability company that governs the affairs and conduct of the business of VEC Imaging Verwaltungsgesellschaft GmbH (“VEC”), a joint venture formed to develop technology to be used in X-ray imaging components.

The Company’s exposure to loss as a result of its involvement with dpiX is limited to the carrying value of the Company’s investment of $ 47.3 million and fixed cost commitments.

In November 2018, the Company and CETTEEN GmbH (“CETTEEN”), formed a German joint venture entity, VEC Imaging Verwaltungsgesellschaft GmbH (“VEC”), to develop technology for use in X-ray imaging components.

In accordance with the VEC agreement, net profits or losses are allocated to the members in accordance with their ownership interest.

The Company's investment in VEC is accounted for under the equity method.

The Company has made contributions totaling $ 2.9 million , and has committed to contribute an additional $ 2.2 million , as milestones are achieved, and to provide certain full time employees to support prototyping and manufacturing activities in exchange for a 50 % interest in VEC.

As of October 2, 2020, the Company has made contributions totaling

$ 4.0 million, and has committed to contribute an additional $ 1.2 million, as milestones are achieved, and to provide certain full-time employees to support prototyping and manufacturing activities in exchange for a 50 % interest in VEC.

CETTEEN made contributions of certain assets including intellectual property in exchange for a 50 % interest in VEC.

The Company's investment in VEC was $ 2.0 million as of September 27, 2019 .

The Company's investment in VEC was $ 2.5 million and $ 2.0 million as of October 2, 2020 and September 27, 2019, respectively.

RESTRUCTURING

Following the acquisition of the medical imaging business from PKI in May of 2017, management began a multiyear program to consolidate the acquired operations, reduce costs, improve productivity and realize synergies.

In March 2018, the Company made the decision to transfer the complementary metal oxide semiconductor (“CMOS”) research and development capability from the U.K.

and to permanently close the operation of the acquired detector business in London.

The company will continue to develop the CMOS technology in the U.S.

due to its competitive advantages, product differentiation and future economic benefit.

In connection with this initiative, we recorded $ 1.7 million in restructuring charges during fiscal year 2018.

In July 2018, the Company committed to a plan to relocate the production of amorphous silicon glass for digital detectors, from its Santa Clara facility, to the jointly owned dpiX fabrication facility in Colorado.

In July 2018, the Company committed to relocate the production of amorphous silicon glass for digital detectors, from its Santa Clara facility, to the jointly owned dpiX fabrication facility in Colorado.

In July 2019, the Company committed to close its Santa Clara facility and to relocate the remaining production to its other existing facilities.

The Company expects operations at the Santa Clara facility to cease by the end of December 2020 and all activities related to the closure of the facility to be complete by the end of March 2021.

In connection with the relocation of the glass production and site closure the Company recorded $ 16.1 million and $ 14.2 million of restructuring and impairment charges during fiscal year 2019 and 2018, respectively.

Fiscal year 2019 intangible asset impairment charges consisted of in-process research and development related to certain projects that were discontinued as a result of the Santa Clara facility closure.

Fiscal year 2018 intangible asset impairment charges were related to a favorable leasehold interest that was impaired as a result of the amorphous silicon glass relocation.

The Company expects to incur an additional $ 8.1 million to $ 12.1 million of restructuring charges through March 2021.

The Company also incurred approximately $ 2.8 million and $ 0.8 million of other unrelated restructuring expenses during fiscal years 2019 and 2018, respectively.

The Company ceased all operations at the Santa Clara facility as of October 2, 2020 and all activities related to the closure of the facility are expected to be complete by the end of December 2020.

In connection with the relocation of the glass production and site closure, the Company recorded $ 9.1 million and $ 18.9 million of restructuring charges during fiscal year 2020 and 2019, respectively.

On July 29, 2020, the Company commenced the implementation of a reduction in workforce to reduce the Company’s operating costs and address the impact of the COVID-19 pandemic.

This action is expected to result in the reduction of the Company’s workforce by approximately 94 employees, of which nearly all are located within the United States.

This reduction is in addition to the previously disclosed reduction in workforce associated with the closure of the Company’s Santa Clara facility.

The Company expects to complete the reduction in workforce by December 31, 2020.

In connection with this reduction in workforce and other restructuring activities, excluding those related to the Santa Clara facility, the Company has recorded $ 4.4 million of expense during fiscal year 2020.

Cash outflows associated with these restructuring charges are limited to employee termination expenses, facility closure and equipment sales and disposals.

Below is a detail of restructuring charges incurred during the 2020 and 2019 fiscal years, which predominately relate to the Company's Medical segment:

(In millions)

Location of Restructuring Charges in Consolidated Statements of Earnings

September 27, 2019

September 28, 2018

Other assets impairment charges

Selling, general and administrative

Inventory write downs

Cost of revenues

Intangible assets impairment

Impairment of intangible assets

Accelerated depreciation

Cost of revenues

Severance costs

Selling, general and administrative

Facility closure costs

Selling, general and administrative

(In millions) Location of Restructuring Charges in Consolidated Statements of (Loss) Earnings October 2, 2020 September 27, 2019

Inventory write downs Cost of revenues $ 1.3 $ 3.1

Intangible assets impairment Impairment of intangible assets — 4.8

Accelerated depreciation Cost of revenues 2.9 4.5

Severance costs Selling, general and administrative 5.7 6.2

Facility closure costs Selling, general and administrative 3.6 0.3

Total restructuring charges $ 13.5 $ 18.9

OTHER FINANCIAL INFORMATION

The following table summarizes the Company’s accrued liabilities:

(In millions)

September 27, 2019

September 28, 2018

The following table summarizes the Company’s accrued liabilities and other current liabilities:

(In millions) October 2, 2020 September 27, 2019

Accrued compensation and benefits

$ 33.0 $ 32.1

Product warranty

Income taxes payable

Payable to Varian Medical Systems

Right of return liability

Deferred consideration

Total accrued liabilities

Total accrued liabilities and other current liabilities $ 70.5 $ 75.7

The following table summarizes the Company’s other long-term liabilities:

(In millions)

September 27, 2019

September 28, 2018

(In millions) October 2, 2020 September 27, 2019

Long-term income tax payable $ 3.9 $ 3.9

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Total other long-term liabilities

The following table summarizes the Company’s other income (expense), net:

$ 34.9 $ 32.5

The following table summarizes the Company’s other (expense) income, net:

(In millions) 2020 2019 2018

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Change in fair value of deferred consideration 0.9 1.0 —

Realized income (loss) on foreign currencies

Impairment of investment ( 2.7 ) 0.0 —

Realized (loss) on foreign currencies ( 3.7 ) ( 1.9 ) ( 1.2 )

Total other income (expense), net

NET EARNINGS PER SHARE

Basic net earnings per common share is computed by dividing the net earnings for the period by the weighted average number of shares of common stock outstanding during the reporting period.

Diluted net earnings per common share reflects the effects of potentially dilutive securities, which is computed by dividing net earnings by the sum of the weighted average number of common shares outstanding and dilutive common shares, which consists of stock options and unvested restricted stock.

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per common share is as follows:

$ ( 7.6 ) $ ( 3.2 ) $ 2.7

(LOSS) EARNINGS PER SHARE

Basic (loss) earnings per common share is computed by dividing the net (loss) earnings for the period by the weighted average number of shares of common stock outstanding during the reporting period.

Diluted earnings per common share reflects the effects of potentially dilutive securities, which is computed by dividing net (loss) earnings by the sum of the weighted average number of common shares outstanding and dilutive common shares, which consists of stock options and unvested restricted stock.

A reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per common share is as follows:

(In millions, except per share amounts)

Net earnings attributable to Varex

2020 2019 2018

Net (loss) earnings attributable to Varex

$ ( 57.9 ) $ 15.5 $ 27.5

Weighted average shares outstanding - basic

38.8 38.2 37.9

Dilutive effect of potential common shares

Weighted average shares outstanding - diluted

Net earnings per share attributable to Varex - basic

Net earnings per share attributable to Varex - diluted

38.8 38.6 38.4

(Loss) earnings per share attributable to Varex - basic

$ ( 1.49 ) $ 0.41 $ 0.73

(Loss) earnings per share attributable to Varex - diluted

$ ( 1.49 ) $ 0.40 $ 0.72

Anti-dilutive employee shared based awards, excluded

The Company excludes potentially dilutive common shares (consisting of shares underlying stock options and the employee stock purchase plan) from the computation of diluted weighted average shares outstanding if the inclusion of the shares underlying these stock awards would be anti-dilutive to earnings per share.

Potentially dilutive shares, which are based on the weighted-average shares of common stock underlying stock options, unvested stock awards, purchase rights granted under the employee stock purchase plan, warrants and convertible notes using the treasury stock method or the if-converted method, as applicable, are included when calculating diluted net income (loss) earnings per share attributable to Varex when their effect is dilutive.

Because the Company incurred a net loss for fiscal year 2020, none of the potentially dilutive common shares were included in the diluted share calculations for those periods as they would have been anti-dilutive.

FINANCIAL DERIVATIVES AND HEDGING ACTIVITIES

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Derivatives Designated as Hedging Instruments - Cash Flow Hedges

The Company uses interest rate swap contracts as cash flow hedges to manage its exposure to fluctuations in LIBOR interest rates.

Interest rate swap contracts hedging variable rate debt effectively fix the LIBOR component of its interest rate for a specific period of time.

As of September 27, 2019 , the Company had the following outstanding derivatives designated as cash flow hedging instruments:

(In millions, except for number of instruments)

Number of Instruments

Notional Value

Interest Rate Swap Contracts

The following table summarizes the amount of pre-tax earnings recognized from derivative instruments for the periods indicated and the line items in the accompanying statements of operations where the results are recorded for cash flow hedges:

Amount of Gain or (Loss) Recognized in OCI on Derivative

The Company previously used interest rate swap contracts as cash flow hedges to manage its exposure to fluctuations in LIBOR interest rates.

Interest rate swap contracts hedging variable rate debt effectively fixed the LIBOR component of its interest rate for a specific period of time.

These hedges were entered into in connection with the Company's prior Credit Agreement, as defined in Note 10.

Borrowings , as the interest rates under the Credit Agreement were at variable rates.

In September 2020, the Company repaid the debt under the Credit Agreement and terminated all of the interest rate swap contracts.

The loss on the interest rate contracts that was deferred in other comprehensive income (OCI) was immediately recognized in earnings from transactions that are remote.

The following table summarizes the amount of pre-tax (loss) earnings recognized from derivative instruments for the periods indicated and the line items in the accompanying financial statements where the results are recorded for cash flow hedges:

Amount of Gain or (Loss) Recognized in OCI on Derivatives

Fiscal Year Ended

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(In millions)

2020 2019 2018 2020 2019 2018

Interest Rate Swap Contracts

$ ( 3.4 ) $ ( 6.3 ) $ 6.9 Interest expense $ ( 1.5 )

The Company expects that $ 0.1 million of the accumulated other comprehensive (loss) income related to cash flow hedges will be realized in pre-tax earnings over the next 12 months, but the amount will vary depending on interest rates.

These derivative instruments are subject to master netting agreements giving effect to rights of offset with each counterparty.

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The following table summarizes the gross fair values of derivative instruments as of the periods indicated and the line items in the accompanying consolidated balance sheets where the instruments are recorded.

Derivative Assets

Derivative Liabilities

(In millions)

September 27, 2019

September 28, 2018

September 27, 2019

September 28, 2018

October 2, 2020 September 27, 2019

Derivatives designated as cash flow hedges

Balance sheet location

Interest rate swap contracts

Other current assets

Other current liabilities

Interest rate swap contracts

Other non-current assets

Other non-current liabilities $ — $ ( 0.5 )

Derivatives Designated as Hedging Instruments - Net Investment Hedges

The Company uses cross currency swap contracts as net investment hedges to manage its risk of variability in foreign currency-denominated net investments in wholly-owned international operations.

The Company uses cross currency swap contracts as net investment hedges to manage its risk of variability in foreign currency-denominated net investments in majority-owned international operations.

All changes in fair value of the derivatives designated as net investment hedges are reported in accumulated other comprehensive (loss) income along with the foreign currency translation adjustments on those investments.

As of September 27, 2019 , the Company had the following outstanding derivatives designated as net investment hedging instruments:

In September 2020, the Company terminated one of the net investment swaps and the loss on the swap was recorded in accumulated other comprehensive (loss) income where it will remain until substantial liquidation of the international operations.

As of October 2, 2020, the Company had the following outstanding derivatives designated as net investment hedging instruments:

(In millions, except for number of instruments)

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Cross Currency Swap Contracts

Amount of Gain or (Loss) Recognized in OCI on Derivative

The following table summarizes the amount of pre-tax earnings recognized from derivative instruments for the periods indicated and the line items in the accompanying statements of (loss) earnings where the results are recorded for net investment hedges:

Amount of Gain or (Loss) Recognized in OCI on Derivatives

Fiscal Year Ended

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(In millions)

2020 2019 2018 2020 2019 2018

Cross Currency Swap Contracts

6 unchanged sentences

(In millions)

September 27, 2019

September 28, 2018

September 27, 2019

September 28, 2018

October 2, 2020 September 27, 2019 October 2, 2020 September 27, 2019

Derivatives designated as net investment hedges

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$ 1.3 $ — Other current liabilities $ — $ ( 0.2 )

Cross currency swap contracts Other non-current assets

— — Other non-current liabilities ( 2.1 ) —

$ 1.3 $ — $ ( 2.1 ) $ ( 0.2 )

Balance Sheet Hedges

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These forward contracts are not designated for hedge accounting treatment, therefore, the change in fair value of these derivatives is recorded as a component of other income (expense) and offsets the change in fair value of the foreign currency denominated assets and liabilities, which are also recorded in other income (expense).

The effect of derivative instruments not designated as hedges for fiscal year 2019 was a loss of $ 1.5 million , which was primarily related to the purchase price hedge established following the announcement of the Company's planned acquisition of Direct Conversion.

The effect of derivative instruments not designated as hedges for fiscal year 2020 was a loss of $ 0.2 million.

The Company does not, and does not intend to use derivative financial instruments for speculative or trading purposes.

The following table shows the notional amounts of outstanding foreign currency contracts entered into under its balance sheet hedge program as of September 27, 2019 :

The following table shows the notional amounts of outstanding foreign currency contracts entered into under its balance sheet hedge program as of October 2, 2020:

Notional Value of Derivatives not Designated as Hedging Instruments:

Buy contracts

Sell contract

(in millions) Buy contracts Sell contracts

Swiss franc $ — $ 1.1

Chinese renminbi 3.4 —

The following table summarizes the Company's short-term and long-term debt:

September 27, 2019

September 28, 2018

(In millions, except for percentages)

Weighted-Average Interest Rate

October 2, 2020 September 27, 2019

(In millions, except for percentages) Amount Weighted-Avg Effective Interest Rate Amount Weighted-Avg Effective Interest Rate $ Change

Current maturities of long-term debt

Term Facility $ — $ 29.4 5.6 % $ ( 29.4 )

Other debt 2.5 1.3 1.2

Total current maturities of long-term debt $ 2.5 $ 30.7 $ ( 28.2 )

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Revolving Credit Facility $ — $ 59.0 5.6 % $ ( 59.0 )

Asset-Based Loan — — —

Term Facility — 308.6 5.6 % ( 308.6 )

Debt issuance costs

Non-current maturities of long-term debt

Total long-term debt, net

Existing Credit Facility

On May 1, 2017 and in connection with the Acquired Detector Business, the Company entered into a new secured revolving credit facility (the “Revolving Credit Facility”) in an aggregate principal amount of up to $ 200.0 million with a five -year term, and a secured term facility (the “Term Facility” and together with the Revolving Credit Facility, the “Credit Agreement”) in an aggregate principal amount of $ 400.0 million .

The Term Facility will be repaid over five years , with 5.0 % payable in quarterly installments

during each of the first two years of the term thereof, 7.5 % payable in quarterly installments during the third and fourth years of the term thereof, and 10 % payable in quarterly installments in the fifth year of the term thereof, with the remaining amount due at maturity.

Varex used the net proceeds from the Term Facility, and the net proceeds from approximately $ 97.0 million drawn on the Revolving Credit Facility, to pay the purchase price for the Acquired Detector Business, plus related credit facility fees, and to repay all of Varex’s obligations under the Previous Credit Agreement.

Both the Term Facility and Revolving Credit Facility expire on May 1, 2022.

The Credit Agreement contains various customary restrictive covenants that limits, among other things, the incurrence of indebtedness by Varex and its subsidiaries, the grant or incurrence of liens by Varex and its subsidiaries, the entry into sale and leaseback transactions by Varex and its subsidiaries, and the entry into certain fundamental change transactions by Varex and its subsidiaries.

It also contains customary events of default and certain financial covenants.

The Company agreed to maintain financial covenants, which include maximum consolidated total leverage ratio, maximum senior secured leverage ratio, maximum capital expenditures and a minimum consolidated fixed charge coverage ratio.

The Company was in compliance with all financial covenants under the Credit Agreement as of September 27, 2019 .

The Credit Agreement is secured by the stock and assets of Varex’s material subsidiaries.

The Credit Agreement has several borrowing and interest rate options including the following indices:

(a) LIBOR rate, or (b) the base rate (equal to the greater of the prime rate, the federal funds rate plus 0.50 % or the LIBOR rate for a one-month period plus 1.00 % ).

Loans under the Credit Agreement bear interest at a rate per annum using the applicable indices plus a varying interest rate margin of between 1.75 % and 2.75 % (for LIBOR rate loans) and 0.75 % - 1.75 % (for base rate loans).

The Credit Agreement also provides for fees applicable to amounts available to be drawn under outstanding letters of credit of 0.125 % , and a fee on unused commitments which ranges from 0.25 % to 0.40 % .

On October 3, 2018, the Company, in accordance with the terms of the Credit Agreement, provided notice to the administrative agent that effective as of October 10, 2018, the Company had permanently reducing the revolving credit commitment under the Credit Agreement by $ 50.0 million to $ 150.0 million .

The reduction in the revolving credit commitment reduced the fees paid by the Company in connection with such commitment.

Subsequent to fiscal year 2019, the Company, in accordance with the terms of the Credit Agreement, provided notice to the administrative agent that effective as of October 8, 2019 , the Company was permanently reducing the revolving credit commitment under the Credit Agreement by $ 25.0 million to $ 125.0 million .

Subsequent to fiscal year 2019, the Company did not comply with the covenant under the Credit Agreement to timely deliver the Company's fiscal year 2019 annual financial statements.

However, upon the filing of this Annual Report with the SEC, the Company 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 , the Company had $ 364.4 million in non-current maturities of long-term debt outstanding, net of deferred debt issuance costs of $ 5.7 million , and $ 30.7 million of current maturities of long-term debt outstanding.

Future principal payments of the long-term debt outstanding as of September 27, 2019 are as follows:

Convertible Senior Unsecured Notes 200.0 10.9 % — 200.0

Senior Secured Notes 300.0 8.2 % — 300.0

Other debt 8.8 2.5 6.3

Total non-current maturities of long-term debt:

$ 508.8 $ 370.1 $ 138.7

Unamortized issuance costs and debt discounts

Debt issuance costs - Credit Agreement $ — $ ( 5.7 ) $ 5.7

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

Debt issuance costs - Senior Secured Notes ( 5.6 ) — ( 5.6 )

Total $ ( 56.0 ) $ ( 5.7 ) $ ( 50.3 )

Total debt outstanding, net $ 455.3 $ 395.1 $ 60.2

Future principal payments of long-term debt outstanding as of October 2, 2020 are as follows:

(In millions)

Fiscal years:

Thereafter 300.9

Total debt outstanding 511.3

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Non-current portion of long -term debt $ 508.8

Convertible Senior Unsecured Notes

On June 9, 2020, Varex issued $ 200.0 million in aggregate principal amount of 4.00 % convertible senior unsecured notes due 2025 (“Convertible Notes”).

The net proceeds from the issuance of the Convertible Notes, after deducting transaction fees and offering

expense payable by the Company, were approximately $ 193.1 million.

The Convertible Notes bear interest at the annual rate of 4.00 %, payable semiannually on June 15 and December 15 of each year, beginning on December 15, 2020, and will mature on June 15, 2025, unless earlier converted or repurchased by us.

The Convertible Notes will be convertible into cash, shares of Varex common stock or a combination thereof, at the Company's election, at an initial conversion rate of 48.05 shares of common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $ 20.81 per share, subject to adjustment pursuant to the terms of the Indenture governing the Convertible Notes (the "Indenture").

The Convertible Notes may be converted at any time after, and including, December 15, 2024 until the close of business on the second scheduled trading day immediately before the maturity date.

The conversion rate of the Convertible Notes may be adjusted in certain circumstances, including in connection with a conversion of the Convertible Notes made following certain fundamental changes and under other circumstances set forth in the Indenture.

It is the Company's current intent and policy to settle any conversions of notes through a combination of cash and shares.

Prior to the close of business on the business day immediately preceding December 15, 2024, the Convertible Notes at the option of the holder can be convertible only under the following circumstances:

• during any calendar quarter commencing after the calendar quarter ending on September 30, 2020, if the last reported sale price per share of Varex common stock exceeds 130 % of the conversion price for each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;

• during the five consecutive business days immediately after any five consecutive trading day period (such five consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price per share of Varex common stock on such trading day and the conversion rate on such trading day;

• upon the occurrence of certain corporate events or distributions on Varex common stock, as described in the Indenture;

• if the Company calls any notes for redemption (under the conditions specified below).

The Convertible Notes will be redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after June 1, 2023 and on or before the 60th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest, if any, but only if the last reported sale price per share of the Company’s common stock exceeds 130 % of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (ii) the trading day immediately before the date the Company sends such notice.

In addition, calling any Convertible Note for redemption will constitute a make-whole fundamental change with respect to that Convertible Note, in which case the conversion rate applicable to the conversion of that Convertible Note will be increased in certain circumstances if it is converted after it is called for redemption.

No sinking fund is provided for the Convertible Notes.

Total interest expense related to the Convertible Notes for the twelve months ended October 2, 2020 was $ 5.0 million and was comprised of $ 2.5 million related to the contractual interest coupon and $ 2.5 million related to the amortization of the discount and issuance costs on the liability component.

On June 4, 2020 and June 5, 2020, in connection with the offering of the Convertible Notes, Varex entered into privately negotiated convertible note hedge transactions (collectively, the “Hedge Transactions”).

The Hedge Transactions cover, subject to customary anti-dilution adjustments, the number of shares of Varex common stock that initially underlie the Convertible Notes.

The Hedge Transactions are expected generally to reduce the potential dilution and/or offset any cash payments Varex is required to make in excess of the principal amount due upon conversion of the Convertible Notes in the event that the market price of Varex common stock is greater than the strike price of the Hedge Transactions, which was initially $ 20.81 per share (subject to adjustment under the terms of the Hedge Transactions).

The strike price of $ 20.81 corresponds to the initial conversion price of the Convertible Notes.

The number of shares underlying the Hedge Transactions is 9.6 million.

On June 4, 2020 and June 5, 2020, Varex also entered into privately negotiated warrant transactions (collectively, the “Warrant Transactions” and, together with the Hedge Transactions, the “Call Spread Transactions”), whereby the Company sold warrants at a higher strike price relating to the same number of shares of Varex common stock that initially underlie the Convertible Notes, subject to customary anti-dilution adjustments.

The initial strike price of the warrants is $ 24.975 per share (subject to

adjustment under the terms of the Warrant Transactions), which is 50 % above the last reported sale price of Varex common stock on June 4, 2020.

The Warrant Transactions could have a dilutive effect to the Company's stockholders to the extent that the market price per share of Varex common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants.

The number of shares underlying the Warrant Transactions is 9.6 million.

The number of warrants outstanding as of October 2, 2020, was 9.6 million.

The Company used $ 11.2 million of the net proceeds from the issuance of the Convertible Notes and $ 49.8 million from the Warrant Transactions to pay the cost of the Hedge Transactions, which totaled $ 61.0 million.

The Hedge Transactions and the Warrant Transactions are separate transactions, in each case, and are not part of the terms of the Convertible Notes and will not affect any holder’s rights under the Convertible Notes.

Holders of the Convertible Notes will not have any rights with respect to the Call Spread Transactions.

Accounting Treatment of the Convertible Notes and Related Hedge Transactions and Warrant Transactions

As the Call Spread Transactions meet certain accounting criteria, the Call Spread Transactions were classified as equity and are not accounted for as derivatives.

The proceeds from the offering of the Convertible Notes were separated into liability and equity components.

On the date of issuance, the liability and equity components of the Convertible Notes were calculated to be approximately $ 152.3 million and $ 47.7 million, respectively.

The initial $ 152.3 million liability component was determined based on the fair value of similar debt instruments excluding the conversion feature assuming a hypothetical interest rate of 10.45 %.

The initial $ 47.7 million equity component represents the difference between the fair value of the initial $ 152.3 million in debt and the $ 200.0 million of gross proceeds.

The equity component is included in additional paid-in capital in the consolidated balance sheets and will not be subsequently remeasured as long as it continues to meet the conditions for equity classification.

The related initial debt discount of $ 47.7 million is being amortized over the life of the Convertible Notes as non-cash interest expense using the effective interest method at an interest rate of 10.9 %.

In connection with the above-noted transactions, the Company incurred approximately $ 6.9 million of offering-related costs.

These offering fees were allocated to the liability and equity components in proportion to the allocation of proceeds and accounted for as debt and equity issuance costs, respectively.

The Company allocated $ 5.3 million of debt issuance costs to the liability component, which were capitalized as deferred financing costs within long-term debt.

These costs are being amortized as interest expense over the term of the debt using the effective interest method.

The remaining $ 1.6 million of transaction costs allocated to the equity component were recorded as a reduction of the equity component.

Senior Secured Notes

Varex issued $ 300.0 million aggregate principal amount of 7.875 % Senior Secured Notes due 2027 (the "Senior Secured Notes") pursuant to an indenture dated September 30, 2020, among Varex, certain of its direct or indirect wholly-owned subsidiaries as guarantors, and Wells Fargo Bank, National Association as trustee and collateral agent.

Interest payments are paid semiannually on April 15 and October 15 of each year, beginning on April 15, 2021.

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.

The Company used $ 267.5 million of the proceeds from the offering to repay the Term Facility (defined below), including accrued interest.

As of October 2, 2020, the book value of the Senior Secured Notes was presented net of unamortized debt issuance costs of $ 5.6 million.

Debt issuance costs are amortized to interest expense over the agreement term using the effective interest method.

The effective interest rate was 8.2 % as of October 2, 2020.

The Senior Secured Notes are secured by a first priority lien on substantially all of the assets of Varex and the assets and capital stock of its subsidiary guarantors (subject to exceptions), except for assets for which a first priority security interest is pledged for the ABL Facility (defined below), in which the Senior Secured Notes will have a second lien security interest.

The Senior Secured Notes include negative covenants, subject to certain exceptions, restricting or limiting Varex's ability and the ability of its restricted subsidiaries to, among other things, incur liens on collateral;

sell certain assets;

incur additional indebtedness;

pay dividends;

issue preferred shares;

consolidate, merge, or sell all or substantially all of its assets;

and enter into certain transactions with their affiliates.

At any time prior to October 15, 2023, the Company has the ability to redeem the Senior Secured Notes under the following optional redemptions:

• up to 30 % of the aggregate principal amount of the notes issued under the indenture with the proceeds of certain equity offerings at a redemption price equal to 107.875 % of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.

• some or all of the notes at a price equal to 100 % of the principal amount of the notes, plus a “make-whole premium,” together with accrued and unpaid interest, if any, to, but excluding, the redemption date.

• up to 10 % of the aggregate principal amount of the notes per year at a redemption price equal to 103 % of the aggregate principal amount of notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding the redemption date.

At any time on or after October 15, 2023, Varex may redeem all or part of the notes at the redemption prices indicated in the indenture, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.

In addition, if the Company experiences certain changes of control or receive proceeds from certain asset sales, holders of the notes will have the right to require the Company to repurchase the notes under the terms set forth within the indenture.

Interest expense related to the Senior Secured Notes for the twelve months ended October 2, 2020 was $ 0.2 million.

Asset-Based Loan

Concurrent with the termination of the Credit Agreement (defined below) and closing of the Senior Secured Notes on September 30, 2020, the Company entered into a new revolving credit agreement consisting of a $ 100.0 million asset-based loan revolving credit facility (the “Asset-Based Loan”, or "ABL Facility").

Borrowings under the Asset-Based Loan will be expected to bear interest at floating rates based on LIBOR, or comparable rate, or a base rate, and an applicable margin based on Average Daily Excess Availability (as defined in the Asset-Based Loan Agreement).

In addition, the Company is required to pay a quarterly commitment fee of 0.375 % to 0.5 %, based on the aggregate unused commitments under the Asset-Based Loan.

The ABL Facility matures on the earlier of September 30, 2025 or 91 days prior to the maturity of the Convertible Notes, at which time all outstanding amounts under the ABL Facility will be due and payable.

As of October 2, 2020, the total undrawn amount under the ABL Facility was $ 100.0 million, however, the borrowing base under the ABL fluctuates from month-to-month depending on the amount of eligible accounts receivable and inventory.

Debt issuance costs, including unamortized deferred costs for continuing lenders under the previously existing revolving credit facility, of $ 3.1 million were capitalized and are being amortized over the term of the new agreement.

The amortization associated with these costs is recorded within Interest expense in the consolidated statement of operations.

The debt issuance costs are included net of amortization within other assets in the accompanying consolidated balance sheets.

The ABL Facility includes various restrictive covenants that limit our ability to engage in certain transactions, including the incurrence of debt, payment of dividends and other restrictive payments, existence of restrictions affecting subsidiaries, sales of stock and assets, certain affiliate transactions, modifications of debt documents and organizational documents, changes to line of business and fiscal year, incurrence of liens, making fundamental changes, prepayments of junior indebtedness, and certain other transactions.

The ABL Facility contains a minimum Fixed Charge Coverage Ratio of 1.00 to 1.00 that is tested when excess availability under the ABL is less than the greater of (i) 10.0 % of the Line Cap (the lesser of (a) the aggregate commitments under the ABL Facility and (b) the aggregate borrowing base) and (ii) $ 7.5 million.

The ABL Facility will have a first lien security interest on accounts receivable, cash, and inventory as well as certain real estate and holds second lien security interest on all other assets.

Credit Agreement

On May 1, 2017 Varex entered into a secured revolving credit facility (the “Revolving Credit Facility”) in an aggregate principal amount of up to $ 200.0 million with a term of five years , and a secured term facility (the “Term Facility” and together with the Revolving Credit Facility, the “Credit Agreement”) in an aggregate principal amount of $ 400.0 million, which was subsequently amended.

On September 30, 2020, the Company terminated its previously existing Credit Agreement, consisting of both the Term Facility and Revolving Credit Facility.

The Company repaid the outstanding Term Facility balance of $ 265.5 million and accrued

interest of $ 2.0 million with proceeds received from the issuance of the Senior Secured Notes (defined above) and wrote off approximately $ 3.8 million of previously recorded debt issuance costs, which resulted in a $ 3.8 million loss on extinguishment of debt, recorded as interest expense within the consolidated statements of operations and comprehensive (loss) earnings.

Assets/Liabilities Measured at Fair Value on a Recurring Basis

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(In millions)

Fair Value Measurements at September 27, 2019

Fair Value Measurements at October 2, 2020

Quoted Prices in Active Markets for Identical Assets and Liabilities

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Cash equivalents - money market funds

$ — $ 72.9 $ — $ 72.9

Derivative assets

Total assets measured at fair value

$ — $ 74.0 $ — $ 74.0

Derivative liabilities

Deferred consideration

$ — $ 2.1 $ — $ 2.1

Total liabilities measured at fair value $ — $ 2.1 $ — $ 2.1

As of September 27, 2019 , the total outstanding borrowings under the Company's credit agreement were $ 395.1 million , net of deferred loan costs, which approximated its fair value because it is carried at a market observable interest rate that resets periodically and is categorized as Level 2 in the fair value hierarchy.

The fair values of certain of the Company’s financial instruments, including bank deposits included in cash and cash equivalents, accounts receivable and accounts payable, also approximate their fair values due to their short maturities.

As of October 2, 2020, the fair value of the Company's Convertible Notes and Senior Secured Notes, as defined in Note 10.

Borrowings, was $ 178.5 million and $ 312.8 million, respectively.

As of September 27, 2019, the total outstanding borrowings of $ 395.1 million, net of deferred loan costs, approximated its fair value as it was carried at a market observable interest rate that resets periodically and was categorized as Level 2 in the fair value hierarchy.

The Company has elected to use the income approach to value its derivative instruments using standard valuation techniques and Level 2 inputs, such as currency spot rates, forward points and credit default swap spreads.

There were no financial assets or liabilities measured on a recurring basis using significant unobservable inputs (Level 3) and there were no transfers in or out of Level 1, 2 or 3 during fiscal year 2020.

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Cash equivalents - Money market funds

Derivative assets

$ — $ 8.8 $ — $ 8.8

Total assets measured at fair value

$ — $ 8.8 $ — $ 8.8

Derivative liabilities

$ — $ 0.7 $ — $ 0.7

Deferred consideration

Total liabilities measured at fair value $ 8.9 $ 0.7 $ — $ 9.6

GOODWILL AND INTANGIBLE ASSETS

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

Accordingly, the Company performed a quantitative impairment analysis to determine the fair values of those reporting units and indefinite-lived intangible assets.

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

The Company developed multiple forecasted future cash flow scenarios for the reporting units and indefinite-lived intangible assets with varied recovery timing and sales impact assumptions.

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.

The Company's Industrial reporting unit's fair value exceeded its carrying value by more than 20 % and the Company's Medical reporting unit's fair value exceeded its carrying value by more than 30 %.

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 as discussed below.

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 the Company's 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.

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 the Company's 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 the Company's global five-year operating plan, then one or more of the Company's 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.

The following table reflects goodwill by reportable operating segment:

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Balance at September 27, 2019 $ 173.0 $ 117.8 $ 290.8

Business combination

Balance at September 27, 2019

Foreign currency translation adjustments

Balance at October 2, 2020 $ 174.4 $ 118.7 $ 293.1

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

September 27, 2019

September 28, 2018

October 2, 2020 September 27, 2019

(In millions)

Gross Carrying Amount

Accumulated Amortization

Net Carrying Amount

Gross Carrying Amount

Accumulated Amortization

Gross Carrying Amount Accumulated Amortization

Net Carrying Amount Gross Carrying Amount Accumulated Amortization

Net Carrying Amount

Acquired existing technology

$ 74.9 $ ( 37.5 ) $ 37.4 $ 74.1 $ ( 28.4 ) $ 45.7

Patents, licenses and other

12.8 ( 9.7 ) 3.1 12.7 ( 8.4 ) 4.3

Customer contracts and supplier relationship

51.2 ( 24.2 ) 27.0 50.7 ( 17.2 ) 33.5

Total intangible assets with finite lives

138.9 ( 71.4 ) 67.5 137.5 ( 54.0 ) 83.5

In-process R&D with indefinite lives

— — — 2.8 — 2.8

Total intangible assets

$ 138.9 $ ( 71.4 ) $ 67.5 $ 140.3 $ ( 54.0 ) $ 86.3

Amortization expense for intangible assets was $ 17.2 million, $ 15.7 million and $ 16.2 million in fiscal years 2020, 2019 and 2018, respectively.

The Company recognized an impairment loss of $ 4.8 million and $ 3.0 million in fiscal years 2019 and 2018 , respectively.

These impairment costs were included in the consolidated statements of earnings under impairment of intangible assets.

As of September 27, 2019 , the estimated future amortization expense of intangible assets with finite lives is as follows:

The Company recognized intangible asset impairment charges of $ 2.8 million, $ 4.8 million, and $ 3.0 million in fiscal years 2020, 2019, and 2018, respectively, which are included in the consolidated statements of (loss) earnings under impairment of intangible assets.

These impairment charges related primarily to the Company's Medical reporting segment.

The fair value of the asset impaired during the third quarter of 2020 was determined using an estimated weighted average cost of capital of 25.0 % (consistent with the rate used at the acquisition date), which reflects the risks inherent in future cash flow projections and represents a rate of return that a market participant would expect for this asset.

The Company believes its assumptions are consistent with the plans and estimates that a market participant would use to manage the business.

The estimated fair value of the in-process R&D intangible

asset as of July 3, 2020 was zero .

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

In addition, as a result of the impact of COVID-19 as discussed above, the Company determined certain impairment triggers had occurred related to the Company’s finite-lived tangible and intangible assets.

Accordingly, the Company analyzed undiscounted cash flows at the asset group level for certain finite-lived tangible and intangible assets as of July 3, 2020.

Based on that undiscounted cash flow analysis, the Company determined that estimated undiscounted future cash flows exceeded their net carrying values, and, therefore, as of July 3, 2020, the Company's finite-lived tangible and intangible assets were not impaired.

As of October 2, 2020, the estimated future amortization expense of intangible assets with finite lives is as follows:

(In millions)

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Lease Commitments

At September 27, 2019 , the Company was committed to minimum rentals under non-cancelable operating leases (including rent escalation clauses) for fiscal years 2020 through 2024 and therea fter, as follows:

$ 7.5 million , $ 5.4 million , $ 4.7 million , $ 1.8 million , $ 0.9 million , and $ 0.2 million , respectively.

Ren tal expenses were $ 5.1 million , $ 5.3 million , and $ 4.0 million for fiscal years 2019 , 2018 and 2017 , respectively .

Leases, included in this report, for additional information about Varex's lease commitments.

Purchase Agreement With Supplier

During the third quarter of fiscal year 2020, Varex entered into a purchase agreement with a supplier to acquire certain equipment and intellectual property from the supplier that is utilized to manufacture X-ray cables utilized in Varex's products.

As of October 2, 2020, there has been no transfer of control of the underlying equipment.

This acquisition is expected to be completed during the 2021 fiscal year and the total consideration to be paid by Varex for the acquired assets is expected to be ¥ 1,084.7 million or approximately $ 10.3 million.

Other Commitments

Related Party Transactions, included in this report, for additional information about the Company’s commitments to dpiX.

See Note 14 .

Redeemable Noncontrolling Interests & Noncontrolling Interests, included in this report, for additional information about the Company’s commitment to the noncontrolling shareholders of MeVis.

The Company has an environmental liability of approximately $ 0.9 million as of September 27, 2019 .

The Company has an environmental liability of approximately $ 2.0 million as of October 2, 2020.

Contingencies

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The Company did not have any contingent liabilities as of September 27, 2019 and September 28, 2018 .

The Company did not have any material contingent liabilities as of October 2, 2020 and September 27, 2019.

Legal expenses are expensed as incurred.

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The noncontrolling interest related to Direct Conversion is included in noncontrolling interest in the equity section of the Company's consolidated balance sheet.

Earnings representing the noncontrolling interest's portion of Direct Conversion's income from operations is included in the Company's consolidated statements of earnings.

Earnings representing the noncontrolling interest's portion of Direct Conversion's income from operations is included in the Company's consolidated statements of (loss) earnings.

In September 2018, the Company entered into a partnership in Saudi Arabia.

The Company has majority voting rights with an approximate 75 % interest.

Accordingly, the Company has consolidated the operations of the Saudi Arabia partnership in our consolidated financial statements and recorded the noncontrolling interests.

Accordingly, the Company has consolidated the operations of the Saudi Arabia partnership in the Company's consolidated financial statements and recorded the noncontrolling interests.

The noncontrolling interest related to the partner’s 25 % interest in the joint venture is included in noncontrolling interest in the equity section of the Company’s consolidated balance sheet.

Earnings representing the noncontrolling partner's share of income from operations is included in the Company's consolidated statements of earnings.

Earnings representing the noncontrolling partner's share of income from operations is included in the Company's consolidated statements of (loss) earnings.

In April 2015, the Company completed the acquisition of 73.5 % of the then outstanding shares of MeVis Medical Solutions AG (“MeVis”), a public company based in Bremen, Germany that provides image processing software and services for cancer screening.

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In October 2015, the DPLTA became effective upon its registration at the local court of Bremen, Germany.

Under the DPLTA, MeVis subordinates its management to the Company and undertakes to transfer all of its annual profits and losses to the Company.

Unde r the DPLTA, MeVis subordinates its management to the Company and undertakes to transfer all of its annual profits and losses to the Company.

In return, the DPLTA grants the noncontrolling shareholders of MeVis:

(1) an annual recurring net compensation of € 0.95 per MeVis share starting from January 1, 2015 and (2) a put right for their MeVis shares at € 19.77 per MeVis share.

Upon effectiveness of the DPLTA, the noncontrolling interests in MeVis became redeemable as a result of the put right and were reclassified to temporary equity.

As of September 27, 2019 , the redemption value of redeemable noncontrolling interests in MeVis was $ 10.5 million .

During fiscal year 2018 , an immaterial number of MeVis’ shares were purchased under the put right.

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

During the fourth quarter of fiscal year 2020, the put right granted to the noncontrolling shareholders of MeVis under the DPLTA expired unexercised, which resulted in the redeemable noncontrolling interests being reclassified to permanent equity as noncontrolling interest in the consolidated balance sheet.

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

Changes in redeemable noncontrolling interests and noncontrolling interests were as follows:

(In millions)

Noncontrolling

(In millions) Redeemable

Noncontrolling

Interests Noncontrolling

Interests Redeemable

Noncontrolling

Noncontrolling Interest

Interests Noncontrolling Interest

Balance at beginning of period $ 10.5 $ 3.3 $ 11.1 $ 2.1

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Contributions from noncontrolling interests — — — 1.4

Reclassification of redeemable NCI in MeVis to noncontrolling interests in permanent equity ( 11.3 ) 11.3 — —

Dividend distributions ( 0.5 ) — ( 0.5 ) —

Other 0.8 ( 0.5 ) ( 0.6 ) —

Balance at end of period $ — $ 14.1 $ 10.5 $ 3.3

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Employee Stock Plans

The Company's employees participate in Varex Imaging Corporation 2017 Omnibus Stock Plan (the “2017 Stock Plan”) and Varex Imaging Corporation 2017 Employee Stock Purchase Plan (the “2017 ESPP”) which allows the grants of stock options, restricted stock units and performance shares among other types of awards.

In January 2017, Varex stockholders approved the 2017 ESPP, which provides eligible employees with an opportunity to purchase shares of Varex common stock at 85 % of the lower of its fair market value at the start and end of a six months purchase period.

The Company's employees participate in Varex Imaging Corporation 2020 Omnibus Stock Plan (the “2020 Stock Plan”), 2017 Omnibus Stock Plan (the “2017 Stock Plan”), and Varex Imaging Corporation 2017 Employee Stock Purchase Plan (the “2017 ESPP”) which allows the grants of stock options, restricted stock units and performance shares among other types of awards.

The 2017 ESPP provides for the purchase of up to one million shares of Varex common stock.

Share-Based Compensation Expense

Share-based compensation expense recognized in the consolidated statements of earnings is based on awards ultimately expected to vest.

Share-based compensation expense recognized in the consolidated statements of (loss) earnings is based on awards ultimately expected to vest.

Share-based compensation expense includes expenses related to the Company’s direct employees.

Prior to the separation, Varian also charged the Company for the allocated share-based compensation costs of certain employees of Varian who provided selling, general and administrative services on the Company’s behalf.

The table below summarizes the effect of recording share-based compensation expense and for the option component of the employee stock purchase plan shares:

(In millions)

2020 2019 2018

Cost of revenues

$ 1.1 $ 1.2 $ 1.3

Research and development

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Total share-based compensation expense

(1) Includes allocated share-based compensation of $ 0.8 million for fiscal year 2017 and represents charges by Varian to the Company for certain Varian employees who provided general and administrative services on the Company’s behalf.

The unrecognized share-based compensation cost as of September 27, 2019 was $ 23.1 million , and is expected to be recognized in the next 3 to 4 fiscal years.

As of September 27, 2019 , there were approximately 1.2 million and 0.7 million shares of common stock available for future issuances under the 2017 Stock Plan and the 2017 ESPP, respectively.

$ 13.4 $ 11.7 $ 10.0

The unrecognized share-based compensation cost as of October 2, 2020 was $ 24.4 million, and is expected to be recognized in the next 3 to 4 fiscal years.

As of October 2, 2020, there were approximately 4.8 million and 0.5 million shares of common stock available for future issuances under the 2020 Stock Plan and the 2017 ESPP, respectively.

The Company utilized the Black-Scholes valuation model for estimating the fair value of stock options granted and the option component of ESPP grants.

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Employee Stock Purchase Plans

2020 2019 2018 2020 2019 2018

Expected term (in years)

6.1 4.6 4.8 0.5 0.5 0.5

Risk-free interest rate

1.1 % 2.5 % 2.6 % 0.9 % 2.5 % 2.0 %

Expected volatility

36.9 % 33.9 % 31.8 % 50.0 % 43.9 % 34.1 %

Expected dividend

— % — % — % — % — % — %

Weighted average fair value at grant date

$ 7.53 $ 10.19 $ 11.57 $ 7.94 $ 7.81 $ 8.92

Option valuation methods, including Black-Scholes, require the input of subjective assumptions, which are discussed below.

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Employee stock purchase plan offering periods are 6 months and provides eligible employees with an opportunity to purchase shares of Varex common stock at 85 % of the lower of its fair market value at the start and end of a six-month purchase period.

The Company has elected to use the simplified method in calculating the expected term of its options due to a lack of sufficient historical information.

Expected Dividend Yield

The dividend rate used is zero as the Company has never paid any cash dividends on its common stock and does not anticipate doing so in the foreseeable future.

The Company is also restricted from paying dividends on common stock under its credit facility.

The Company is also restricted from paying dividends on common stock under its debt facilities.

Expected Volatility

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Adequate Company-specific data does not exist for this time period as the Company began trading in January 2017.

The volatility variable used is a blended approach by using the Company's historic data for the years it has been publicly traded and a benchmark of other comparable companies’ volatility rates for the prior years.

The volatility variable used is a blended approach by using

the Company's historic data for the years it has been publicly traded and a benchmark of other comparable companies’ volatility rates for the prior years.

Stock Option Activity

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$ 30.60 4.1 $ 1,220.3

591 $ 13.61 - $ 28.12

Canceled, expired or forfeited

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( 64 ) $ 22.84 - $ 23.24

Outstanding at September 27, 2019

Outstanding at October 2, 2020

2,735 $ 13.61 - $ 37.60

Exercisable at September 27, 2019

$ 29.23 4.5 $ —

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, which is computed based on the difference between the exercise price and the closing price of Varex common stock of $ 28.28 as of September 27, 2019 , the last trading date of the Company's respective fiscal years, and which represents the amount that would have been received by the option holders had all option holders exercised their options and sold the shares received upon exercise as of that date.

The weighted-average grant-date fair value of options granted during fiscal years 2019 , 2018 and 2017 was $ 3.0 million , $ 3.1 million and $ 9.2 million respectively.

The total intrinsic value of the options exercised during the years ended September 27, 2019 , September 28, 2018 and September 29, 2017 was $ 0.2 million , $ 1.7 million and $ 1.4 million respectively

Exercisable at October 2, 2020

1,794 $ 25.17 - $ 37.60

$ 30.48 2.9 $ —

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, which is computed based on the difference between the exercise price and the closing price of Varex common stock of $ 12.37 as of October 2, 2020, the last trading date of the Company's respective fiscal years, and which represents the amount that would have been received by the option holders had all option holders exercised their options and sold the shares received upon exercise as of that date.

The grant-date fair value of options granted during fiscal years 2020, 2019 and 2018 was $ 4.4 million, $ 3.0 million and $ 3.1 million, respectively.

The total intrinsic value of the options exercised during the years ended October 2, 2020, September 27, 2019 and September 28, 2018 was $ 0.4 million, $ 0.2 million and $ 1.7 million, respectively

Restricted Stock Units, Restricted Stock Awards and Deferred Stock Units

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Balance at September 27, 2019

Canceled or expired

Balance at September 27, 2019

The total grant-date fair value of shares granted in fiscal year was $ 9.0 million , $ 10.1 million and $ 11.4 million for fiscal years 2019 , 2018 and 2017 , respectively.

Shares outstanding at September 27, 2019 , September 28, 2018 and September 29, 2017 had an estimated market value of $ 19.2 million , $ 18.4 million and $ 17.8 million , respectively.

( 224 ) 32.77

Canceled, expired or forfeited

Balance at October 2, 2020

The total grant-date fair value of shares granted was $ 11.9 million, $ 9.0 million and $ 10.1 million for fiscal years 2020, 2019 and 2018, respectively.

Shares outstanding at October 2, 2020, September 27, 2019 and September 28, 2018 had an estimated market value of $ 11.8 million, $ 19.2 million and $ 18.4 million, respectively.

TAXES ON EARNINGS

Income tax expense is based on reported income or loss before income taxes.

Income tax expense or benefit is based on reported income or loss before income taxes.

Deferred income taxes reflect the effect of temporary differences between asset and liability amounts that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes.

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(In millions) 2020 2019 2018

Current provision:

Current (benefit) provision:

$ ( 16.3 ) $ 9.2 $ ( 2.1 )

State and local

( 1.4 ) 1.3 ( 0.3 )

Total current

Deferred provision (benefit):

$ ( 12.0 ) $ 17.3 $ 5.1

Deferred (benefit) provision:

$ ( 1.7 ) $ ( 10.0 ) $ ( 7.0 )

State and local

0.6 ( 1.6 ) 0.7

( 2.1 ) — ( 1.4 )

Total deferred

Taxes on earnings

Earnings before taxes are generated from the following geographic areas:

( 3.2 ) ( 11.6 ) ( 7.7 )

Taxes on (loss) earnings $ ( 15.2 ) $ 5.7 $ ( 2.6 )

(Loss) earnings before taxes are generated from the following geographic areas:

(In millions) 2020 2019 2018

United States

Earnings before taxes

$ ( 74.1 ) $ 5.9 $ 3.7

1.5 15.6 22.0

(Loss) earnings before taxes $ ( 72.6 ) $ 21.5 $ 25.7

The effective tax rate differs from the U.S.

federal statutory tax rate as a result of the following:

2020 2019 2018

Federal statutory income tax rate

21.0 % 21.0 % 24.5 %

State and local taxes, net of federal tax benefit

1.0 ( 0.9 ) 1.1

Revaluation of deferred tax liabilities for US statutory change

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Research and development credit

3.7 ( 10.2 ) ( 11.1 )

Prior year deferred tax adjustments 0.4 4.7 1.9

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US tax reform - international provisions — ( 4.7 ) —

US NOL carryback 5.6 — —

Other 0.6 ( 2.5 ) 4.2

Effective tax rate

20.9 % 26.5 % ( 10.1 ) %

During fiscal year 2020, the Company’s 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 were 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.

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

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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 is phased in from a U.S.

As a September

fiscal year filer, the lower corporate income tax rate is phased in from a U.S.

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

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These favorable U.S.

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

tax items were offset by 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, the Company’s effective tax rate varied from the U.S.

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

4 unchanged sentences

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.

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Significant components of deferred tax assets and liabilities are as follows:

(In millions)

September 27, 2019

September 28, 2018

(In millions) October 2, 2020 September 27, 2019

Deferred Tax Assets:

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Credit carryforwards 5.9 1.9

Deferred financing fees 3.3 —

Interest expense limitation 4.7 —

Lease liabilities 7.2 —

Other 6.0 7.5

$ 66.7 $ 46.1

Valuation allowance ( 28.7 ) ( 18.8 )

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Investments in privately held companies ( 2.8 ) ( 3.3 )

Right of use assets ( 6.7 ) —

Other ( 1.3 ) ( 2.3 )

Total deferred tax liabilities ( 39.8 ) ( 35.5 )

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taxation of foreign earnings included in U.S.

Tax Reform, the Company reevaluated its previous indefinite reinvestment assertion with respect to these earnings during fiscal year 2018, which resulted in the Company revoking its assertion for current and future earnings for all countries, while maintaining the assertion that historic earnings are

indefinitely reinvested outside the U.S.

The Company has modified this prior assertion for the year ended September 27, 2019 with respect to the acquisition of Direct Conversion.

The Company modified its prior assertion in fiscal year 2019 with respect to the acquisition of Direct Conversion.

The modification was to assert that all earnings for Direct Conversion, located primarily in Sweden and Finland, are indefinitely reinvested in those countries.

For the year ended October 2, 2020, the Company maintains these assertions.

Due to the level of earnings available for repatriation, the treaty benefits applicable to jurisdictions in which those earnings are located, and the now favorable U.S.

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State income taxes and foreign withholding taxes that would apply if the foreign earnings were actually repatriated in the form of a dividend.

As of September 27, 2019, the Company has net operating loss carryforwards of approximately $ 24.3 million with $ 4.4 million expiring between 2020 and 2030 and $ 19.9 million carried forward indefinitely.

As of October 2, 2020, the Company had foreign net operating loss carryforwards ("NOL") of approximately $ 27.0 million with $ 4.3 million expiring between 2021 and 2030 and $ 22.7 million carried forward indefinitely.

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.

The Company has evaluated the impact of the CARES Act and concludes the NOL carryback provision of the CARES Act will result in a material cash tax benefit.

The valuation allowance relates primarily to net operating losses in certain foreign jurisdictions where, based on the weight of available evidence, it is more likely than not that the tax benefit of the net operating losses will not be realized.

The valuation allowance increased by $ 14.8 million during fiscal year 2019 and decreased by $ 0.3 million during fiscal year 2018.

The increase during the current year was primarily related to the acquisition of Direct Conversion that included deferred tax assets subject to a valuation allowance as of acquisition.

The valuation allowance increased by $ 9.9 million during fiscal year 2020 and increased by $ 14.8 million during fiscal year 2019.

The increase during the current year was primarily related to net operating losses in certain foreign jurisdictions, limitations on interest expense, and U.S.

Federal and State research and development tax credits.

Changes in the Company's valuation allowance for deferred tax assets were as follows:

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Unrecognized tax benefits balance–beginning of fiscal year $ 0.6 $ 0.6

Subtractions based on tax positions related to a prior year

Additions (subtractions) based on tax positions related to a prior year 0.2 ( 0.2 )

Additions based on tax positions related to the current year — 0.2

Unrecognized tax benefits balance—end of fiscal year $ 0.8 $ 0.6

As of September 27, 2019 and September 28, 2018 , the total amount of gross unrecognized tax benefits was $ 0.6 million and $ 0.6 million , respectively, all of which would affect the effective tax rate if recognized.

The Company includes interest and penalties related to income taxes within taxes on earnings on the Combined Statements of Earnings.

As of October 2, 2020 and September 27, 2019, the total amount of gross unrecognized tax benefits was $ 0.8 million and $ 0.6 million, respectively, all of which would affect the effective tax rate if recognized.

The Company includes interest and penalties related to income taxes within taxes (benefit) on earnings on the consolidated statements of (loss) earnings.

For the year ended October 2, 2020, $ 0.1 million interest and penalties have been included for this period.

For the year ended September 27, 2019, $ 0.1 million interest and penalties have been included for this period.

For the year ended September 28, 2018 any interest or penalties related to unrecognized tax benefits are minimal and have been included in the balance for that period.

The Company files U.S.

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jurisdiction tax returns.

Material liabilities arising related to the pre-spin operations

would be the responsibility of Varian.

Material liabilities arising related to the pre-spin operations would be the responsibility of Varian.

Other periods for entities acquired are still open and subject to examination.

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The segments align the Company’s products and service offerings with customer use in medical and industrial markets and are consistent with how the Company’s Chief Executive Officer, who is also its 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.

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

The operating and reportable segment structure provides alignment between business strategies and operating results.

Description of Segments

The Medical segment designs, manufactures, sells and services X-ray imaging components for use in a range of applications, including radiographic and fluoroscopic imaging, mammography, computed tomography, radiation therapy and computer-aided detection.

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

The Company’s X-ray imaging components are primarily sold to imaging system OEM customers that incorporate them into their medical diagnostic, radiation therapy, dental, veterinary and industrial imaging systems.

The Company also sells its X-ray imaging components to independent service companies, distributors and directly to end-users for replacement purposes.

The Industrial segment designs, manufactures, sells and services products for use in the security and industrial inspection applications, such as airport security, cargo screening at ports and borders and nondestructive examination in a variety of applications.

The products include Linatron X-ray accelerators, X-ray tubes, digital flat panel detectors, high voltage connectors and image processing software that we generally sell to OEM customers that incorporate these products into their inspection systems.

The Medical segment designs, manufactures, sells and services 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 (a component of X-ray units that holds X-ray film cassettes).

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

The Industrial segment designs, develops, manufactures, sells and services X-ray imaging products for use in a number of markets, including security applications for cargo screening at ports and borders and baggage screening at airports, and nondestructive testing and inspection applications used in a number of other markets.

The Company's Industrial products include Linatron ® X-ray linear accelerators, X-ray tubes, digital detectors and high voltage connectors.

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

Accordingly, the following information is provided for purposes of achieving an understanding of operations, but it may not be indicative of the financial results of the reported segments were they independent organizations.

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(In millions)

2020 2019 2018

$ 584.5 $ 596.8 $ 602.0

153.8 183.8 171.4

Total revenues

Total gross margin

738.3 780.6 773.4

136.4 188.9 190.5

53.8 67.8 63.4

Total gross profit

190.2 256.7 253.9

Total operating expenses

Interest and other expenses, net

Earnings before taxes

223.9 211.0 209.4

Interest and other expense, net ( 38.9 ) ( 24.2 ) ( 18.8 )

(Loss) earnings before taxes ( 72.6 ) 21.5 25.7

Taxes (benefit) on earnings

( 15.2 ) 5.7 ( 2.6 )

Net (loss) earnings ( 57.4 ) 15.8 28.3

Net earnings attributable to noncontrolling interests

Net earnings attributable to Varex

Net (loss) earnings attributable to Varex $ ( 57.9 ) $ 15.5 $ 27.5

The following table summarizes the Company’s total assets by its reportable segments:

(In millions)

September 27, 2019

September 28, 2018

October 2, 2020 September 27, 2019

Identifiable assets:

$ 900.2 $ 794.3

Total reportable segments

$ 1,139.5 $ 1,038.9

Geographic Information

Property, plant and equipment, net

Revenues Property, plant and equipment, net

Fiscal Years Fiscal Years

(In millions) 2020 2019 2018 2020 2019

United States

$ 249.8 $ 275.3 $ 268.8 $ 115.9 $ 122.6

Latin America

5.2 7.3 7.0 — —

231.5 269.0 254.5 21.5 11.4

251.8 229.0 243.1 7.8 8.3

Total company

$ 738.3 $ 780.6 $ 773.4 $ 145.2 $ 142.3

The Company operates various manufacturing and marketing operations outside the United States.

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EMPLOYEE BENEFIT PLANS

Varex’s 401(k) plan became effective on January 1, 2017.

Varex’s 401(k) plan is intended to be qualified under Section 401(a) of the Code with the 401(k) plan’s related trust intended to be tax exempt under Section 501(a) of the Code and intended for all full-time employees in the United States.

This plan allows employees to contribute a portion of their pretax salary up to the maximum dollar limitation prescribed by the Internal Revenue Service.

Prior to Varex's 401(k) plan becoming effective, Company employees participated in Varian's 401(k) plan.

The Company made matching contributions to the plan totaling $ 4.4 million, $ 6.7 million and $ 6.5 million in fiscal years 2020, 2019 and 2018, respectively.

The Company also maintains defined benefit plans for employees located outside the US.

The net pension liability is included in non-current liability on the Company's consolidated balance sheets and totaled $ 5.5 million and $ 3.3 million as of September 27, 2019 and September 28, 2018 , respectively.

The Company’s net periodic benefit costs for the Company’s defined benefit plans was not material for fiscal years 2019 , 2018 and 2017 .

OTHER COMPREHENSIVE INCOME

The following table presents the changes in the accumulated balances for each component of other comprehensive income (loss):

The net pension liability is included in other long-term liabilities on the Company's consolidated balance sheets and totaled $ 6.5 million and $ 5.5 million as of October 2, 2020 and September 27, 2019, respectively.

The Company’s net periodic benefit costs for the Company’s defined benefit plans were not material for fiscal years 2020, 2019 and 2018.

OTHER COMPREHENSIVE (LOSS) INCOME

The following tables present the changes in the accumulated balances for each component of other comprehensive income (loss):

(In millions)

Unrealized Gain (Loss) on Derivative Financial Instruments

Unrealized Gain on Defined Benefit Obligations

Accumulated Other Comprehensive Income

Unrealized Gain (Loss) on Derivative Financial Instruments Unrealized Gain (Loss) on Defined Benefit Obligations Currency Translation Adjustment Accumulated Other Comprehensive (Loss) Income

Balance at September 28, 2018 $ 5.8 $ — $ — $ 5.8

Other comprehensive loss before reclassifications

( 8.3 ) ( 1.9 ) — ( 10.2 )

Income tax benefit

Balance at September 27, 2019

No amounts were reclassified out of accumulated other comprehensive income during fiscal years 2019 and 2018.

REVENUE RECOGNITION

The Company adopted ASC 606 on September 29, 2018, using the modified retrospective method for all contracts not completed as of the date of adoption.

The reported results for fiscal year 2019 reflect the application of ASC 606 guidance while the reported results for fiscal year 2018 were prepared under the guidance of ASC 605, “Revenue Recognition.” The primary impacts of the adoption include:

(1) recording a separate contract liability and contract asset related to the sale of X-ray tubes that were sold with an option for the customer to require the Company to repurchase specific parts of the X‑ray tube at a specific price;

and (2) recording a liability related to the deferral of revenue for service type warranties that are provided to certain customers who purchase Linatron ® X-ray accelerators.

The Company has made the following accounting policy elections and elected to use certain practical expedients, as permitted by the FASB, in applying ASC 606:

(1) the Company accounts for amounts collected from customers for sales and other taxes, net of related amounts remitted to tax authorities;

(2) the Company does not adjust the promised amount of consideration for the effects of a significant financing component, if, at contract inception, the Company expects the period between the time when the Company transfers a promised good or service to the customer and the time when the customer pays for that good or service will be one year or less;

(3) the Company expenses costs to obtain a contract as they are incurred if the expected period of benefit, and therefore the amortization period, is one year or less;

(4) the Company accounts for shipping and handling activities that occur after control transfers to the customer as a fulfillment cost rather than an additional promised service and these fulfillment costs are included as a component of cost of revenues;

and (5) the Company does not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer.

Transaction price and allocation to performance obligations

Transaction prices of products or services are typically based on contracted rates.

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.

The Company allows customers to return specific parts of purchased X-ray tubes for a partial refund credit, which is identified as variable consideration.

The Company recognizes a reduction to revenue and cost of sales at the time of sale and a corresponding contract liability and contract asset.

The Company records this estimate based on the historical volume of product returns and adjusts the estimate on a quarterly basis based on the current quarter sales and current quarter returns.

If a contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation.

The Company determines standalone selling prices based on the price at which the performance obligation is sold separately.

The beginning net cumulative-effect adjustment to the balance sheet for the adoption of ASC 606 is as follows:

Adjustment Due to

(In millions)

September 28, 2018

September 29, 2018

Prepaid expenses and other current assets

Liabilities and Equity:

Deferred revenues

Accrued liabilities

Deferred tax liabilities

Other long-term liabilities

Retained earnings

The following tables compare the reported consolidated balance sheet and statement of operations for fiscal year ended September 27, 2019, to the amounts that would have been reported if ASC 605 had been in effect:

September 27, 2019

(In millions)

Balance without Adoption

Prepaid expenses and other current assets

Liabilities and equity:

Deferred revenues

Accrued liabilities

Deferred tax liabilities

Other long-term liabilities

Retained earnings

Twelve Months Ended September 27, 2019

(In millions)

Balance without Adoption

Cost of revenues

Taxes on earnings

Net earnings attributable to Varex

Contracts and performance obligations

The Company's performance obligations consist mainly of transferring control of products and services identified in the contracts or purchase orders.

For each contract, the Company considers the obligation to transfer products and services to the customer, which are distinct, to be performance obligations.

Revenue recognition

Revenue is recognized when, or as, obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to customers.

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer.

Product revenue is 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 recognized over time as the services are rendered to the customer based on the extent of progress towards completion of the performance obligation.

The Company recognizes service revenue over the term of the service contract.

Disaggregation of Revenue

Refer to Note 15 .

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 assets are included within the prepaid expenses and other current assets, and other assets balances.

Contract liabilities, which also includes refund obligations are included within the accrued liabilities, deferred revenues, and other long-term liabilities balances.

The following table summarizes the changes in the contract assets and refund liabilities for the twelve months ended September 27, 2019:

(In millions)

Contact Assets

Balance at September 29, 2018

Costs recovered from product returns during the period

Contract asset from shipments of products, subject to return during the period

Balance at September 27, 2019

(In millions)

Refund Liabilities

Balance at September 29, 2018

Recognition of revenue included in beginning of year refund liability

Additions to refund liabilities

2.1 0.6 — 2.7

Foreign currency translation adjustment

Balance at September 27, 2019 $ ( 0.4 ) $ ( 1.3 ) $ — $ ( 1.7 )

Remaining Performance Obligations

Remaining performance obligations represent the transaction price of firm orders for which revenue has not yet been recognized.

As of September 27, 2019, total remaining performance obligations amounted to $ 265.2 million .

The Company expects to recognize a majority of the remaining performance obligations over the next 12 months.

Costs to Obtain or Fulfill a Customer Contract

The Company has certain costs to obtain and fulfill a customer contract, such as commissions and shipping costs.

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.

SUBSEQUENT EVENTS

On October 1, 2019, the Company, in accordance with the terms of the Credit Agreement, provided notice to the administrative agent that effective as of October 8, 2019, the Company was permanently reducing the revolving credit commitment under the Credit Agreement by $ 25.0 million to $ 125.0 million .

The reduction in the revolving credit commitment will also reduce the fees paid by the Company in connection with such commitment.

Other comprehensive (loss) income before reclassifications

( 3.4 ) 0.9 ( 1.3 ) ( 3.8 )

Amount reclassified out of other comprehensive income 1.5 — — 1.5

Amount reclassified out of other comprehensive earnings - transaction remote 2.4 — — 2.4

Income tax impact

( 0.1 ) ( 0.3 ) 0.3 ( 0.1 )

Foreign currency translation adjustment

Balance at October 2, 2020 $ — $ ( 0.7 ) $ 1.5 $ 0.8

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 9A. Controls and Procedures