Varex Imaging Corp 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Basis of Presentation We became an independent publicly-traded company in January 2017 following our separation from Varian and subsequent distribution of shares of our common stock to Varian stockholders. The following discussion and analysis contains forward-looking statements relating to future events or our future financial or operating performance that involve risks and uncertainties, as set forth above under "Forward-Looking Statements." Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors described in this Annual Report on Form 10-K. Our Business Varex Imaging Corporation is a leading innovator, designer and manufacturer of X-ray tubes, digital detectors, linear accelerators and other image software processing solutions, which are mission critical components of a variety of X-ray based diagnostic imaging equipment. These products are used in medical imaging as well as in industrial and security imaging applications such as general X-ray, computed tomography (“CT”), C-arms, angiography, fluoroscopy, mammography, and dental. In addition, our components are also used in security and quality inspection systems, as well as for analysis and measurement applications in industrial manufacturing applications. Global original equipment manufacturers (“OEMs”) incorporate our X-ray imaging components in their systems to detect, diagnose, protect and inspect. As of October 2, 2020, we had approximately 2,000 full-time equivalent employees, located at manufacturing and service center sites in North America, Europe, and Asia. Our products are sold in three geographic regions: the Americas, EMEA, and APAC. The Americas includes North America (primarily the United States) and Latin America. EMEA includes Europe, Russia, the Middle East, India and Africa. APAC includes Asia and Australia. Revenues by region are based on the known final destination of products sold. Our success depends, among other things, on our ability to anticipate and respond to changes in our markets, the direction of technological innovation and the demands of our customers. We continue to invest in research and development and employ approximately 500 individuals in product development. Combining this focus on innovation and product performance with strong long-term customer relationships allows us to collaborate with our customers to bring industry-leading products to the X-ray imaging market. We continue to work to improve the life and quality of our imaging components and leverage our scale as one of the largest independent X-ray imaging component suppliers to provide cost-effective solutions for our customers. Impact of COVID-19 The unprecedented nature of the COVID-19 pandemic and its impact on the global economy has created a disruption to our business that includes increased uncertainty in demand for certain products for medical and industrial applications, as well as increased variability in our supply chain and manufacturing productivity. The economic downturn triggered by COVID-19 has led to significantly lower demand from our customers and delays in equipment installations. In conjunction with this reduced forecast and uncertainty beyond the forecast horizon, we evaluated our product offering and decided to discontinue certain low margin, low demand products. As a result, during the third quarter of fiscal year 2020 we took an approximately $15.8 million pre-tax non-cash charge for the write-down of associated inventory and restructuring activity, impaired $2.8 million of intangible assets and wrote off a $2.7 million cost investment in a privately-held company. The COVID-19 pandemic has had a significant effect on hospitals, clinics and outpatient imaging centers as they have encountered declines in surgeries and other non-emergency procedures. In some cases, certain healthcare facilities have been closed and non-emergency procedures have been deferred. As a result, many hospitals, clinics and outpatient imaging centers have reduced their capital purchases of imaging equipment from OEMs which has led to lower demand for X-ray imaging components. In addition, reduced usage of certain X-ray equipment has resulted in less demand for replacement components that wear-out with use. Additionally, equipment installations were delayed, due to reduced access to healthcare institutions. Partially offsetting this has been increased demand for CT and certain radiographic diagnostic imaging equipment used to screen for or assist in the treatment of respiratory diseases (such as COVID-19). While healthcare systems and economies around the world have begun to reopen, customer demand has not returned to pre-pandemic levels, and the adverse effects of COVID-19 on our financial statements and results of operations have been significant. While we believe that the fundamentals driving long-term demand in both our medical and industrial segments remain intact, we believe that in the near-term, reduced demand in our industrial segment and for certain higher end medical products will continue to 42 Table of Contents depress our results of operations. While our manufacturing sites are currently up and running, COVID-19 and associated economic disruptions have had an adverse impact on our manufacturing capacity, supply chains and distribution systems, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments are taking. Supply chain logistics have also become more challenging and while we have had success in localizing our supply chain through our “local-for-local” initiative, supply chain logistics could remain challenging. The actions taken to combat COVID-19 have had, and we believe will continue to have, a negative impact on our operating results, cash flows and financial condition. We expect uncertainty related to the COVID-19 pandemic to continue into the beginning of calendar year 2021. While we have implemented safeguards and procedures and taken other measures to counter the impact of the COVID-19 pandemic, the full extent to which the COVID-19 pandemic has and will directly or indirectly impact us, including our business, financial condition, and results of operations, will depend on future developments that are highly uncertain and cannot be accurately predicted. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, suppliers, and stockholders. Subsequent Measurement of Goodwill Goodwill is not amortized but is tested annually, or more often if impairment indicators are present, for impairment at a reporting unit level, based on a comparison of the fair value of the reporting unit with its carrying amount. Goodwill is tested for impairment via a one-step process by comparing the fair value of goodwill with its carrying amount. We recognize an impairment for the amount by which the carrying amount exceeds the fair value. We generally use both an income approach utilizing the discounted cash flow method ("DCF") and a market approach utilizing the public company market multiple method, when testing for impairment. In the third quarter of 2020, changes in facts and circumstances and general market declines from COVID-19 resulted in reduced operating results. We considered these circumstances and the potential long-term impact on cash flows associated with our reporting units and determined that an indicator of possible impairment existed within our Medical and Industrial reporting units. Accordingly, we performed a quantitative impairment analysis to determine the fair values of those reporting units. We used both an income approach utilizing the discounted cash flow method ("DCF") and a market approach utilizing the public company market multiple method. We developed multiple forecasted future cash flow scenarios for the reporting units with varied recovery timing and sales impact assumptions. Based on the output of the analysis, we determined that the fair values of both the Medical and Industrial reporting units exceeded their carrying amounts. Accordingly, no impairment charges were required as of July 3, 2020. However, an impairment charge was required for the Company's in-process R&D. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated future annual net cash flows, income tax rates, discount rates, revenue growth rates, forecasted gross margins, market multiples, terminal value and other market factors. This fair value measurement was based on significant inputs not observable in the market and thus represents a Level 3 fair value measurement. If current expectations of future revenue growth rates and forecasted gross margins, both in size and timing, are not met, if market factors outside of our control, such as discount rates, change, if market multiples decline, or if management’s expectations or plans otherwise change, including as a result of the development of our global five-year operating plan, then one or more of our reporting units might become impaired in the future. The Company will continue to monitor the financial performance of and assumptions for its reporting units. A future impairment charge for goodwill could have a material effect on the Company's consolidated financial position and results of operations. Refer to Note 12. Goodwill and Intangible Assets, in the accompanying notes to the consolidated financial statements for more information regarding goodwill. 43 Table of Contents Operating Segments and Products Our Chief Executive Officer, who is our Chief Operating Decision Maker (“CODM”), evaluates our product groupings and measures our business performance in two reportable operating segments: Medical and Industrial. The segments align our products and service offerings with customer use in medical and industrial markets and are consistent with how the CODM evaluates the business for the allocation of resources. The CODM allocates resources to and evaluates the financial performance of each operating segment primarily based on revenues and gross profit. Medical In our Medical segment, we design, develop, manufacture, sell and service X-ray imaging components, including X-ray tubes, digital detectors, high voltage connectors, image-processing software and workstations, 3D reconstruction software, computer-aided diagnostic software, collimators, automatic exposure control devices, generators, heat exchangers, ionization chambers and buckys. These components are used in a range of medical imaging applications, including CT, mammography, oncology, cardiac, surgery, dental, and for other diagnostic radiography uses. Our X-ray imaging components are sold primarily to OEM customers. These OEM customers then design-in our products into their X-ray imaging systems for a variety of medical modalities. A substantial majority of medical X-ray imaging OEMs globally are our customers, and many of these have been customers for over 25 years. We believe one of the reasons for customer loyalty is that our hardware and software products are tightly integrated with our customers’ systems. We work very closely with our customers to create custom built components for their systems based on technology platforms that we have developed. Because our products are often customized for our customers’ specific equipment, it can be costly and complex for our customers to switch to another provider. Once our components are designed into our customer’s equipment, our customers will typically continue to use us to supply any replacement components and for service and support for that equipment. Some of our products are also included in product registrations for our customer’s equipment that require regulatory approval to change. In addition to sales directly to OEM customers, we also sell our products to independent service companies and distributors and directly to end-users for replacement purposes. We are one of the largest global manufacturers of X-ray components and each year we produce over 27,000 X-ray tubes and 20,000 X-ray detectors. We estimate that our worldwide installed base of products is over 150,000 X-ray tubes, 150,000 X-ray detectors, 300,000 connect and control components and 15,000 software instances. Replacement and service of our existing installed base makes up a significant portion of our revenue. Many of our components need to be replaced regularly. For example, CT X-ray tubes generally need to be replaced every 2 to 4 years. In China, the replacement cycle for CT X-ray tubes can be as frequent as every 6 to 12 months due to high utilization of imaging equipment. Other products such as X-ray Detectors have a useful life of as much as 7 years, but can require service and repairs during their useful life. In addition, our detector customers often elect to upgrade products to newer technology before the end of a current product’s useful life. X-ray imaging software is a relatively small part of our business with room to grow and includes consistent maintenance revenue on software licenses. In China, the government is broadening the availability of healthcare services. As a result, the number of diagnostic X-ray imaging systems, including CT imaging systems, has grown significantly. We are developing CT X-ray tubes and related subsystems for Chinese OEMs as they introduce new systems in China. We presently have multi-year pricing agreements for CT tubes with 8 medical X-ray imaging OEMs in China. Over the long-term, our objective is to become the partner of choice both for OEMs and in the replacement market as CT systems become more widely adopted throughout the Chinese market. In China, despite a COVID-19 related slowdown in the beginning of the year, demand for our products has returned, and full year fiscal 2020 results for China exceeded our pre-pandemic expectations. In recent years our growth in China has been impacted by the trade war with the United States. Our business has been impacted in two principal ways: (1) imports of raw materials from China have become more expensive and (2) importing finished U.S. manufactured products into China has also become more difficult and more expensive. In order to mitigate the impact of tariffs on materials imported from China, we have implemented changes to secure more non-China sources of materials used to manufacture our X-ray imaging products. With respect to imports into China, the additional tariffs imposed by the Chinese government have led to a decrease in sales of radiographic detectors manufactured outside of China. To help address these issues, as well as to be closer to our global customer base, we continue to expand manufacturing capabilities at our facilities in China, Germany and the Philippines and also implemented local sourcing strategies to lower our costs and offer local content. This local-for-local strategy has been well received by both our local customers as well as global OEMs, and acts as a natural hedge against trade wars and other potential supply chain disruptions. 44 Table of Contents Industrial In our Industrial segment, we design, develop, manufacture, sell and service X-ray imaging products for use in a number of markets, including security applications for cargo screening at ports and borders and also baggage screening at airports, and nondestructive testing and inspection applications used in a number of other vertical markets. Our Industrial products include Linatron® X-ray linear accelerators, X-ray tubes, digital detectors and high voltage connectors. In addition, we license proprietary image-processing and detection software designed to work with other Varex products to provide packaged sub-assembly solutions to our Industrial customers. Our Industrial business benefits from the research and development investment as well as manufacturing economies of scale on the Medical side of our business, as we continue to find new applications for our technology. Along with more favorable pricing dynamics, this allows us to generally achieve higher gross profit for Industrial products relative to our Medical business. In addition, our Industrial business benefits from our long-term service agreements for our Linatron® products. The security market primarily consists of airport security for carry-on baggage, checked baggage and palletized cargo, as well as cargo security for the screening of trucks, trains and cargo containers at ports and borders. The end customers for border protection systems are typically government agencies, many of which are in oil-based economies and war zones where there has been significant year over year variation in buying patterns. Non-destructive testing and inspection verticals utilize X-ray imaging to scan items for inspection of manufacturing defects and product integrity in a wide range of industries including the aerospace, automotive, electronics, oil and gas, food packaging, metal castings and 3D printing industries. In addition, new applications for X-ray sources are being developed, such as sterilization of food and its packaging. We provide X-ray sources, digital detectors, high voltage connectors and image processing software to OEM customers, system integrators and manufacturers in a variety of these verticals. We believe that the non-destructive testing market represents a significant growth opportunity for our business and we are actively pursuing new potential applications for our products. The economic downturn triggered by the COVID-19 pandemic has reduced the demand for X-ray imaging equipment utilized in the non-destructive testing market as manufacturers have focused on cash preservation and have reduced spending for capital equipment. Additionally, the unprecedented decrease in passenger air traffic has led to decrease in demand in the security market. The Company expects uncertainty in demand to continue for at least the remainder of the current calendar year. Fiscal Year Our fiscal year is the 52- or 53-week period ending on the Friday nearest September 30. Fiscal year 2020 was the 53-week period that ended October 2, 2020, fiscal year 2019 was the 52-week period that ended September 27, 2019, and fiscal year 2018 was the 52-week period ended September 28, 2018. Set forth below is a discussion of our results of operations for fiscal years 2020, 2019 and 2018. Comparison of Results of Operations for Fiscal Year 2020 and 2019 Our annual report on Form 10-K for the fiscal year ended September 27, 2019, filed December 20, 2019, includes a discussion and analysis of our year-over-year changes, financial condition, and results of operations for the fiscal years ended September 27, 2019 and September 28, 2018 in Item 7 of Part II therein. Revenues, net (In millions) 2020 % Change 2019 % Change 2018 Medical $ 584.5 (2)% $ 596.8 (1)% $ 602.0 Industrial 153.8 (16)% 183.8 7% 171.4 Total revenues, net $ 738.3 (5)% $ 780.6 1% $ 773.4 Medical as a percentage of total revenues 79 % 76 % 78 % Industrial as a percentage of total revenues 21 % 24 % 22 % Medical revenues decreased $12.3 million primarily due to decreased sales of X-ray tubes and digital detectors for oncology, dental, mammography and fluoroscopic applications, offset by increase in sales of OEM X-ray tubes for CT applications and full year impact of revenues related to the acquisition of Direct Conversion in April of 2019. 45 Table of Contents Industrial revenues decreased $30.0 million due to decreased sales of X-ray tubes for airport security, digital detectors for inspection applications and were partially offset by the full year impact of revenues related to the acquisition of Direct Conversion in April of 2019. Revenues by Region (In millions) 2020 % Change 2019 % Change 2018 Americas $ 255.0 (10) % $ 282.6 2 % $ 275.8 EMEA 231.5 (14) % 269.0 6 % 254.5 APAC 251.8 10 % 229.0 (6) % 243.1 Total revenues, net $ 738.3 (5) % $ 780.6 1 % $ 773.4 Americas as a percentage of total revenues 35 % 36 % 36 % EMEA as a percentage of total revenues 31 % 34 % 33 % APAC as a percentage of total revenues 34 % 29 % 31 % The Americas revenues decreased $27.6 million primarily due to decreased sales of X-ray tubes, lower sales of digital detectors and computer-aided detection software as a result of the COVID-19 pandemic. EMEA revenues were also impacted by COVID-19, and decreased $37.5 million primarily due to decreased sales of digital detectors, lower sales of high voltage cables, and lower sales of X-ray tubes partially offset by the full year impact of revenues from the acquisition of Direct Conversion in April of 2019. APAC revenues increased $22.8 million primarily due to increased sales of OEM X-ray tubes in China and the full year impact of revenues from the acquisition of Direct Conversion. Gross Profit (In millions) 2020 % Change 2019 % Change 2018 Medical $ 136.4 (28) % $ 188.9 (1) % $ 190.5 Industrial 53.8 (21) % 67.8 7 % 63.4 Total gross profit $ 190.2 (26) % $ 256.7 1 % $ 253.9 Medical gross margin 23 % 32 % 32 % Industrial gross margin 35 % 37 % 37 % Total gross margin 26 % 33 % 33 % Gross margin decreased for fiscal year 2020 compared to 2019. The gross profit for fiscal year 2020 included $22.2 million of restructuring and product discontinuation charges and purchase price accounting adjustments. The gross profit for fiscal year 2019 included $9.4 million of restructuring charges and purchase price accounting adjustments. The medical segment gross margin in 2020 decreased primarily due to restructuring and product discontinuation charges, higher manufacturing costs, and unfavorable product mix. The industrial segment gross margin in 2020 decreased primarily due to lower sales volume and higher manufacturing costs. Operating Expenses (In millions) 2020 % Change 2019 % Change 2018 Research and development $ 78.9 1 % $ 78.1 (6) % $ 83.0 As a percentage of total revenues 10.7 % 10.0 % 10.7 % Selling, general and administrative $ 142.2 11 % $ 128.1 4 % $ 123.4 As a percentage of total revenues 19.3 % 16.4 % 16.0 % Impairment of intangible assets $ 2.8 (42) % $ 4.8 60 % $ 3.0 As a percentage of total revenues 0.4 % 0.6 % 0.4 % Operating expenses $ 223.9 6 % $ 211.0 1 % $ 209.4 As a percentage of total revenues 30.3 % 27.0 % 27.1 % 46 Table of Contents Research and Development Research and development costs for fiscal year 2020 increased to 10.7% of revenues due to higher prototype material costs. We are committed to investing in research and development efforts to support long-term growth objectives by bringing new and innovative products to market for our customers. Selling, General and Administrative Selling, general and administrative expenses as a percentage of total revenues increased to 19.3% for fiscal year 2020 from 16.4% for fiscal year 2019 due to higher audit and consulting fees associated with the remediation of internal control deficiencies and increased legal fees for patent litigation. These were partially offset by reductions in personnel and travel related expenses. Impairment of intangible assets Impairment of intangible assets decreased for fiscal year 2020 to $2.8 million as compared to $4.8 million for fiscal year 2019. In connection with the July 2019 announcement of the Santa Clara facility shut down we discontinued further efforts on certain in-process research and development intangible assets. As a result, we recorded a corresponding impairment charge of $4.8 million in fiscal year 2019. See Note 6. Restructuring, included in the accompanying notes to our consolidated financial statements for further information. Interest and Other Expense, Net The following table summarizes our interest and other expense, net: (In millions) 2020 % Change 2019 % Change 2018 Interest income $ 0.1 — % $ 0.1 (50) % $ 0.2 Interest expense (31.4) 49 % (21.1) (3) % (21.7) Other income (expense), net (7.6) 138 % (3.2) (219) % 2.7 Interest and other expenses, net $ (38.9) 61 % $ (24.2) 29 % $ (18.8) Interest and other expense, net increased in fiscal year 2020 compared to fiscal year 2019, primarily due to increased interest expense related the issuance of the Convertible Notes in June 2020, early extinguishment of debt and interest rate hedges in September 2020, and increased losses related to equity method investments compared to the prior fiscal year. Taxes on Earnings Fiscal Years 2020 2019 Effective tax rate 20.9 % 26.5 % We had an income tax benefit of $15.2 million and an income tax expense of $5.7 million, for effective rates of 20.9% and 26.5%, for fiscal years 2020 and 2019, respectively. During fiscal year 2020, our effective tax rate varied from the U.S. federal statutory rate of 21% primarily because of the favorable impact of U.S. net operating losses to be carried back to tax years with greater U.S. federal statutory rates. These favorable tax items are mostly offset by the unfavorable impact of additional losses in certain foreign jurisdictions, limitations on interest expense, and R&D credits for which no benefit is recognized. During fiscal year 2019, our effective tax rate varied from the U.S. federal statutory rate of 21% primarily because of the favorable impact of changes to the U.S. corporate tax structure resulting from U.S. Tax Reform, and U.S. research and development tax credits. These favorable U.S. tax items were offset by losses in certain foreign jurisdictions for which no benefit is recognized as well as earnings in certain other foreign jurisdictions that are taxed at higher rates. During fiscal year 2020, U.S. Tax Reform provisions, including GILTI (global intangible low-taxed income), BEAT (base-erosion anti-abuse tax), FDII (foreign-derived intangible income), limitations on interest expense deductions, and other components, if applicable, have been included in the calculation of the fiscal year 2020 tax provision. The determination of the tax effects of U.S. Tax Reform may change following future legislation or further interpretation of U.S. Tax Reform from U.S. Federal and state tax authorities. These provisions became effective for us during fiscal year 2019. The guidance for accounting for U.S. Tax Reform 47 Table of Contents required taxpayers to make an election regarding the accounting for GILTI. This policy election is to either: (1) treat GILTI as a period cost if and when incurred, or (2) recognize deferred taxes for basis differences that are expected to reverse as GILTI in future years. We made the accounting policy election to account for GILTI under the period cost method. Liquidity and Capital Resources We assess our liquidity in terms of our ability to generate cash to fund our operations, including working capital and investing activities. We continue to generate cash from operating activities and believe that our operating cash flow, cash on our balance sheet and availability under our new ABL Facility will be sufficient to allow us to continue to invest in our existing businesses, consummate strategic acquisitions and manage our capital structure on a short and long-term basis, and are sufficient to meet our anticipated operating cash need for at least the next 12 months. The maximum availability under our ABL Facility was $100.0 million as of October 2, 2020, however, the borrowing base under the ABL Facility fluctuates from month-to-month depending on the amount of eligible accounts receivable and inventory. See Item 1A. “Risk Factors” for a further discussion. At October 2, 2020 we had $452.8 million in long-term debt and $2.5 million of current maturities of long-term debt, net of deferred issuance costs of $56.0 million. See Note 10. Borrowings, in the accompanying notes to our consolidated financial statements for more information regarding our indebtedness. Cash and Cash Equivalents The following table summarizes our cash and cash equivalents: (In millions) October 2, 2020 September 27, 2019 $ Change % Change Cash and cash equivalents $ 100.6 $ 29.9 $ 70.7 236.5 % Borrowings The following table summarizes the changes in our debt outstanding: (In millions) October 2, 2020 September 27, 2019 $ Change % Change Current portion of Term Facility $ — $ 29.4 $ (29.4) (100.0) % Current portion of Other debt 2.5 1.3 1.2 92.3 % Revolving Credit Facility — 59.0 (59.0) (100.0) % Asset-Based Loan — — — N/A Term Facility — 308.6 (308.6) (100.0) % Convertible Senior Unsecured Notes 200.0 — 200.0 N/A Senior Secured Notes 300.0 — 300.0 N/A Other debt 8.8 2.5 6.3 252.0 % Total debt outstanding, gross 511.3 400.8 110.5 27.6 % Debt issuance costs - Credit Agreement — (5.7) 5.7 (100.0) % Unamortized discount and issuance costs - Convertible Notes (50.4) — (50.4) N/A Debt issuance costs - Senior Secured Notes (5.6) — (5.6) N/A Total debt outstanding, net $ 455.3 $ 395.1 $ 60.2 15.2 % 48 Table of Contents Cash Flows Fiscal Years (In millions) 2020 2019 2018 Net cash flow provided by (used in): Operating activities $ 13.2 $ 71.9 $ 85.3 Investing activities (26.9) (93.2) (25.2) Financing activities 83.6 (0.1) (90.4) Effects of exchange rate changes on cash and cash equivalents 0.9 (0.7) (0.5) Net increase (decrease) in cash and cash equivalents $ 70.8 $ (22.1) $ (30.8) Net Cash Provided by Operating Activities. Cash from operating activities consists primarily of net earnings adjusted for certain non-cash items, including share-based compensation, depreciation, amortization and impairment of intangible assets, inventory write-downs, deferred income taxes, amortization of deferred loan costs, income and loss from equity investments and the effect of changes in operating assets and liabilities. For fiscal year 2020, compared to fiscal year 2019, net cash provided by operating activities were as follows: • Net losses were $(57.4) million compared to net earnings of $15.8 million, • Non-cash adjustments to net earnings were $84.5 million compared to $51.4 million, • Operating assets and liabilities activity: ◦ Accounts receivable decreased by $17.7 million compared to a decrease of $14.8 million, ◦ Inventories increased by $42.7 million compared to an increase of $11.1 million, ◦ Prepaid expenses and other assets increased $9.3 million compared to a decrease of $4.3 million, ◦ Accounts payable increased by $14.3 million compared to a decrease of $9.0 million, ◦ Accrued liabilities and other long-term operating liabilities increased by $8.1 million compared to an increase of $10.9 million, and ◦ Deferred revenues decreased by $2.0 million compared to a decrease of $5.2 million. Net cash used in investing activities. Cash used in investing activities was $26.9 million and $93.2 million for the fiscal years 2020 and 2019, respectively. Net cash used in investing activities for fiscal year 2020 related primarily to the building of our facility in the Netherlands as well as capital expenditures in our sources and detectors businesses. Net cash used in investing activities for fiscal year 2019 related primarily to the acquisition of 98.2% of the outstanding shares of common stock of Direct Conversion for $69.5 million in cash, net of cash acquired, and capital expenditures for property plant and equipment of $19.8 million. Net Cash Provided by (Used in) Financing Activities. Financing activities for the fiscal year 2020 consisted of the issuance of $200.0 million in aggregate principal amount of 4.00% unsecured convertible senior notes due 2025 (“Convertible Notes”). The net proceeds from the issuance of the Convertible Notes, after deducting transaction fees, were approximately $193.1 million. In connection with offering the Convertible Notes, we separately entered into privately negotiated convertible note hedge transactions. We used $11.2 million of the net proceeds from the issuance of the Convertible Notes to pay the cost of the convertible note hedge transactions. Additionally, during fiscal year 2020 we issued $300.0 million aggregate principal amount of 7.875% Senior Secured Notes due 2027 (the "Senior Secured Notes"). The net proceeds from the Senior Secured Notes after initial purchasers’ discount, commissions and estimated fees and expenses of $5.6 million, were approximately $294.4 million. We used $267.5 million of the proceeds from the offering to terminate and repay our previously existing credit agreement. Financing activities for the fiscal year 2019 primarily consisted of borrowings under our credit agreements of $85.4 million, repayments of borrowings of $87.0 million, and net proceeds from equity plans of $2.5 million. Days Sales Outstanding Trade accounts receivable days sales outstanding (“DSO”) was 66 days and 63 days at October 2, 2020 and September 27, 2019, respectively. Our accounts receivable and DSO are impacted by a number of factors, primarily including the timing of product shipments, collections performance, payment terms, the mix of revenues from different regions and the effects of economic instability. 49 Table of Contents Contractual Obligations The following table summarizes, as of October 2, 2020, the total amount of future payments due in various future periods: Payments Due by Period (In millions) Total Fiscal Year 2021 Fiscal Years 2022-2023 Fiscal Years 2024-2025 Beyond Operating lease obligations $ 34.1 $ 7.1 $ 10.8 $ 6.8 $ 9.4 Principal payments on borrowings 511.3 2.5 5.0 202.9 300.9 dpiX fixed cost commitment 3.2 3.2 — — — Dividends to MeVis noncontrolling interest 3.8 0.5 1.1 1.1 1.1 Supplier equipment acquisition 10.4 6.3 4.1 — — Total $ 562.8 $ 19.6 $ 21.0 $ 210.8 $ 311.4 We lease office space under non-cancelable operating leases. The leases expire at various dates through 2026, excluding extensions at our option, and contain provisions for rental adjustments, including in certain cases, adjustments based on increases in the Consumer Price Index. The leases generally contain renewal provisions for varying periods of time. For further discussion regarding our borrowings, see Note 10. Borrowings, included in the accompanying notes to our consolidated financial statements. In October 2013, we entered into an amended agreement with dpiX and other parties that, among other things, provides us with the right to 50% of dpiX’s total manufacturing capacity produced after January 1, 2014. The amended agreement requires us to pay for 50% of the fixed costs (as defined in the amended agreement), as determined at the beginning of each calendar year. For the remainder of calendar year 2020, we estimate that we have fixed cost commitments of $3.2 million related to this amended agreement. The fixed cost commitment for future periods will be determined and approved by the dpiX board of directors at the beginning of each calendar year. The amended agreement will continue unless the ownership structure of dpiX changes (as defined in the amended agreement). In October 2015, pursuant to a Domination and Profit and Loss Transfer Agreement (the “MeVis Agreement”), we committed to grant the noncontrolling shareholders of MeVis: (1) an annual recurring net compensation of €0.95 per MeVis share; and, (2) a put right for their MeVis shares at €19.77 per MeVis share. The annual net payment will continue for the life of the MeVis Agreement, which we anticipate will continue for as long as we remain as the controlling shareholder of MeVis. The put right for the MeVis shares expired in September 2020. As of October 2, 2020, noncontrolling shareholders together held approximately 0.5 million shares of MeVis, representing 26.3% of the outstanding shares. Contingencies From time to time, we are a party to or otherwise involved in legal proceedings, claims and government inspections or investigations, customs and duty audits and other matters both inside and outside the United States, arising in the ordinary course of our business or otherwise. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. See Part 1, Item 3 of this Annual Report for additional information regarding legal proceedings and Note 13. Commitments and Contingencies, in the notes to our consolidated financial statements for further information regarding certain of our contractual obligations and contingencies, which discussion is incorporated herein by reference. Off-Balance Sheet Arrangements In conjunction with the sale of our products in the ordinary course of business, and consistent with industry practice, we provide standard indemnification of business partners and customers for losses suffered or incurred for property damages, death and injury and for patent, copyright or any other intellectual property infringement claims by any third parties with respect to our products. The terms of these indemnification arrangements are generally perpetual. Except for losses related to property damages, the maximum potential amount of future payments we could be required to make under these arrangements is unlimited. As of October 2, 2020, we have not incurred any material costs to defend lawsuits or settle claims related to these indemnification arrangements. As a result, we believe the estimated fair value of these arrangements is minimal. 50 Table of Contents We also have indemnification obligations to our directors and officers and certain of our employees that serve as officers or directors of our foreign subsidiaries that may require us to indemnify our directors and officers and those certain employees against liabilities that may arise by reason of their status or service as directors or officers, and to advance their expenses incurred as a result of any legal proceeding against them as to which they could be indemnified. Critical Accounting Policies and Estimates The preparation of our consolidated financial statements and related disclosures in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on historical experience and on various other factors that we believe are reasonable under the circumstances. Our critical accounting policies that are affected by accounting estimates require us to use judgments, often as a result of the need to make estimates and assumptions regarding matters that are inherently uncertain, and actual results could differ materially from these estimates. For a discussion of how these estimates and other factors may affect our business, see Item 1A. “Risk Factors.” We periodically review our accounting policies, estimates and assumptions and make adjustments when facts and circumstances dictate. Such accounting policies require us to use judgments, often as a result of the need to make estimates and assumptions regarding matters that are inherently uncertain, and actual results could differ materially from these estimates. For a discussion of how these estimates and other factors may affect our business, see Item 1A. “Risk Factors.” Inventories 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. We evaluate the carrying value of our inventories taking into consideration such factors as historical and anticipated future sales compared to quantities on hand and the prices we expect to obtain for products in our various markets. We adjust excess and obsolete inventories to net realizable value and write-downs of excess and obsolete inventories are recorded as a component of cost of revenues. Goodwill and Intangible Assets Goodwill is initially recorded when the purchase price paid for a business acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. Our future operating performance will be impacted by the future amortization of these acquired intangible assets and potential impairment charges related to these intangibles or to goodwill if indicators of impairment exist. The allocation of the purchase price from business acquisitions to goodwill and intangible assets could have a material impact on our future operating results. In addition, the allocation of the purchase price of the acquired businesses to goodwill and intangible assets requires us to make significant estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets and the appropriate discount rate for those cash flows. Should conditions differ from management’s estimates at the time of the acquisition, material write-downs of intangible assets and/or goodwill may be required, which would adversely affect our operating results. We evaluate goodwill for impairment at least annually or whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The evaluation includes consideration of qualitative factors including industry and market considerations, overall financial performance, and other relevant events and factors affecting the reporting unit. If we determine that a quantitative analysis is necessary, we perform a quantitative analysis which consists of a comparison of the fair value of a reporting unit against its carrying amount, including the goodwill allocated to each reporting unit. We determine the fair value of our reporting units based on a combination of income and market approaches. The income approach is based on the present value of estimated future cash flows of the reporting units and the market approach is based on a market multiple calculated for each reporting unit based on market data of other companies engaged in similar business. If the carrying amount of the reporting unit is in excess of its fair value, the difference between the fair value and carrying amount is recorded as an impairment loss. The impairment test for intangible assets with indefinite useful lives, if any, consists of a comparison of fair value to carrying value, with any excess of carrying value over fair value being recorded as an impairment loss. In fiscal years 2020, 2019 and 2018, we performed the annual goodwill impairment test for our two reporting units and found no impairment. We performed the annual goodwill analysis as of the first day of the fourth quarter of each fiscal year (using balances as of the end of the third quarter of that fiscal year). For both reporting units, based upon the annual goodwill analysis that we performed as of the first day of the fourth quarter of the respective fiscal years, either a quantitative analysis of the impairment test was not completed based on evaluation of qualitative factors or, if quantitative analysis was completed, the fair value was substantially in excess of carrying value. However, significant changes in our projections about our operating results or other factors could cause us to make interim assessments of impairments in any quarter that could result in some or all of the goodwill being impaired. 51 Table of Contents In the third quarter of 2020, changes in facts and circumstances and general market declines from COVID-19 resulted in reduced operating results. We considered these circumstances and the potential long-term impact on cash flows associated with our reporting units and determined that an indicator of possible impairment existed within our Medical and Industrial reporting units. Accordingly, we performed a quantitative impairment analysis to determine the fair values of those reporting units. We used both an income approach utilizing the discounted cash flow method ("DCF") and a market approach utilizing the public company market multiple method. We developed multiple forecasted future cash flow scenarios for the reporting units with varied recovery timing and sales impact assumptions. Based on the output of the analysis, we determined that the fair values of both the Medical and Industrial reporting units substantially exceeded their carrying amounts. Accordingly, no impairment charges were required as of July 3, 2020. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated future annual net cash flows, income tax rates, discount rates, revenue growth rates, forecasted gross margins, market multiples, terminal value and other market factors. This fair value measurement was based on significant inputs not observable in the market and thus represents a Level 3 fair value measurement. If current expectations of future revenue growth rates and forecasted gross margins, both in size and timing, are not met, if market factors outside of our control, such as discount rates, change, if market multiples decline, or if management’s expectations or plans otherwise change, including as a result of the development of our global five-year operating plan, then one or more of our reporting units might become impaired in the future. The Company will continue to monitor the financial performance of and assumptions for its reporting units. A future impairment charge for goodwill could have a material effect on the Company's consolidated financial position and results of operations. We will continue to make assessments of impairment on an annual basis or more frequently if indicators of potential impairment arise. Taxes on Earnings 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. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax assets will not be realized. In addition, we provide reserves for uncertain tax positions when such tax positions do not meet the recognition thresholds or measurement standards prescribed by the authoritative guidance for accounting for income taxes. Amounts for uncertain tax positions are adjusted in periods when new information becomes available or when positions are effectively settled. Interest and penalties related to uncertain tax positions are recognized as a component of income tax expense. 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.S. Tax Reform”). U.S. Tax Reform significantly revised the U.S. corporate income tax structure including a lower corporate statutory rate and changes to the way foreign earnings are taxed. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law is enacted. In accordance with these rules, we are including the impact of certain provisions of U.S. Tax Reform to the extent they are effective during the current reporting period. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. On July 2, 2020, the US Treasury Department issued a regulation providing an election to waive NOL carryback to a former consolidated group. We have evaluated the impact of the CARES Act and concluded the NOL carryback provision of the CARES Act will result in a material cash tax benefit. The CARES Act retroactively clarified treatment of qualified improvement property as 15-year property instead of 39-year property as defined under U.S. Tax Reform. Certain qualified improvement property is also eligible for bonus depreciation. Recent Accounting Standards or Updates Not Yet Effective See Note 1. Summary of Significant Accounting Policies, of the notes to the consolidated financial statements for a description of recent accounting standards, including the expected dates of adoption and the estimated effects on our consolidated financial statements. 52 Table of Contents Backlog Backlog is the accumulation of all orders for which revenues have not been recognized and are still considered valid. Backlog also includes a small portion of billed service contracts that are included in deferred revenue. Our total backlog at October 2, 2020 was $207.6 million, a decrease of 21.7% from the backlog of $265.2 million at September 27, 2019. Orders may be revised or canceled, either according to their terms or as customers’ needs change. Consequently, it is difficult to predict with certainty the amount of backlog that will result in revenues. We perform a quarterly review to verify that outstanding orders in the backlog remain valid. Aged orders that are not expected to be converted to revenues are deemed dormant and are reflected as a reduction in the backlog amounts in the period identified. In addition to orders for which revenues have not been recognized and are still considered valid, we have pricing agreements with many of our established customers that span multi-year periods. These pricing agreements include volume ranges under which orders are placed.